Russia: Tale of two countries

Questions hang over an economy's success or failure. Phil Reeves reports from Moscow

He has one of the more sought-after telephone numbers on the planet, and yet it can be bought. If you have investment dollars - say, $100m - you too can call President Boris Yeltsin's protege, Boris Nemtsov. The charming but persuasive minister would be delighted to help you hack a path through Russia's jungle of red tape.

That, at any rate, was his message to leading business executives during a trip to Japan this week. The offer was open to those willing to invest in Russia, said First Deputy Prime Minister Nemtsov. "If you can't reach me at my offices, ring me on my mobile phone," he told them. "If you can't reach me on the mobile, phone me at home."

It was a stunt, but one with a serious element: Russia is still struggling to shake off a post-Soviet depression that has cut its gross national product (GNP) in half, crippled much of its industry, and left millions beneath the poverty line. It desperately needs investors, but it is finding them hard to get.

Yet if the Japanese - and any other foreign investors - are to take up Mr Nemtsov's invitation, a fundamental question must be resolved: are the signs that Russia's economy on the mend to be trusted, or is the country sliding further into decline?

In the last few weeks, the issue has become the focus of debate, not least because of conflicting government statistics. In January - when President Yeltsin seemed at death's door and the country desperately needed a lift - the State Statistics Committee (Goskomstat) announced that GNP was up by 0.1 per cent on January last year.

The following month the government statisticians detected a similar improvement, reporting an upturn of 0.9 per cent. Both results were achieved by massaging the numbers - namely by factoring in a higher figure for the black economy this year than last. But Mr Yeltsin felt confident enough to predict 2 per cent growth this year, the first turn-around since the transition to a free market began in 1992.

This month the government's economists changed their minds. There would be no improvement this year after all, they declared; in fact, GNP could slide slightly further into the mire. Again, the sulphurous whiff of politics was in the air: the Kremlin is sparring with a truculent parliament over the Yeltsin administration's plans for budget cuts and a new tax code. Predicting further gloom may help pressure deputies to support their line.

What, though, is the truth? Opinion is divided as never before. The optimists - notably Western analysts - point out that the landscape is more promising than it has been since the implosion of the Soviet empire. Boris Yeltsin has recovered from his illness, and he has thrown himself into running the country with unexpected energy.

The rouble is stable, and strengthening. Inflation is down, running at under 3 per cent a month for more than a year. The cost of government borrowing has dropped hugely from phenomenally high levels of last year. Foreign direct investment, though low, is picking up and foreign portfolio investment is showing an abrupt rise. Capital flight - which last year saw $2bn a month leave the country - is ebbing. Real incomes rose by 4 per cent in the first quarter of this year.

Mr Yeltsin has surrounded himself with a sharp young team of free market economists. His communist and nationalist opponents are not particularly effectual. "The conditions are beginning to emerge for an upturn," said Al Breach, an economist at the Russian European Centre for Economic Policy.

But predictions of an end to the Russian slump have come and gone before. In October 1995, the European development organisation OECD foresaw growth in Russia for 1996. What happened? The economy contracted by another 6 per cent, propelled off course by Mr Yeltsin's wild election spending spree. While parts of Russia are seeing their fortunes improve, the brunt of this trend is confined to the city of Moscow, and oil-rich areas. Other parts of the country remain hopelessly benighted.

Wages and pension arrears have been steadily rising and now stand at about $12bn, a crisis deepened by the failure of the government to collect taxes. In the first quarter, it raised just over half of the targeted revenues. Into the mix should be stirred endemic corruption, a lack of laws governing business transactions, tensions between central and regional government, an arcane tax system, and limitless quantities of red tape.

No matter how much money flows into Moscow, the rest of Russia's 147 million population face more hard times. The government is to reform the domestic housing and energy subsidies by targeting benefits for the genuinely poor - a move that may bring long term benefits, but will have the immediate effect of deepening the economic gloom. "Even if the conditions were to improve markedly, you still won't see a lot of investment here. It'll take 20 years to sort out this place," said one Western analyst. "And that's if things go well."

Winners and losers in the new capitalist era

The list of those in the winners' enclosure in post-Soviet Russia is short, writes Phil Reeves. At the top of the list is the city of Moscow. While much of the rest of the country is in the doldrums, the capital is thriving, buoyed up by a huge black economy. It is fast becoming an island state, three times richer than the rest of the country.

The Muscovites are not entirely alone: at their side stand the "new Russian" beneficiaries of the privatisation process that has produced huge wealth for a small and frequently corrupt minority. There are also winners among the growing service industries (notably telecommunications), and industrial sectors - for example, petrochemicals, and exporters of non-ferrous metals.

The losers' enclosure is larger and stretches from Murmansk in the west to Vladivostok in the far east: thousands of factories have long stood idle, with nothing to fill their place. The largely unreformed agricultural sector is in disarray. So, too, are government services, the military, coal mining and most heavy industry. And many millions of Russians are still waiting for their pay and pensions.