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Russia, the sick of BRIC?

Modernization is the new buzz word in Russia. Since his notable speech to the State Duma (Parliament) two years ago where he openly admitted the archaic state of Russian economy and the corrupt and “semi-Soviet” society, Russian President Dmitry Medvedev has spearheaded the campaign of modernization. The Russian state controlled media have been copiously reporting the latest achievements to that end, concentrating on the main “strategic” directions, designed to leapfrog Russia into the modern era and make it a part of the globalized world. The most discussed topic, “Skovkovo” , Medvedev’s pet-project, is Russian answer to Silicon Valley, and is supposed to bring in much needed foreign capital and knowledge-based technologies.

Yet, despite the touted efforts, Russia has not been able to make the much desired “breakthrough”. According to the latest report by the World Economic Forum, Russia’s competitiveness continues to deteriorate and it occupies 63rd position among other nations. As has been reported even by the generally pro-government Russian media, not only have the efforts to attract the needed amount of FDI largely failed but a new more ominous trend has emerged, fleeing of domestic capital overseas. What is even more disturbing, the Russian business community is trying to move its children out of the country as well. This is the latest evidence of the general lack of confidence in the country’s ability to create a business-friendly climate in the foreseeable future.

This, in turn, brings about a fundamental and much debated question, the answer to which, will ultimately determine the country’s future – can Russia modernize economically without modernizing politically. Modern Russia is an authoritarian country based on the system of the state “vertical” power, courtesy of Mr. Putin, the ex-President and now prime minister who is widely believed to be ruling the country behind Mr. Medvedev’s back. Any meaningful opposition is harassed, the court system is owned by the state and open to the highest bidder.

The scale of corruption is staggering even by the standards of developing world, and, has effectively become a way of life. But Russian corruption has developed a unique and menacing side to it where the business community is the target of the extortionist efforts of the state. The same newspaper which highlighted the flight of domestic capital, quoted a senior officer of the Russian Independent Institute of the Social Policy, who stated that according to the latest analysis the share of state bureaucrats among the 10% of the wealthiest Russians is steadily increasing at the expense of business people.

Some of the tales of state extortion are beyond comprehension to the Western reader. According to Business-Solidarity, a nongovernmental organization that defends the rights of entrepreneurs, a trend to extort money from businesses on trumped-up charges by law enforcement officers has swept the country, and it already has a name: criminal-legal repression. Historically, Russia has always been the Land of Man as opposed to Land of Law, but the sheer scale of state corruption and its virtual impunity has rarely been seen before. It is virtually impossible to establish and grow your business unless you have the protection of the state official at the right level. It has become clear to many, including the Russian President, that to create the right investment climate, the legal culture and the healthy civil institutions must be created first.

The atmosphere of lawlessness, jungle mentality and “totality of state”, affords no guaranties even to those who have long been part of the system’s upper echelons, accumulating great wealth in the process, but have fallen out of favor, and kicked-out. As reported by the Telegraph, former all-powerful Mayor of Moscow, Juri Luzhkov, who has recently been ignominiously fired by the Russian President due to “loss of trust”, has moved both of his daughters from Moscow to London, citing serious concerns about their well being.

During his meeting with the visiting Finnish President, Mr. Medvedev said that modernization in Russia is impossible without reforms in political institutions.

Stay tuned.

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