When we all think of Russia – we tend to think of it as the alternative superpower – the controlled economy ying to the capitalist yang of the Unites States, the loud dissenting voice of the post-capitalist and post-Soviet world.

It turns out much of this post is WWII thinking, brought to us by Hollywood villains, the way that they portray themselves on the world stage, with things like murdering dissenters, changing the constitution to allow Putin to remain in office, the sinking of the Kursk and rumour of involvement in rigging the American elections.

In the Summer break, CoreData went to Russia to understand what the rich there are doing, because while there are just as many millionaires in Russia as there are in Australia there are almost 20 times as many people who have more than $100 million in investable assets – but that of course is how Oligarchies work and that makes them very interesting to private bankers anywhere.

The economic news is frankly pretty bad. Russia is in a nasty recession; the middle class has effectively halved in size in the past three years, as the falling Ruble and oil and gas sector and the reality of a Government that doesn’t much care for the mass of its people are biting hard.

A falling middle class is a bad sign for an economy – because they are the engine of growth – they employ the people and they in every economy around the world are the people who pay the tax.

The Oligarchs too are hurting – because of the lack of security in the Russian financial system (600 banks were closed down last year) and the collapse in the value of the currency added to the relatively high cost of lending, means the thing that they are most interested in doing is getting their cash out of Russia.

The destination for the cash is mostly to nearby friendly western democracies, which, when they talk of their love for Mother Russia and in the same breath express affection for the Swiss and UK banking systems, is something of a delicious irony.

As part of understanding Russia, the first thing to do is to pull apart the numbers. The big ones, like population and geography, are relatively easy; there are 140 million people and by areas it is the largest  single country in the world with 17 million square kilometers under Vladimir Putin’s control – nearly as big as Canada and America combined.

But, if you look deep into the economy, then the figures are less impressive. Russia’s GDP, which is mostly oil and gas based, is 13th largest in the world and that according to the World Bank, ranks it lower than Australia.

While Gross Domestic Product is a useful metaphor for how a country is going, economists tend to look for other clues and one of our favourite numbers to examine is the Gross National Income (GNI) which looks at how much people are earning.

To put things in perspective the World Bank Data shows that Australia is about 20th on this list with a GNI of US$42,000 a year (about the same as Canada and a little bit better than the UK) while Russians are 47th on the list with a GNI of US$23,000 a year. People there are, relatively speaking, poor.

Growth in Russia is important to understand, partly because it’s a massive market and partly because it has the capacity to change the direction of the European markets really quickly, but the upshot of this year’s research is that we shouldn’t expect anything at all very soon.

It’s not the fundamentals that really matter – essentially Russia is pretty much a free market economy, it is the system that is broken. The middle class – stripped of its ability to trust the financial system – is unable to grow and lacks any sort of trust at all in the future.

Everyone that we spoke to is doing everything they can to save outside the system, to avoid debt, because it’s expensive and varies depending on your income type.

Here’s a good example. We interviewed someone who is a leading neurosurgeon at a St Petersburg Hospital. She has been a doctor since the 1980s and is now in the teaching phase of her career.

She receives all her income from the state – so she gets treated by the banks as a “good” risk. That means her rate of interest on a mortgage is 14.5%. If her income was “grey” – that means partly from the state and partly from private enterprise – that rate jumps to 18.5% and if it was “black” – all from private enterprise – then if you could get a loan – the rate would be over 20%.

But here’s the kicker – a senior neurosurgeon at a St Petersburg hospital should have a great income. But she doesn’t. She gets about $1,200 a month. She quite literally has become a neurosurgeon only for the love of it. There is no money and very little fame.

The banks too come and go. Everyone we interviewed had lost all their money at least once, because of the collapse of the Ruble, because a bank had failed, or because there had been a shift in the will of the Government.

This was a fascinating moment in the research; in the West we tend to think of Mikhail Gorbachev as a hero of the Russian people, for delivering Reagan-era change and ending in real terms the Cold War. It was his actions that freed Lithuania and Poland and brought down the Wall in East Berlin.

The Russians don’t like him, they hate him – Glasnost (openness) and its twin policy drive Perestroika (restructuring) were a disaster for the Russian people. They lost all their savings when their currency was revalued.

Apparently Gorbachev, who now lives in London, is disliked by the Russians, not just because he lost all their savings, not just because he only lasted a year in the leadership role (Russians expect their leaders to die in office) but because he’s sold out. He apparently appeared in a Pizza Hut commercial.

I tend to see their point. I mean he’s got a Nobel Peace Prize. I don’t expect Barrack Obama to appear on TV selling flour and tomato paste with cheese any time soon.

At the heart of this problem is the fact that the banks aren’t well regulated and aren’t guaranteed – only deposits of up to 10,000 Rubles ($223) will be underwritten by the Government – if the bank fails – the rest is in the wind, so there is no point in building up assets in the banking and investment system.

All of this drives two clear behaviours; the first is an incredible short termism in saving behaviour – the  Russians like to spend – and a belief in property as a place to store money.

Apart from a few suburbs favoured by the very rich – property is cheap – partly because there is a lot of it, partly because mortgages are hard to get and people are having to save in an insecure system and invest.

All of this means that the economy is essentially hollow, locked into an earn and spend cycle and to constantly hope that the Government shifts its focus from making the rich richer and start to build the system.

But what about the Army? Don’t they remain something to be feared and a core part of the power of the world.

Well, yes and no. The Russian appetite for a fight in the right area remains unchanged – but their ability to wage war against anyone serious is pretty limited.

Yes, they are nuclear capable and yes, they have an egotist in charge, but they are no longer really heavy weights.  In terms in of men under arms, Russia comes fifth – sandwiched between North Korea and Pakistan, but frankly half the size of the USA. So despite Russia’s boasts, unless they have China on side if push ever comes to shove, they are in real trouble.