#16 - JRL 7246
Newsweek
July 14, 2003
Atlantic edition
The Two Russias
As oil money and reform turn Moscow into a normal European capital, the hinterlands are stuck in post-Soviet dysfunction
By Christian Caryl
With Stefanie McIntyre in Moscow

Five years ago, Moscow's Gorbushka Market was a window on the lawless Russian economy. Merchants trafficked pirated CDs under the trees or peddled smuggled stereos from the backs of trucks--dodging cops and tax inspectors. These days the Gorbushka (as Muscovites affectionately refer to it) has emerged into the light. A Soviet-era TV factory has been converted into an air-conditioned consumer-electronics mall--some 2,000 stores, ranging from stalls offering mobile phones to luxury boutiques featuring state-of-the-art viewing salons for flat-screen TVs. Sony and EMI are building official pavilions, and 75,000 people visit each day. "We believe we are the biggest seller of music and videocassettes, music CDs and DVDs in Europe," says Igor Tokar, a spokesman for the mall's biggest landlord, adding that the Gorbushka is no longer a window on the nation, or even part of it. "Russia is a separate country," says Tokar. "What can I say? Moscow is Moscow."

Fifteen years after Mikhail Gorbachev made his first moves toward reform, there's a widespread belief that Russia is developing into a normal market economy. What's really happening is that Moscow is becoming a pretty typical European capital, while the rest of the nation waits in vain for real change. Other oases of urban prosperity include St. Petersburg, but only Moscow has been able to exploit its position as the traditional center of all Russian worlds to build a modern, service economy. Officially, per capita GDP in Moscow ($5,500 in 2002) is three times higher than elsewhere in Russia, but most experts say the real gap is wider and growing fast. As in other rapidly urbanizing countries like China, that's creating two vastly different realities. "The question," says Moscow media mogul Oleg Khripunov, "is whether this Moscow locomotive will pull the rest of Russia behind it or detach itself from the rest of the train and speed away."

Moscow's momentum dates to the Soviet era, when central planners made even the smallest decisions in the capital. When the Soviets fell, a new class of industrial oligarchs rose, but they too rely on Moscow connections to stay in business. Now, the emerging rule of markets means that business, finance, entertainment, media, trade, culture and fashion are increasingly focused on Moscow--as if New York, Washington and Los Angeles were one capital. "Moscow has always been a parasite at the center of the empire, sucking all that's good from the fringes to itself," says American banker Bernard Sucher, who recently took a job with a Russian bank based, of course, in Moscow. More than 84 percent of all bank assets in Russia are on deposit in the capital. "This is where the action is," says Sucher.

About 7 percent of Russia's 145 million people live in Moscow, but they produced 21 percent of the nation's GDP in 2002, up from 14 percent in 1997. Because the rich and private businesses are heavily concentrated in Moscow, the real gap is likely even wider. "Income levels are understated everywhere in Russia, and in the higher-income brackets they're probably understated more," says World Bank economist Christoph Ruehl. "And the more that's coming from the private sector, the more that they're hiding."

Much of the money now comes from oil found in far off Siberia, or the Pacific island of Sakhalin. But Russian oil companies like Gazprom pay taxes in their home city, usually Moscow. The capital is pouring money into sleek new highways and a gleaming makeover of Domodyedovo airport, now Russia's best, while the rest of the country falls deep into disrepair. More than ever, it's Moscow where the deals are done, the profits banked, creating a new professional class that staffs a booming service economy. By 2000, service industries accounted for 45 percent of the Russian economy--and 75 percent of Moscow's.

President Vladimir Putin bemoans Russia's failure to create a new sector of small businessmen to replace the oligarchs, but those worries apply mainly outside the capital. One quarter of all Russian small businesses are in Moscow, from insurance companies and fitness clubs to newspaper kiosks, market-research agencies and restaurants like Bely Kvadrat, a luxuriously minimalist eatery owned by two Frenchmen and frequented by style-minded magnates prepared to blow $3,600 on a bottle of 1990 Petrus (Pomerol AOC). Another characteristically Moscow business: agencies arranging high-concept birthdays for children of the rich. They can do a Harry Potter-theme bash or rent you a party elephant.

Builders and architects are swamped with work for the newly wealthy. The skyline is dotted with new residential skyscrapers boasting penthouses, "intelligent building services," indoor pools and skating rinks. The suburbs are exploding with new homes--from modest to Disneyland grotesque. Delta Credit, a U.S. bank, is one of three companies in the nascent market for home mortgages, and has so far loaned $80 million with sales growing at 150 percent per year, says chairman James Cook. The catch: 97 percent of its business is in Moscow.

Middle-class Muscovites are coming to expect foreign vacations, Chinese takeout, and a Toyota or a Ford in the garage. Yelena Bashkirova of the ROMIR polling agency says ironic ad styles now work in Moscow with "no difference from the West." Nearly 40 percent of all cell phones in Russia are owned by Muscovites. Retail is booming. "I would say that Moscow is not Russia, definitely," says Irina Vanenkova, a spokeswoman for the Russian arm of Swedish-furniture-retailer IKEA. "When we compare different stores in the world, our Moscow store is compared to stores in London, Paris and New York."

Increasingly cosmopolitan Moscow is attracting young people from rural towns (despite complex new documentation rules), which only makes the capital more alien to the aging countryside. Muscovites like Vitaly Maslov, 20, an economics student at Moscow University, no longer think in strictly Russian terms. In his spare time Maslov works for his parents, both of whom own small businesses, giving him enough money for his favorite pastime, disco bowling. "Moscow compared with Western cities is more real, raw, and there are more prospects," he says. "I wouldn't say Moscow is better than Western cities but it's definitely more interesting, with more possibilities."

Russian wealth is becoming concentrated not only in one city, but also in the hands of fewer people. A 2002 study by Brunswick UBS found that 54 of the 64 top private companies are controlled by eight "financial-industrial groups"--meaning the oligarchs, all based in Moscow. One of the big debates now is whether Russia will become "a civilized resource-driven economy" like Canada, or go the way of resource-rich dictatorships, says Ruehl. "If the present concentration of wealth isn't broken apart, then you will end up with Nigeria."

It's not clear which tendency will win. Optimists say Moscow's wealth will begin to trickle down soon. Big retailers like IKEA are preparing to push into the provinces. Economists like Anders Aslund of the Carnegie Endowment insist that some of Russia's other big cities, including St. Petersburg and Yekaterinburg or Rostov on the Don, are poised to challenge Moscow's predominance. Analyst Peter Boone of UBS Brunswick Warburg argues that growth rates in the rest of Russia are "just as high as Moscow's." Most Russians doubt that. So does Sucher, the American banker, who says the best the hinterlands can hope for is greater prosperity. But to catch up to Moscow? "No, never," he says. "That's just not the way the thing's built."

Under current trends, Russia is emerging not only as two separate economies, but two separate economic cultures. In Moscow, where all the big players congregate, they enrich one another and the city but also check one another's powers. In the provinces, it's still possible for oligarchs to call the shots, often in allegiance with powerful local governors, but with retarding effects on development. The likely result is that while Moscow may look and behave increasingly like a modern European city, the rest of Russia will look more backward in comparison.