Western-Style Capitalism, but With a Russian Accent

There was always some plausible explanation for these exceptions to the global rules -- the pursuit of some still-evolving industrial policy, protection of strategic industries, enforcement of tax and environmental laws, or recovery of ill-gotten gains. But the fact that they almost always come at the direction of the Kremlin and with the connivance of the courts serves as a frequent reminder that property rights and the rule of law are still evolving notions in Russia.

"This is still a system where you have to rely on those you know and trust, because the legal infrastructure and general business culture haven't yet evolved," said Pat Cloherty, who has managed three successful investment funds in Russia, including one for the U.S. government.

Andy Somers, the president of the American Chamber of Commerce here, acknowledged that the higher returns companies earn from doing business in Russia are, at least in part, a reflection of the higher legal and political risks. And those who don't have the stomach to play by Russian rules, he added, should probably look to do business somewhere else.

There is something about this mix of East and West, corrupt and legitimate, authoritarian government and free-market, that strikes even Russians as . . . well, Russian. As one financier put it to me, paraphrasing an old Russian saying, "In the last five years, everything has changed. In the last 200 years, nothing has changed."

Make no mistake that it is Russian President Vladimir Putin who has concocted this seemingly contradictory mix of instincts and policies.

The modern-day czar doesn't hesitate to instruct his oligarchs to "invest" a billion dollars or two in Russia's successful bid for the 2014 Winter Olympics in the resort city Sochi or order the state arms monopoly to buy up a state-owned car company rather than allow 100,000 employees to lose their jobs. No major corporate transaction happens without his say-so, and those who cross him are almost certain to receive a visit from the tax police.

At the same time, Anatoly Chubais, who served in the government of Putin's predecessor, Boris Yeltsin, assures that it was Putin who overrode the opposition of every governor, every party leader, every oligarch and virtually the entire bureaucracy and backed Chubais's controversial plan to break up and privatize the massive state electric monopoly and deregulate prices. The process has created dozens of private companies competing to produce and distribute power, with no dominant player. And when the restructuring is completed next spring, Chubais will have raised several hundred billion dollars in badly needed capital to modernize the industry.

If Putin steps down next March, as he has said he will, the odds are that the next president will not be so clever at balancing these two economic policies. The succession battle raging behind the walls of the Kremlin is said to have little do with policy or ideology or even personality.

Rather, I'm told, it is a battle among competing oligarchs and state-owned companies, each with its own candidate, its own ministries and financiers.

And while Putin has been able to protect and enhance his power by cleverly playing these various forces off against each other, history suggests the next guy won't be shy about punishing the losers and consolidating his political and economic power.

As it all unfolds, the West may want a better strategy than it now has for strengthening the hand of market-oriented liberals. The wrong approach is to lecture the Russians or threaten them, such as by holding up their admission to the World Trade Organization. The Bush administration favored those tactics, and they seem to have generated more defiance than cooperation.

At the same time, it only encourages the Russians' worst instincts when oil company executives, having just had their assets seized or their joint venture arrangements forcibly renegotiated, show up at the recent St. Petersburg Conference on Investment and declare how wonderful it is to do business in Russia.

"You are trying hard to discourage us from investing in Russia," one oil industry chief executive recently told Yegor Gaidar, a former prime minister who now heads an economic think tank here. "The problem is that you are just not trying hard enough."

A better policy is surely to be found somewhere between disrespectful threats and obsequious butt-kissing. Western business and political leaders should insist on fair commercial dealing as a precursor to further investment, while disabusing Russians of their widely held belief that favoritism, corruption and unfair dealing are just as prevalent in the West. (I lost count of how many times I had Halliburton thrown back at me during my visit.)

At the same time, the West should make clear to Russians that while they are free to run their domestic economy as they see fit, Russian companies owned or highly favored by the government won't be allowed to use their outsized profits to compete in our markets or buy up our companies.

In the end, however, it will be Russians themselves who will decide whether free-market or state-managed capitalism wins out. Although most Russians distrust government, they distrust markets even more. And as long they are willing to tolerate high levels of public and corporate corruption, the economy is likely to continue its current drift toward state control.

For in Russia, Chubais said, corruption and government control of the economy are really just "two sides of the same card," the one enabling and feeding off the other. That was true under the czars, it was true in Soviet times and it is true today. And, as Chubais and others now see it, the concentration of political and economic power that they have re-created probably can't -- or won't -- be broken until energy prices fall, economic boom turns to bust and an angry public demands reform.