The Service Sector Is Serving Russia Well

Valery Samodurov smelled opportunity when he kept hearing Russian entrepreneurs bellyache about their catch-22: New private banks wouldn't grant credit without a government loan guarantee, but such guarantees were available only to state-run enterprises. So Samodurov, the former head of a construction cooperative, founded Megapolis Insurance Co. in his home town of Chelyabinsk in the Ural Mountains. "We just used our heads and figured out what kind of insurance local businesses needed," says the 42-year-old Samodurov. That was three years ago. Now ,his company has 50 employees selling insurance through 35 branch offices across Russia and other republics of the former Soviet Union.

Pioneers such as Samodurov are helping change the face of the Russian economy and may even be speeding up the pace of economic reform. Taken together, they are creating an expanding new service industry that may be able to absorb many of the millions of workers being cast off by Russia's crumbling manufacturing base. For the first time in Russia's history, services account for half of the country's gross domestic product, up from 31% in 1991 and less than 20% during most of the Soviet period (chart).

New jobs in the service sector are helping to ease Russia's unemployment worries. Officially, the jobless rate is only 2%, but that figure hides the fact that as many as 7 million people are on the books of giant state enterprises that haven't met a payroll in months or else operate only a few months out of the year. And the unemployment picture is expected to worsen this fall, when the government begins auctioning off the assets of up to 22,000 bankrupt state companies.

Many workers still on the payrolls of failing companies already are taking service jobs. In addition, many others, who have officially lost their jobs, moonlight while collecting unemployment checks from the government. "A lot of people registered as unemployed in industry are really working in service jobs," says Sergei Pavlenko, head of Russia's Working Center for Economic Reform, a government think tank. Adds Charles R. Blitzer, chief economist at the World Bank Moscow Office: "That explains why there have been few riots or protests by the jobless."

Russia's booming services industry runs the gamut from small retailers operating out of kiosks to banks and cable-television operators to hotels. Self-employed Russians install computers, repair telephones, and give therapeutic massages. Elena Chirlova, 32, is a former doctor who brings in $100 a week giving massages, supplementing her meager $100-a-month salary as a physical therapist. The average monthly income in Russia is $62.

Financial services are especially strong. Megapolis is one of some 2,000 companies that have licenses to provide insurance. Commercial and cooperative banks have spread their tentacles into virtually every village in Russia for a combined total of 4,900 branches. Now that Moscow-based Most Bank offers a ruble credit card, it has had to hire 30 clerks to process receipts, bill cardholders, and reimburse retailers.

LAGGING STATISTICS. It's difficult to get an accurate measure of the total contribution of services to the Russian economy. Government statistics mostly count public services--which are declining fast--and haven't caught up with the explosive growth in such sectors as retail trade and professional services, says Vladimir L. Sokolin, deputy chairman of the State Statistics Agency. Indeed, official figures indicate that the service sector tumbled 12% last year. And the latest employment figures show service-sector jobs have decreased slightly since 1990, to about 32.5 million currently.

Economists point out several reasons why the numbers aren't painting a true picture. For one thing, 1993 industrial production plummeted by 21%--in an economy that shrank 17% overall--so the fact that services shrank by only 12% shows they are taking up much of the slack. And many small businesses hide their income from the tax authorities, resulting in underreporting of both jobs and income. Government officials say this unofficial trade could equal 20% of GDP, which came to $95 billion for the first five months of 1994.

Still, Russia has a long way to go before its service sector rivals that of the West. For now, most of the new services, especially restaurants and stores, are aimed at the newly rich. But as Boris N. Yeltsin dismantles the old Soviet military-industrial complex, services could be Russia's salvation.

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