Reforming Russia’s Economy: First Things First

The Challenge

It is hard to overestimate the immensity of the challenge that Russian leaders face in terms of economic reform. Consider the following:

  • By the end of 1999, the Russian economy had shrunk to just over half the size it had been a decade earlier. Russia currently produces less than Belgium and only 25% more than nearby Poland.
  • Russia’s GDP (gross domestic production) today is one-tenth the size of America’s, one-half the size of India’s, and less than that of Brazil.
  • To the east of Russia is China, a country with a population eight times that of Russia and an economy five times larger, and growing much more dynamically. To the west is an increasingly integrated Europe, with a GDP ten times larger than Russia’s.
  • In recent years, Russia has received less foreign investment than Peru.

While this comparative data begins to illuminate the macro-economic issues facing the nation’s leadership, when we look at the situation on a more practical level, Russia’s condition looks even more bleak. According to the Russian State Statistics Committee, in the first quarter of 2000, 41.2% of the population (59.9 million people) fell below the official poverty line of $40 per person in monthly income.

Russia’s middle class, which slowly emerged in the 1990s, was devastated by the financial crisis of August 1998 and is now still vulnerable to shifts in the economy. A recent study notes that Russia’s middle class accounts for 4 million people, or 7% of the population between the ages of 18 and 50. America’s middle class, by comparison, totals about 64% of its population.

The Seeds of Change

Our university is a member of both the U.S.-Russia Business Council, headquartered in Washington, D.C., and the American Chamber of Commerce in Moscow. These two highly respected associations are working hard to build positive relationships with Russia’s leaders and are regularly offering counsel on how to develop a better foreign investment climate, a simpler and fairer tax system, more transparency in commercial dealings, and other important reforms. This conversation needs to be ongoing, despite political climates that can shift dramatically during presidential elections in both countries. A long-term partnership between our two nations is in the best interests of both; great care must be taken to prevent any resurgence of the animosities of the Cold War period.
But in addition to these top-level discussions between corporate and government leaders in both nations, economic reform must also be nurtured at the grassroots level. Teaching the mechanisms of the free market and the structure of free market institutions is important, but without a discussion of the moral and ethical foundations upon which a free market operates, the benefit to Russians is limited. Operating with integrity and openness, honoring a contract, fostering and maintaining trust, valuing customers, and thinking long-term about investing for the future – these values and practices require a foundation other than self-interest and greed.

The Whisper of Hope

The Moscow Times recently reported that a group of 30 young Russian business owners and managers have formed a political discussion group called “Club 2015.” Rather than buying politicians, which is the usual approach in Russia, these leaders want to reshape the economic and political mentality in their country. They are pushing three concrete proposals: adoption of international accounting standards, free movement of capital, and reform of the customs system. These proposals are not new; the difference is that now Russians themselves want to adopt them. They want a world in which honest companies are not at a disadvantage.

There are other encouraging economic signs in Russia. One is the various grassroots efforts by Russians to change the way they think. Dr. Alexander Zaichenko, a former economic advisor to the Gorbachev government and currently a Trustee of our university, has established a network of “Clubs for Fair and Ethical Business,” groups of business and government leaders who meet regularly to discuss how they can work with integrity in the Russian marketplace. They share their own stories, seek counsel from each other, and encourage one another as they strive to rebuild Russia one person at a time and from the bottom up. In addition, a number of non-governmental organizations, such as Opportunity International and the International Service Center’s Integra Venture program in Russia, are helping to establish small businesses by giving local entrepreneurs access to capital from revolving credit funds and then providing counseling services, assisting with the development of business plans, and holding these companies accountable to repay their loans.

While these advances may seem small-scale, they are critical to Russia’s economic rebirth. Top-down change, often radical in nature, has been a pattern in Russia’s history. Real change, long-standing change, will not come from government decrees or heavy-handed Kremlin leaders. Real change will come from the Russian people themselves, when their government reduces its all-encompassing system of controls and creates a climate that frees the people to exercise their own initiative and creativity. Once that happens, the Russian people will begin the long, slow process of building for the future.