Putin’s speech echoed Boris Yeltsin’s state-of-the-nation speech of 1997, when he promised 2 percent economic growth and vowed “to establish order” based “not on force but on the rule of law.” And some observers see ominous parallels between today’s improving economy and the boomlet of 1997 that crashed in a heap of financial wreckage in August 1998. But the pessimists for once may be wrong. Evidence is mounting that the current economic recovery, which began before Putin came to power, is accelerating and has some staying power.

Investment spending on fixed capital–new plant and equipment and residential construction–rose 4.5 percent in 1999 over 1998. Preliminary data from Goskomstat, the official statistical agency, show a further 14 percent year-on-year increase in January-May of 2000.

The figures are surprising to skeptics and a bit puzzling even to optimists about Russia’s economic chances. After all, the well-known disincentives to investment–the crazy-quilt tax structure, government corruption, criminal extortion–all still flourish. And even though the economy is producing only half the goods and services it did eight years ago, official records show there is still plenty of idle capacity in existing factories. But the boom is not entirely mysterious.

First, the financial collapse and devaluation of August 1998, led–painfully, to be sure–to replacement of imports with domestic products at home, and to increased earnings for exporters. That built up demand. Second, much of what is called excess capacity is junk, barely capable of producing goods that no one wants or needs. Enterprises may assign value to useless plant and equipment, but as demand picked up, mothballed Soviet-era factories didn’t necessarily start to hum. New capital stock had to be created, and that requires high levels of investment.

To make investment easy, the Central Bank over the past twelve months or so has reflated the economy with low interest rates and a rising supply of money. For those with the political pop or economic clout to get credit, banks will lend twelve-month money at under 30 percent interest, a rate that could turn out to be less than the rate of inflation. And the government has closed the big-casino financial markets that in 1998 made a chump out of anyone who spent rubles on anything but government paper. With no short-term government notes to speculate in, it’s OK for managers to invest in production.

Rising inflation has to be a worry. Just two weeks ago, Finance Minister Aleksei Kudrin projected 2000 inflation at 4 or 5 percent. The federal budget uses a figure of 18 percent. But consumer prices rose 2.6 percent in June, which is about 36 percent on an annual basis.

One reason for the inflation surge is the government’s success in ensuring that earnings from exports are brought back to Russia. The Central Bank buys up this foreign currency for rubles, adding to the money supply and pushing up prices. That suggests that if oil and gas and mineral exporters would just squirrel more money away in Cyprus and Nauru, containing inflation would be a simpler task. Of course investment would drop as well. It’s choices like these that make economics the dismal science.