State-Run Shakedown

By Michael Schuman / Moscow Monday, Sept. 26, 2011
    • Photograph by Alexander Gronsky / Agency.Photographer.ru for TIME

    Economic twilight? The Kremlin promises change, but so far it's more talk than action

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    Yet so far, Medvedev's bold talk has remained mostly talk. In part, the roadblock may be a resistant bureaucracy still not detached from its Soviet roots. "There is no respect for private property and economy in the minds of the majority of bureaucrats," Dvorkovich complains. The biggest obstacle might be Putin. Medvedev sits in the Kremlin, but Putin remains the ultimate arbiter in the economy, and there is little to suggest he has joined the small-government tea party. "He believes in the traditional Russian way — the state should be the biggest player in everything," says Maria Lipman, a political analyst at the Carnegie Endowment for International Peace in Moscow. The sort of liberalization propounded by Medvedev would threaten the sources of patronage and control that ensure Putin's position. In fact, by advocating market reform, Medvedev and his advisers are issuing a barely veiled critique of Putin. Dvorkovich talks of turning Russia into a "less paternalistic" society — a swipe at Putin's method of governing: "I think we have, potentially, people who are more inclined to freedom than state intervention into private life." And, Dvorkovich adds, their numbers are growing. Yet more paternalism is likely what Russia will get. With the next presidential election in March, Kremlin watchers are waiting to see if Putin will declare his candidacy for a third term.

    Because of his popularity at home and the not-so-free-and-fair nature of Russian elections, he would almost surely win. Even if Putin remains in the background, some analysts believe Medvedev and his team haven't forged a political base sturdy enough to challenge Putin or his policies. That leaves Putin's critics convinced that only a major shake-up in Russian politics could fix the economy. Talk of market reform "is like a patient with terminal cancer putting on nice makeup," says Browder. "In order for Russia to change, they need a real change in most of the government leadership."

    Diversify or Die
    with no sign of that happening, discontent is growing. In a closely watched August poll conducted by Moscow's Levada Center, a mere 22% of respondents believed their government could improve the country's prospects. A restless public is not the only factor increasing the pressure to reform. The poor investment climate has made the economy dangerously dependent on oil and more vulnerable to volatile prices. Putin's expanded state is so thirsty for oil revenue that it requires not just high prices but increasing prices to meet its spending commitments. If oil prices plunge to $70 or less per barrel, it could face a budget crisis. The only solution is diversification into new industries, but Russia has had minimal success. Even though it was famous during the Soviet era for its advanced technical talent, the country today has only a handful of technology firms with a global presence.

    The Kremlin is attempting to change that through — not surprisingly — state action. Medvedev has endorsed a $6 billion program to create a state-run technology park outside Moscow called the Skolkovo Innovation Center. Companies that gain admittance will get tax breaks, express customs clearance and other perquisites. Some 120 firms have received the green light so far. Yet even the endeavor's senior managers fret that the program will be undermined by corruption. To shield the project from self-serving bureaucrats, applications are judged by panels of independent experts. Plans call for the park, on which construction is just beginning, to have special teams of police, health inspectors and other government agents to ensure that the usual suspects don't prey on the start-ups. Alexey Sitnikov, head of international development at the Skolkovo Foundation, the organization managing the project, hopes that a successful park will kindle the entrepreneurship the nation so badly needs. The goal "is not so much diversifying the economy but creating an entirely new economy," he says.

    Is that possible? One factor that still binds Russia to China, India and Brazil is its tremendous untapped potential in the still strong consumer market. Car sales, for example, jumped 32% in August from a year earlier. It is telling that Alex Shifrin refuses to give up on Soupchik even after the trauma he has endured. "Russia is a lousy place to do business," he says, "but a great place to make money." Unfortunately, with the state in the way, not enough businesspeople are willing to find that out.

    — with reporting by Simon Shuster / Moscow

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