Economy of Clay

NEWSWEEK JAPAN

Moscow may seem an odd place to host a major international boat show—not least because Russia's capital is nearly a thousand kilometers from the open sea.  But over the last few years, a heady combination of easy oil money and a taste for excess has worked strange miracles in this, Europe's brashest capital. Earlier this month, wealthy Russians snapped up gleaming motorboats lined up in front of a swish shopping mall; the price tags ranged from $3.8 million to $20 million for a 47-meter "transatlantic mega yacht."

Across town, dominating the city's skyline, the skyscrapers of the Moskva-City business development are springing up like mushrooms after the rain. By 2015, Moscow will boast the 10 tallest office buildings in Europe—and already prime office rents in Moscow are going above $2,000 a square meter, 50 percent higher than the most prestigious skyscrapers of midtown Manhattan. According to a recent study, Russia now boasts 103,000 dollar millionaires and 55 billionaires, whose lavish spending has fueled a boom in everything from construction to retail.

On paper, Russia's basic economic indicators appear quite healthy: growth has averaged 7.5 per year for the last eight years, the country's massive debts have been replaced with a $150 billion stabilization fund, and its trade balance shows a healthy surplus of $72.5 billion last year. The Russian stock market's RTS index has grown by a staggering 1,922 percent between 2000 and 2007.

But in truth, the Russian economy as a whole is an edifice with feet of clay. The bling and glitter of the capital obscures a harsh reality: the architecture of Russia's economy is no more solid than that of an inflatable children's castle at fairground, with energy and commodity prices the wind that keeps it inflated. Yes, the Russian economy has been growing fast. But little of that growth has spilled over into the real Russian economy. Rather, the boom has, in many ways, held back Russia's non-commodities economy from growing: rampant inflation, spiraling real-estate prices and higher labor costs, bureaucratic corruption, expensive credit and bad governance have combined to stifle the competitiveness of many Russian businesses.

"Russia's macroeconomic performance has been stellar," says economic analyst Anders Aslund. "But Russia's oil surplus is so huge that it hides flaws in economic policy; the longer oil prices remain high, the worse economic policy will become. Booms breed complacency and corruption."