Red Bricks of Past Hobble Russia’s Economic Future

The arrest of energy oligarch Mikhail Khodorkovsky, Russia’s richest man, on Oct. 25 has sparked a new round of soul-searching in the West about Russia’s present and future.

Political analysts fear more targeted attacks on prominent figures and a further squeeze on Russian civil society. Business leaders and government officials worry about a reversal of the 1990s privatization process that awarded Khodorkovsky ownership of Russian oil giant Yukos, and a change in the rules of the game for international companies trying to invest and do business in Russia. Many in the United States wonder how they could have been so mistaken in seeing progress in the rule of law and market economic reforms instead of increasing authoritarianism and state control over the economy.

The West was blinded by Khodorkovsky’s success. Politicians and investors mistook his dramatic transformation, from “robber baron” to responsible businessman and head of one of the world’s great oil companies, for Russia’s own transformation. Khodorkovsky was a symbol of our aspirations for Russia, not the embodiment of Russia today. In his understanding of a market economy, his business style, his unashamed embrace of the concept of private property, and more recent philanthropic efforts, he was a revolutionary not a pioneer. Russia—and Russia’s current leadership, in particular—was not ready for him.

When President Vladimir Putin, for example, looks at Russia, he does not see a fully fledged market economy or anything yet approximating it. Even though more than a decade has passed since the collapse of the Soviet Union, Russia still has a version of the old Soviet command economy. Moscow may be a showcase for new Russian enterprise and growth, but the rest of the country looks quite different.

Russia’s population and industry are scattered across a vast land mass in cities and towns with few physical connections between them cut off from domestic and foreign markets. Poor road, rail, air and other communications hobble efforts to promote trade. One-third of the population lives and works in harsh climatic conditions, including in Siberian cities, built by Soviet central planners, where average winter temperatures fall to between minus 15 and minus 45 degrees Celsius. Russia has more people in remote, cold places than any other country in the world. Distance and cold are a permanent “tax” on the Russian economy. Millions of Russians and thousands of moribund, old-style factories are dependent on cheap heat and energy. Russia’s enormous oil and gas industries keep the economy afloat. Ultimately, from the point of view of a modern market economy, a vast swath of Russia’s population, factories and cities are simply in the wrong places.

To really put Russia on track toward a market economy, millions of people will have to move from Siberia to European Russia. Most will want to move to Moscow, Russia’s only “boom town.” Moscow has what the rest of Russia lacks communications, connections, services, growth in new technologies and industries, new housing and foreign investment. There is a huge gap between Moscow and other Russian cities, including St. Petersburg. And Moscow is already overwhelmed by migrants.

The greatest task for any Russian leader who aspires to make the country a truly competitive player in today’s global economy is to undo in a fundamental way the gigantic mistakes of the Soviet past. But to do that will involve even more wrenching change and dislocation than Russia has already experienced in the past decade. This kind of instability is what Putin wants to avoid. He has said many times that he does not want to repeat the great upheavals of the past. “The time of revolution is over,” he said as he entered office. So his only alternative is to try to keep people in place and to employ technical fixes to make the Soviet legacy more manageable and efficient.

Khodorkovsky’s vision of the Russian future and its challenges was incompatible with Putin’s. Gazing out from the vantage point of the energy sector the most profitable and competitive part of the Russian economy Khodorkovsky focused on efficiency and openness. Encouraged by his board and shareholders, the adulation of his Western interlocutors, and his links to the global economy, he put Yukos on a different plane. But he couldn’t drag the rest of the Russian economy after him. Worst of all in the eyes of the current Kremlin leaders, as a revolutionary business leader who wanted to shake things up, Khodorkovsky’s attempts to change the system would create instability, politically as well as economically.

Communist planners created and distorted Russia’s economy over a period of more than 50 years. And given the entrenched resistance to change, it will take more than one man and one oil company no matter how revolutionary, rich or influential to transform it again.