Russian economy recovers at last

By Svetlana Kovalyova

MOSCOW (Reuters): Sergei Teryokhin has sad memories of the day Russia's financial markets collapsed. But these have nothing to do with the crisis that savaged many investors and brought down the government.

"Crisis? You mean Aug. 17, 1998? I only remember it was a crisis because my father-in-law died that day," said Teryokhin, director of a poultry farm near Moscow that, like many other domestic enterprises, is flourishing.

The entire Russian economy has been given a new lease of life, thanks partly to the crisis-induced rouble devaluation which helped local firms to compete with imports.

After years of lurching from one economic debacle to another, culminating in the disastrous 1998 default on domestic debt, hardly a day goes by now without positive economic news.

The country, benefiting from high world energy and commodity prices, is on track this year for record post-Soviet growth in gross domestic product (GDP), officially seen at 5.5 percent.

"We cannot say the Russian economy is in a great shape now, but the situation is stable -- industrial output is growing, GDP has record growth," said Oleg Vyugin, chief economist at Troika Dialog brokerage and a deputy finance minister in 1998.

Down on Petelinskaya farm, about 50 kilometers west of Moscow, Teryokhin proudly displays new Western equipment in a freshly painted barn that will expand an operation which already produces 440,000 tons of poultry a month.

The tall, wiry manager exudes energy as he talks about plans to cater for growing demand for domestic products and compete with more expensive imported chicken -- dubbed "Bush's legs" by Russians after a wave of U.S. imports started under the presidency of George Bush in the late 1980s and early 1990s.

"We are growing. We bought a totally run-down farm last August, invested $600,000 and we'll be ready to start the first (new production) cycle in December," Teryokhin said.

He said the 1998 crisis helped turn a loss-making farm into a successful enterprise within a couple of years, using Western technology and business methods.

Igor Babayev, president of the Cherkizov agrarian and industrial complex which owns Petelinskaya, said the government had started doing the right things.

"At some point they will take care of agriculture. We just have to work and be patient," he said.

Most economists would put the recent economic recovery down to good fortune with external factors, especially soaring oil prices, rather than any major policy breakthroughs, although radical tax reforms are due to kick in next year.

Parliament has approved a new flat income tax rate of 13 percent to replace the current scale from 12 to 30 percent.

The government hopes this and other measures to reduce and simplify the tax system will help attract investment and sustain growth that has been picking up steadily since the crisis.

The government said GDP rose 7.3 percent in the first half of 2000 in year-on-year terms, while output of key industrial sectors soared 8.6 percent, compared with the same 1999 period.

Russian gold and foreign exchange reserves, also steadily growing in recent months, rose to $23.6 billion on Aug. 4 from $23.2 billion on July 28, well above pre-crisis levels of about $18 billion.

The rouble has been strengthening since the beginning of this year and is trading around 27.7 per dollar, much firmer than a budgeted annual average of 32 per dollar for this year, more evidence of Russia's booming foreign trade balance.

This year's forecast rise in GDP of 5.5 percent compares with 3.2 percent in 1999, while annual inflation is seen at about 20 percent, down from 36.5 percent last year.

The 2000 budget is expected to have an outright surplus for the first time in years, seen at 1.7 percent of GDP, and a 4.7 percent primary surplus, which is calculated before debt payments.

Inspired by the economy's recent sprightly performance, the government has forecast further economic growth in 2001, with an ambitious four percent forecast.

Officials are now talking about returning next year to international financial markets that have been closed to Russia since the August 1998 default.

However, the government cannot rest on its laurels and count on unpredictable factors such as oil prices and foreign loans.

"The crisis has played into the hands of the Russian economy, but only in the short-term," Vyugin said. "In the long-and even medium-term we have to carry out such a policy that would make the Russian economy really competitive."

The International Monetary Fund, Russia's main lender before the crisis, has urged the government to implement structural reforms to improve the investment climate and sustain growth.

Analysts said keeping inflation under control despite a constantly growing money supply, which the economy cannot soak up, is one of the main headaches for the government, coupled with a heavy debt burden that threatens future budgets.

Russia and the London Club of commercial creditors agreed in February to restructure about $32 billion of Soviet-era debt, writing off about one third of the sum and repackaging the rest into new Russian Federation Eurobonds.

The government hopes to reach a similar agreement with the sovereign holders of about $42 billion Soviet-era debt, the Paris Club, but the country creditors have been skeptical about such a deal. The talks are due to resume in the autumn.

If a deal is not reached with the Paris Club, it would mean an additional $4 billion in foreign debt repayment next year, a considerable burden for a $40 billion draft budget.

"Russia needs to implement structural reforms -- everyone is fed up with these words, but it is really true," Vyugin said.