PARIS, Jan. 13 (UPI) -- Mikhail Gorbachev didn't understand the old Soviet Union, Boris Yeltsin didn't understand the new Russia. Vladimir Putin understands both and has cold-bloodedly promoted the re-emergence of some of least savory features of each one.
Putin, Russia's president, has been able to get away with this because of the high price of oil and natural gas. He has been able to increase pensions and police and civil service salaries. He is funding a defense modernization program and an ambitious global strategy of national promotion of which the $50 billion Olympic Games in Sochi this winter are just one feature. English language Russian TV is another.
The world is likely to focus on the latest outbreaks of suicide bombings that may put the Olympics at risk and on Putin's attempt to polish his human rights record by freeing some prominent prisoners. But the big issue for most Russians is the grim state of the economy.
Despite bringing stability and fostering the growth of a new middle class, Putin has failed in one key regard. He hasn't used the country's oil and gas wealth to build a rational modern economy, with advanced manufacturing and good infrastructure and booming service industries to create quality employment.
The economy is flat, currently growing at an annual rate of 1.2 percent, and inflation is a 6.5 percent and rising. While unemployment is low, at less than 6 percent (defined as those actively seeking work), more than one-quarter of the workforce is employed by the state. Finance Minister Anton Siluanov last year said that the state, which employs more than 18 million people, should trim jobs to improve productivity.
"When it comes to increasing labor productivity, you need to free up workers," he told a news conference in St. Petersburg. "We're afraid to cut jobs for workers in both the public sector and in the private sector."
In fact, the state plays a heavy role in the supposedly private sector. A recent survey by BNP-Paribas indicated Russian companies majority owned by the government account for half of the country's gross domestic product, up from about 38 percent in 2006.
The Russian education system is very good at turning out university graduates but the quality is questionable. Not a single Russian university makes the list of the world's top 100. In the 2012 QS World University Rankings, Moscow State was at No. 116, while St. Petersburg University was ranked 253. This year, the Russian government has announced a new $1 billion investment aimed at boosting Russian universities in the rankings.
Russian school students came in at No. 40 in the PISA global rankings, behind Turkey at 39. (The United States was 15th.)
Under Putin's administrations, Russia has wasted what former Finance Minister Alexei Kudrin called "the fat years" from 2000-08, when exports of oil, gas and minerals were booming. But since the 2008 financial crisis, growth has slowed and some $350 billion has left the country -- some of it lost when the banks of Cyprus ran into crisis last year.
"Russia has a severe problem with illegal flows of money," the Global Financial Integrity group reported last year, estimating a total of $782 billion in "illicit capital flight" since 1994. "Hundreds of billions of dollars have been lost that could have been used to invest in Russian healthcare, education, and infrastructure," the report noted.
Putin, who wants Russia to join the top five global economies, (it currently ranks No. 8, behind India but ahead of Italy), last year convened a top-level conference on restoring growth. The consensus was that the country had to invest in new technologies, clamp down on corruption, liberalize labor markets and slash the role of the state.
"The problems of the Russian economy show not a fleeting but a chronic character, and their treatment requires structural measures," Evsey Gurvich of the Economic Expert Group told the conference.
He noted that real wage growth of 8.4 percent in 2012 was almost triple the 3 percent advance in productivity. Putin should take "energetic measures," without tax increases, to rein in monopolies and increase the ability of the workforce to operate more efficiently, he argued.
The main result of that conference was an ambitious privatization program, aimed at selling of $51 billion of state assets over the next three years. These were at first to include parts of top infrastructure companies like Russian Railways, national airline Aeroflot and Sheremetyevo International Airport, oil-major Rosneft, shipping giant Sovcomflot and the hydroelectricity company RusHydro.
But Putin insisted that these privatizations take place on the newly privatized Moscow exchange, which has yet to establish a reliable reputation, and the Russian judicial system's cavalier treatment of foreign investors is another problem. Moreover, the privatization program was heavily scaled back in June.
So the country remains an under-performing economy, based on exporting raw materials, with a serious corruption problem and uncertain human and property rights. It has few international friends, except those like Ukraine which can be bought and other former Soviet states that can be bullied. Given the hopes that blossomed 25 years ago when Mikhail Gorbachev welcomed President Ronald Reagan to the Kremlin, the results so far are a sad disappointment.