NCPA - National Center for Policy Analysis

Creating Capitalism From The Ground Up

August 18, 1999

Did Russia use a faulty model in trying to switch from communism to capitalism: first creating banks to make loans, rather than allowing profit-making industries to grow? Some observers think so.

Moscow banks crashed with a mighty roar last year, cutting 75 percent off the value of the ruble against the dollar. But far away in the hinterlands of Russia, industries ranging from paper mills and oil companies to fruit-juice makers and dairy farms are creating wealth -- enough to make loans and investments along the production chain, economists report.

The fall of the ruble is actually helping out, making exports more competitive and blunting competition from foreign imports domestically. Also, a doubling in the world price of oil hasn't hurt.

In areas where local industries are booming, workers and suppliers are getting paid in cash rather than IOUs. Large, successful companies are making loans to suppliers on terms which a bank would have turned down. For example, a dairy farm in a town west of Moscow is installing a $1.2 million milking and refrigeration system financed by a loan from the head of a large national fruit-juice and dairy products company. The small dairy will pay off the loan by handing over its milk output for three days of every month for eight years.

Many such transactions are helping improve Russia's economy.

  • Industrial production in July was 12.8 percent higher than a year earlier.
  • The country's trade surplus for the first half was more than 10 times higher than in the same period last year.
  • Inflation has slowed to around 2 percent a month, after spiking to 38 percent last September -- and is expected to be less than 50 percent for 1999, compared to 84 percent last year.
  • Gross domestic product may even rise a tiny bit this year -- only the second annual increase since 1991.

Source: Andrew Higgins, "With Banks Ailing, Russians Gain Credit from Trees and Milk," Wall Street Journal, August 18, 1999.


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