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Putin: Russia's new enigma
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February 9, 2000: 10:09 a.m. ET
As ex-KGB man tilts towards the Kremlin, economic challenges loom large
By Staff Writer Douglas Herbert
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LONDON (CNNfn) - He's Russia's presumptive leader. But ask most Russians what remedies a "President" Vladimir Putin - currently the acting president and prime minister - might prescribe for his country's economic ills and you're likely to draw a blank.
With six weeks remaining until Russians head to the ballot box, Putin's presidential platform is a bit like Winston Churchill's famous quip about Russia itself - a riddle wrapped in a mystery inside an enigma. It's a platform shrouded, the cynics chime in, by a brutal military campaign in Chechnya that has claimed thousands of lives and cost hundreds of millions of dollars.
Putin's tight-lipped demeanor - a legacy of his 16 years in the Soviet KGB, based in the former East Germany - may rile his peers in the West. But it has proven an electoral asset among his compatriots. Polls suggest that Russians - fed up with the crime, cronyism and corruption endemic in the New Russia of Boris Yeltsin - are pinning their hopes on Putin to deliver an elusive commodity: stability.
"We have suffered so much from the fact that we never knew what will be tomorrow," Lena Chernyshkova, marketing director at the Skate Press consultancy in Moscow told CNNfn.com. So far, Chernyshkova noted, Putin's steps on the economy have been mostly symbolic: he set up a new center for economic study as a reformist think-tank. But the center has remained largely mute on policy.
 Putin's image is that of a man who dreams of restoring an authoritative role to the State, but paradoxically he says he wants to enlist that State as a champion of semi-free-market forces: beefing up tax laws, cracking down on scofflaws, and acting as a Kremlin-based marketing machine for the international investment that Russia sorely needs to revive its flagging industrial base. Putin is known to be particularly eager to attract investment in high-tech industries.
"The government should create a good investment climate in the country, trying to strengthen the state institutions that support market mechanisms," Putin told reporters in Moscow after the opening session of parliament last month.
Workers paid in condoms?
Under the Yeltsin regime, Russia's industrial output plummeted 50 percent as the country's command economy crumbled under the weight of the free market. Capital flight out of the country - mostly into offshore tax havens - stood at $1.8 billion in the first half of 1999, only a slight dwindling of the cash exodus that dogged Yeltsin through the early years of his administration. Tax evasion remains rampant, despite sporadic efforts by Yeltsin to crack down on delinquents.
In scores of cash-starved regions, barter economics is the rule as it was under the tsars. A recent story of far-East factory workers being compensated in condoms may seem striking to a Western worker rewarded with stock options- but it's anything but anomalous. Russians still instinctively stash rubles under their mattresses rather than entrust them to fly-by-night banks. Much of the population subsists on food grown on backyard plots. The ultimate indignity is biological: the average male life span has plunged to 57 years - among the lowest in the industrialized world.
Beneath the patina of gloom, there are rays of hope.
Russia's state statistics committee recently said it expects the country's gross domestic product for 1999 to grow by 3.2 percent, its fastest rate in a decade and a dramatic turnaround from the 4.6 percent contraction in 1998. First Deputy Prime Minister Mikhail Kasanov, speaking a couple of weeks ago at the World Economic Forum in Davos, Switzerland, said Russian industrial output grew 8 percent last year, compared with a fall of 5.2 percent in 1998.
(Click here to see Russia's RTS stock index)
These figures reflect the positive domestic impact of the ruble devaluation in the summer of 1998, which spurred internal production by making imports prohibitively costly to most Russians. But the benefits may be starting to wear off, according to figures recently cited by London-based weekly magazine The Economist. In December, the magazine said, food imports were up 48 percent, suggesting that local production is no longer plugging as large a hole in demand.
Nor are Western lending institutions likely to be impressed by a stronger GDP growth rate alone.
