May 29th, 2012
07:38 AM ET

Would moving capital kick-start Russian economic reform?

By Fareed Zakaria

A bold proposal recently caught my eye: One of Moscow's top academics says Russia should build a new capital city. This city would be far, far away from Moscow, 4,000 miles to be exact — in Vladivostok.

Why?

Well, the person who proposed the idea, Sergei Karaganov of Moscow's Higher School of Economics, wrote in a state-run newspaper that a capital in the far east would make Russia part of what he calls "the rising world" — closer to dynamic Asian economies and further away from an aging Europe.

The idea of moving a capital is not without precedent.

British India moved its capital from the coastal city of Calcutta to the more centrally located Delhi in 1911, and then created the city of New Delhi.

In the 1920s, Turkish nationalists moved their capital from Istanbul to Ankara, kick-starting rapid growth in central Turkey.

More recently, Brazil moved its capital from Rio de Janeiro to Brasilia, in the center of the country; and Kazakhstan moved its seat of government from Almaty to Astana to be closer to Russia.

It's unlikely President Vladimir Putin will want to follow suit. But he would do well to think about the underlying thrust behind the argument: Moscow needs urgent reform. Russia is not really a booming emerging market economy. It is an oil-rich kleptocracy where mostly everything else in the country — including the once-vaunted military — is in a shambles.

Putin often cites figures to show he has presided over a boom. The average Russian's income has risen more than seven-fold in the last decade, from 2,000 to 14,000 dollars a year.

Yet that statistic tells an incomplete story. Russia's growth has been uneven.

Moscow has 78 billionaires — more than any other city in the world. Those billionaires, along with others in the rest of the country, account for 20% of Russia's GDP. Far higher than any country.

That doesn't leave much of Russia's economy for businesses and the other 141 million people in the country.

The second problem is that Moscow's fate has for years been linked to crude oil prices. Data shows how Russian stocks have risen and fallen in step with oil prices.

According to Reuters, Russia now needs crude to trade at $117 a barrel simply to balance its budget. That number used to be $50 as recently as 2008, and $27 at the start of Putin's first presidency. Talk about a bloated state.

In part, Moscow's escalating expenses are a result of Putin's largesse, a policy designed to keep his electorate happy and keep him in power.

Rising crude prices have allowed Putin to maintain that system of bribery. But with global growth now slowing, he can no longer count on the same set of conditions for the rest of his presidency.

Instead, he needs to reform the economy. Private companies need the freedom and confidence to actually develop.

Russia has only one main bank — its people need a financial system they can trust.

Russia ranks 143rd in the world on Transparency International's corruption index.

To his credit, Putin acknowledges these problems. Shortly after his re-election, he spoke of improving Russia's rank in the World Bank's "Ease of Doing Business" list, from 120th in the world to a place in the top 20.

He also targeted raising investment from 20% of GDP to 27%.

But if those targets sound somewhat familiar, it's because he's set similar ones before — during his first presidency. And didn’t meet them.

This time, he not only has the economy to fix: he's also faced with an opposition movement with growing courage.

The Kremlin this week welcomed a new cabinet, but it's mostly full of mostly the same old faces. If Putin keeps the same old policies, his problems may only just be starting.


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soundoff (198 Responses)
  1. charles bowen

    Move it .....and loose Putin in the move ........ Charles Bowen Solomon Stone

    June 3, 2012 at 8:22 am | Reply
  2. Dennis

    After he is done in office,they can rename the capital "Putingrad"

    June 3, 2012 at 10:35 am | Reply
  3. Arcangelw7

    Pat, I want to know why you are not at the Bilderberg Meeting or even reporting on it? Why as a Christian, are you not standing up to this evil in this world with Prayers & Leadership, shining Gods light on their Darkness being executed in secret right now as the Global Agenda?

    You should be rallying people peacefully to be there with the protesters and leading them in prayers for this world and Country, and binding up the Principalities and Powers of Darkness as they discuss our demise right in your own backyard. Why is there not even a whisper of this event coming from CNN and who do you really stand up for, the Globalists or God? Shame on you!

    June 3, 2012 at 1:41 pm | Reply
  4. D. B.

    Do the U.S. and Canada need to move their capitals to L.A. and Vancouver to participate in trade with the Pacific nations? No. The location of the capital city should not matter in a modern, well-governed nation. It only matters in countries where the economy is controlled by political patronage. That's Russia's real problem.

    June 3, 2012 at 2:00 pm | Reply
  5. Sabu

    We had a Governer who said I can see Mr Putin in my backyard, but actually what happend was once she heared her Daughter screaming PUTIN PUTIN she thought its Mr Putin but after her daughter got pregnant and she realized it was her daughter telling her boyfriend to PUT IN, and rest is history.

    June 3, 2012 at 5:32 pm | Reply
  6. capper

    the people of the russian far east for decades have been trying to convince moscow to put more development into vladivostok and the surrounding regions. so far, it has not come to pass.

    June 3, 2012 at 8:28 pm | Reply
  7. Marc Azous

    This is actually the smartest thing I've heard come out of Russia since Tetris.

    June 3, 2012 at 9:03 pm | Reply
  8. Marc Azous

    Russia is large enough to have 4 or 5 capitals, or main cities, or economic zones.

    June 3, 2012 at 9:05 pm | Reply
  9. johnny

    Putin's days are limited. The murmur against his dictatorship is growing louder than before. Many potential techocratic entreprueners have been unfairly sidelines so that Putin can continue his ridiculously poor handling of Russia's once opulent wealth.

    Russia is now relying mainly on the sale of oil, which Putin got special concessions from former Arabian dictators. In exchange for that, Putin supplies these murderous dictators guns and planes to kill innocent citizens or to keep them in check.

