The Two Russias.(Moscow and the rest of Russia have two separate economies)(Column)

Five years ago, Moscow's Gorbushka Market was a window on the lawless Russian economy. Merchants trafficked pirated CDs under the trees or peddled smuggled stereos from the backs of trucks--dodging cops and tax inspectors. These days the Gorbushka (as Muscovites affectionately refer to it) has emerged into the light. A Soviet-era TV factory has been converted into an air-conditioned consumer-electronics mall--some 2,000 stores, ranging from stalls offering mobile phones to luxury boutiques featuring state-of-the-art viewing salons for flat-screen TVs. Sony and EMI are building official pavilions, and 75,000 people visit each day. "We believe we are the biggest seller of music and videocassettes, music CDs and DVDs in Europe," says Igor Tokar, a spokesman for the mall's biggest landlord, adding that the Gorbushka is no longer a window on the nation, or even part of it. "Russia is a separate country," says Tokar. "What can I say? Moscow is Moscow."

Fifteen years after Mikhail Gorbachev made his first moves toward reform, there's a widespread belief that Russia is developing into a normal market economy. What's really happening is that Moscow is becoming a pretty typical European capital, while the rest of the nation waits in vain for real change. Other oases of urban prosperity include St. Petersburg, but only Moscow has been able to exploit its position as the traditional center of all Russian worlds to build a modern, service economy. Officially, per capita GDP in Moscow ($5,500 in 2002) is three times higher than elsewhere in Russia, but most experts say the real gap is wider and growing fast. As in other rapidly urbanizing countries like China, that's creating two vastly different realities. "The question," says Moscow media mogul Oleg Khripunov, "is whether this Moscow locomotive will pull the rest of Russia behind it or detach itself from the rest of the train and speed away."

Moscow's momentum dates to the Soviet era, when central planners made even the smallest decisions in the capital. When the Soviets fell, a new class of industrial oligarchs rose, but they too rely on Moscow connections to stay in business. Now, the emerging rule of markets means that business, finance, entertainment, media, trade, culture and fashion are increasingly focused on Moscow--as if New York, Washington and Los Angeles were one capital. "Moscow has always been a parasite at the center of the empire, sucking all that's good from the fringes to itself," says American banker Bernard Sucher, who recently took a job with a Russian bank based, of course, in Moscow. More than 84 percent of all bank assets in Russia are on deposit in the capital. "This is where the action is," says Sucher.

About 7 percent of Russia's 145 million people live in Moscow, but they produced 21 percent of the nation's GDP in 2002, up from 14 percent in 1997. Because the rich and private businesses are heavily concentrated in Moscow, the real gap is likely even wider. "Income levels are understated everywhere in Russia, and in the higher-income brackets they're probably understated more," says World Bank economist Christoph Ruehl. "And the more that's coming from the private sector, the more that they're hiding."

Much of the money now comes from oil found in far off Siberia, or the Pacific island of Sakhalin. But Russian oil companies like Gazprom pay taxes in their home city, usually Moscow. The capital is pouring money into sleek new highways and a gleaming makeover of Domodyedovo airport, now Russia's best, while the rest of the country falls deep into disrepair. More than ever, it's Moscow where the deals are done, the profits banked, creating a new professional class that staffs a booming service economy. By 2000, service industries accounted for 45 percent of the Russian economy--and 75 percent of Moscow's.

President Vladimir Putin bemoans Russia's failure to create a new sector of small businessmen to replace the oligarchs, but those worries apply mainly outside the capital. One quarter of all Russian small businesses are in Moscow, from insurance companies and fitness clubs to newspaper ...