Quotes of the Day

There are no oil wells in the Russian town of Kaluga, no gold mines and no rich mineral deposits. In fact, until recently, there was very little in this town (pop. 345,000) other than some run-down farms, a distillery that produces mediocre vodka, an assortment of metalworking shops, a big statue of a Soviet rocket-science pioneer and a T-34 wartime tank monument on the main road into town that still bears the inscription, "For Stalin and the motherland."

But these days, here in provincial Russia, a three-hour drive from Moscow, something is stirring. The potholes on Lenin Street are as treacherous as ever, but over the past couple of years the dreary Soviet-era stores that once lined it have been snapped up and remodeled. Waitresses in red tartan aprons now dish out edible pizza for $1 a slice at Tashir's shiny new restaurant, which also offers wireless Internet access. Nearby are a sushi bar, a kitchen design store, a café that bears a passing resembling to Starbucks, a bright yellow mobile-phone kiosk that's open 24 hours a day and Jackpot, a slot-machine arcade that marks Kaluga's attempt at glamour. A South African company has renovated the town's brewery. "You can see people have more money," says Alexander Kuptsov, owner of Bellissimo, a shoe boutique that stocks a range of little-known Italian brands alongside a few famous ones like Valentino. In a good month, he sells 150 pairs.

With oil prices at over $70 bbl., Russia is awash in cash — and at least some of it is now trickling down to ordinary people in ordinary places. After seven consecutive years of robust economic growth — currently around 6% after inflation — growing numbers of Russians have money to spend. That makes for a remarkably different Russia from the $10 bbl. 1990s, when a handful of Moscow oligarchs worked their political connections to build vast fortunes at the expense of everyone else. There's still nothing egalitarian about the way Russia's new wealth is distributed; the rich are getting a lot richer, corruption is endemic and millions of people continue to struggle, especially the old and those in rural areas. But wages are rising fast, there's plenty of work available, particularly for young urbanites, and private companies are sprouting.

Victoria Grankina, a Moscow-based retail expert, reckons that about 30% of the population now lives "fairly comfortably" on a monthly income of about $1,000 for a family of four. Whether that makes them middle class in the Western sense is a matter of dispute. What's certain is that rising consumption is no longer limited to Moscow. National retail spending has doubled in the past three years and the strongest growth is now to be found in the Urals region and parts of Siberia, where it is leaping by more than 25% per year. The number of mobile phones has soared from 12 per 100 Russians in 2002 to 88 today. Sales of new foreign cars jumped 60% last year. Charter holidays to Turkey and Egypt are taking off, as are two financial novelties: consumer credit and home mortgages. Billboards plastered around Russia's big cities now vigorously tout them, alongside dvd players and fridges. Even the number of Russians living in misery is dropping: a World Bank study shows that the Russian poverty rate halved between 1999 and 2002. That still leaves 2 out of every 10 Russians living in poverty, but the number continues to decline.

Sergei Kuznetsov, 32, is one Russian in a hurry to live better. He used to sell sausage from a kiosk in Kaluga's open-air market, a tough business under any circumstances and particularly after Russia's 1998 financial crisis, when the government temporarily suspended debt repayments and devalued the ruble by 30%. But the economy recovered much faster and more strongly than anyone expected. Together with his wife and a friend, Kuznetsov scraped and borrowed to buy a crude packaging machine and set up a snack-food business. Sunflower seeds are his main product. He buys them in bulk from farmers in Rostov, 400 km away, roasts them, and then sells them in nearby towns through a small network of distributors. He recalls how in the early days he had to trudge through fields carrying bags of seeds to the building that housed his rented roaster because it wasn't accessible by road. Today, the Kuznetsov Seed Co. has annual revenues of about $1 million, and most of its upgraded equipment is in the cafeteria of a former school. Kuznetsov drives a silver Renault Scenic compact suv while his wife, who has stopped work to remodel their apartment, dodges the potholes in her new lime green Daewoo. Some 21 people work at the company these days, and he doubled their salaries in the past year, to about $300 per month, the Russian average. Now he's planning his next step: to buy land outside town to build a factory. Getting permits will require laborious and expensive tangling with the local bureaucracy, but Kuznetsov is not deterred. "You can never be optimistic about anything in our country because if you're optimistic it will end badly," he reflects. Still, his prosperity reflects the welcome economic stability in the country. And for that, he credits Vladimir Putin, the Russian President. "There is no alternative to him," he says. "Stability is important for business."