    June 3, 2012 at 9:18 pm | Reply
  10. johnny

    Signs of a fast declining Russian economy –

    1 – Russia's top central banker, Sergei Ignatyev, warned on Wednesday that capital flight is a "serious problem," as newly released figures showed $42 billion has left the country in the first four months of the year. (wsj 4 Jun).

    2 – Oil production in Saudi Arabia rose to 9.923 million barrels a day in March, from 9.853 million barrels a day in February, overtaking Russia as the world's largest producer for the first time in six years.

    3 – BP maneuvers for a tricky Russian Exit. The oil major's sudden decision to put its 50% stake in TNK-BP up for sale could herald its exit from Russia, and end its fraught relationship with its partners.

    June 3, 2012 at 9:44 pm | Reply
  11. johnny

    Signs of Putin getting a boot to his butt, before 2015 –

    Popular support for Vladimir Putin's government continues to erode and Russia could see a full-blown political crisis before he finishes his six-year presidential term, according to a new report from an influential Moscow think tank.

    "The erosion of confidence can't be stopped," Mikhail Dmitriev, director of the Center for Strategic Studies, said in an interview on the eve of the report's public release on Thursday. The study is being closely watched because Mr. Dmitriev's center was the only major one to accurately predict early last year that support for the regime was plunging and that it would face a crisis as early as December's parliamentary elections....."

    (Gregory L White)

    June 3, 2012 at 9:48 pm | Reply
  12. beezers

    Move the capital to Vladivostok? Maybe that's why the US is moving its naval carriers to Asia and the Pacific Ocean. :)

    June 4, 2012 at 1:21 am | Reply
  13. ponderer

    Perhaps a trade and business capital in in Vladivostok and Moscow will remain governing capital, Fareed ?
    All things are possible in this age of speed-of-light information technology transactions. I also think humanity could use a whole bunch of new cities not just in Russia, but all over the globe. Don't ask who will pay for it all, though !

    June 4, 2012 at 4:16 am | Reply
  14. sportsfan8888

    Move the USA ca[ital to Kansas while they are at it.

    It would be a huge improvement over the corrupt NY DC corridor.

    June 4, 2012 at 4:20 am | Reply
  15. panorain

    Seven billionaires control 20% of the economy? This means that Putin needs to ax a few more billionaires. It's been a long time since he got the last one. Putin must be getting itchy anyway. Eenie meenie minie moe.

    June 4, 2012 at 8:24 am | Reply
    • digitalclips

      Putin probably wants to one of those billionaires.

      June 5, 2012 at 10:15 am | Reply
  16. Jacknyd

    The name of the new capitol will be ( Syria )

    June 4, 2012 at 9:34 am | Reply
  17. josh rogen

    maybe the us should move its capital from Washington D C to somewhere in Iowa to be closer to the corn

    June 5, 2012 at 12:44 pm | Reply
  18. nike air jordan 1 dmp pack

    Great list, very interesting especially the one on the Manifesto which sparked something. Thanks for the good advices.nike air jordan 1 dmp pack

    June 6, 2012 at 3:11 am | Reply
  19. Cragglesmacks

    Hmmm interesting, moving their capital in east asia. Maybe we should move our capital closer to Asia to Los Angeles......haha no maybe not ;)

    June 6, 2012 at 11:52 am | Reply
  20. man

    farid zakaria, how can you prove that putin is providing shelter to a bribing system, this article is full of shameful hate, what do you want a casino economy and riches made in stock exchange, this is utterly discusting and shameful article by a very very biased person

    June 8, 2012 at 8:29 am | Reply
  21. man

    first worry about your own system which is on the brink of disaster, people like you are dragging usa to near disaster situation by distracting people attention and focus on weakness of others. americans should be aware of people like him who do not speak of americas problems.

    June 8, 2012 at 8:32 am | Reply
  22. man

    he will never talk about russia`s good things, like stability, public systems, just they want denationazation of russia natural resources.

    June 8, 2012 at 8:33 am | Reply
  23. Zia

    Another foolish article by the author. Moscow is the most convinent place for capital of Russia. It has moderate climate compared to Vladivostok, has the author been to Vladivostok in winter??? Moscow is very well connected (especially with Saint Petersburg) & is easy to access from most countries. It already has very good infrastructure in place.Moscow defines Russia.It is near Ukraine and Belarus which helps Putin to keep an eye on these places (remeber his motor bike trip to Ukraine or his visits to black sea resorts). Imagine travelling from Delhi, Berlin , London or Kiev to Vladivostok??
    What about the time zone gap between Moscow and Vladivostok?? Would you hear a morning news from Vladivostok during dineer in Moscow???
    Infact it makes sense to economically develop places like Sochi, which is what Putin is doing (Winter Olympics) as they have excellant weather & reduced start up costs for running business (lot of saving on heating & electricity & good roads and transport in winter due to lack of snow).

    June 9, 2012 at 2:48 pm | Reply
  24. nomththanks

    Putin seems to know what the cure is – arrest the Jews who've come in to ruin the country and return Russian wealth to the people and the state.

    July 23, 2012 at 9:16 am | Reply
  25. nomththanks

    Putin seems to have the answer already – arrest the Ashkenazi Jews who've come in to ruin the country and return Russian wealth to the people and the state.

    July 23, 2012 at 9:18 am | Reply
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    August 2, 2012 at 2:38 pm | Reply
  27. Alexander

    Cuidado com a propaganda ocidental anti-Putin. O homem devolveu o orgulho aos russos.

    August 7, 2012 at 2:39 am | Reply
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    August 27, 2012 at 10:17 am | Reply
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