Economy of Clay

Russia's Ministry of the Economy found in a 2007 study that Russia's average industrial productivity was just 1/30th of the United States and European Union; AvtoVaz, for instance, the maker of Lada cars, utilized 27 times more man-hours per unit of profit than the average European manufacturer. And workers in the Russian aerospace industry produced an average of $14,800 per person—in the EU's aerospace industry, the average is $126,800.

"The driver of the economic growth has been the private sector, but Putin is endangering that growth through his renationalization campaign," says Aslund. According to the European Bank for Reconstruction and Development, Russia's private sector generated 70 percent of GDP in 2004 but by 2007 that fell to just 61 percent. And renationalization continues, by fair means and foul, as TNK-BP, Domodedovo airport in Moscow and other private companies singled out for "soft renationalization" by the state are finding out, to their cost.

Most worrying of all, the nationalization and inefficiency have led to a decline in the most important sector of all, oil production. Private investment transformed the old Soviet oil industry into something more modern, drilling new wells when old ones were exhausted and opening new fields. By 2004, production was up to 1991 levels—but without continued investment, that level will soon sag again.

Indeed the future supply of Russian oil is threatened by a likely decline in production levels, one of the country's top oil executives has warned. Leonid Fedun, CEO of Lukoil, Russia's largest privately owned oil company, said last week that $1 trillion would have to be spent on developing new reserves if current output levels were to be maintained—meanwhile the most recent figures show that Russian oil output fell 1 percent in the first quarter of 2008. 

Another problem is an underdeveloped financial system, which makes credit for small businesses expensive and hard to find. Over the last two years, consumer credit has boomed nearly fourfold, with companies such as Russky Standart making small- and medium-scale loans to middle-class Russians to buy cars and apartments. But on a larger scale, Russian businesses are finding it hard to finance their debt or attract real investment.

Again, the macroeconomic figures are deceptive: foreign direct investment into Russia was $28 billion last year, and net capital inflow into Russia reached a record $82.3 billion in 2007, almost double the previous year's figure. But the vast majority of that money went into the energy and mining sectors: the Moscow-based small businesspeople's association Opora reports that banks remain unwilling to make long-term loans at reasonable rates because of the instability in the real economy and uncertain property rights.