Central Europe Review: politics,
society and culture in Central and Eastern Europe
Vol 0, No 9
23 November 1998

Sam Vaknin B A L K A N   E N C O U N T E R:
Russia's New Economy

Dr Sam Vaknin

The recent economic "crisis" in Russia is only the bursting of the Moscow bubble, and this event is a positive development. Russia as a whole is still promising, but it needs to stop relying on the international community.

With no Russian in sight, foreigners like to belittle and mock Russia. "It is a criminal gangland" (an American term which better fits Italy), "corrupt" (Belgium is more corrupt), "bureaucratic" (try Germany). They point to its 160 billion USD in foreign debt. But this is one of the lowest rates in the world (c. 40% of GDP). The USA owes almost twice as much per its GDP.

Foreigners do not like Russia, and Russia should stop relying on them so heavily. Not because of nationalistic reasons. Because of realistic ones. It is not realistic to expect foreign institutions and lenders (such as the IMF) to provide Russia with another 45 billion rubles. It was the IMF that de-monitized the Russian economy. Its outlandish demands to limit the money supply reduced the amount of rubles in circulation to a dangerous, life-threatening level (15% of GDP). The result was an unprecedented barter economy (more than 75% of all transactions) and a collapse of the popular trust in the ruble.

There has never been a post-Communist "Russian Economy." There was a "Moscow Economy" and a "Rest of Russia Economy." The first was a bubble of consumption, novelty seeking, vanity and financial assets. The "crisis" in August was merely the bursting of the Moscow bubble. Why do I consider this to be good for Russia?

First, it will weed out the weak economic players. Shady companies, the manufacturers of shoddy goods, financial leeches and parasites - all will vanish together along with easy, corrupt and criminal money. Foreign firms, which came over to ride the wave of unbridled consumerism and to make a quick buck, will go home. The export revenues of oligarchs and robber barons will revert back to the nation. In time, their inefficient, corrupt fiefdoms and monopolies will crumble. They may even begin to pay taxes.

Multinationals committed to the still promising Russian market will not go away. They will invest more and provide even more credits to local suppliers and partners. They will hire good staff, reduce costs and finally acknowledge the existence of life (and markets) outside Moscow. The crisis in Moscow is a blessing for the rest of Russia, as has often been the case in history.

Recent developments also offer a chance for domestic industry and services. With unemployment up, wage costs are down by half. So are rent and security costs and other overhead. Many good people are available today at a reasonable price. Companies have rationalized, cut the fat and fired unneeded people: the firms have become lean and mean. They are fast becoming competitive in their own markets and, later on, perhaps, in export markets.

Additionally, imports are down by 45%. Domestic firms face much less competition, on the one hand, and less choosy clients, on the other hand. This is their opportunity to capture market share. Russian businesses are used to operating without a banking system or in hyperinflation. Foreigners are not. Shops will prefer to stock cheaper domestically produced goods. Both product quality and the attention to the consumer's needs and demands need to improve. But the prize is enormous: control of the Russian market.

But is there a Russian market? This is the only cloud in the silver lining. Russia is being regionalized, broken down. The movement of both people and goods is gradually being restricted. The fragmentation of a hitherto unified market is detrimental. This is the real risk facing Russia. Whatever the political arrangements, the economy must remain united. The various oblasts, mini-states and fiefdoms are simply not economically viable on their own.

Dr Sam Vaknin, 23 November 1998


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