Market holds its breath at red return

Russian reforms could be under threat, writes Yvette Cooper

"I want to cast my vote like every other Russian. I'm hoping there will be a ballot box in the Russian consulate." Vladimir Rojankovsky, on a work attachment with city stockbrokers James Capel, is just one of many frustrated Yeltsin voters stuck in London during today's presidential election. Whether it be courses in economics, classes in finance and business, or exchange programmes with City firms, the Russians are here - and learning fast.

The big question is whether their market-oriented skills and experience will be much use to them when they return, if communist leader Gennady Zyuganov is elected president. "I don't want to be a pessimist," says Vladimir, "but I think the opinion polls underestimate the communist support. If Zyuganov wins, my position is vulnerable."

He is right to be cautious. Despite bullish confidence among the Yeltsin campaigners, no one can be sure of the outcome either today, or in a second round head-to-head between Yeltsin and Zyuganov if neither wins outright. True, the opinion polls this week put Yeltsin ahead, but these have understated the communist vote. Pavlov Peplukin, former advisor to the Russian government and chief economist of the Russian investment bank Troika Dialog, says: "In Moscow everyone is certain Yeltsin is going to win. But Moscow isn't Russia, and that's what worries me."

Not that anyone can predict what will happen even if Zyuganov does win. The Communist party has remained remarkably slippery about what it would do with power - largely because members disagree so vehemently with one another. At least three economic policies emerged as different factions leaked their proposals before the final draft was agreed. Some favour atavistic measures to restore elements of Soviet planning whereas the moderate communists sound almost like European social democrats.

But what about Zyuganov himself? In his speeches several important themes recur: protectionism and hefty support for key industries and massive increases in state spending on welfare-state transfers, science, education, health and defence.

This kind of industrial policy would be a disaster for Russia's real economy, which is only starting to recover. One of the reasons the economy contracted so dramatically during the transition was because such a large proportion of the resources were tied up in industrial production. A sustainable economic future depends on redeploying those resources in response to domestic and international demand.

Macro-economic prospects for Russia under Zyuganov don't look too promising either. Rising inflation, rapid capital outflows and a collapse in inter- national confidence all look likely, as the communists try and fail to fund massive spending plans. Tax revenues are proving hard to collect, thanks to poor administration, plenty of allowances, and sophisticated tax evasion.

According to Peplukin, further borrowing - and funding existing debt - will be a problem. The $10.2bn (pounds 6.1bn) IMF loan has tight strings attached, and neither international nor domestic markets will be keen to lend to a communist government they distrust. Nor could Zyuganov just decide to print money to finance his plans - not without persuading the governor of the independent central bank. Of course they could always resort to unconstitutional strategies like ditching the governor.

However, it is possible that a sensible communist president might find himself bounced by financial crises and fiscal constraints back into a policy that looks just like Boris Yeltsin's.

Of course, it won't be an easy ride even if Yeltsin is re-elected. Large sectors of the economy remain inefficient and unproductive. Lack of faith in the rule of law - to enforce business contracts as well as to protect people on the streets - constrains business confidence and investment. Although inflation is falling and the economy is growing, Yeltsin has little fiscal freedom to manoeuvre. As a result, much-needed welfare support to cope with growing inequality is not forthcoming.

But it is too easy to succumb to a Russian gloom about the future. In a new book - The Coming Russian Boom, to be published next month - Professor Richard Layard of the London School of Economics and John Parker, a journalist, provide an optimistic prognosis. They argue that the country's natural resources and educated population mean that the only question is when, not whether, Russia will prosper. As Vladimir says: "We can be optimistic as long as there are no more shakes. All we need is a quiet and supportive atmosphere in which people can start producing and doing normal things."