The International Monetary Fund has already delayed the release of the next $640 million tranche of a $4.5 billion loan to the country, claiming the government has dragged its feet in implementing long-promised structural reforms. "This remains a cause for concern since positive macroeconomic performance cannot be sustained without further significant structural reforms needed to transform the Russian economy," the IMF said in a recent statement. Yet with a new, more centrist parliament now in place, the alignment of forces in favor of speedier reform may shift.
The problem, from the IMF's view, is not necessarily a lack of liquidity in Russia, but rather misguided use of the cash at hand. The Russian Central Bank's hard-currency reserves currently stand at $13.1 billion - their highest level since the fall of 1998. But the IMF has made it clear it wants to see Russia rely more on commercial bank and other sources to cover its financing needs, rather than pillage the central bank coffers.
Sea of insolvent companies
Among other demands being made by the IMF: for Russia to collect 100 percent of the tax owed by the monolithic state gas monopoly Gazprom - the country's largest company - and from two other giants, the national power grid Unified Energy Systems and the Railways Ministry. The lenders also want to see new bankruptcy legislation - not an insignificant point in a country where analysts say a large minority of companies are insolvent by Western accounting standards.
Vlad Sobell, the senior economist at Daiwa Institute of Research, estimates that about a third of Russia's existing companies would be liquidated if a western-style bankruptcy law were on the books. Tax receipts, while rising, are still dismally low by Western standards. Revenues collected represented just under 13 percent of GDP in the first three quarters of 1999 - up from 9.3 percent in the same period in 1998.
Sobell sees Putin as a benevolent force that will push on with privatization and try to clean up the system. He sees positive signs in the fact that Putin has already surrounded himself with reformers such as Anatoly Chubais, Yeltsin's economic guru who fell out of favor when his pet project - privatization - became a vast gravy train for former Communist apparatchiks who made off with the best assets.
But Sobell says he has few illusions about the pace of economic renewal under Putin.
"He won't be too radical," he said. "He doesn't want any more shocks, because the country is tired of shocks. The sense I get is that if the economy keeps recovering, it will be better placed to address these problems."
Putin signaled his timetable when he said recently that Russia's economy would have to grow at a rate of 8 percent a year over the next 15 years to catch up with the economies of Portugal or Spain. At $190 billion, one recent report noted, Russia's GDP is only a fifth the size of China's and one-fiftieth that of the United States.
Sobell believes Putin has three major factors working in his favor as he sets about his task. The stabilization of the economy, a worldwide boom in crude oil prices, one of Russia's chief exports, and the gradual re-emergence of investor confidence in the country after the mass exodus of portfolio capital in the summer of 1998. "Engineering a revival on the basis of a semi-market economy that has already absorbed the most serious shocks of transition is easier than having to take the plunge and trigger off the shocks in the first place."
A steady stock market
Eric Fine, a Russia specialist at Morgan Stanley Dean Witter, believes the country's biggest near-term challenge is a bloated balance of debt payments owed to overseas lenders, now valued at around $3 billion. But on balance, Fine is encouraged by the resolve successive governments have shown in freeing prices, establishing markets and getting banks operating, and expects further reform to keep the upward trend moving.
Investors seem to agree. On Dec. 31, 1999, the day Yeltsin handed over the nuclear suitcase to Putin, Russia's benchmark RTS1-Interfax stock gauge spurted nearly 17 percent, to 175.262. The index stands 10.7 percent higher year-to-date, at 194.100.
Fine says he expects to see few if any dramatic developments in the first months under a Putin presidency.
"But once Putin is elected...you will see a sharp improvement with the West, a resumption of IMF lending, and a strong team put in place by Putin that will both strengthen government and (implement) needed reforms."
Fine knows from anecdotal evidence that reform is making progress in some day-to-day areas of Russian life. He recalled an incident in which a Russian friend was pulled over by a traffic cop and told his son was in breach of a Russian law prohibiting children under 10 from riding in the front seat. In the past, a cash bribe would have been slipped through the window in nine out of ten cases. But in this case, the cop refused to accept a pay-off, and the motorist got an unexpected lesson in the New Russia under Putin: "They gave him a ticket." 
--with additional material from wire reports
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