Russian Detour

Russia is one emerging market that should be doing much better than it is. Oil prices are up, the country has little external debt, and politically…at least on the surface…things are calm. The real problem as almost everyone knows but is afraid to say, is that Russia is still run the same way it has been for a 1,000 years: from the top down. This will not work in the 21st century.

Of course, China has a dictatorship coupled with a fast growing (if you believe the official numbers) mercantile economy, and is the model for Russia and others who reject the chaotic systems of the West with their messy democratic politics and bottom up entrepreneurial economies.  The problem with the China/Russia model is that they plateau and cannot adopt or change fast enough to create or even sustain wealth. This often leads to a crash…or worse. Moreover, when the citizens of such nations become increasingly disenchanted, especially with few outlets to express their desires, this create the very instability that this model seeks to avoid.

March 5 (Bloomberg) — Russia is in a funk. Its performance at the Winter Olympics in Vancouver was its worst ever, and its economy suffered more last year than any other nation in the Group of 20.

This is no coincidence, as the old Communist newspaper Pravda used to say. These failures are linked, and they have to do with a political system that has sucked the air out of the country. State companies control much of theeconomy, a single party rules the airwaves, and an overbearing, corruptbureaucracy twists laws and stifles initiative.

None of this is good for business and, as it turns out, it isn’t good for sport. If Russia wants to go for gold it will have to shed a system that operates from the top down.

That approach worked, at enormous human cost, under Soviet communism, which succeeded in rapidly industrializing a backward economy and in churning out top athletes like widgets. But it’s all wrong for the 21st century.

Yet for some reason, Russia’s leaders are still stuck in the past. The reaction to the dismal showing at the Olympics was typical: President Dmitry Medvedevhas called for the heads of the country’s top sports officials — as if a purge would make any difference to the performance of Russian hockey stars.

There is no doubt that Russia’s sports bureaucrats have a lot to answer for. But their grotesquely bloated expense accounts aren’t the sole cause of shortcomings in a national sports system that has been neglected for 20 years.

No Engine

Another sample of retrograde thinking is written all over Russia’s plan to create its own Silicon Valley, a project headed by Vladislav Surkov, the Kremlin’s top strategist. As he made clear in a Feb. 15 interview, Surkov finds the best way to generate innovation and spur the modernization of Russia’s lagging economy — which he compares to an old armored railroad car without an engine — is to deploy “consolidated power,” or if you will, “authoritarian modernization.”

Talk about a contradiction in terms. You don’t have to be a die-hard free-market capitalist to doubt whether “authoritarian modernization” will produce the creative talent and risk-taking entrepreneurship that led to the boom in Silicon Valley.

Russia has reason to worry about its competitiveness, as a sports power and as an economy. Surkov said as much when he called the country a “vacuum” caught between Asia, Europe and the U.S. “If we are not able to increase incomes, people will start to be listless and disillusioned,” he said.

Alarm Bell

This kind of disillusion has already set in and it is sapping Russia’s performance — on the ice rink, on the slopes and in the real economy — everywhere outside oil, gas and other areas dominated by government bureaucrats and their oligarch buddies.

Like many other Russians, Aleksei Pushkov, a television commentator, saw the country’s poor showing in Vancouver — with only three gold medals — as an alarm bell. “It is a signal that we are creating a country and a society devoid of motivation,” he said on Feb. 27.

For some, the news is that people like Surkov and Pushkov are now admitting that Russia is at a standstill, 10 years after Vladimir Putin, now prime minister, took office as president and started to build his famous “vertical power” structure.

“When something is declared broken, you can fix it,” said Esther Dyson, head of EDventure Holdings, which mentors technology companies, and one of three foreigners on Surkov’s innovation commission. “The opportunity here is that Surkov is declaring that something is broken.”

Avoiding Bribes

Dyson, a veteran of Russia’s turbulent capitalism, says the innovation team should focus on demands that come from society itself — by, for instance, coming up with a handy electronic system that would help Russians pay traffic fines easily, and avoid having to shell out repeated bribes to greedy cops.

“It sounds trivial, but if you can change habits in daily life, it carries over,” she said. “It starts with the culture, and giving people the feeling that markets work and laws are enforced.”

That may sound like a modest goal, compared with Serco’s grandiose vision of a multibillion-dollar Silicon Valley emerging on some Russian steppe. But if Russia is to emerge as a winner, it has to start by giving people a system they can believe in.