Look Past Russia’s Troubles and See Its Potential
For all the global anxiety and publicity about Russia’s election today, U.S. business and investors are curiously indifferent.
In contrast to the Cold War years, when decisions in the Soviet Union--of which the Russian Federation was the largest component--held the attention of world business and made markets tremble, today’s critical contest among President Boris Yeltsin, Communist challenger Gennady Zyuganov and assorted other candidates is regarded as an interesting but distant development in the global economy.
The indifference may be understandable. The Soviet Union is no more, and Russia seems to be a military threat only to its former provinces.
The Russian economy, once seen as second- or third-ranking in the world, is now much diminished. Russia, with 150 million people, is estimated by the World Bank to have a gross domestic product of roughly $350 billion--less than half that of California, which has 30 million people.
U.S. business has only $4 billion invested in Russia. By comparison, it has $14 billion invested in Singapore.
And all investment flows have stopped this year because of concern over crime, corruption, the rise of Communist candidate Zyuganov and, most important, the existence of more immediate investment opportunities elsewhere in a changing world.
But to dismiss Russia in its post-Soviet struggles would be a mistake. Russia, along with its neighbors Ukraine, Belarus and other once-Soviet lands, could be a place of great future opportunity.
In any case, Russia will have much to say one way or the other about world events in the early part of the 21st century.
What are its prospects? Good in the long term for practically any kind of business. Vladimir Kvint, a Russian-born economist who is now a director of emerging markets for Arthur Andersen, points out that Russia is geographically the world’s largest country and has major supplies of natural gas, oil, gold, cobalt, copper and other resources.
More important, it has educated people. The same skills that put cosmonauts in orbit are available for development of software and telecommunications.
Still, many Western business people are skeptical after years of promises of big oil developments and ambitious joint ventures. They ask, “Where’s the actual business today?” They should think small and remember Armand Hammer, says Richard Jacobs, president of Newstar Group, a Washington-based investment company with operations in Moscow. Jacobs worked 14 years in Russia for Hammer’s Occidental Petroleum. He’s referring to the late entrepreneur’s success in the early days of the Soviet Union when, at Lenin’s direction, Hammer opened a pencil factory.
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Similarly, today’s opportunities lie in serving basic needs, says Jacobs. Newstar, which has raised $4 million from U.S. investors, owns warehouses and food-distribution businesses in Moscow. The overall Russian economy is difficult to judge right now, but Moscow is humming and pulling the rest of the country, he says.
Newstar also invests in Russian government bonds--the domestic debt issued to the Russian people, as distinct from the $100 billion of foreign debt owed to the World Bank and foreign governments and banks.
The domestic bonds pay as much as 150% interest in an environment of 20% annual inflation, down from hyperinflation of 2,000% four years ago. And the ruble’s value has settled at about 5,050 to the dollar since the government introduced a stabilization program last year.
At the same time, an erupting scandal over millions of stolen bonds in Russia and Chechnya shows how much of a Wild West atmosphere still prevails.
After the election, new investments could flow into Russia, encouraging the natural abilities of its educated people to bring new industries out of its old military-industrial complex. One need look no further than the contributions Russian emigres have made to Israel’s economy for an idea of what such technically skilled people can accomplish.
Barton Biggs, economist and strategist for the Morgan Stanley investment firm, likens Russia today to Japan in the late 1940s. “Japanese industry had been devastated, the country was in depression, crime was rampant,” says Biggs. “The same issues face Russia today.” Others are cautious. Charles Wolf Jr. of Rand Corp., who in the 1980s correctly pointed out that the Soviet economy was much weaker than CIA analyses were then claiming, notes that Russia has further to go than Japan had.
It is a country that has never known capitalism or democracy and is only now constructing its legal system. Also, “there are very different contending visions of where the country should go,” Wolf says.
Most political experts believe that Yeltsin and economic reform will win the election, if not today then in a runoff on July 7.
But all economic experts agree that there can be no turning back to the communist economy of factories without parts where workers were drunk by afternoon and prone to horrible accidents--where male life expectancy had fallen to 58 years, compared with 73 for the United States, 75 for Japan.
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Some experts think the new Russian economy will develop along South Korean lines, with big semi-state companies to organize modern industries. And that’s ironic, because it was South Korea’s rapid growth and adaptation of modern electronic industries that spurred Mikhail Gorbachev to open the Soviet economy in the 1980s.
Gorbachev and his colleagues feared that the Korean economy would surpass that of the Soviet Union if they didn’t modernize. And they were right. South Korea’s annual output of goods and services is now larger than that of Russia and its neighbors Ukraine and Belarus combined.
Whatever happens today, Russia has a huge gap in living standards to make up.
