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The Crumbling Of Russia


International Business: Russia

The Crumbling of Russia

The country is scrambling to find funds for infrastructure

The Kursk, a 15,000-ton Russian nuclear submarine, explodes and plunges to the bottom of the Barents Sea, killing 118 seamen. Two weeks later, on Aug. 27, a 1,771-ft.-high Moscow television tower catches fire, killing three people and leaving millions of TV screens blank. Isolated incidents? Hardly. Beyond those headline-making disasters runs a long series of less spectacular miseries attesting to Russia's decrepit condition.

The country's infrastructure is falling apart. Gas pipelines spring leaks daily, electricity is regularly cut off across Russia's far-flung regions, most of the nation's roads are pitted with potholes, trains stop running, industrial accidents are rampant, and toxic waste seeps from industrial plants into drinking-water supplies. This chronic malady is not simply about bad Soviet-era technology. It also stems from an 80% decline in investment during the post-Soviet era. Making matters worse, the stewardship of key facilities and funds is in the hands of corrupt and inefficient managers. There are no hard figures on what it would cost to rebuild the infrastructure. But by one estimate, it could cost $100 billion--four times Russia's current annual budget.

President Vladimir V. Putin, elected in March, is determined to turn things around. He has approved an ambitious plan of reforms to spur growth by improving conditions for investment and by deregulating Soviet-era behemoths such as electricity giant United Energy Systems (UES) and the Railways Ministry. He also wants to open the way for some competition to Gazprom, the natural gas monopoly. The day after the Ostankino TV-tower fire, Putin declared that "only economic development will allow us to avoid such calamities."OPPOSING FORCES. But infrastructure reform is a political minefield, not just a technological and economic challenge. At UES, chief executive Anatoly B. Chubais has floated an ambitious plan to break up the monopoly into hundreds of smaller companies and sell stakes in them to raise $30 billion in badly needed investment capital over 10 years. Electricity prices, now set at artificially low levels by the government, would also be gradually raised.

Sounds good, except that certain well-connected foreign shareholders in UES are fiercely opposed, saying the scheme would depress the value of their stock. Since consumers can't afford higher electricity prices, they fear the companies will have meager profits and be sold at bargain prices. They've taken their complaints directly to top Kremlin officials, who dislike the ambitious Chubais. So now the plan is stalled, and UES, billions of dollars in debt, has pulled the plug on 7,500 nonpaying customers, including schools, hotels, and even defense installations.

While politicians dither, shoddy Soviet-made equipment will continue to break down. One reason the Ostankino tower caught fire was that Soviet planners refused to buy nonflammable cable cladding from the West. "The designers knew the tower was dangerous even when it was being built" in the mid-1960s, says Moscow electrical engineer Mikhail Ryzhok, who had helped install cabling when the tower was constructed. The repairs could cost as much as $1 billion.

The cadre of specialists trained to maintain complicated equipment is also dwindling. The most worrisome spot is the atomic energy sector. In the wake of the Kursk disaster, Putin has offered higher pay for workers involved in the design, construction, and maintenance of nuclear warheads. This step was long overdue: Two years ago, scientists at the nuclear research center of Sarov went on a brief strike to protest their paltry monthly wage of $144. But huge problems remain, as Russia struggles with the monumental task of deactivating large chunks of its once-grand nuclear arsenal.

There is one glimmer of hope. Boosted by optimism in Putin's reform plans and high commodity prices, investment in the Russian economy grew 17%, to $17 billion, in the first seven months of the year. If the new government can keep up that momentum, Russia may be able to draw the curtains on its disaster movie: More growth means a higher tax take, which means more money for repairs. If not, Russia is doomed to be "a country of chaos, of cold and dark," says economist Ben Slay at the PlanEcon think tank in Washington. That's a drama nobody wants to see.By Paul Starobin and Catherine Belton in MoscowReturn to top


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