The Kremlin begs to differ.

• Author: Simes, Dimitri K.

Twenty years after the fall of the Berlin wall, Russia remains as Sir Winston Churchill described it: "a riddle, wrapped in a mystery, inside an enigma." Russia's complexity has contributed to an American debate in which policy preferences too often shape analysis rather than analysis driving policy. It's not a sound basis for decisions when key American interests and goals are at stake.

One doesn't need to be a Russian domestic radical or a foreign Russophobe to see major flaws in the way Russia is ruled. The country's president, Dmitri Medvedev, has catalogued its problems: "an inefficient economy, semi-Soviet social sphere, fragile democracy, negative demographic trends and unstable [North] Caucasus," not to mention "endemic corruption" defended by "influential groups of corrupt officials and do-nothing 'entrepreneurs'" who want to "squeeze the profits from the remnants of Soviet industry and squander the natural resources that belong to us all."

Russia's problems are fundamental to its political system, which, while officially democratic, is perhaps best understood as popularly supported semiauthoritarian state capitalism. Russia is clearly not a Western-style democracy, though its citizens enjoy considerable freedom of personal expression, with the level of liberty inversely proportional to the potential impact of criticism. The state dominates "strategic sectors" of the economy like energy and defense, but political-business clans have retained much space to pursue their parochial interests, including through the state's administrative machinery. As throughout its history, Russia is dominated by a ruling class: originally aristocrats, then Communist Party nomenklatura, and now a combination of senior bureaucrats and business leaders, including former Soviet managers, ruthless-yet-effective younger entrepreneurs, and outright criminals who took advantage of the decay, collapse and anarchy of the 1980s and 1990s.

The question now is how long Russia's current political arrangements can hold. Corruption is deeply embedded and pervasive, affecting state and private enterprises along with the media and the courts, severely limiting Russia's modernization and sustainable economic growth. And with so much power concentrated at the top of the system, recent murmurs of a growing rift between President Medvedev and Prime Minister Vladimir Putin false serious concerns about stability.

Moscow's arbitrary rule affects the people and state of Russia most of all, but it also presents a challenge to the United States. Russia is vital to American interests, and if the Obama administration has any illusions about the nature of Russian politics or, alternatively, surrenders to the long-standing temptation to act as a self-appointed nursemaid, it could severely damage our ability to work pragmatically with Russia to advance important U.S. goals.

It is difficult to overstate the role of corruption in Russia, which in many ways is the glue that holds together the disparate groups dominating Russia's current political system. The Russian state is organically linked to Russian companies, both overtly--through stock ownership and officials' simultaneous service on corporate boards--and covertly, through family ties and secret deals. At the upper levels, Russia's corruption takes the form of private stakes in state firms and profound conflicts of interest; at lower levels, simple bribery is more common. And the scope of corruption is expanding: according to official statistics, Russia's bureaucracy has doubled in size in the last ten years.

Those at the top have a relatively free hand to enrich themselves through insider dealing. Thus, notwithstanding Russia's extensive privatization, it is often difficult to distinguish between government-owned companies and large private conglomerates. Officials are deeply involved with both and the government often acts to protect both, though it is not always clear whether government actions are a result of state or private interests.

Because of corruption, Russia's political system is simultaneously very resistant to change and remarkably fragile. Extensive overseas portfolios and property held by Russian officials and oligarchs are a clear indicator of their own limited confidence in Russia's stability. There is an exuberant Russian presence in London, New York and on Mediterranean beaches that is totally out of line with the size of Russia's economy. The reluctance of major Russian firms to make long-term capital investments in their own country is further evidence of this mindset. If those who hold power still feel the need to hedge their bets, it is all the more true of international investors.

In addition, the uninhibited power of huge government-owned or government-connected firms to act against their competitors discourages both foreign investment and the development of small- and medium-size businesses in Russia. Though Gazprom has legitimately wanted Ukraine to pay its bills on time and in full, the resulting disputes took on a very different character when Russian officials became involved. In the end, the repeated crises damaged Moscow's reputation as a reliable energy supplier and a responsible European power. The Alfa Group's struggle with BP over control of their TNK-BP joint venture is another example in which well-connected Russian moguls allied with the state to apply pressure to their business partners. What would be routine commercial disagreements in other countries can rapidly trigger state intervention in Russia, usually to the disadvantage of foreign firms or others outside the system who lack effective protections or recourse.

Corruption and insider dealing can have tragic consequences in Russia, as they did in an August explosion at the Sayano-Shushenskaya dam in Siberia, when over seventy people were killed due to inadequate maintenance. Putin himself described as "irresponsible and criminal" an apparent maintenance contract with a fraudulent firm set up by top managers. Beyond limiting investments in safety and maintenance, however, irresponsibility and corruption have also strongly discouraged investment in other key areas. Russian firms happily squeeze out foreign investors but don't themselves put money into new equipment, training, or research and development. Despite recent increases, state investments in education, health, and science and technology are also inadequate for sustainable economic growth and to diversify beyond energy exports.

Here it is useful to compare Russia to China. China is less free than Russia according to Freedom House, and has a number of similar problems, but is considerably more attractive to foreign investors. The huge scale of China's market is a major inducement, but Beijing's greater willingness to accept international rules and its much more strategic approach to cultivating foreign investors--whose presence China's leaders view as essential to meeting their development goals but energy-rich Moscow has seen as easily replaceable--also make a big difference.

It will not be possible to modernize Russia without a genuine effort to eliminate corruption--and this includes at the top. Corrupt conduct is not simply tolerated, but a way of life with profound political implications. Any opening in the political system that would allow corruption to be exposed could potentially decimate Russia's elites--and they know it. Everyone who is involved in corruption whether directly or indirectly (by failing to act on knowledge...