In 2007, my Russian business partner and I were driving to a meeting in Moscow as Dmitri Medvedev was announced on the radio as the heir apparent to Vladimir Putin’s Presidency. My partner said:

Putin will be back in 4 years. He will come back as the savior to Russia’s economic problems. Currently Russia looks good on paper in terms of its GDP and debt recovery. But this will not last. (Boris) Yeltsin gave away the country’s national resource riches. Putin has chosen corruption over moving the country away from dependency on oil and gas to becoming a true player in the high tech global economy. Over the next four years it will become clear to many how Russia is quickly declining. Medvedev will be left do deal with the consequences of Yeltsin’s and Putin’s mistakes and the results of the “KGB Economic Model.” Medvedev will not have the power to make any major changes, but will take the blame for the economic problems. Putin will come back as the savior to the economy in 2012 and seal his ambition for a long-term dictatorship.

It’s 2011 and while it seems that some Russians may not see Putin as a hero or as savior, they have little they can do to force something different. They have supported Putin’s plans and voted in his party’s Duma candidates over the past 4 years.

Now, though, the snowballing problems of Russia’s decline are firmly in Putin’s lap. Results of this model and others are just starting to be realized as the country has used up every bit of the positive outcomes left by the Soviet government – most noticeably in the decline of the educational system,  its global scientific and engineering prowess, its declining infrastructure, and its athletic performances on the world stage.

Russia’s Private Sector

During Vladimir Putin’s presidency, it was assumed that rapid privatization of industry would lead to industrial funding of R&D in Russian universities to make up for their severe budget cuts in education. Instead, foreign companies rushed in to sell their products, many in sectors the Russians might have grown themselves, such as pharmaceuticals, aviation products and automobiles. Putin continued to isolate Russia from a painful but necessary integration into the global economy. He failed to insist on continued (let alone increased) investments into his citizens’ future and instead turned a blind eye as government investments went into the pockets of those appointed to oversee the country’s progress.

Presidents Yeltsin and Putin did not have the stomach to force many defense institutes out of business. Instead, they allowed them to hold on in a kind of quasi-existence for years with no investment into research, people or infrastructure. In a massive effort to control and manage both the vertical and horizontal networks of the Soviet military-industrial complex, Putin’s government established a new management model through State Corporations for its defense and civilian industries. These Corporations are non-commercial organizations subordinate to the President, not the government, of Russia. Putin created the public-private model where the toughest will survive and the others will go bankrupt. Soviet defense institutes now are joint ventures and have shares. Many of their leaders have borrowed money against these shares to keep the old institutes on life support and then borrowed more money to pay off earlier loans at higher interest rates.

If there were boards of directors to evaluate successes of these corporations, there would probably be high marks for serving the governing elite’s property grabs, but very low marks for increasing opportunities to support the 600,000 people employed through 562 enterprises.  In 2009, 30 percent of the nearly 400 firms under this new management structure were facing bankruptcy proceedings.  There are seven State Corporations that all own up to 100 percent of the joint ventures they manage. As several of these State Corporations look to sell government-owned stock to private investors, they are finding that foreign investors are balking at current valuations. And, having been burned in the past, Russian citizens regard investing in stocks as gambling.

Russia’s Olympic Dream

The 2010 Winter Olympics resulted in the lowest numbers of medals every won by Russia – 15 medals placing the country 11th in overall medal standings. What made it worse is that the government had made record investments into its athletic programs in anticipation of the Sochi Olympics in 2014. Most of the money never made it to training and support of its athletes. Putin pushed hard for Russia to be the 2014 host, planning to support this endeavor with government funds and donations from his favorite Oligarchs. These controversial plans were made when oil was selling for $130/barrel.

One of these State Corporations, Olimpstrol, is building the facilities for the Sochi 2014 Winter Olympics. When the price of oil fluctuated decreased late in 2008 to as low as $34 per barrel, Putin’s plans for Sochi became colossal. Russia had to dig deep into its once large coffers of savings while the government adjusted its budgets in real time to reflect the greatly reduced barrel price. (Russia’s 2009 budget was based on an oil price of $95 a barrel, with no contingencies for such a severe drop.) On top of that, many of Putin’s billionaire buddies lost lots of money because they had invested their earnings outside of Russia. The budget for Sochi’s preparation was increased to $30 billion, greatly exceeding the original budget of $6.25 billion. Yet this may not be enough as material costs continue to skyrocket.

Russia’s Oil and Gas Sector

For Putin, gas prices have to crest above $100/barrel – the number many believe for Russia’s GDP to be healthy. If oil prices stay closer to $60/barrel the Finance Ministry has already announced the country’s debt may exceed 21% of GDP by 2013-2014.

Russia’s Diminishing Population

Russia’s population is dying out. Its population of 142 million (less than half of the United States) is losing 700,000 people a year, double the number of developed countries. Putin offered increased child support and a bonus for a second child in 2000 which helped, but not enough. Immigrant families were much more likely to take the bonus. The birth rates increased because of the uptick in birth rates in the 1980s – those born then are now having kids now. But the next generation of those reaching child-bearing age is much smaller. Alcoholism continues to cut short both men’s and women’s lives. Healthcare spending, like everything else, does not reach its intended targets. While not welcoming immigrants, Russia is more dependent on them than ever. Thousands are pouring in from Central Asia and China. Russia continues to lose its smartest graduates as they find opportunities abroad.

Putin’s dream of being one of Russia’s greatest leaders may become Russia’s biggest nightmare if he continues on the current path. The last long-term leader for Russia was Leonid Brezhnev who ruled from 1964-1982. It is widely portrayed as an era of stagnation when strong oil sales masked economic decline. This time, economic stagnation may be the least of the country’s problems.