EPA-EFE/Sergei Chirikov

Some easy fixes for Russia’s flagging economy – if only politics didn’t get in the way

With the outcome of the Russian election almost certainly a return to power for Vladimir Putin, it’s perhaps more interesting to consider how he could improve the country’s flagging economy. This is more of a mystery.

Russia’s economy has been effectively flatlining since 2010. It has a population of about 140m people, is abundant in natural resources and enjoys practically universal higher education. But its GDP is about 50% of the UK, which translates into about four-fold gap in GDP per capita.

As well as an abundance of oil, timber and steel, which are sold to both Europe and Asia, there’s no lack of capital or labour. Russia is a net exporter of capital, unemployment is fairly low and wages average a paltry US$700 a month, indicating an abundance of people eager to work.

Factors such as weather and size do not create similar development issues for countries such as Finland or Canada. Finland actually provides an opportunity to observe the stark contrast in development by looking at villages east and west of the border: it is accessible to everyone who has access to Google Maps.

Russia’s economy performance boils down to Russia’s governance. Namely: untrustworthy enforcement that leads to very weak entrepreneurship, isolationist trade policy that helps incumbent inefficient companies to stay afloat, and the lack of predictability that makes it risky for people to invest. These issues are well-known and are voiced by Putin himself as well as his opponents.

Lack of security

In Russia, the conviction rate in criminal cases is above 99% (compared to about 85% in the UK). Some people argue that this is a good thing – the police are efficient and they only get the bad guys. But human rights groups point to the use of torture and other ill treatment to obtain evidence, which puts the conviction rate into question.

Acquittal is seen as a failure of the investigator. The authorities have a “case solved percentage” figure to achieve – and acquitting lowers that. This leads to a culture of fear where people are afraid of stepping out of line. It creates an environment that prevents entrepreneurs from trying new things because you can get into trouble for improving your product.

The risk of ending up on the wrong side of the law stifles innovation. shutterstock.com

These issues are driven by the design of the enforcement system – and there is no reason why they cannot be improved upon. Russia could follow the lead of Georgia, for example, which has relatively efficiently reformed its police system in recent years, so this is not impossible to fix.

Trade issues

The unpredictability of Russia’s political and economic environment is not entirely a domestic issue. Things like US and European economic sanctions, while targeting individual companies, affects the wider economy too. This, after all, is the point of them.

But even without the sanctions, the state and non-state agents act in unpredictable ways which make investment risky. Imagine if you thought there was even a 10% chance you might have to abandon your home in the next five years: are you as likely to invest in a new roof and solar panels? For these reasons, there is little incentive to build long-term plans in Russia, which leads to slower development.

This is due to politics and fights over power between the powerful. It is, however, possible to deal with in our lifetime.

But perhaps the easiest and the most pernicious problem to resolve is that of international trade. Russia is a part of the Eurasian Economic Union (EEU), which includes neighbouring countries such as Kazakhstan and Belarus. Being a part of a trade union is generally a good thing – unless it stimulates the new member to trade with less efficient partners (economists call this trade diversion).

Being a part of the EEU does not help Russia much: 8.7% of Russia’s trade is with Belarus and Kazakhstan, and less than 2% is with other countries of the EEU, while the Netherlands alone constitutes about 10% of Russian trade.

Lower trade fosters monopolies, a smaller market makes entry for foreign firms unattractive, and higher prices due to lower competition makes consumers worse off. But there is nothing inherently politically impossible about opening up for trade. Some companies and industries might suffer because of the opening – but the list of suffering companies is already far too long.

Foreigners might buy off and move the profits of Russian companies overseas – but that’s already happening. There’s literally no economic or political reason to maintain the isolation.

Yet, if anything, isolationism grows stronger. “Counter-sanctions” imposed by Russia on itself in 2014 that forbade imports of European foodstuffs and deprived all Russian pizza joints of mozzarella had no effect except for making food in Russia relatively more expensive.

Russia’s economic growth is stifled by Russia’s institutions. There is a great potential for development, but politics continues to get in the way. Some changes are more plausible than others, but even the easiest one to implement is very unlikely. And without the bulk of Russians comprehending the costs they are bearing by maintaining the status quo – without their explicit desire for change – there’s very little that can be done.