Russia's Economy in Steep Decline, Yet U.S. Passes on Chance to Crush Putin

The Russian economy has recorded its sixth straight quarter of declining economic growth. A year and half ago, Russian GDP growth was above 5%; now it’s barely above 1%, and the worst appears yet to come.

Ironically, as second quarter 2013 performance results came out last week, the truly frightening news for Russia was how well the country’s stock market was doing. It shrugged off news of the sixth straight quarterly decline, and it shrugged off the fact that the Q2 growth of 1.2% was more than a third less then the Kremlin had predicted. The only way the Russian market could ignore news this bad? By already being dead.

Pavel Demeshchik, a dealer at ING Bank in Moscow, told the Wall Street Journal: “The market is thin, volumes are low. All went to dacha after lunch on Friday.” The market doesn’t care how bad the news is because hardly anyone is trading.

At the start of the year, the Kremlin rosily predicted 3.6% growth for 2013 -- the same level Russia had in the first half of 2011. By April, the Kremlin was already backing away from that prediction, cutting the forecast by a third to 2.4%.

The Russian economy is spiraling helplessly into recession even though the price of crude oil, its lifeblood, remains strong. The reason is simple: Putin’s draconian neo-Soviet policies are choking off foreign investment and causing domestic capital to flee at an alarming rate. There simply is no money available for building factories and creating jobs. Last year, foreign direct investment (FDI), already at anemic levels even for Russia, plunged by 15%. In 2008 at the start of the global economic crisis, Russia raked in $75 billion in FDI. By 2012, Putinomics had established Russia as the worst-performing major economy post-crisis: FDI had fallen by more than half to $31 billion.

For comparison, Ireland attracted that amount despite having just 3% of Russia’s population. Brazil, to which Russia is often compared, has more than doubled Russia’s FDI at present.

But even if there was reasonable cash flow, Russia could not make use of it for two profoundly worrying reasons.

One is corruption: Transparency International calls Russia the most corrupt major civilization on this planet. Because of corruption, the 2014 Olympic Games are costing Russia at least double what they should, as the Kremlin has to throw two dollars in to get one dollar’s worth of work back out.

The other is lack of innovation. Putin is squeezing the life out of Russian society, denying citizens the chance to be enterprising. Further, higher education is dismal. Russia doesn’t have a single school ranked among the world’s top 75. Professors are poorly paid, facilities are poorly funded, and research is profoundly constrained by politics, just as in Soviet times.

When American gay advocacy groups recently considered boycotting Russian goods over Putin’s homophobia, they were unable to identify a popular Russian good worth boycotting. Stolichnaya vodka was considered -- but no, it’s not Russian.