The growth of the economy as a whole is closely tied to the oil price. An average oil price of $24 a barrel this year would support GDP growth of 4 per cent in Russia, and a budget surplus equal to 1.5 per cent of GDP. But if the average oil price plunged to $12, that would mean GDP growth of just 0.6 per cent and a budget deficit equal to 2.5 per cent of GDP. Russia’s oil and gas industries account for 50 per cent of export revenues, 40 per cent of gross fixed investment, and, provide through taxes, 25 per cent of government revenues.

Some economists say a high dependence on commodity export revenues is intrinsically bad. Countries reliant on oil and gas revenues have little incentive to diversify and modernize their economies when prices are high and their economies are awash with dollars, as Russia’s was this spring. But when prices plunge, it is too late for reform, and prosperity and even social stability will be endangered.

Russia’s ministry of foreign economic relations and trade treats diversification of the economy as an urgent priority. The worry here is that the government may stray too far into industrial policy, and start trying to “pick winners” among fledgling industries. Past experience, in Russia and elsewhere, shows that when governments try to pick winners, they often end up with losers that they subsidies and protect. Besides, if oil prices do remain strong, Russia will pay a tremendous opportunity cost for investing elsewhere its economy is booming now only because of the oil industry investment of recent years.

The most widely accepted view, therefore, is that the Russian government should concentrate efforts on improving the general business environment in Russia, and leave private investors to decide which industries to favour. Surveys point to excessive government regulation, and the absence of a well-functioning banking system, as main obstacles to growth and diversification of the Russian economy. The tax system, which rated highly as a problem until two years ago, has been successfully simplified and the top rates much reduced, a rare and universally applauded triumph for the government.

The excess of regulation and the shortage of banks are problems affecting mainly smaller and newer companies in Russia. The country’s dozen or so big business groups have their own internal sources of finance, mainly from oil revenues, and good enough names of borrow in the bond market. The failure so far has lain with smaller and newer companies. Harassed by bureaucrats and unable to get the bank loans they need to grow, they have created little of the growth, employment, and diversification that the Russian economy has so badly needed. The optimists point out that the service sector, where small businesses tend to be concentrated, is being lifted by a boom in domestic demand, as high oil revenues pour back into the country. In February Russia’s services sector was showing its strongest growth in almost a year. Moneyed Russians are chasing everything “from second-tier equities to metals plants, agricultural land, retail space, antique furniture and Moscow real-estate.

An economy in which commodity revenues underpin capital investment, keep the rouble strong, and create booming markets for service industries and for some locally produced consumer goods, notable food. It may well produce GDP growth of 5 to 6 per cent or more this year if the oil price remains strong. But it will still leave some very grim problems untouched in Russia’s older and heavier manufacturing industry, where a single vast factory can be vital to the local prosperity of a whole town. Russia has fallen far behind the west in its capacity to make cars, aircraft, televisions and refrigerators, and is a non-starter in the newer manufactured products of the information age.

The rehabilitation of manufacturing is one rare area in which foreign direct investment could be vital to Russia. By bringing in new technologies, and new managerial methods that raise productivity, foreign companies can show it is more profitable in the long run to build good products rather than bad ones. The big test case for manufacturing is likely to be General Motors’s new joint venture with Avtovaz, the leading Russian carmaker. Together, they have built a factory in Samara region, where they began producing late last year a sports utility vehicle of Russian design with American refinements. If the joint venture succeeds, it will set an example and a trend for manufacturing across Russia, encouraging hopes of a balanced and diversified economy. Hungary

The economy is faltering. The sustained rapid growth which followed the 1995 austerity package has declined sharply in the face of the global slow-down and a serious drop in Hungary’s international competitiveness. Gross domestic product rose by just 3.3 per cent last year, down from 6.6 per cent a year earlier. The figure, good by western European standards, is well short of the rate need to ensure Hungary reaches the wealth levels of its European Union partners quickly after it joins in 2004.

Slovenia