Chris Doss The Russia Journal ----------------------------
Investor's Business Daily April 11, 2002 Feature Story Basket Case Now A Breadbasket: Putin's Crew Transforms Russia BY PAUL KATZEFF
Imagine investing in a nation that grew nearly five times faster than the U.S. last year.
Or where inflation-adjusted wages have jumped 34% since 1998 and sales of big-ticket durables like cars have doubled since 1990.
What is this economic juggernaut? The Russian Federation.
Russia is a changed land since August 1998, when it devalued its ruble and defaulted on government bonds. Once-proud Russia became economically crippled.
But now, Russia is in the midst of a radical turnaround.
Led by President Vladimir Putin, a small army of reformers has spearheaded key economic and business reforms.
A new labor code makes it easier for employers to hire and fire workers. Last summer the Duma, or parliament, legalized private ownership of urban land. And on Jan. 1, the tax on business profits was slashed to 24% from 34%.
At the same time, a 13% flat tax on personal income went into effect. That lifted tax revenue 30% in the first half of 2001, says Leon Aron, a Russia expert at the American Enterprise Institute.
"Russia's economic reform has been fueled by three factors," said Michael Donnelly, manager of the $145 million American Century Emerging Markets Fund. Those include a new flat tax, better corporate governance and financial transparency by business and government, and a boom in oil prices.
The ashes of economic destruction caused by the 1998 crisis turned out to be
fertile soil for Russia's new crop of corporations, says Stanley Vyner. He's
chief investment officer for ING Funds, which runs the ING Russia Fund.
"The devaluation and default of '98 pushed the exchange rate very low," he said. "But that let the balance of payments build up. That eliminated one of
the key risks to investing there for foreigners."
Also in the crisis' wake, domestic output flowered. "Devaluation made imports too expensive," Donnelly said. "So they fell off a cliff. But domestic industries picked up the slack. That boosted employment and corporate profits."
Lower costs and richer consumers helped foreign investment blossom. Ford (F), GM (GM), Wm. Wrigley Jr. (WWY), Caterpillar (CAT), Motorola (MOT) and Procter & Gamble (PG) are among the Yankee heavyweights to start or expand activities, says Helen Teplitaskaia, president of the American-Russian Chamber of Commerce.
"They weathered the 1998 storm," said Stephen Brayton, spokesman for Gillette (G), which entered Russia in 1993. "In 2000 we opened a new $40 million facility in St. Petersburg for blades and razors. We also expanded a Moscow sales office."
Still, not all of Russia's problems are solved. "The country remains poor by
Western European standards," the AEI's Aron said.
And not all have shared. "If you're 50 years or older, you are adrift," said
John Connor, lead manager of $13 million Third Millennium Russia Fund. "You're a product of the communist system. You're likely to be unable to adjust to the new realities.
"But people in their 20s and 30s don't drink at lunch. They're eager to learn new skills. They understand if they don't work hard, they might be fired. These people are hard to differentiate from young people in New York."
(CD editorial note: Isn't that wonderful? Actually, the extent of their anti-Americanism probably differentiates them from young people in New York.)
Problems remain. Not all companies have adopted Western corporate disclosure
rules. And Russia's Rust Belt finds it hard to find customers for its obsolete goods.
"High oil prices have helped the country pay down its debt," Donnelly added.
"But oil prices could go down. The economy is broader than it used to be, but less income from oil would still hurt."
Also, there is political risk. "If anything happens to Putin, the outcome of
succession is unknown."
Still, the reforms go on.
On Putin's agenda are banking modernization, pension privatization, an end to housing subsidies and more competition in the gas, water and electricity markets.
(CD again: I don't think housing subsidies are ever going to end.)
Reorganization of the energy industry and phone monopoly into seven "Baby Bellskies" will continue, says Vyner. And more corporate tax reform is under
discussion, says Matthew Ryan, co-manager of MFS's $95 million Meridian Emerging Markets Debt Fund.
Then there's Russia's entry into the World Trade Organization. "That will mean a further opening of Russia's economy to global trade," Ryan said.
(CD: This is actually pretty controversial. Many of the oligarchs are dead-set against WTO entry.)
"For the first time since 1998," Aron said, "there's talk of Russia floating
government bonds again."
For the U.S., these reforms help.
"As Russia reforms its institutions and attracts investment," Ryan said, "this begins to spell the end of concerns about Russia lapsing back to being
a more worrisome adversary."