PERSPECTIVE ON RUSSIA : State Sector Collapses, Private Sector Snores : Yeltsin’s reforms misjudged the appetite for entrepreneurship. Growth takes a back seat to just staying afloat.

At today’s summit meeting in Washington between Boris Yeltsin and George Bush, economics will be high on the agenda. While the American economic situation has improved, Bush will have to concede that he still has concerns. What will Yeltsin be able to report?

While his situation is still very serious, Yeltsin does have some reason to boast. He launched one of the most ambitious economic reforms the world has seen in several decades, and so far, his government has survived.

In a bold effort to stimulate more rational use of the country’s resources and manpower, he decreed that prices of most goods should be determined by market forces, not dictated by central planners. To temper the ensuing tenfold inflation, Yeltsin and his chief economic adviser, Yegor Gaidar, have sought to institute a balanced budget.

Yeltsin should have immediately privatized the country’s lands, services and small industries. Eventually, he corrected his error, and now private businesses are slowly beginning to sprout all over the country as profit opportunities become irresistible. I have met millionaires in the former Soviet Union who have bought their own cargo ships and trucks. They are uninhibited about rocketing their way through uncharted legal shoals as what once was illegal becomes legal, at least sort of. Some of them once spent time in jail, and they fully realize that conditions may change and they may again end up “enemies of the people.� For that reason, they hold most of their dollar earnings abroad.

While theoretical economists debate when and how to make the ruble convertible, these millionaires have discovered that, for their purposes, the ruble is already convertible. There are periodic auctions where these businessmen can buy dollars. They use these dollars to import consumer goods, everything from toiletries to Toyotas, which they sell in rubles. With their profits, they return to the auction and repeat the process.

I met one import entrepreneur who also earns dollars by brokering petroleum exports. As part of the decentralization process, local officials in some of the oil-producing regions have been allowed to sell up to 25% of their output to non-state purchasers. Thus my friend arranged the sale of oil from Bashkir to foreign purchasers for dollars.

Unfortunately, most of this activity involves nothing more than buying and selling. With such high inflation and political instability, it is too risky to go into production. But the Chinese confronted similar obstacles a decade or so ago and ultimately began to engage in manufacturing as well.

Against these promising developments there are mounting problems that in turn are fueling resistance to Yeltsin’s efforts. His biggest worry is that a substantial proportion of the state economic sector has already collapsed or is about to do so. The breakup of the country into quarreling separate nations adds to the confusion and complexity of trying to produce without a steady flow of components.

The big unknown is whether the nascent private sector will grow fast enough to take the place of the collapsing state sector. Yeltsin’s advisers are only slowly coming to appreciate that, while it is to be expected and applauded when some of the state factories, with their outdated technology and military production, are closed, that fall in output must be offset by new growth, particularly in consumer goods. Instead, until just recently Gaidar placidly accepted the notion that all efforts to transform communist planned economies into market economies must inevitably precipitate a 20% drop in GNP. As China has shown, that need not be. Unfortunately, such faulty analysis has lulled some Russian economists into the mistaken conclusion that since the GNP has dropped 20%, the reforms must be working.

The continuing inflation is equally frustrating. The effort to balance the budget and curb the printing of money by the banks has been all but nullified as state enterprises have discovered how to create their own money: They simply refuse to pay their bills and wages. This also avoids, at least temporarily, the alternative of bankruptcy and layoffs. State enterprises’ unpaid bills have soared from almost zero a few months ago to 1.5 trillion rubles as of May 1; unpaid wages exceed 70 billion rubles.

Sooner or later this Ponzi scheme will come undone and there will be widespread bankruptcy and unemployment that some expect could reach 10 million. To avoid that, Yeltsin has begun to pull back on some of his reforms by appointing officials from the old central planning days. He has decided to increase government subsidies to factories and raise wages. But this fuels inflation and violates the conditions set by the International Monetary Fund for loans from the West.

Perhaps it was unrealistic for Yeltsin and Gaidar to think that in a reasonably short time they could straighten out an economy that for 70 years had been purposely distorted. No wonder they become enthusiastic at the least sign of progress. But too much enthusiasm may be premature. Muscovites tell of the Yeltsin reformer who found himself in a train going through a narrow tunnel. “Good news,� he shouted. “I see light at the end of the tunnel.� Hearing that, the conductor responded, “You idiot! That’s another train.