RUSSIAN INDUSTRY ENJOYING “VIRTUAL RECOVERY.”

Observers fixated on Russia’s ugly politics are likely to be stunned by the latest official report on 1999 industrial growth. Goskomstat reported today that gross industrial production in September had grown by 20.2 percent over its September 1998 level (Russian, Western press reports, October 15). This brings industrial growth in Russia up to 7 percent for the first nine months of 1999, and virtually guarantees that Moscow will report growth in gross domestic product (GDP) of at least 2 percent this year. Indeed, Goskomstat reported last month that GDP in the second quarter grew 1.4 percent, suggesting that the Russian economy is recovering smartly from the August 1998 financial collapse.

Russia’s surprising industrial turnaround reflects three factors. The first is statistical: since output fell so sharply after August 1998, even moderate monthly industrial growth in 1999 translates into large production increases in year-on-year terms. Second, the collapse in the exchange rate (from US$1 = 6 rubles in August 1998 to US$1 = 25 rubles now) caused imports to drop some 45 percent during the January-July period. Because foreign competitors have been priced out of the market, Russian producers of import substitutes have vamped up production of goods which could not be sold during the days of the hard ruble. Third, rising world commodity prices have boosted output in the wood and paper, chemicals, and other export-oriented industrial branches.

Still, there are many reasons to view signs of Russia’s economic recovery with skepticism. Goskomstat’s industrial growth figures have been criticized by many observers, including the Russian Finance Ministry. Further, signs of life have yet to spread beyond Russian industry. Spending by Russia’s impoverished consumers fell by some 9 percent during the first half of 1999, as average monthly wages in July were only US$63. Output growth has yet to boost investment spending, which was down 1 percent during the first seven months of the year. And the industrial recovery has done little to boost Russia’s ability, or willingness, to service its foreign debts. While Moscow is current on its obligations to the IMF, World Bank and its eurobond holders, Russia is pleading poverty and requesting forgiveness for the lion’s share of its Paris and London Club debts. Perhaps most important, little progress has been made in restructuring Russia’s comatose banking system, cleaning up Russia’s opaque public finances or protecting the rights of minority shareholders in Russian companies. Without significant reforms in these areas, Russia’s nascent economic recovery may turn out to be more “virtual” than real.

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