# Posted 11:27 PM by Ariel David Adesnik  

A PSEUDO-ECONOMY FOR A PSEUDO-DEMOCRACY: TM writes in to provide some context for my earlier comments about Russian economic growth:

I worked as a banker in Russia from 1997-2000 and can give some missing perspective. Russia's current "boom" is due entirely to $38-per-barrel oil. Each $1 rise in the oil price adds $1B to the Russian state's foreign reserves. Though structural demand and supply conditions may well keep oil prices high long-term, it's useful to think of the Russian economy as another version of Nigeria: an oil-addicted primitive economy in which basic market institutions are either stunted or non-existent. 
 
Today's Russia is not capitalist. Capitalism requires a vast infrastructure of laws, mechanisms, practices designed to channel savings into productive investments, and Russia's banking system is so corrupt and primitive that the majority of Russian savings are either spirited abroad (as in the case of most of the "oligarchs"' ill-gotten profits) or stuffed under mattresses.
 
When I worked at Citibank, our emerging markets development matrix put Russia in the same category of market development as Nigeria and Indonesia: the banking system is a shambles, with very little credit available to firms and households; foreign direct investment outside of the oil sector is minuscule (Poland has attracted many times the amount of FDI that Russia has--even when one INCLUDES the oil sector); and the amount of daily trading on the local capital marketslocal  market capitalization barely exceeds the size of a single top-tier US high net worth brokerage account.
 
Secondly, to the point about inequality, I haven't seen the data or the methodology behind the "inequality coefficient" Shleifer references, but there's one data point that suggests a different picture. On the most recent Forbes List of Billionaires you will find 31 New Yorkers and 23 Muscovites. Note that there are fewer than 20 billionaires in France and the UK combined, and only a handful of billionaires in countries such as Brazil and Mexico that have similar population size as Russia and that also have spectacular concentrations of wealth...
 
Finally, about the productivity improvements that Khodorkovsky et al. have supposedly made with their oil companies: Given the extreme incompetence of soviet management, and the dearth of capital investment during the last 30 years, it would be impossible for anyone but a moron not to raise the return on invested capital in Russian firms.
 
The real challenge for Russia is to create a rudimentary banking system. Khodorkovsky like most oligarchs has his own "bank", called Menatep, and his record here is one of fraud, incompetence and outright theft of depositors' assets. The banking and currency crisis that he, other corrupt "bankers" and the Yeltsin regime perpetrated in August 1998 destroyed the lifetime savings of millions of Russians. For this felony alone the man should go to prison.
 
The oligarchs have looted Russia and destroyed any hope of that country entering the ranks of the leading economies of the world for at least two generations. For anyone but a Geneva jeweler or a London or Costa del Sol estate agent, there is no silver lining to this cloud.

I'm no economist, but I wouldn't be surprised if Russia's economy was no more substantive than its constiutional order. As Mike McFaul has noted, that sort of relationship between growth and democracy is the norm in Eastern Europe. (0) opinions -- Add your opinion