Russia: How Long Can The Fun Last?

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Garry Kasparov, the chess grandmaster and a frequent critic of the Kremlin, said in an interview with Maria Bartiromo.

BUILDING UP RESERVES
Some also wonder whether the expansion can be sustained. There's little doubt that a major driver of the newfound bounty is oil and other natural resources. Without the runup in commodity prices, economic growth would have been two to three percentage points lower during the last three years, estimates the Organization for Economic Cooperation & Development. Developing countries, meanwhile, don't have a very good track record of using windfall profits from commodity booms to lay the foundations for sustainable growth.

To his credit, Putin has used much of the cash to build up financial reserves. Russia has created a $90 billion fund—equivalent to 9% of gdp—to protect against a drop in oil prices. Fiscal policy remains tight, with the Kremlin expecting a budget surplus equal to 7% of GDP this year. And Russia is well ahead of most other resource-rich countries in its economic development, with a long tradition of education, science, and industry. Now, its tech companies are starting to give India's outsourcing sector a run for the money. Software exports will top $1.5 billion this year, vs. just $128 million in 2001. "We really can compete on a global scale," says Dmitry A. Loschinin, chief executive of Russia's largest software developer, Luxoft.

Economists warn, however, that high oil prices have bred complacency. The OECD cautions that economic reforms have largely stagnated. Worse, corruption and bureaucratic interference continue to impede business: Russia ranks alongside Gambia and the Philippines near the bottom of think tank Transparency International's annual list of corrupt countries. "It's the general scourge of Russia," says Anatoly Berestovoi, deputy director of a Moscow construction company. "You have to speed things up by interesting this or that official personally."

Most troubling is government's growing role. The Kremlin has taken control of some two dozen Russian companies since 2004, including oil assets from Sibneft and Yukos, as well as banks, newspapers, and more. Despite his sporadic support for pro-market reforms, Putin has backed national champions such as energy concerns Gazprom and Rosneft. The private sector's share of output fell from 70% to 65% last year, while state-controlled companies now represent 38% of stock market capitalization, up from 22% a year ago. "The tendency that really worries us," says William Tompson, the oecd's senior Russia economist, "is the big increase in state property."

But for now, few middle-class Russians seem to share the oecd's concerns about the economy, or the international community's worries about their president's dark reputation.

Bush is BusinessWeek's Moscow bureau chief.