The Volga Basin’s Merchant Capital is New
Russia’s Economic Showcase
Industrial Production is Falling all Over Russia.
Not in Nizhny Novgorod, Where Political Stability and Progressive
Leaders are Making Reform Work.
Burke, Justin. "The Volga Basin’s Merchant Capital is New Russia’s Economic Showcase." Christian Science Monitor, 2 September 1993, 8-9.
Commanding the heights above the confluence of the Volga and Oka
rivers, the kremlin of Nizhny Novgorod has protected this traditional
merchant center since the 14th century.
Even today, though the threat of invasion has long ago passed,
the ancient fortress still plays a significant role in the economic
life of 20th-century Russia’s third largest city.
As Russia grapples with free market reforms, those working within
the redbrick bastion remain the main protectors of the local merchant
class, which is emerging after 70-plus years of Communist suppression.
But in contrast to previous centuries, when the city’s defenders
manned the ramparts, these days they fill the offices of the Regional
Administration building, located on the kremlin grounds.
Here reform’s most important champion is Boris Nemtsov, the
region’s 34-year-old governor. Under his leadership, Nizhny
Novgorod has become Russia’s free market showcase, moving
faster and farther than any other Russian area to privatize state-owned
enterprises and unleash entrepreneurial potential.
Yet despite their accomplishments, Mr. Nemtsov and his team freely
admit there is still plenty of work ahead. "The more we accomplish
the more we realize must be done," says Viktor Lisov, a top
aide to Nemtsov.
Of all the reasons for Nizhny’s economic success, the progressive
thinking of the regional leadership is most important. In Russia,
reform still greatly depends on personalities, and in many regions
political leaders have only grudgingly taken steps to dismantle
the command system installed by the Communist Party during its seven
decades of unchallenged rule. That system concentrated virtually
all power over the economy in the hands of the political elite.
In Nizhny, however, the Nemtsov administration views government
bureaucracy as market reform’s biggest stumbling block and
has tried to redistribute economic decision making power. "The
leadership here understood that it had to give people economic freedom
to make reforms work," Mr. Lisov says.
Reforms in Nizhny have greatly benefited from harmonious relations
between legislative and executive branches of the regional government.
In Moscow, by contrast, the conflict between President Boris Yeltsin
and parliament has emerged as reform’s largest obstacle.
In addition, the city’s status as the Volga Basin’s
traditional merchant capital has helped promote reform. Before the
Bolsheviks came to power in 1917, the annual Nizhny Novgorod fair
was one of the largest trade exhibitions in Russia, attracting merchants
from across the empire. The merchant heritage goes along with an
industrial tradition dating to the 19th century and strengthened
during the Soviet era. Now Nizhny has a population of about 2 million
and a large concentration of military-industrial plants.
Tradition, liberal leadership, and stability all have helped make
Nizhny a reform laboratory, attracting lots of outside attention.
Leading Russian economist Grigory Yavlinsky, for example, has worked
with local leaders to develop a blueprint for further reform. Nizhny
also has received significant federal aid, as well as advice from
foreign organizations, particularly the International Finance Corp.,
a World Bank affiliate.
"If there was 10 Nemtsovs around that had his drive, then
[Russia] would be in a much better position," says Charles
Froese, a retired American oil executive who advises local industrial
managers on the free market transition.
The region has garnered the most attention for its privatization
plans, being among the first to sell off small and large-scale enterprises,
as well as agricultural land. But Nemtsov and others are perhaps
more proud of Mr. Yavlinsky’s overall reform plan.
That program aims to encourage entrepreneurial activity by reducing
bureaucratic procedures and maintaining a stable social climate.
The Yavlinsky economic team also has employed innovations to help
local government deal with social obligations, including the issue
of post-communist Russia’s first municipal bond. Last year’s
bond issue raised about 3 billion rubles ($3 million) for city coffers.
Beyond the Yavlinsky plan, the Nizhny region has pioneered Russia’s
new bankruptcy process. In late August, the Zvezda knife factory
near Nizhny became the first major industrial enterprise to file
for bankruptcy. Zvezda lists debts of over 90 million rubles (about
$90,000), and is hoping a court-appointed receiver will turn the
company around. If Zvezda is successful, it could provide an important
precedent. Though Russia has had bankruptcy legislation since March,
Soviet-era factory directors view bankruptcy proceedings with trepidation.
But the most significant thing is setting Nizhny apart from other
regions is industrial production. While Russia is struggling to
stem the drop in industrial production, Nemtsov says output in Nizhny
rose 2 percent in May over the same month in 1992.
The statistics may give reason for hope, but before the region
turns a corner it will have to deal with several strategic problems,
the governor says.
Nemtsov and his advisors, for example, are not satisfied with the
They say enterprises cannot be considered truly privatized until
a mechanism, such as a stock market, exists to trade shares publicly.
"What we have is more collectively held property than private
property," says Sergio Ivanenko, and economist at Yavlinsky’s
epicenter think tank.
Mr. Ivanenko says another daunting task will be dismantling the
Communist-built system that makes industrial enterprises responsible
for financing social infrastructure, such as housing and schools.
Such obligations force industry to divert resources badly needed
for modernization to the social sphere.
"It will be a difficult step politically because we are all
used to cheap housing and other social benefits," Ivanenko
says. "It will take a long time … but the whole nation
must do this."
According to Lisov, Nemtsov’s aide, solving the remaining
problems depends on reducing government’s role in the economy.
A top priority is to reshape popular attitudes long used to taking
orders instead of replying on individual initiative. "The
people are used to the government taking care of them," Lisov
says. "We must break down this psychology."
But no matter how much it advocates deregulation, the Nemtsov administration
still must frequently intervene in the developing market. That is
because Nemtsov says he still cannot trust some conservative industrial
managers who enjoy virtual monopolies.
"This is very difficult for us," Lisov says. "Nemtsov
says we shouldn’t interfere in the economy on the one hand.
But on the other we don’t have a real market economy yet."
If the regional obstacles can be overcome it could have nationwide
ramifications, says economist Ivanenko.
"Nizhny Novgorod is a typical defense-oriented city,"
he says. "If we can solve this city’s problems it may
provide an example for Russia in general."
As for his own role, Nemtsov claims rapid reforms in Nizhny could
collapse if he were to leave office. But he adds that if the present
course continues for another 12 months, then the local market transformation
would no longer depend on the regional leader personally.
"Even within the current administration there are a lot of
problems. But I think that within a year, if I were to leave office,
no one would notice," the governor says.
Bastion of the reformers: From a building on the grounds of Nizhny
Novgorod’s kremlin, or fortress, the region’s
economic planners aggressively implement the privatization
of state-owned enterprises. Fruit sellers test out their entrepreneurial
potential just across the street.
At a nizhny trolley stop: Reformers recognize that Russians will resist giving
up cheap public services.
Center of commerce: Nizhny Novgorod’s pre-Bolshevik merchant
heritage goes along with an industrial tradition dating to
the 19th century and strengthened during the Soviet era. Gravel
is loaded onto Volga River barges, above. Pepsi, whose billboard
is shown at right, is one of many Western businesses attracted
to the climate fostered by wholesale economic reform here.
Reprinted with permission of the Christian Science