That sort of endorsement is common in today's Russia, where Putin's popularity rating is over 70%. It's a far cry from the view in the West, where the Russian President is often painted as a throwback to autocracy. Many Westerners have been alarmed as the Kremlin tightened its grip on society, cracked down on nongovernmental organizations and maneuvered to take control of natural resources and other industries it deems strategic. U.S. Vice President Dick Cheney last week delivered one of the Bush Administration's most scathing attacks on Russia, lambasting the Kremlin for "unfairly and improperly" restricting people's rights and saying that "no legitimate interest is served when oil and gas become tools of intimidation or blackmail."

Some of that apprehension spills over into concerns about the integrity of the Russian economy. Payoffs are the norm if you need any sort of official permit. Andrei Milekhin, who runs Russia's biggest polling organization, Romir Monitoring, reckons that public officials who line their own pockets make up a significant portion of the new middle class. And it's not just Russians who are expected to pay: IKEA ran into a wall of trouble in Moscow because it refused to give kickbacks to city officials. It finally managed to open its two stores there after it made a big public fuss. Yet Derk Sauer, for one, is convinced something significant has changed in Russia. He's a Dutchman who started a magazine business in Moscow during Soviet times, and built it into Russia's biggest media company. Among the dozens of titles he now publishes is Russian Cosmopolitan, which has doubled its circulation to 1 million in just 18 months. He used to pay his staff in dollars, but in March he switched to rubles — because the staff asked him to. "Putin gave the Russians back their self-confidence," he says.

That's not to say Russians are giving up their legendary pessimism. Milekhin says his polls suggest that most people don't feel better off even if they are consuming more. Everyone grumbles about inflation, currently about 12%. Apartment prices are soaring faster than in Shanghai or New York City. Yet the favorite political noun of the moment is the one used by seed roaster Kuznetsov: stability. For all its dramas and uncertainties, the Putin era seems less erratic than the last decade, starting with the collapse of the Soviet Union in 1991 and finishing with the Yeltsin-era 1998 crisis that wiped out most people's savings. Oil may be powering economic growth, but Putin is reaping the benefit of it. "He's our Teflon President," says Milekhin, pointing to a chart that shows how even potentially damaging events such as the Beslan school hostage crisis in 2004 haven't dented Putin's popularity.

Those most optimistic about the future are the people too young to remember Soviet times. Valentina Zagrebelnaya, 25, is part of that generation. She treads carefully as she crosses Lenin Street so as not to get mud on her spike-heeled ankle boots. She runs the Kaluga branch of KMB bank, which specializes in giving small loans to entrepreneurs. The Kuznetsov Seed Co. is by far her biggest client. She was 21 when she opened the bank branch, a graduate fresh from the local arts college with no financial experience. No matter: in the first couple of years there were almost no takers. Now, though, she's busy. Last year there were about 70 startups in Kaluga. The KMB Kaluga branch's loan portfolio swelled over the past year from $600,000 to $2 million, and the number of clients has doubled. "A lot of people want to open shops," she says.

And if the scene is that vibrant in a backwater, head to any of the dozen big cities in Russia and the signs of new prosperity are even more striking. Yekaterinburg in the Urals (pop. 1.3 million) is one example. It's best known as the place where the Bolshevik revolutionaries shot the last Czar and his family in 1918. In Soviet times, it was an industrial center specializing in heavy machinery, including for military industries. But in the early 1990s, local factories ran out of money and rival mafia gangs battled for control of parts of town. A row of ornately decorated graves in Shirokorechenskoye cemetery is the legacy, including one with a life-size portrait engraved on a marble slab that shows the mobster in a sharp suit, casually dangling the keys of his Mercedes.

