Friends and placemen

The state is one of the chief obstacles to Russia’s modernisation. During the 2000s the number of bureaucrats almost doubled. A quarter of the workforce is employed in the public sector. The total number of people who depend on the state is between 35% and 40%, says Boris Grozovsky, a Russian economic observer. This, he says, points to the share of the electorate that benefits from the status quo. At election time municipal workers are bused in to show support for Mr Putin. Meanwhile, the main purpose of Russia’s civil service is to shuffle papers around and extract administrative revenue from firms and private citizens. The bureaucrats have little interest in fostering competition that might cost them their jobs.

This is particularly true of the security services and prosecutors who have been among the main beneficiaries of Mr Putin’s rule. Alexander Bastrykin, a faithful chief investigator, recently told a Russian state newspaper that "privatisation is a threat that could finish off the Russian economy." Suspicious of private business, the Kremlin has entrusted the economy to state corporations, often run by former security servicemen and its few friends. Whereas oligarchs in Boris Yeltsin’s time were private businessmen who influenced the running of the state, the Putin-era oligarchs are former KGB men who have used state power to grab private businesses.

Some analysts estimate that these state companies control about half of Russia’s economy. They are sheltered from competition, soak up resources and stoke inflation. State companies award contracts to nominally private companies owned by friends and relatives of their managers. The Sochi Olympics are a prime example: the biggest contracts were given to firms run by Mr Putin’s chums, including Arkady Rotenberg, his boyhood judo partner.

This sort of thing creates a system of perverse incentives, fosters cynicism and cronyism and discourages those who want to use their initiative and skills. One man has worked for two companies owned by Mr Putin’s friends. His latest employer is a firm owned by a close relative of a powerful government official. "My salary is higher than I would get in an independent firm, but my responsibility is much less. I add almost no value. Connections decide everything," he says.

Although Russia still boasts some of the most entrepreneurial and hardy businessmen, who are determined to succeed and continue to invest, many burn out and leave. Economic activity in the country is waning, mergers and acquisitions are drying up and capital and brains are flowing out of the country. Evgeny Gavrilenkov, the chief economist at Sberbank, Russia’s largest state bank, says the problem is exacerbated by the central bank which, in order to stimulate growth, is injecting liquidity into the market while also trying to support the rouble. This allows banks and their clients to speculate in foreign exchange rather than invest. Yet the main reasons for the slowdown in investment are uncertainty about the future and the lack of proper legal title to property.

Date: 2016-01-14; view: 832