Corruption Grows in Russia

The economic bubble burst in 2008. The political bubble will be next.

When the U.S. mortgage crisis was in full swing, Russian officials gloated that while America’s bubble had burst, their country remained largely unaffected by the Western world’s financial woes. Views changed rapidly in Moscow when energy prices plummeted in the last quarter of 2008, taking the Russian economy along for the ride. Russia has come a long way since the first week of January 2009—the price for its Urals blend has more than tripled from $34.20 per barrel then to over $110 per barrel last week—and it is tempting to determine that Russia has weathered the storm. But has it?

Economically speaking, Russia is clearly in much better shape now that it was in the spring of 2009. The country’s Central Bank reserves have rebounded to $520 billion, not quite back to the 2008 peak of $600 billion, but impressive. And growth for the first quarter of 2011 exceeded 4 percent—not great by BRIC standards, but certainly eye-catching for the United States and many others. The problem is that tide of reform that had earlier swept away Russian leaders (at least rhetorically, if not yet in practice) is predictably ebbing as new waves of petrodollars roll ashore.

To be fair, Russia’s president, Dmitry Medvedev, has been waging what appears to be an unannounced reelection campaign largely on the issue of modernizing Russia’s economy (and, in some ways, its politics). Medvedev says that he wants a diversified economy with more foreign investment and a new culture of innovation, but has been largely unable to deliver. Of course Medvedev’s predecessor and partner, Prime Minister Vladimir Putin, said substantially the same things in the past—compare their presidential speeches to the Russian parliament, the Kremlin’s version of the American State of the Union Address—and didn’t deliver too much in that area either.

The central challenge, which both Medvedev and Putin have acknowledged in their particular language and styles, is Russia’s enormous corruption problem. Unfortunately, this aspect of Russia’s economy seems to be getting only worse over time. During a recent visit to Moscow, I was struck by how many people told me that corruption under Medvedev was more extravagant than under Putin, when it was in turn more widespread than under Russia’s first president, Boris Yeltsin. More remarkable and more concrete is a recent interview by Russia’s chief military prosecutor in Rossiiskaya Gazeta, the government’s official newspaper, stating that almost 20 percent of the country’s military budget is “plundered” through corruption, including fake invoices and kickbacks. If this is happening in the military, it’s hard to imagine that the situation is different in the rest of Russia’s government bureaucracy. Medvedev himself has said that $35 billion in government funds was stolen in 2010.

Russia’s massive corruption is a huge drain on its economy and society and holds the country back in almost every possible way. It slows economic growth by creating substantial de facto taxes on businesses and significantly reducing the value of the government’s efforts to invest in infrastructure and social welfare. It simultaneously thrives on and reinforces Russia’s weak rule of law, creating a situation in which Russia’s leaders cannot establish a truly law-governed state without threatening the livelihoods of a large share of the country’s elite. And it contributes to a broad sense of frustration and pessimism.

From this perspective, the apparently real competition between Medvedev and Putin over who should represent the so-called “party of power” (which incorporates Putin’s United Russia Party, but ultimately includes much if not most of Russia’s elite) may be entertaining but ultimately secondary: whoever wins could find himself trapped in a system that cannot be reformed without being broken apart. It looks increasingly like Russia’s leaders can’t change anything important without changing everything, which they will likely be very reluctant to attempt.

Yet, whether or not Russian leaders make that attempt, it is difficult to see how Russia’s current system can last indefinitely. In a sense, Russia’s economic bubble may have partially burst in 2008, but its political bubble is still expanding. Everyone in Russia knows the political system doesn’t work, but everyone keeps buying into it, believing that it will last a little longer. And Russia may well continue to muddle along for some time, as it has in the past, especially if oil prices stay high and the benefits of corruption trickle down. But then again it might not—that’s the thing about bubbles.

Russia’s growing uncertainty will be a difficult test for the Obama administration, which will need to navigate carefully between Medvedev and Putin in the months leading up to Russia’s December parliamentary elections and its expected March 2012 presidential balloting. Hopefully, administration officials are also thinking—at least in the backs of their minds—about what they might do if the unexpected happens. Vladimir Putin appears to be in a position to decide who will be Russia’s next president and, at least for the moment, seems to have renewed interest in the job. But there are also some scenarios, however unlikely, that could take Russia in very different directions.

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