Financial Times (UK) September 22, 2003 Russia's economic strength begins in the home By Mark Medish The writer is a partner at Akin Gump Strauss Hauer & Feld and was a senior US Treasury and National Security Council official, 1997-2001
President Vladimir Putin comes to the US this week bearing good news. The Russian economy continues to gain speed, and investment-grade status may be around the corner.
As he drives through New York, Mr Putin will see something striking: the logo of Russia's Lukoil has replaced the all-American Getty sign at local petrol stations. The symbolism is powerful. Russia and the US can be meaningful investment partners. But the real question for the Russian economy is whether it can become more than the world's newest petrol pump.
Russia's relationship with market capitalism has been dramatic. Russia emerged from the ashes of the 1998 financial collapse to log almost five years of steady growth in gross domestic product.
An emerging Russian middle class has begun to assert itself with raw spending power. Retail turnover in 2003 may reach Dollars 150bn.
Initially, the retail trend was strongest in food sales, but consumer durables are now increasing as a share of household spending. Domestic manufacturing has responded to this demand. Whether Russia can also grow into an export platform, as China has done, is an open question. Russia's skilled workforce, low labour costs, and central Eurasian location suggest that such an opportunity may exist.
The trend, if sustained, could have profoundly positive implications for Russia's overall economic and political development. Promoting this trend is likely to be a theme of Mr Putin's meetings, both with prospective US investors and, at Camp David, with President George W. Bush and his team.
The Russian consumer story has not gone entirely unnoticed by foreign investors. Ikea, the mass-market Swedish furniture retailer, opened several megastores in Moscow and St Petersburg in 2000. Ikea's sales have been strong enough to justify plans for a further dozen stores across the coun try, evidence of middle-class patterns spreading beyond the two biggest cities. The German supermarket chain Metro is following suit. Russia's wireless sector is among the hottest in emerging markets.
The rising middle class strengthens the business case for big western consumer-oriented companies to take a closer look at Russia. Russians want quality furniture, mobile phones, televisions, appliances, and cars. If this continues, a boom in commercial banking and other services should not be far behind.
Having endured decades of supply-side privation under the Soviet command economy, average Russians are becoming dictators of market demand. This change is fuelled by several factors. Russian households are much wealthier than previously supposed; they seem to have a high marginal propensity to consume; and they have few debts.
The strengths of Russia's new consumers are also tied to abiding weaknesses in the economy. First, the unexpectedly high disposable income reflects years of accumulated "mattress money" - the uncounted grey economy. Some analysts estimate Russia's current GDP at nearly Dollars 450bn, 40 per cent higher than official figures.
Second, the high propensity to consume partly reflects the lack of sound channels for savings and investment. Finally, the low debt level is due largely to the absence of wide-scale consumer credit facilities. Changing this will take time.
Policy challenges remain, including management of the windfall from high oil prices, diversifying the productive economy, deepening the rule of law, and entering the World Trade Organisation. These tasks can be achieved if Mr Putin and his government continue to recognise their central importance and act on it.
A surging consumer sector will both reinforce and ease the process. Consumers are natural proponents of market reform and a business environment that promotes predictability, transparency, and wealth creation. An active middle class is the most potent force for change in market economies.
Economics is also politics. Mr Putin's political strategy may depend increasingly on satisfying middle-class constituencies. This would mean responding seriously to their interests, while balancing the demands of super-rich oligarchs, the security apparatus, and pensioners. If he succeeds, Mr Putin's legacy will be a genuinely modern Russia.
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