02/25/2011 07:44 pm ET | Updated May 25, 2011

It's The Corruption, Stupid

WARNING: Before you invest, look behind those gleaming Russian facades


While money is fleeing from Egypt and the Middle East, the fact that Russia's economy grew by 4% in 2010 may make certain Western investors salivate. And when you hit Moscow, the opulence of the expense accounts, and the sheer panache of the boutique hotels and shopping malls may make life back home feel a tad dog-eared. But before you invest, you must look behind gleaming facades. And it's not a pretty sight.

Russia's very own Wikileaks website - - revealed the other day that at the annual meeting between Prime Minister Putin 'and Finland's President, Tarja Hallonen, Putin seemed surprisingly 'frustrated and anxious'. I would be too if I were running Russia.

Troika Dialog, the largest private investment bank in the ex-Soviet region, has just published a report, 'Russia: 20 years of change'. It reviews some of the striking facts about the cataclysmic change which has taken place there.

A mere six years after the fall of communism, 70% of the state-run, planned economy was already in private hands. Today, 55% of Russians are now middle class, according to the standard global definition. Annual consumption, which was under $1,000 per head in 1990, now stands at almost $6,000. In addition, as the report does not even bother to say because we all know it: Russia enjoys the world's largest energy resources.

So what's the problem? It's corruption, stupid. After Russia's post Communist decade of Wild-West gangster capitalism, in 1998 Transparency International ranked the country as only the 76th most corrupt country out of 180 - square in the middle between more respectable Western countries and those largely from the Third World where anything goes.

Today, after Vladimir Putin has claimed to have restored law and order, Russia has dropped to near the bottom of the honesty league, ranking 154th out of 180. How did that happen?

In order to understand, we need to look back to the way Yeltsin 'brought democracy to Russia', a mantra beloved of Western media. In fact, he wasn't much bothered by the democracy bit. He brought markets to Russia.

Advised by Jeffrey Sachs and his Harvard clan, his team decided that the highest priority was to privatise the old state-owned economy. In the mass privatisation that followed, the old party elite and the factory bosses set about privatising the institutions they managed as rapidly as possible. Within a few years, all the key industries - gas, oil, minerals - were in private hands. The results were catastrophic for the economy. The bosses siphoned off money and raw materials desperately needed for investment from their enterprises into co-ops, private banks and abroad, into offshore companies.

In theory, the public were invited to buy a stake in this sell-off. They were issued with vouchers worth about $20. But since there was absolutely no framework of laws or financial institutions to regulate this activity, companies appeared out of nowhere, promising fairy-tale dividends to those who invested their vouchers, then disappeared, never to be seen again. A freeforall in property began, with officials appropriating any building or land in desirable locations, often validated by corrupt judges.

Meanwhile, the state was running out of money. The oligarchs who enabled Yeltsin to win the 1996 election started bankrolling government in return for shares in more key state assets.

Bureaucrats were not paying people's salaries but used them for their own private corrupt purposes. Tax collection had dried up completely. Government was so deeply in debt that it was paying back more than it borrowed. So the market crashed.

Hardly surprisingly, the overriding concern of Russia's elite since then has been to ensure that the country's political or legal systems will not be able to challenge the legitimacy of the privatization process.

Putin has proved a safe pair of hands in this respect. In the name of re-establishing law and order after the anarchic '90s he curbed the independent media empires, centralized power, castrated the opposition and clipped the wings of the judiciary.

At first, in the early 2000's, with the economy buoyant on rising oil prices and the streets now cleared of gangs, this scarcely seemed to matter to the average Russian. The World Economic Forum's 'control over corruption' indicator shows that things looked as if they were coming back under control after 2000. But this improvement stalled around 2005. It has been deteriorating dramatically ever since.

The political measures to protect the elite from unwanted scrutiny have sealed corruption into the 'vertical of power', as every Western businessman operating in Russia will tell you.

To curb this all-enveloping corruption will require the Russians to breathe life back into civil society. It needs a judiciary, a polity and a press that can hold anyone to account, regardless of their position. And since the elite, the security services and the state bureaucrats are all implicated in the corruption, how can this be done?

No wonder Putin is feeling anxious. The Russian economy looks like a success story, and talks like one. But this is an illusion: it is stuck. It desperately needs to diversify and modernize.

But as the Troika report points out, the economy has shifted dramatically away from investment over the last 20 years: in real terms it is half what it was in 1990, under communism. Who but BP would want to invest in Russia right now?

Troika's concluding statement on corruption is significant: 'As we have argued for some time, Russia is in an anomalous position to have so much corruption amid such high levels of wealth, education and internet usage. This is thus an area where we expect change.' (my italics).

This is where this otherwise admirably researched report slips into wishfulness. Troika's expectation of change is a sentiment worthy of President Medvedev, who has been doing his utmost to clear up corruption - by exhortation. But no amount of exhortation is going to clean up Russia's corruption. For corruption is the beating heart of the system.

At a time when the Egyptian people are busy reminding us that we cannot sustain our democracy at home by imposing autocracies abroad, we should bear in mind the part we have played in bringing this situation about in Russia.

Unlike in Egypt, there is no groundswell of popular support for the Western model of liberal democracy in Russia. A recent poll shows the Russian people are among the most hostile to 'the Western dream' in the world. They think they have experienced democracy, and it stinks. Nor is this going to pass quickly: polls show that the new, post-Soviet are even more anti-Western than their parents.

So what's to be done? The Russians are going to have to find their own way out of this problem - without interference from the West this time. That Ruleaks report suggested that Putin was rattled by US chatter about 'regime change'. He is right to be worried by that. And so should we. Without a plausible alternative anywhere but on the anti-Western nationalist xenophobic right, any change of regime right now would be likely to bring something much worse to power.

Susan Richards is the author of LOST AND FOUND IN RUSSIA (The Other Press) and founder editor of opendemocracy/