Russia: The Trouble with Putinomics

Rusfinance and Société Générale officials say they are working the crisis to their advantage and have increased the company's share of the auto-loan market. "We see this as an opportunity," says Lyudmila Bogushevskaya, director of Rusfinance's regional network department.

Such optimism can be found elsewhere. The Kaluga region, to which Lyudinovo belongs, continues to draw in foreign investors, including automakers. Volkswagen has invested about $350 million in an assembly plant and is producing about 320 cars per day. Peugeot is not far behind. Dietmar Korzekwa, VW's group representative for Russia, says the automaker is continuing with its current growth plans. In part, VW is betting that if the Kremlin raises import taxes on autos, as it has suggested it might, it will become more advantageous to manufacture in Russia.

Russia needs foreign companies to plug a huge hole in Putin's economic policies. During his first term, Putin introduced modern tax and corporation laws. But he failed to spur the development of a business infrastructure that would enable Russia to shake its overreliance on energy and metals. Now, as the crisis starts to bite, the Kremlin is reacting by increasing its control over broad swaths of the economy. Through the state-controlled banks, it is bailing out selected business executives who are having trouble paying their debts--including Oleg Deripaska, a metals tycoon who until recently was Russia's richest man. It is also playing an increasingly intrusive role in the private sector. At a meeting in Moscow on Nov. 25, for example, Igor Shuvalov, Putin's First Deputy Prime Minister, told the nation's major retailers that the Kremlin would ensure they gain access to credit on the condition that they demonstrate "social responsibility" by not raising prices.

Back in Lyudinovo, snow is falling heavily. Andrei Petrov, the biggest retailer in town, owns many of the stores, including the new emporium, and also runs a wholesale-distribution business to supply them. Getting in to see him is hard. A security guard wants to know whether we are American spies. Petrov's deputy, Viktor Denisov, nervously locks his office door when he crosses the corridor to see his boss. Petrov is deliberately cagey about business prospects. Yes, an economic crisis is now raging, "but this is not the first time we've had one," he says. Indeed, back in 1998, Denisov says mysteriously, "it was a crisis that helped us move a step ahead." Business, both insist, has not been affected. But press Petrov on prospects for the year and he shifts uneasily in his seat. "We will be making some corrections," he finally concedes. Putin himself couldn't have put it better. The question is, Just how much pain will Russians have to endure before the government makes the corrections that are so desperately needed?