Russia Gets Rich

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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.