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.


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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