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Russia 2007: Ruble, Ruble,Toil and Trouble

America's former Cold War enemy has thrown off the shackles of communism and entered a new era of billionaires, su­­per­models, jailed oligarchs, and polonium assassi­nations. What's behind it all? An econ­omy in overdrive. Tyler Cowen, a professor of economics at George Mason University, explains the basics.

Why did communism collapse in the USSR?

Because even Soviet leaders ceased to be­­lieve in it. The defeat in Afghanistan, the Reagan arms buildup, the need to im­­port more grain, and a drop in oil prices all came together at the same time. It was impossible to pay the bills. Once Gorbachev started reforms, no one had a good alternative plan for maintaining the status quo, and a middle-class person in Switzerland or America had a higher standard of living than all but the highest party apparatchiks.

What happened to all the properties and industries once owned by the state?

Citizens received vouchers for the newly privatized assets, but some people bought up many vouchers very cheaply early in the process, usually with the assistance of government loans. Extortion and assassinations of rivals were not uncommon. Some clever and well-connected individuals be­­came millionaires or billionaires, especially in the energy sector, but ordinary people were left with almost nothing. More recently the Putin régime has been renationalizing assets and trying to control the oligarchs. That is why Mikhail Khodorkovsky of the Yukos Oil Company—and a political opponent of Putin's—languishes in a Siberian prison and why the remainder of his company, which has since filed for bankruptcy, is now owned by the government.

Why is Moscow one of the most expensive cities in the world?

It's more expensive to visitors than to residents. The skyrocketing de­­mand for hotel rooms—especially by people doing busi­- ness in the city—has outpaced the supply. Agriculture remains inefficient and customer service is only now developing, so it's not un­­usual to pay $50 to $100 for a meal of indifferent quality. But Musco- vites are not paying those prices. Foreign-ers are even charged more at tourist sites. When I go to a Moscow museum with my wife (who is Russian), I keep my mouth shut, look away, and let her buy both tickets.

Why is it so hard to catch a cab in Mos­cow?

It is and it isn't. Every car in the city is a cab, at least for the right price. If you stick your hand out, lots of private cars will pull over to pick you up. But most drivers speak only Russian and will charge non-Russians (who are obvious) much higher rates. This system discourages the development of a reliable and safe English-speaking fleet—it's a good deal for them but a bad one for you.

Why is the country's economy growing so fast?

It's playing catch-up after many years of trail­ing the West. Oil and gas prices are very high and taxes are low (a flat rate of 13 percent), which encourages private enterprise. From Soviet times the country inherited a decent infrastructure and a good education system. Still, most Westerners won't invest there—the judiciary is unreliable, contracts aren't enforceable, and corruption is rampant. Worse, there's no guarantee that the high energy prices will last forever.

Who "lost" Russia?

No one. It's more accurate to say that Rus­sia has not yet been found. Critics com­monly charge that unwise American advice or unwillingness to spend on aid for Russia caused its democracy to fail in the nineties. But we never controlled that outcome. And by historical standards, the reconstruction has gone remarkably well. When the Soviet empire was collapsing in the eighties and early nineties, there were fears of civil war, violent clashes, and widespread fam­ine. Apart from the problems in Chechnya, those predictions have not come to pass.

Why hasn't Russia become a free country?

Most Russians prefer a strong leader to a free society. There is not much tradition of a free press, many people still revere the mem­ory of Stalin, and the rapidly growing mid-dle class tends to be cynical and apolitical. Russians—even the intelligentsia—tend to put loyalty to friends above allegiance to ab­­stract principles of governance and law. No country becomes free on that basis.

—Tyler Cowen is the author of Dis-cover Your Inner Economist. He and his Russian wife and stepdaughter live in Fairfax, Virginia.