Russia made a remarkable recovery from the August 1998 financial meltdown. Imports collapsed, demand was sustained and domestic production filled the gap. Industrial output rose 8 percent in 1999 and 9 percent in 2000, lifting the economy as a whole. Gross domestic product increased 3.5 percent in 1999 and 7.7 percent last year.

Did industry, the looted and cash-starved weakling of post-Soviet Russia, suddenly step from a phone booth with sinewy production functions and a muscular bottom line? No. The sector took advantage of a 400 percent increase in the ruble price of a dollar, and of heavily subsidized domestic energy in a period of rapidly rising world energy costs. The combination was a double whammy that fried imports, which in 1999 and 2000 were down by around 40 percent from the 1997 peak of $72 billion. Domestic production could not fail to benefit.

Now the whammies are wearing off. The ruble has been steady at around 28 to the dollar for the past year, while the ruble prices domestic industry pays for its inputs have risen by 40 percent. Energy prices to industrial consumers, under strict price controls in 1999-2000, are now being allowed to rise. In addition, monopoly suppliers UES (electricity) and Gazprom (gas) are demanding payment in cash, not in kind–and they are getting it. Cash covered a third of payments owed to UES a year ago but covers three fourths today. Gazprom has lifted its cash payments from 40 percent to 67 percent of receivables over the same period.

Facing a stronger ruble and a dearer kilowatt, Russian industry looks anemic again. Output has scarcely grown over the past three months, and imports of goods like cars, trucks and even beer are rising. Industry may respond with mergers, closures and investments to improve competitiveness, or it may plead for more protection and renewed subsidies. The choice will be critical to Russia’s future.