Three Key Problems of the Russian Economy That Need to Be Addressed

Russia’s economy is plagued by three major problems: its poor investment climate, which includes ineffective institutions; weak competition; and the government’s excessive role in economic regulation. Unless these problems are resolved soon, we won’t be able to support even the current 4% growth, let alone modernize the economy.

On April 20, Prime Minister Vladimir Putin reported back to parliament on the government’s performance in 2010. He said that Russia must become one of the world’s top five countries in terms of per capita GDP. interview with Sergey Aleksashenko, director of macroeconomic research at the Higher School of Economics national research university (HSE).

What is your assessment of the prime minister’s report?

I don’t think the report was an outstanding event in the nation’s political life, as was suggested ahead of it. It was a fairly routine statement made in Vladimir Putin’s usual style, in which he said that everything we have done was done correctly; that all outstanding problems will certainly be resolved; and that everyone who needs money will get it. Russia has enemies, both in the country and outside it, and hence we should trust the party and the government. The report turned out to be nothing unusual.

What do you think about the current government’s focus on social problems?

I think that it fits the clearly populist pre-election mood. Many countries with authoritarian regimes try to increase their electoral support by implementing high-profile, but usually ineffective, social programs.

In fact, even the documents prepared by the government show that this is so. For example, the Healthcare Ministry’s pension reform policy document concludes that the resources allocated in Russia for the pension system are equivalent to the funds set aside for this purpose in Western Europe. Unfortunately, the results achieved are considerably worse than in Europe.

Therefore, I think that this focus on social pledges is good for gaining support ahead of the election, but misguided as actual solutions to these problems.

Can the housing problem realistically be solved in the near future, or is this yet another of Putin’s populist promises?

I think Vladimir Putin’s promise that every third Russian family will be able to buy housing independently or with mortgages by 2015 has not been thoroughly worked out and is unrealistic. The main obstacle to achieving this objective is the huge gap between people’s incomes and the cost of housing.

According to expert estimates, only 5% to 7% of Russians are currently in a position to buy housing independently or with mortgages. It is simply impossible to increase this number fivefold within four years only by increasing incomes, whereas the government is not taking any noticeable action to reduce house prices. Moreover, even if we roll our sleeves up and tackle this problem immediately, we will be unable to radically increase construction rates in just four years. In short, I think this objective is entirely unrealistic.

Furthermore, I think that a large-scale program to build housing at prices several times lower than is currently the case would, in principle, stimulate some segments of the Russian economy and become a growth driver. But so far I have not heard about anything like that.

Was anything important said about the further development of entrepreneurship and business in Russia?

I only paid attention to one theory: Vladimir Putin has said that Russia needs to increase the share of foreign direct investment to $60 or $70 billion a year, which amounts to approximately 4% or 5% of Russia’s GDP at current levels. This is a feasible goal, because Russia must increase investment but lacks the internal resources to do so. Moreover, foreign investment does not only mean money but also technology and management.

It is good that the prime minister concedes that the Russian economy cannot be modernized without foreign investment. But, unfortunately, he made no mention of the quality of Russia’s investment climate, the fact that there is no supremacy of law, or the problem of large-scale corruption. That means that the very idea of attracting foreign investment has no solid foundations.

I do not think Russia’s business community learnt anything of importance. But then, maybe they were not the intended audience for the speech.

Is there anything else you would have liked the prime minister to include in his address to parliament? Or anything you would have liked to hear about in greater detail?

Russia’s economy is plagued by three major problems: its poor investment climate, which includes ineffective institutions; weak competition; and the government’s excessive role in economic regulation. Unless these problems are resolved soon, we won’t be able to support even the current 4% growth, let alone modernize the economy. It’s just impossible. In fact the prime minister failed to mention any of these problems.

What do you think he meant when he talked about a “new industrialization”?

I think that is rather obvious. The last massive upgrade of Soviet production assets took place in the late 1970s-early 1980s. It is certainly impossible to remain competitive in today’s [global] economy if the bulk of the country’s industrial equipment is 35 to 40 years old. So by referring to a new industrialization the prime minister was talking about another all-encompassing upgrade of industry. Or he could be referring to increased investment, something we have already discussed.

Why didn’t Putin say anything about the rise in employers’ social security taxes? Is it only a minor problem, or what?

In fact the prime minister didn’t mention any of the major problems of the day. One of the cornerstones of his policy is the view that everything that has been done was done correctly. In this context, any discussion of the new social security tax and the fact that a U-turn is needed would have meant admitting it was a mistake, and the government doesn’t like doing that. That is why he avoided making any mention of it. Neither did he mention the pension reform and lack of balance in the pension system, clearly for the same reasons: he probably has not yet found a solution he was ready to defend.

He doesn’t seem to like the straightforward policy of raising the retirement age, much, so he must be trying to find a better solution. 

What growth points do you see in the Russian economy?

I do not think economists or the government could list any specific growth points for the Russian economy, or for any other economy, for that matter, because economic growth stems from business activity – entrepreneurship. I think that, if the government were to create an environment which businesses would find convenient and profitable, where investment is protected, the courts defend property rights and law-enforcement agencies uphold the law, then businesses would quickly find areas for investment and development. We’ll only be able to identify the growth points once growth has begun – post factum.

We are now discussing economic modernization, innovation, commercialization of inventions and so on. What should we do next? 

Next, we should realize that no modernization or innovation is possible in a country with archaic, semi-feudal relations between the government and the people, or the government and businesses, where there is no political or economic competition, no independent courts, no rule of law, and this much corruption and misappropriation. After all, today active, enterprising individuals find it easier to change their country of residence than to actually change the country they live in.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.