Commentary: How Russia Can Avoid The Asian Abyss

Stretching 11 time zones from the Baltic Sea to the Sea of Japan, Russia straddles Europe and Asia. For centuries, it has borrowed technology and ideology from both East and West. Now, Russians are engaged in a great debate over how to build a new, "Russian-style capitalism," and again they are looking outside their borders. The choice is between American-style open markets or a more closed, directed type of economic management that has flourished, until recently, in Asia.

Given Asia's problems, the decision should be an easy one. But Russia's Establishment is resisting change. After abandoning state control of the economy and flirting with throwing markets open in 1992, Russia has lurched toward crony capitalism over the past few years. In the new Russian economy, politically connected entrepreneurs and former state factory directors have amassed huge financial-industrial empires as the government has sold off state assets cheaply. Favored banks have also grown rich by pocketing fat interest payments on government accounts. Russia's financial-industrial giants already bear a strong resemblance to Japan's keiretsu and South Korea's chaebol. Even worse, Russia's economy is mob-infested on a scale beyond even the Yakuza's ties to business in Japan.

Asia's economic meltdown gives President Boris N. Yeltsin and his brain trust a big opportunity to change direction. Indeed, he should resolve to launch another Russian revolution--a major new push toward open Western free-market economics. As the Asian crisis has underscored, a system based on easy credit, lack of transparency, and insider deals will collapse of its own weight sooner or later. That eventually could happen in Russia. Big banks such as Menatep and Oneximbank have extended loans to shaky companies in their industrial groups. A ruble crisis could also rock Russian banks, which have gambled in the currency markets just as plunging currencies have hit banks hard in Asia. "The collapse in Asia does much to undermine those who argue that the model of financial-industrial groups is the only one that can work in Russia," says Michael A. McFaul, a professor of political science at Stanford University.

OPEN UP. Yeltsin should move forcefully. He should throw his weight more solidly behind the policies of his two First Deputy Prime Ministers, Anatoly B. Chubais and Boris E. Nemtsov, who are pushing for a more open and transparent market. The Federal Securities Commission should be given real power to take quick action against the many managers who grossly violate shareholder rights. High-level officials such as Prime Minister Viktor S. Chernomyrdin should not be allowed to overturn the decisions of tax authorities to seize the property of big debtors--even if the companies are friendly to the government. New incentives to stimulate small-business development should be enacted quickly.

It won't be easy to change course overnight. Historically in Russia, as in many Asian cultures, government's biggest role is to dole out favors. Personal relationships are more important than legal contracts. Wiping out endemic official corruption could take 5 to 10 years, as more Soviet-era bureaucrats retire. Says Mikhail Fridman, chairman of Alfa Group, one of Russia's biggest financial-industrial groups: "A market mind-set will only come into being slowly." Meanwhile, many of his fellow barons are fiercely battling to preserve their special privileges.

Russia is still run from the top down, despite the significant steps that have been made toward creating a democratic state. Yeltsin calls all the shots. He could create a lasting legacy by consolidating and accelerating initiatives to make Russia's market more fair and open--to small, unknown investors as well as large, influential ones. A new influx of foreign and local investment could break up the big groups and reignite Russia's economy. But if Yeltsin gives in to the oligarchs, Russia will remain a land of the very rich and the very poor. And an Asian-style collapse could well be in the cards.

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