"Don't Turn to Russia for Economic Inspiration," The Washington Times 19 July 2001 p A20

Columnist Lawrence Kudlow attributes Russia's economic growth to its adoption of a flat tax ("Economy tuning up in Russia," Commentary, July 17). But the Russian economy has been growing since 1999, even though the flat tax was only implemented in 2001. Two external causes account for this discrepancy.

The first is the spike in oil prices since 1999. Russia's economy is heavily dependent on its energy sector, which accounts for two-fifths of Russian exports. While Russia's total energy production is falling, the value of its energy exports are rising as global energy prices surge. Moreover, state-controlled energy firms are the source of the surpluses Mr. Kudlow attributes to the flat tax.

The second economic spur is the low exchange rate. Russia's currency is still undervalued as a result of the ruble's 1998 collapse. As a result, imports into Russia are expensive while its exports are artificially cheap. This led to an explosion in Russia's manufacturing exports. As the ruble rises again, however, Russia's failure to restructure manufacturing firms will resurface.

Fundamentally, the Russian government is still the problem, not the solution. The Russian tax code was complex, but the real drags on business are the transaction and compliance costs associated with corruption. The government also interferes with shareholder rights, for example, by placing a bureaucrat at the head of Gazprom, the allegedly private natural gas producer. It uses corporate law to ferret out political opponents instead of corrupt managers. None of these policies fosters the long-term economic growth that Russia so desperately needs.

WILLIAM D. SHINGLETON

Senior Fellow

National Defense Council Foundation

Alexandria