Has Financial Collapse Saved Russia?

MOSCOW: Something surprising has happened to the Russian economy. Last August, Russia experienced financial collapse, defaulting on treasury bills as its stock market plunged 94% from its October 1997 peak. The ruble was devalued to one quarter of its prior value. Half of Russia's banks closed, and many Russians lost their savings, while living standards fell by some 30%. In September, inflation skyrocketed to 38% a month, and industrial production plummeted by 15%. Russia seemed in an economic free-fall. Both GDP and industrial production fell by 5% in 1998, and the IMF forecast a further decline in GDP of 9% in 1999.

Now everything has changed. Russia is turning around. Industrial production has recovered month by month. It surged by 6.1% in May, and it is heading towards growth of at least 5% this year, though GDP might barely rise as many services are contracting with domestic consumer demand. While Russian statistics remain poor, the reversal is too great to be in doubt.

The most obvious reasons for the sudden upturn is the devaluation, which caused an instant halving of imports and made exports cheaper, and rising oil prices. Industries that have grown the most, however, are not raw materials but intermediary goods, such as chemicals, pulp, paper, and construction materials, and some manufactured goods, notably microbiology, pharmaceuticals, machinery, textiles, shoes, glass and porcelain. The expansion for some products exceeds 30% in a year, while other industries continue to contract.