At the time of the Russian devaluation in August 1998 one of the popular market jokes was: what is the difference between a rouble and a dollar? The answer: a dollar. Yet the high inflation expected to hit Russia in 1999 never arrived and the rouble has been stable for months. Moreover, reasonably low inflation has allowed a grass roots economic recovery, adding to the benefits of a high oil price.
Cynics counter that all of Russia's recent economic success is due to the oil price, and that reform has been secondary to President Vladimir Putin's efforts to consolidate power. But Mr Putin has made significant reform progress.
A second joke encapsulates the hopes and fears of Putin observers. It appeared at the end of 1999 when it became clear that Mr Putin was to replace Boris Yeltsin as president. Nobody seemed to know much about Mr Putin except that he had been a good technocrat in St Petersburg. More recently he had headed the FSB (the successor to the KGB). The joke was that he would let his St Petersburg friends design the economic programme and his FSB friends implement it – and everyone hoped it wouldn't be the other way round.
Mr Putin's close ties with the military and the FSB, the pressure put on the independent media company Media-Most, and the government's policy in Chechnya have all caused concern in the West. Many investors are still nursing their wounds from 1998. The US Republican Right remains vociferous in criticising IMF involvement.
However, Mr Yeltsin's legacy required a strong leader to clear up the mess and a strong central government to avoid a further break-up of the country. Mikhail Gorbachev started perestroika under the illusion that the Communist Party was popular and that socialism and democracy would be strengthened within it. He was overcome by events.
Similarly Mr Yeltsin initially pushed reform aggressively, creating chaos and a backlash against privatisation as a result. Corruption blossomed in the form of the "oligarchs". By the end of his term the West's foreign policy was simply to contain him and wait for a replacement.
In such circumstances there is a lot of sense in consolidating power and strengthening the state as the first priority, ahead even of economic reform. To divide and rule the duma (parliament), Mr Putin supported a Communist Speaker. He reduced the regional governors' powers in the Upper House and pursued them for corruption. He also turned on the oligarchs. Vladimir Gusinsky of MediaMost and the biggest oligarch of all, Boris Berezovsky, left the country. Mr Putin is a formidable character. He scares people.
He has also taken a much greater executive role in policy formation. Under Mr Yeltsin, vying power bases were represented in the Cabinet, with leadership epitomised by Gazprom's Viktor Chernomyrdin, Prime Minister for much of the period, who was famed for his defeatist remarks. The current Prime Minister, Mikhail Kasyanov, leads a much more co-ordinated and relatively non-politicised government.
There have been major reforms, particularly tax reform. As a result of the flat 13 per cent rate introduced last year, income tax revenue increased by 70 per cent in the first quarter compared to the previous year. From a weak fiscal position, the central government now enjoys strong revenues of close to 20 per cent of GDP. Corporate governance has also improved, characterised by Mr Putin's recent appointment of loyalist Alexei Miller as chief executive of Gazprom.
The economy is still vulnerable to a downturn in the oil price, but the strategy is to budget for a low oil price and put excess revenues into a stabilisation fund. Meanwhile, investors can observe a country with both fiscal and current account surpluses, reserves often growing by $500m a week, but with sovereign Eurobonds yielding nearly 10 per cent above US Treasuries. While Russian debt has performed very well since the devaluation, more is still expected. For many the verdict is still out, but it looks as if Mr Putin has indeed appointed his reformist and FSB friends to the right jobs and not the wrong ones.
Jerome Booth is a director of Ashmore Investment ManagementReuse content