The symbol of Ochakovo Beer is a full-bearded, prosperous-looking Russian country man hoisting a stein of golden lager with an anticipatory smile. At the Ochakovo brewery here, the symbol reflects the reality.
The brewery is working around the clock and plans to nearly double production this year, to 118 million gallons of seven types of brew. "It's become profitable to produce in Russia, and beer is becoming more fashionable," said the brewery's vice president, Inna Kochetova. "Young people don't drink vodka anymore."
The surge in beer sales is a small glimpse of how the devaluation of the ruble a year ago today has rearranged the landscape of the troubled Russian economy. The ruble's collapse and the subsequent economic crisis were like a forest fire that blackened everything. New shoots of industrial activity are now springing from the ashes.
For beer drinkers, the ruble's crash made imports prohibitively expensive because many more rubles were needed to buy foreign-made products, and demand soared for Russian-made beer, whose cost was barely affected. Imported beers, once half the market, now account for less than 10 percent. In other sectors, from sausage to cars, domestic production is starting to fill the gap left by the disappearance of imports.
After years of industrial decline and a post-Soviet economic plunge equivalent to the Great Depression, the sight of factories beginning to stir again offers a glimmer of hope for Russia. A rise in world oil prices is also providing a boost, for Russia is a leading oil producer. "The balance of pluses and minuses is now in Russia's favor," said former economics minister Yevgeny Yasin.
Unfortunately, the factory revival is not the whole story. A host of deeply ingrained problems, from a crippled financial sector to chronic corruption to a shortage of capital, continue to plague Russia's bid to become a market economy, and some of the difficulties have grown worse in the past year. One of the most serious is continuing political instability as symbolized by President Boris Yeltsin's firing of his prime minister last week. The influence of business tycoons also remains strong.
The Russian people were big losers in the currency devaluation and financial crisis. The nascent middle class had come to trust commercial banks and lost millions of dollars in deposits when a number of banks collapsed. In addition, most wages and pensions were not indexed to protect people against the higher costs they faced, because of the devaluation, for imports and for domestic goods affected by the pickup in inflation that followed.
The ruble's devaluation on Aug. 17, 1998, was a thunderbolt that seemed to unravel one of Yeltsin's few accomplishments, a stable currency and the quelling of hyperinflation of the early '90s. But many experts say the devaluation was inevitable and marked an important turning point in Russia's short, turbulent effort to become a market economy. The ruble was devalued from about six per dollar a year ago to a rate of about 25 per dollar today. (Russia also defaulted on about $40 billion in short-term high-interest domestic bonds known as GKOs.)
Looking back, some economists say that Russia could not have sustained the stronger ruble. The Asian economic crisis and the drop in oil prices were double blows, and the government was living in a financial bubble -- borrowing more than it could afford. Now, economists say, the weaker ruble has created conditions for industrial growth, and contrary to expectations, Russia has not returned to hyperinflation.
"The crash in the ruble was the best thing that ever happened to this country," said Eric Kraus, a Moscow-based banker. "An overvalued currency is a recipe for disaster. When I arrived, Moscow was more expensive than Osaka or Zurich. Russia is a poor country, and it should not be that expensive. The overvalued ruble meant that it was just much cheaper to import. There was no use restructuring industry when you could import the same goods for a quarter of the price."
Anders Aslund, a senior associate at the Carnegie Endowment for International Peace, said he believes Russia is experiencing a "radical turnaround" driven by devaluation and higher oil prices.
He pointed out that the industries that are thriving produce not raw materials but intermediary goods, such as chemicals, pulp and paper, as well as construction materials and manufactured goods like cars, pharmaceuticals, machinery, textiles and shoes. Barter -- which had gripped the whole economy in recent years -- is declining, he said, while tax payments in cash are rising.
The more promising outlook is reflected in the prospects of the giant Ochakovo brewery, located in a Moscow industrial zone. Once a Soviet-era beer and bottling factory, the company, now owned by its workers, installed new brewing equipment in recent years and is in position to meet the growing demand for Russian beer.
Moreover, devaluation reduced the brewery's costs because it pays in rubles for water, electricity and wages, while buying malt and hops abroad. Most Russian workers do not get full wage adjustments for the devaluation, so the price of labor dropped dramatically with devaluation.
"Our costs are in rubles, and dollars are not a decisive factor," said Kochetova, the brewery executive. While Ochakovo beer retails for eight to 10 rubles a half-liter (32 to 40 cents for almost 17 ounces), imports cost twice as much.
Breweries are also riding a tide of interest among young drinkers. Ochakovo has brought out four new beers to cater to the younger generation, which "wants to taste something new and interesting," said marketing specialist Galina Grekova. Russians under age 30 account for nearly a third of beer consumption here, surveys show.
Russia has hundreds of breweries, however, and competition is growing stiff. Kochetova said product quality had to be improved from the notoriously bad Soviet brew. "It's not the beer we had four years ago," she said.
But the big question for Russia goes beyond getting some factories back on their feet. Some economists have questioned whether the latest industrial spurt -- based on import substitution -- can be sustained. Aslund said, however, that "a qualitative breakthrough is taking place, and not only a temporary improvement."
One big casualty of the ruble's devaluation was Russia's financial system, which has yet to be put back together. "The financial system looks lamentable after one year," said Yasin, the former economics minister, adding that rebuilding it "will go slowly, primarily because it does not possess any serious capital."
Kraus said that even before the devaluation, "there was a total divorce between the financial sector and the real economy. Unlike the Wall Street crash of '29, when you had a crash that brought down the real economy, you didn't have that here. The Russian financial sector was not providing capital to industry. . . . The capital functions were not missed because they had not been there.
"It's a major problem that you cannot get the development of a modern, functioning capitalist economy in the absence of capital," he added. "On the other hand, Russia never had it. . . . There are other things that are more important at the present time, such as establishing rule of law, enforcement of contracts and a reasonable tax system. The tax system destroys everything here."
Ochakovo's Kochetova said the brewery has received bank credits but declined to answer specific questions about its finances.
In the longer term, Russia remains a pariah on global credit markets, having defaulted on both its domestic debts and its promise to repay Soviet-era debts, some of which are now being restructured. The country appears to have avoided a sovereign default this summer. But some analysts say it is too early for Russian businesses and the country to resume borrowing.
"It's like keeping loaded guns out of the hands of children," Kraus said. "Most of the money was misallocated or ripped off. I don't think at the present time they would make good use of easy money from abroad."
CAPTION: A BUDDING REVIVAL (This chart was not available)