Russia's Medvedev Gets Down to Business

With economic growth roaring, the new President must address inflation, overdependence on oil, entrenched corruption, and crumbling roads

by Jason Bush

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On May 7, a few minutes before noon, millions of Russians turned on their television sets to watch the dawn of a new political era. At a sumptuous Kremlin ceremony, Dmitry Medvedev, Russia's newly elected President, solemnly took the presidential oath, become just the third President in Russia's history.

As he uttered the words in front of the assembled dignitaries, Medvedev must surely have pondered his remarkable good luck. Still something of a mystery to the Russian public and just 42 years old, Medvedev knows full well that he owes his ascent to one person. That man, of course, is outgoing President Vladimir Putin, a figure now so influential that his recommendations are invariably taken as gospel by politicians and voters alike.

In other ways, too, fortune has smiled on Dmitry Medvedev. Compared with the dismal situation that faced his two predecessors, Medvedev inherits a country that is in remarkably better shape. Fueled by record high prices for oil and gas—Russia's main exports—the Russian economy is in its ninth year of solid growth. Last year the growth in gross domestic product accelerated to more than 8.1%, fueling an impressive consumption boom and a growing middle class.

Turning Point

It's certainly an enviable starting point for any incoming leader. But perhaps not quite as enviable as it seems. Medvedev still faces plenty of tough challenges in the months and years ahead. His tenure will determine not just the fate of the Russian economy (BusinessWeek.com, 3/3/08) but will also heavily influence the future of its homegrown businesses and the foreign companies that continue to pour into the country.

Even Russia's oil-fueled growth has its downsides. Inflation is rising, exacerbated by the inflow of petrodollars, as well as global trends on food and fuel markets. Last year inflation was officially 12.9%—well above target—and it's set to get worse as the effect of preelection price controls wears off. The problem is now far and away the biggest concern of ordinary Russians, according to opinion polls. Rising prices are, in turn, fueling wage demands, causing growing labor unrest (BusinessWeek.com, 4/25/08).

It's not an easy problem to fix. As Medvedev ponders the conflicting advice of his ministers, he will face some tough policy choices over politically sensitive matters such as government spending and the exchange rate. Whatever he does, he's sure to displease someone.

While day-to-day economic issues such as inflation are becoming increasingly complex, they ultimately reflect even deeper problems concerning the very structure of the Russian economy. Worrisome bottlenecks are appearing, and could well slow growth unless something is done about them. Even as shiny glass skyscrapers rise up in Moscow, the city's roads are so awful that two-hour traffic jams are routine, costing the economy tens of billions of dollars each year in lost productivity and wasted energy.

Repairing the Infrastructure

Travel to Russia's far-flung regions, and the situation is even worse. To fix Russia's crumbling infrastructure, Medvedev has pledged to invest hundreds of billions of dollars in roads, railroads, and airports. But with so much money being spent so liberally, it will be no easy matter to ensure that it isn't stolen or wasted.

Like most other Russians, Medvedev also is well aware that Russia's long-term prosperity depends on weaning the country away from its heavy dependence on oil and gas and encouraging the growth of innovation. In developed economies, that role is typically played by small businesses, but in Russia, these still represent only around 15% of the economy.