Because of the extent of the corruption, the Russian economy is stagnant. In net terms, Russia is losing $7 billion to $8 billion of capital every month, equivalent to 5 percent of monthly GDP. Most businesses devote enormous time and attention to protecting themselves against raiding. This entails developing their connections to law enforcement. For fear, again, of being targeted by raiders, Russians are reluctant even to expand existing businesses.
Russia increasingly resembles a Third World economy. Crude oil and gas now account for 75 percent of the value of its exports. At the same time, two-thirds of Russian industry is uncompetitive, producing low-quality goods for the internal market and countries such as Iran. It is supported by the revenue from oil and gas. The state’s deficit when the oil-and-gas sector is subtracted is now expected to be 12.7 percent of GDP.
To reverse this situation, Russia needs normal conditions for investment. Those are not possible without the rule of law. Trying to assure his reelection, Putin’s government authorized $161 billion in additional spending through 2018, including increased pensions and a freeze on gas prices. One of the purposes of this move is to help preserve the domestic peace. But the government now needs an oil price of $150 a barrel over the next few years to meet its obligations. This may be unattainable. A crash in the oil price would plunge Russia into crisis immediately.
A final factor in Russia’s growing internal crisis is an increase in ethnic tensions. Russia faces a terrorist threat from the North Caucasus, and in many cases Russians have responded to it with racism and xenophobia.
Putin became president in 2000 because of the second Chechen war, which was launched after four apartment blocks were blown up in Russia in September 1999 in attacks that were blamed on the Chechens. A fifth bomb did not explode, and those who placed it were arrested and turned out to be not Chechens but agents of the Federal Security Service (FSB). But this finding had little influence on the subsequent course of events.
The decision to launch a new war had far-reaching consequences. Russia managed to subdue the separatist revolt in Chechnya, but the rebellion spread to the rest of the North Caucasus and metamorphosed into an Islamic insurgency. In 2007, Doku Umarov, a veteran Chechen field commander who became head of the resistance, proclaimed himself the leader of an Islamic emirate embracing the entire North Caucasus.
The shift in ideology led to a greater emphasis on terrorism. Umarov took credit for the bombing in November 2009 of the Nevsky Express train between Moscow and St. Petersburg, in which 27 were killed. He also took credit for the suicide attacks in March 2010 on the Moscow metro, where 40 were killed and 95 injured, and for the suicide bombing in January 2011 at the Domodedovo airport, where 36 were killed and 160 wounded. Moscow became the only European capital to be hit by terrorists repeatedly.
Meanwhile, extreme nationalists, including neo-Nazis, gained strength within Russia. After Putin was elected president in 1999, he promised “to destroy the terrorists in their outhouses.” Such statements, and the renewed pursuit of a war of extermination in Chechnya, led to a sharp rise in anti-Caucasian sentiment. Soon, popular support for discrimination against people from the Caucasus was at 55 percent, and it remains at that level to this day.
In 2006, a conflict between Russians and local Chechens in Kondopoga, a town of 35,000 in Karelia, the Russian region that borders Finland, led to anarchy, a pogrom against Chechens, and a takeover of the city by an enraged Russian crowd. At roughly the same time, 13 were killed and 47 injured when a bomb exploded in Moscow’s Cherkizovsky Market, where many of the traders are from the Caucasus and Central Asia. By 2008, there were an estimated 30,000 aggressive and fascist-leaning nationalists in the five or six largest Russian cities. Even as the violence grew, the police remained indifferent, particularly to the killing of non-Russians.