Economy of Clay

For evidence of this systemic inefficiency, compare Russia's apparently healthy GDP growth with that of its neighbors. Seven-to-8 percent sounds robust—until you look at Ukraine, or Turkey, which have enjoyed nearly 7 percent annual growth since 2004, yet none of them have oil, gas or significant mining industries. Plus, they have had to take the knock of much higher energy prices. "Russia has underperformed in relation to the other former Soviet republics," says Aslund.

Indeed, by some estimates, Russia's GDP growth should have been closer to 14 percent—after all, Russia is the world's largest energy exporter at a time when prices have tripled during the last half decade. So where did the difference go? "Russia's elite still believes that what they have can be taken away at any time, so they spend like mad, or hide their money abroad," says Professor Igor Turkhansky, who studies elites at Moscow's Russian State University for the Humanities. "The idea of reinvesting your money to grow your business, or to saving your salary in a Russian bank for the future—all these ideas are very new."

The underlying reasons for Russia's underperformance are more political than economic. Though in fairness the Putin government has, over the last eight years, pursued some wise macroeconomic policies—most notably, setting up a "stabilization fund" into which $157 billion of oil revenues have been placed for a rainy day. That will certainly help to avert the kind of financial crisis that toppled Russia's last truly reformist government back in 1998—which was caused by a broke government accumulating vast debts, both domestic and international, which it couldn't service. A full-scale default ensued—something that Putin's stabilization fund will prevent.

But on a deeper level, the policies of Putin's Kremlin—which will doubtless be continued by the Medvedev administration—have considerably worsened Russia's economic situation. At base, the most fundamental economic problem is that the Kremlin has grossly undermined basic property rights. Put bluntly, "the state uses the law selectively to expropriate the property of its enemies—or of any business which individual bureaucrats want to steal," says Sergei Filatov, an activist for the United Civic Front opposition group.  

Last December, for instance, the Russian government temporarily shut down the operations of a natural-gas development on Sakhalin operated by Royal Dutch Shell, Mitsui & Co. Ltd. and Mitsubishi Corp. And last month a campaign of harassment against the TNK-BP joint venture was stepped up a notch when the Federal Security Service, or FSB, successor to the KGB, raided BP's Moscow offices and arrested a Russian-American executive and his brother on spying charges. The reason for the pressure? Gazprom has long been negotiating for a bigger share of TNK-BP's Kovytka gas field in Siberia. "We're quite used to this kind of behavior," says the company executive, who was not authorized to speak on the record. "In West Africa, for instance, and Venezuela." 

The result is a kind of state-sanctioned extortion. And by extension, that every businessperson in Russia knows that his or her business is only safe from being raided and stolen by bureaucrats or police to the extent that they have powerful allies in the police or administration themselves. The system "is essentially feudal," says Elena Panfilova, head of the Moscow office of Transparency International, an anticorruption watchdog. "Every business pays a tribute to the local holders of power—from the police to the fire inspectors to the regional governor." If they do not pay, then the business—whether it's a multi-billion-dollar offshore gas project or a hairdressing salon—can be closed for any of a dozen technicalities.