If Russian democracy and its new economy were being built "from the bottom up," as The Economist claims, wouldn't it be less likely that large business interests whether domestic or foreign would be driving the process?

Now The Economist's claim may be wrong in any event. But even the part of its Russia survey that Dan quotes says clearly, "Russia's new-found prosperity is fragile and will require deep and difficult reforms to sustain." Is Russia's prosperity even more fragile than The Economist thinks? Could be, but I don't know that who buys ads in The Economist would be the first datum I would pick to support that conclusion.

“Could be, but I don't know that who buys ads in The Economist would be the first datum I would pick to support that conclusion.”

On the contrary, I think it is very significant. Running an ad in the Economist is deemed as standard operating procedure by many companies. That they chose not to do so in this particular instance is worrying. At the minimum, it prompts one to ask further questions.

Nice piece of work, Dan.

Great observation. I'm impressed.

Russia is still suffering from the free market "shock therapy" and asset-stripping and organized crime growing "deregulation" binge that happened in the 90's - under a Democratic watch. It was a bitter thing to see the Russian market get flooded with cheap import chicken, the meltdown of the Russian stock market, the consolidation by oligarchs of state-owned assets in what ammounted to hostile take-over and liquidation operations with rampant corruption. That things hit a bottom and stabilized and even started creeping up is just a tiny mercy compared to the carnage.

It's widely acknowledged that under Yeltsin and Clinton that the standard of living for Russians dropped precipitiously because of inflation, GDP reduction, etc. One of the reasons why Putin has such large lattitude putting away politically dissident Russian oligarchs is that the people of Russia loathe the oligarchs for looting and sacking their nation. The words "carpet-baggers" should conjure up a decent American analog.

The case of Russia's "free market reforms" have become a case study in exactly how not to move a centrally planned economy into a capitalist free-market economy. Whenever for instance China's and India's leaders hear about us Westerners bleating for more deregulation, they think about Russia and go "Yeah right buddy. That's what you told the Russians too!"

It's a shame that the Russians themselves didn't have the sense to not listen to the bad advice they were given.

Except the advice they should have been given was advice they did not want to listen to: the way to build a prosperous free economy is from the ground up, starting with the private ownership of land. In other words, full and unqualified repudiation of the central tenet of Soviet Communism.

Russians did not want to hear this, the people in power found it easier and more profitable to privatize from the top down, and Western governments and business interests decided that this was better than nothing. Put that way, they may have been right, and at the time abandonment of the ideological struggle to destroy Communism at the roots avoided ruffling many feathers. In the long run, though, it carried a heavy price.

Incidentally, I doubt how influential the Russian experience has been in China or India. China appears to have clear development priorities and started following these years before the Soviet government fell; India's legacy of socialism inherited from the British is without doubt a more important source of resistance to deregulation than anything that happened in Russia -- apart from which the example of China and other East Asian countries appears to have made a much greater impression in India.

Like so much western coverage of Russia, the Economist article misses the point, which is that Russia is not capitalist.

The name of the game in Russia, as always, is arbitraging the state: buy low from state suppliers-- be it oil or government debt or any number of goods-- and then sell high on world markets.

The core reason for this bastard economy is the absence of a banking sector. There is no way to properly attach collateral, no real means of assessing risk, no effective mechanism for channeling savings into productive investment. Hence the ridiculous national pastime of rube goldberg schemes for enterprise cash management and the other national pastime of squirreling away dollars under mattresses.

The effects of this cash-oriented economy are that

1) consumer spending is much higher than expected (note that Mercedes does more business in Moscow than almost any city in the world, and that the Russian lingerie retailer Dikhaya Orkhideya has over 100 outlets and does 3x the $ volume per square foot than Victoria's Secret...)

2) business investment is much lower than expected. Most Russian industrial concerns, including the oil companies, are nothing more than cash cows for thieving directors who transport their loot to Geneva, the Costa del Sol and the Cote d'Azur.

So life in Russia is brighter (esp in Moscow) than you would expect, and Russia's long-term prospects are worse than the Economist expects.

The net of this is that until Russia develops a real banking sector, and of course the legal and judicial infrastructure to support the same, we should think of Russia as an oil-rich primitive economy along the lines of Nigeria or Venezuela.

Oldman doesn't know what he's talking about. Instead of recycling partisan cliches, he should go to Russia and get a sense of the core, structural reasons for that country's condition. Hint: about 90% due to the legacy of the command economy and its destruction of civil society (eg see notes about the absence of a real banking system, above), maybe 10% due to the ill effects of ongoing government-aided corruption.

And if you think the stealing began or ended with Yeltsin, then you clearly know nothing about Russia or its Soviet institutions.

No matter: everything's really just a reflection of US politics, right?

"russia's economy is more fragile than the Economist believes"

This is so obvious that I can't see why the western press keeps getting it wrong. Russia's current economic growth is entirely dependent on $40-a-barrel oil.

Each $1 increase in the oil price adds $1B to Russia's reserves. When oil crashes to earth, Russia will again default, devalue and destroy the lifetime savings of millions of its citizens.

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