FEAR FACTOR

Fear takes many forms in today's Russia. Democrats fear the loss of basic rights, from a free media and fair elections to guarantees against arbitrary arrest. Ordinary Russians fear a return to the chaos and poverty of the 1990s, fueled by recent welfare cuts and the unending war in Chechnya. Businessmen and international investors fear an increasingly capricious government that denies them what they need most--stability and a clear set of rules.

The man who inspires this fear, Russian President Vladimir Putin, is nearly all powerful. He has exploited a string of terrorist incidents--most notably the Sept. 1 school massacre in Beslan, which left hundreds dead and horrified the world--to further consolidate his position. Henceforth, he announced, the Kremlin would appoint regional governors, who previously were elected. In the last month he has floated a new plan to appoint the nation's top judges--also in lieu of elections--extending his grip on the judiciary. Having already secured control of Russia's Parliament in elections late last year, the former KGB man now dominates all three branches of government. Many Russians think consolidating power in Putin's hands is the only way to bring the country's feuding politicians to heel. But already, as with the tsars and the Soviets, a system built on one man and held together by fear is proving to be much shakier than it looks.

Signs abound. In St. Petersburg and Novosibirsk, known for their concentration of computer-software start-ups, new companies are moving to the West in search of stability and government support. Capital flight this year is projected to rise as high as $15 billion, up from last year's $2.9 billion. That partly reflects the worries of rich Russians, spooked by the government's crackdown on the Yukos oil company; reports last week indicated that the Kremlin could sell off a large chunk of the company to the state monopoly for $4 billion, a fraction of its value. But the flight also expresses deeper concerns. Many Russians believe that the small but steady gains in living standards they've enjoyed in recent years are tenuous, at best. Economists say the government is likely to miss an inflation target of 10 percent this year, aggravating a little-noticed but potentially troubling decline in real wages over the first five months of 2004. A banking crisis this spring, coupled with a predatory bureaucracy, has discouraged small businesses from setting up or expanding. In this climate, says Mikhail Delyagin at Moscow's Modernization Institute, "economic development is not possible."

That's bad news for Putin, who has staked his presidency on doubling Russia's GDP over the coming decade and eliminating abject poverty. Just last week a top economic adviser, Andrei Illarionov, broke ranks and declared that the Kremlin's new authoritarianism is backfiring. A week earlier, Illarionov joined other leading economists in attributing all of Russia's 7.3 percent GDP growth last year to higher oil prices. He claimed that if oil revenue were factored out, growth actually dropped by nearly 2 percent in 2003. Illarionov blames the Yukos affair, as well as the government's ham-handed meddling in the economy, especially the energy sector. Other experts say the new prime minister, Mikhail Fradkov, is a weak technocrat who is afraid to initiate needed economic reforms without clear orders from the Kremlin.

So far, these problems have been masked by high oil prices--which boost GDP by an estimated 0.5 percent for every $1 increase in the cost of a barrel ($55 at the end of last week). But economists like Delyagin point to subtle shifts in spending patterns--including an increased reliance on credit--as evidence that the lower middle class is already smelling trouble. Travel down the economic food chain, they say, and you discover a more discouraging landscape, with small businessmen struggling to survive and bitterly disappointed that the Kremlin's most liberal economic initiatives--like banking reform to deliver cheap credit and cleaned-up courts to honestly arbitrate commercial disputes--have stalled. "The worst thing is the unpredictability of it all," says Sergei Shporkhun, an entrepreneur who imports textiles from Sweden and China. "Three years ago I felt sure of what would come. I felt like the government's partner. Now, I feel like a subject. Sure, I earn money. But I hide it. I'm afraid to put money into the economy."

Ordinary Russians call it stagnatsiya, stagnation. Vasily Melnichenko, an energetic small businessman in the village of Galkinskoye in the Urals region, recognizes it as the same feeling that weighed him down as a collective-farm director in the waning days of the Soviet Union. He talks about the "invisible barrier of fog and walls" he encounters in securing the 40 permits and licenses he needs to begin mining operations for a local rock useful for such things as kitty litter and water filters. Economists call them "administrative barriers," and they come in different forms in different places--corrupt officials, demands for bribes or just bureaucratic delays. The problems are too big for individuals to tackle, says Melnichenko, complaining that no one in Moscow seems to be listening now that power has grown so centralized. Without local self-government, sensitive to local needs, "business can't grow," he says.

Russia has only so much time to establish the nimble, responsive government that Putin in his early days seemed to envision--a government that nourishes business, rather than stifles it. According to a report last week by Standard and Poor's, the ownership of three-quarters of Russia's top 50 companies is unknown--largely because those owners fear getting on the wrong side of the Kremlin. Unless that worry is lifted, the Russian economy will continue to slide backward.