Take the R Out of BRIC

What on Earth is Russia doing on the list of top emerging economies?


As Russia proudly boasts its prominence at G-20 summits, gatherings of the BRIC countries (Brazil, Russia, India, and China), and other global economic round tables, an embarrassing question arises. Does Russia really deserve to be a BRIC? The country’s economic performance has plummeted to such a dismal level that one must ask whether it is entitled to have any say at all on the global economy, compared with the other, more functional members of its cohort.

I have just returned from Moscow, which is always dreary around this season. But this year, the mood among the capital’s eloquent liberal economists has hit a new low. For the last seven years, Russia has undertaken no significant economic reforms. Instead, the state has been living off oil and gas, like a lucky but undeserving rentier. With oil prices hovering just above $75 per barrel, the elite can stay afloat without much effort and even less development. Russians talk about a new Brezhnev stagnation, a reference to the 1970s slowdown that a post-Soviet Russia had hoped to avoid. Meanwhile, the Kremlin identifies itself with the BRICs — the world’s leading emerging economies.

But Russia is clearly falling behind. This year, China is likely to grow by 8.6 percent, India by 6.0 percent, and Brazil by 0.3 percent, according to J.P. Morgan. Russia’s GDP, on the other hand, may plunge as much as 8.5 percent. Even worse, this year Russia is the worst performer among the G-20 group of the world’s largest economies. In 2008, Russia had the second-largest GDP of the four BRIC countries at current exchange rates. This year, its GDP will drop far behind Brazil and possibly also India.

Of course, the country stands out in other undesirable ways from the G-20 as well. Although it is not the most authoritarian (China and Saudi Arabia take top place in that category), anti-corruption watchdog Transparency International ranks Russia by far the most corrupt. The consequences of this have been visible: Moscow has failed to build roads since 2000. In his Nov. 12 presidential address, President Dmitry Medvedev acknowledged that investments in infrastructure are a waste because projected costs are several times higher than justified. Corruption is costly.

Nor is Russia a member of the World Trade Organization, unlike all other G-20 countries. It came close to entering that organization last June, but Prime Minister Vladimir Putin suspended the attempt, leaving Russia outside international trade debates.

If Russia is indeed falling out of BRIC, it is because that country’s crisis is not financial but systemic. Russia is suffocating from the dominance of corrupt state corporations and red tape — and oil isn’t going to save it this time. The government bailed out the worst-hit state corporations and banks from financial crisis with its reserves last year, the third-largest such stock in the world. The current growth crisis followed; this massive misallocation of capital to state crony companies has depressed economic dynamism.

Meanwhile, the paralyzing gridlock between Putin and his chosen successor, Medvedev, only makes things worse. A cruel joke is making the rounds in Moscow: There is definitely a Putin camp and a Medvedev camp. The question is, to which camp does Medvedev belong? What’s clear is that the two sides fight persistently. When the financial crisis struck, the reformist Medvedev camp rose in influence, but when the oil price surged again, the state-focused Putin camp returned with a vengeance.

Today, it’s hands down the Putin show. Falling out of influence, Medvedev has launched a devastating criticism of his partner’s state capitalism. "Should we drag into the future our primitive raw material economy and endemic corruption?" he asked in his Web posting "Forward Russia" last September. In particular, Medvedev criticizes "legal nihilism" and inefficient state corporations.

Perhaps what Medvedev hopes is that Russia’s economic performance will prove so meager that it will force the country’s rulers to embrace economic reforms. The state corporations perform so poorly that not even an authoritarian polity can defend them much longer. Most criticized are the armaments company Russian Technologies, the energy companies Gazprom and Rosneft, and the bank VTB. The biggest corporate catastrophe among these is the state-dominated gas monopoly Gazprom. At a time of global oversupply of gas, the company refuses to modernize, choosing instead to intimidate its customers in Europe. Sagging demand and high prices have driven down its output 20 percent this year, but its management remains in denial. Rumors abound that major CEOs will be ousted, and the government has spoken vaguely about privatizing 2,500 state companies.

There has been one concrete sign of what may be to come. Putin’s old media minister, Mikhail Lesin, was sacked on Nov. 18 by Medvedev because of "unethical behavior" and "conflicts of interest." Lesin had imposed government control over Russian television while allegedly running a related business empire of his own. It was quite a surprise to see the Kremlin holding its cabinet to such standards.

Sooner rather than later, something will have to give. Tension is growing between Medvedev’s talk about modernization and the reality that the Kremlin is at a stalemate. Russia is too rich, too well-educated, and too open to be so corrupt and authoritarian. The country should just hope change can come fast enough that BRIC doesn’t turn into BIC.

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