Is Russia About To Strike It Rich?


A Guide to New Markets and Politics

By Richard Layard and John Parker

Free Press -- 380pp -- $27.50

The timing could have been perfect. Richard Layard and John Parker completed writing The Coming Russian Boom in March, just three months before Russia's crucial presidential elections. Although Boris Yeltsin was trailing in the polls, the authors gambled that he would defeat his Communist rival, touching off a boom in investment--just as their book hit the shelves this fall.

But writing about Russia is fraught with peril. Although Layard and Parker guessed right on Yeltsin's victory, their book is coming out just weeks before Yeltsin goes under the knife for bypass surgery and as a vicious power struggle swirls around the Kremlin. It's almost as if Russia cannot live without crisis. While the country has survived many of them--from attempted coups to the collapse of its currency--it takes a brave soul to predict a coming Russian boom.

Yet Layard's and Parker's work makes for fascinating reading precisely because of its contrarian outlook. Although the timing is unfortunate, the book presents a well-documented case that capitalism has taken root in Russia for good. "Whatever happens to the politics, there will be strong economic growth, based on private enterprise," they write. Russia's economy "will grow faster over the next twenty years than that of most OECD countries, and probably faster than most emerging markets (outside the Far East)."

The authors belong to what I call "the half-full-glass" school of Russia observers. A professor at the London School of Economics, Layard has been an adviser to the Russian government since 1991. Parker was The Economist's Moscow correspondent when reforms were launched in 1992. "We have always been more optimistic than most people about Russia," they admit.

Their approach, though, is far from naive. They structure the book around 12 tough questions, beginning with what they call the biggest one of all: "Is Russia different?" For centuries, Russian thinkers have argued that Russia is unique. This is so not only because of its size, straddling Europe and Asia, the argument goes, but because "the Russian soul" is different: Russians value things of the spirit and collectivism far more than individualism and material success. And Russia has long been known for its tendency toward authoritarianism. All these factors, skeptics argue, make it impossible for Russia to embrace democracy and capitalism.

The Coming Russian Boom attempts to defeat these arguments. Russia's size should not interfere with its ability to develop a market economy in an era of global communication and technology, Layard and Parker argue. And it is largely the older generation that believes the Russian soul is unique: Younger Russians, polls show, consider their country a European nation. The authors also cite research showing that "Russians are no more hostile to business or private property than Americans are, nor are they more intolerant of income inequalities."

The economic transformation since 1992 bears out the authors' conclusion that Russia can develop into what "reformers have long held up as their aim: a normal country." When the government liberalized the economy in January, 1992, the Russian citizen responded like homo economicus--not homo sovieticus. As prices more than tripled and as wages lagged, Russians began working extra jobs to earn more money. After sweeping privatization, 70% of the economy is in private hands. Citizens want to preserve what they have gained.

So when does the boom begin? Lay-ard and Parker don't say exactly, but they predict that the economy will be chugging along at growth of 5% a year by the end of the decade. Russian officials are forecasting 2% or more next year, even though gross domestic product shrank by 6% in the first nine months of 1996. Inflation is under control, and industry is in the midst of a shakeout. "The economy has now bottomed out, and it is poised for an upsurge," argue Layard and Parker. The authors believe investors will be enticed by the promise of cheap assets. "At $20 billion, Russia's main companies are valued at about 7 percent of one year's national income," they write--compared with about 70% for the U.S.

But there are, of course, obstacles to exploiting Russia's economic potential. The most important is the government's failure to enforce the laws, notably those involving property rights, contracts, and tax collection. That's a major reason for the explosion of organized crime in Russia: Hired killings still often take the place of the courts. The Mafia will remain a part of the Russian scene for years, Layard and Parker believe, but they see signs that Russian criminals want to legitimize their illegal gains. "Those who made their fortunes by robbery already want to develop reputations for more respectable practice, and they want a strong legal system to protect the property they previously stole," the authors argue.

The other major problem is political instability. Just as Western investors held their breath before last June's election, they are now watching warily while the President prepares for surgery. The recent battle pitting Prime Minister Viktor Chernomyrdin and Yeltsin aide Anatoly Chubais against ambitious ex-general Alexander Lebed, which led to the ouster of the latter, only added to investor nervousness.

What will happen after Yeltsin's operation is just the latest of Russia's frightening unknowns. Writing even before the presidential race, Layard and Parker concluded that Russia would most likely continue on a course similar to that charted by Yeltsin. They say this would mean a government reasonably friendly to Western investors, who would help fuel 5% annual growth.

The authors do envision other possibilities. One is the rise of a "noncommunist nationalist" who would rule with an authoritarian style but defend the market economy. Another, less likely, would be a government of accelerated reform. That could produce growth of 6% a year and foreign investment of up to $10 billion annually--more than triple the level of recent years.

The biggest drawback of The Coming Russian Boom remains its poor timing. Lebed, who placed third in round one of the presidential vote, rates only a mention. And the most recent crisis was obviously unforeseen. Nevertheless, Layard and Parker do a good job of explaining how much Russia's economy has changed since 1992, and they try to peer into its political future. For executives seeking a solid guide to the new Russian capitalism, The Coming Russian Boom is worth a serious look.

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