Unofficial Translation

THE DANGERS OF MARKET MANIC DEPRESSION

Westerners frequently comment that Russians oscillate between extremes. They say the Russian character mirrors the country's dramatic changes in seasons and climate. Few can disagree that the moods of Russian people can change in a flash from exuberance to depression.

Perhaps Westerners have now taken on this very Russian character trait that they find so different from their own. What else can explain today's infectious optimism in the West about the Russian economy? Has it really been so long since the markets and pundits in New York and London were calling Russia economically irrelevant, or worse?

Make no mistake, Russia is far better off today than in 1998 or even one year ago. Once crippled by government default and ruble devaluation, the feel-good factor is back. Thanks to prudent economic and fiscal policies, Russia has joined China as a Cinderella story on the world economic stage.

But does Russia's progress justify the unqualified exuberance of Western investors and politicians recently witnessed at the widely attended Russian Economic Forum in London and the World Russian Forum in Washington? Rational exuberance may be fitting. On the other hand, what Alfa Bank president Pyotr Aven has aptly termed unbridled euphoria, will lead to false expectations, lost investment and serious damage to Russia's reputation.

Tax, pension and land reforms together with serious attention to corporate governance are laying foundations for sustainable economic growth. But fundamental problems persist -- the dysfunctional banking system, gargantuan government bureaucracy and a demographic crisis of alarming proportion. As President Vladimir Putin recently pointed out in his state of the nation address, while the Russian economy is growing faster than most others around the globe, that growth is neither stable enough nor robust enough to compete effectively in the world economy.

Of course, many in the business and financial community have deliberately and justifiably talked up Russia's prospects to persuade the outside world it is a place worthy of investment. Amid global economic slowdown and sluggish performance in both the United States and Western Europe, Russia's growth rates, 5.3 percent in 2001 and probably 4 percent this year, make Russia look like an attractive bet.

I, too, am one of the most forceful advocates of new foreign and domestic investment in Russia. But investment decisions must be based on facts, prudence and an objective view of the economic risks and opportunities.

Well-run companies understand that it is essential to manage expectations of the markets and to deliver performance in line with their own predictions. Overperformance can destabilize share prices as much as underperformance. Markets are interested in whether companies can sustain growth over the long-term. Russia must and will be judged by these same criteria.

Increased political stability, the adoption of progressive economic and tax legislation, a raft of plans to reform the civil service, the natural monopolies and the banking sector, and the country's eager pursuit of WTO membership are all highly encouraging. Putin has stabilized relations with Western countries, evidenced by the decision to ally Russia with the United States in the war against terrorism and the extraordinary upgrading of Russia's relations with NATO.

But the facts are the facts, and we must face up to them. Real exchange rate appreciation has eroded the effects of devaluation in 1998, and increased quantities of imports are returning to the Russian market. For the economy to grow, industry must increase labor productivity and efficiency levels -- factors that have been Russia's Achilles' heel for centuries.

The backbone of any successful modern economy is small and medium enterprises. Their number is growing, but they are still painfully under-represented. Small businesses need relief from the stranglehold of state bureaucracy as proposed by Putin, as well as access to finance and credit from the domestic banking system.

We also have to face the fact that foreign investment is a highly competitive process. Russia has no right to assume that foreign investment will happen simply because of the country's huge market potential and low tax rates. For major multinational manufacturers, Russia is just one of many markets.

On the plus side, more Russian capital is being repatriated from abroad, a sure sign of increased business confidence. The recent publication of a corporate governance code is a significant step forward in establishing a modern business culture in Russia and in attracting and protecting investors.

However, the economy as a whole remains far too reliant on oil and gas exports, which represent about 40 percent of total exports and 15 percent of gross domestic product. Their proportion has diminished, but the country's overall economic performance and foreign debt repayment schedule is hostage to high commodity prices. Russia exports little other than raw materials, weapons and vodka.

Growing numbers of the Russian business elite share my determination to be able to conduct business in Russia according to international norms. While we see the obstacles on the horizon, we also see that Russia has no choice but to make a quantum leap toward full integration into the global economy.

A year and a half ago, there was talk in the United States about the possibility of a vacuum in the heart of Eurasia, "a world without Russia." Today, with the growth of the economy and after the turning point of Sept. 11 and the just-concluded Russia-U.S. summit, the situation has again radically changed.

Russia is unquestionably moving in the right direction, and we can justifiably feel confident and optimistic about the future. But despite the country's significant progress, we must recognize that we are only a small way down the road of economic transformation. We cannot afford to be economical with the truth; otherwise, these achievements will be for naught.

If Russia can build an infrastructure for lasting economic growth, the better able the country will be to withstand the sudden and extreme changes in the perceptions of this great country held by Russians and foreigners alike.

Ruben Vardanyan is general director of the Rosgosstrakh insurance company and CEO of the Troika Group of Companies. He contributed this comment to The Moscow Times.