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Russian road to mediocrity

by Andrey Borodaevskiy

Trying to explain the causes of the recent sharp slowdown of Russia’s economy, many local analysts tend to concentrate on technical particularities of the country’s economic mechanism.

Typically, while doing so, they dismiss as “commonplace” and thus “impractical” such fundamental issues as the necessity to improve the political and investment climate, to radically revise the tax system and to stop discriminating against small and medium-size businesses — by setting for them clear and stable rules of the game.

Other observers, many of them foreign — such as Financial Times or Standard & Poor experts — point to basic negative features of Russia’s political and business environment. They refuse to regard the current fall in growth rates as temporary and their turnaround as feasible.

Instead, they treat the slowdown as a sign that the social modus vivendi under President Vladimir Putin, which could be summed up as “more personal consumption in exchange for less democracy and for an oligarchic paradise,” has been crumbling, together with the growth potential inherent in it.

Among domestic economists, only a few, like bank VTB24 head Michail Zadornov, stress comprehending such basic changes as the mass outflow of capital, which could lead to a general paralysis of the investment process, or the sharp deterioration of world commodity markets. These phenomena in turn undermine the current major growth factor — the rise in personal spending by the population. “You cannot ride far on one weakened horse while the two others are no good at all,” he concludes.

The two most popular questions asked in public discussions around Russia throughout its history are: “Who is to blame?” and “What to do?”

About the first question, speakers and writers are rather reserved in their judgment nowadays. It is clear why — the answer is obvious but uncomfortable.

Still, some analysts name it using different degrees of euphemism. In a nutshell, it is a narrow group of tycoons close to Putin who are engaged mostly in the resource sector and interested in a cheap national currency, murky “tax waters,” boundless “offshore freedom” (though it looks as if this bonanza may be partly sacrificed pretty soon), mastering or embezzling budget funds, endless reshuffling of investment projects, etc.

The last point deserves further comment. According to Valeriy Zubov, professor of the Higher Business School and a Duma member, these days there is active redistribution of industrial investment projects. Many individual businessmen are pressed by various government bodies to cede their promising investment schemes — usually to state corporations or to big business enterprises financed with credits of some state-owned banks.

Not only are large amounts of funds wasted in such needless reshuffling (instead of being used for new projects) but investment results visibly deteriorate, because state-sector efficiency is lower and embezzlement of funds is higher than in the private sector.

We must give the current government its due for its attempts to live up to obligations toward those receiving incomes from the budget, including many people employed in the service sector, pensioners, etc. But the prospects cannot be called bright.

In May 2012, the then newly re-established president made so many promises concerning earnings in the public sector that only a GDP growth rate of about 4 percent could have secured their fulfillment, according to Russia’s minister of economic development Alexei Ulyukayev.

It is an axiom that normal financing of the consumption sphere should be based on good and ever better functioning of the production sphere. Meanwhile, a favorable business climate is exactly what the country lacks. Practically all available production factors and capacities are fully engaged, but there is no actual growth in productivity or necessary structural change.

The basic weakness of the economic mechanism is also strongly felt in infrastructure — with especially grave consequences for northern and eastern regions amid catastrophic budget deficits. Growth without real development leads to a gradual loss of the growth potential itself, which is what we are witnessing right now.

Among the few positive signs inspiring some optimism in regard to Russia’s economic future is the generally unexpected rise on the “Doing Business” list compiled by the World Bank. In the 2014 report comparing national regulations for small- and medium-size enterprises, Russia placed 92nd — up 19 positions from the previous list and higher than any of its partners in the BRICS group (Brazil, Russia, India, China, South Africa) — while China slid to 96th. However, business conditions are still a far cry from what may be called normal and from the ambitious goal set by Russia’s president — to become one of the first 20 economies in this ranking by 2018.

Also, a recent optimistic forecast issued by Goldman Sachs must be mentioned: From 2014, economic progress in the CEEMEA region (Central and Eastern Europe, Middle East and Africa) will likely serve as one of the “locomotives” fueling growth around the world, with Russia as one of the main contributors. The Goldman experts count on low-inflation figures and an active reform process in our country that will, according to their expectations, bring back considerable investment flows.

However, the value and trustworthiness of this forecast is reduced by the fact that, in 2012, Russia’s government concluded a contract with Goldman Sachs, entrusting it with the important task of promoting a positive image of Russia among international investors.

In fact, what we were speaking about till now concern mostly domestic growth factors and domestic economic and social conditions.

Is it right to limit analysis in this way in the age of globalization? Show me a more or less successful modern country that would consider its development issues in a strictly local context and avoid international factors except when, say, world commodity prices are concerned!

Unlike Russia, the other BRICS countries are actively engaged in international economic cooperation going far beyond traditional commercial trade. Their high rates of growth and increasing prosperity depend on foreign funds, foreign markets, foreign technology and management experience to a much greater degree than what we see in Russia. That’s why further political and economic reform that would raise investment attractiveness is so essential for my country — if it really wants to figure among the leading economies.

It is much better to eat a turkey in good company than to gnaw on a skinny post-Soviet chicken alone while trying to hide some of the meat and bones abroad — beyond the reach of Russian Themis.

Such is this author’s answer to the “What to do?” question posed earlier in this text.

Andrey Borodaevskiy (annabo36@mail.ru), an expert on world economy and international economic relations, was a professor at Seinan Gakuin University, Fukuoka, from 1994 to 2007.