The killings haven't entirely stopped — a member of the city council was mysteriously found hanged in his jail cell last year after being arrested for alleged extortion — but these days, cranes rather than guns are a more apt symbol of Yekaterinburg. Office and apartment blocks are shooting up. A new Russian Orthodox church has gone up on the site where the Czar was killed, paid for by the state-owned Ural Metal and Metallurgical Co., which is doing good business in copper wiring. There's an Egyptian-themed bowling alley, a Scottish pub where the barmen wear kilts, a chain of eight fast-food restaurants called McPeak, countless sushi bars and a huge German cash-and-carry hypermarket out near the airport. British Airways and Germany's Lufthansa have both started direct flights here. "It used to be hard to get credit, but now banks are lining up to lend to us," says Leonid S. Bazerov, who built a shopping mall in an abandoned theater on Vainer Street in the mid-1990s and has now expanded it to almost 10 times the original size.

Can the boom times last? Russia has set aside a portion of the windfall oil revenues in a so-called stabilization fund that now tops $55 billion. It's also running a budget surplus that's the equivalent of 7% of gdp, and has bolstered central bank reserves and slashed foreign debt by half. But economists worry that the Kremlin hasn't used the recent fat years to cut back on the remnants of Soviet-era bureaucracy, modernize Russian industry or improve the overall investment climate. "Russia will continue to be hooked on oil revenue for the foreseeable future," cautions Ivan Szegvari, a Russian economy specialist at the European Bank for Reconstruction and Development in London.

Some critics are even blunter. "There is no Putin economic miracle," growls Robert Amsterdam. He's a Canadian lawyer who represents Mikhail Khodorkovsky, a onetime Russian oligarch who fell out of favor with the Kremlin, which last year jailed him in Siberia on fraud and tax evasion charges and nationalized Yukos, his oil company. Amsterdam describes his client as "the world's first energy hostage." Yes, he acknowledges, "the middle classes are starting to grow in Russia, but there's a tremendous amount of insecurity and fear that's creeping in."

Clearly it's risky for Russia to depend so heavily on its oil, gas and natural resources. Retailing is booming (see Comrades in Consumption) but so far, there are only relatively few examples of other businesses that have whipped themselves into shape. Kalina is one — a Russian cosmetics factory based in Yekaterinburg since 1942. In 1996, a Russian businessman acquired a controlling interest and starting rebuilding it. Today the plant is almost fully automated, and its main brand, Black Pearl, is Russia's best-selling face cream, ahead of more expensive imports by L'Oréal and others. "We're gaining market share, both because the number of customers is increasing, and because they're buying more," says Alexander Petrov, the chief financial officer.

But there is still plenty of evidence that Russian businesses need to diversify if the entire population is to benefit. Those who can't afford to splurge on face cream are to be found at places like the Shartashky open-air market in Yekaterinburg. Here several stalls are reserved free of charge for the elderly trying to supplement meager state pensions. At one end, women in thick coats sell glass jars of tomatoes and cucumbers they have grown and pickled themselves. At the other end stands Victor Shkola, 66, hovering by his collection of wrenches, screwdrivers and assorted metal widgets. He retired from a road construction company six years ago and can barely pay the rising rent and utilities bills, which eat up about $75 of his $95 monthly pension. On good days he can earn up to $8 a day from sales of his hardware, but that's not enough. "I can't help my daughter and my two granddaughters," he says grimly, "and that makes me feel bad." Putin this year has made a point of promising to spend more on social services, and the Kremlin recently raised some state pensions. But in the food section of the Shartashky market, Gulfara Shakhulovna, 59, isn't impressed. She is worried about the health of her husband, a carpenter who retired but went back to work again to make ends meet. Pensions may be going up, she says, "but that won't help because food and rent are also going up."

Prices are going up in Kaluga, too, but Svetlana Nikolskaya, 36, says she tries to be flexible if it means making a sale. She is a former accountant and vegetable saleswoman. Three years ago, after the birth of her son, she started selling Polish wedding dresses from home. It took her three months to sell the first one. Today, she has a cramped boutique on Lenin Street next to a hat shop. In the wedding season, she sells up to 20 dresses a month at prices ranging from $100 to $400 apiece. If that's too high, she's pleased to be able to offer a discount. A prominent sign in the store says "500 rubles off" — that's about $17. Is she confident about the future? What does she think of Putin? She squirms uncomfortably, claiming not to know anything about politics. How about business? She flashes a broad smile. "Yes," she says, "I believe in the future of that." Today's Russia depends on a few million more sharing that optimism.

• PETER GUMBEL / Kaluga
• Oil money is firing up the economy and breathing new life into once derelict Soviet-era towns