Russia’s Nigeria Connection

For companies daring enough to do business in Russia, recent developments have appeared positive. Many Russians themselves consider the election of Vladimir Putin a promising sign. They also applaud their president's move to clean up Gazprom, and saw his replacement of the natural gas giant's former CEO as a sign of his commitment to end corruption.

Some pro-government commentators even liken Putin to Russia's autocratic Czar Alexander III, who consolidated control over Central Asia and began industrialization at home. Other Russians compare the country to Germany under the first Kaiser in the 1870s.

Like the Germany of that time, Russia remains an autocratic and bureaucratic state. It has a strong army, a yearning for law and order, and a burning ambition to belong to the world's Great Powers.

And like Germany a century ago, Russia believes it can pursue its own path of economic and political development, one that will be different from the West.

The similarities between Russia today and Germany after 1871 are, however, superficial at best. Russia shares much in common with Nigeria — a country where corrupt political and business elites dominate.

Russia has suffered massive de-industrialization over the past decade. Soviet-era directors took over state factories they had been running. Instead of investing in these plants, they picked them apart — and siphoned off cash. When these so-called managers obtained Western investments, they funneled them to secret off-shore accounts.

True, the Soviet-era manufacturing base has enjoyed a renaissance over the past two years. However, this has occurred under unusual economic circumstances. After its 1998 financial crisis, Russia became shielded from international competition. This was mainly due to the devaluation of the ruble, which remains undervalued, discouraging imports — and hiding a lack of competitiveness.

The Russian Central Bank has been busily buying dollars, which keeps the ruble artificially low. If the currency were allowed to appreciate in line with increased hard currency inflows triggered by higher commodity prices, Russia's manufacturing base would collapse.

The truth is that Russia is becoming ever more dependent on exports of raw materials, rather than manufactured goods. It is as if Russia were reverting to its position in Europe before World War I when it was the continent's breadbasket. Now, thanks to high oil prices, Russia is becoming Europe's gas station.

Before too long, Russia's natural resources and its stultifying bureaucracy could prove a lethal combination for the economy. Commodities are relatively easy to produce because they require little skilled labor. Equipment necessary for their extraction can be imported. When prices are high, commodities generate plenty of cash and demand considerable government involvement.

This mix invites corruption. For a glimpse of what it could lead to, look to Nigeria, where hundreds of billions of dollars in oil revenues has disappeared over the past two decades.

Russia is much closer to the African nation than it is to European historical examples. Russia's economy grew by nearly 8 percent last year, but the government collected less than half of the taxes it was owed. It ran a $60 billion trade surplus, but, curiously enough, lacked money to service its external debt.

Moreover, Russia's oil-producing regions, just like Nigeria's, are on the brink of starvation, while Moscow is drowning in luxury. The metropolitan area controls 85 percent of the country's financial assets, but has less than 10 percent of the population.

Declining oil prices won't change the situation except, perhaps, to make its robber barons a little less rich. Instead, observers interested in reading the country's future should watch for the adoption of a trustworthy legal system and better corporate governance.

Look for signs of respect for minority shareholders, and judges who are willing to rule against tycoons if the law requires it. The new Russia may be setting its sights on becoming a leading industrial economy, but without such changes it will drift closer to the Nigerian model.