Economy of Clay

Not surprisingly, given the fact that it is more profitable to be a bureaucrat than a businessman, that the size of Russia's bureaucracy has risen by 50 percent in the eight years of Putin's rule—from 522,000 to 828,000. More, a survey last year of 16-to-24-year-olds by the Moscow-based Levada Center found that nearly 70 percent of young Russians aspired to work for the state rather than become entrepreneurs.

In 2007, Transparency International ranked Russia 143rd out of 180 countries on corruption, putting it on par with Gambia, Indonesia and Togo (in 1998 it was in 76th place.) Even Alexander Buksman, Russia's deputy prosecutor general, estimates that scale of kickbacks and corruption comes close to equaling entire annual revenues of the Russian state. "The scale of bribes has reached such a level that within a year a midranking corrupt bureaucrat can buy himself a 200-square-meter apartment," complains Buksman.

This systemic insecurity is really the root cause of Russia's instability. Small wonder, then, that and the reason that the number of small and medium scale business is actually going down in Russia—while they account for over half America's GDP. In Russia, firms employing fewer than 100 people account for just 15 percent of gross domestic product.

Tackling corruption has been a major theme of president-elect Dmitry Medvedev's rhetoric over the last few months. Calling corruption "a key threat to modernization and social stability," Medvedev even announced that he would ban law-enforcement and local inspection bodies from entering business premises without a warrant from a court. Medvedev also ordered the government to review legislation to protect small companies from being forced to enter into "security" or "consultancy" contracts with local authorities.

But while Medvedev at least seems to grasp the seriousness of the problems facing small businesses—and the importance of creating a real, non-oil dependent economy to secure long-term prosperity—critics charge that it's impossible to expect local administrations and local law enforcement to reform, when they themselves are the main problem. "Corruption is not an aberration from the system," explains Panfilova. "In Russia today, it is the system."

More, the state-centered economic system that Vladimir Putin has created favors giant, fully or partly state-owned behemoths like Gazprom or the oil company Rosneft over small, private businesses. Indeed, the Kremlin has been the fastest-growing Russian corporation of all, extending state control into almost every sector of the economy from energy and metals to the defense industry, car and aircraft makers and the media. These giants are grossly inefficient by any Western corporate standards, yet the flood of oil money coming in obscures their fundamental unsoundness in a deluge of cash.