November 11, 2013
Center on Global Interests, 10th Floor, 1050 Connecticut Ave, NW, Washington, DC

Dr. Sergey Aleksashenko spoke at CGI about Russia’s struggling business climate and his concerns for the future of the economy.

In the World Bank’s latest Doing Business assessment, Russia jumped 19 places in ease of doing business and was ranked the most business-friendly among the BRICS nations. But given the country’s widespread corruption and the potential loss of Russia’s independent commercial court system, does this assessment accurately reflect Russia’s economic climate? Speaking at CGI on November 12, Dr. Sergey Aleksashenko, Director of Macroeconomic Studies at Moscow’s Higher School of Economics and former Deputy Chairman of the Russian Central Bank, explained why we should doubt the World Bank’s latest ranking and gave his predictions on the future of the Russian economy.

According to Aleksashenko, misperceptions about the Russian economy begin at home. Even the basic, essential question of whether the economy is expanding or contracting has a different answer depending on who is asked. According to statistics cited by Russian officials, the economy is growing; yet quarterly measurements by the government’s own Rosstat agency show a consistent decline across consecutive quarters. When presented with the conclusion of this data—that Russia is in a recession—officials ascribe economic challenges to external factors, frequently putting blame on the drop in global oil prices. Aleksashenko noted that the oil price argument did hold true for Russia’s economic setbacks in 1992, 1998 and 2008, when plunging energy prices left the country short on revenue. But he argues that today’s economic slow-down cannot be explained this way: a similar oil price drop in 2011 barely made a dent on the economy, suggesting that other factors are at play. With no observable decline in recent net exports, which constitute one of Russia’s main economic pillars, there is little indication that the external environment is bad for Russian business.

Why, then, is Russia in decline? Aleksashenko identified negative growth in investment and a poor institutional climate as the two main factors in this trend. Investment in Russia has gradually waned due to the country’s exchange rate appreciation, persistently high inflation, and upward adjustments on gas prices that make Russian energy less competitive. But the main problem, according to the speaker, is a lack of property rights protection, which exacerbates the first issue by making individuals less willing to invest.

In light of these deteriorating domestic conditions, Aleksashenko questioned why the World Bank reported progress. The answer may lie in the specific, and very limited, parameters of the Doing Business calculations. For example, the report examines the length of time needed to register and open a business, but does not take into account the quality of the process—including such factors as the level of transparency, contractual enforcement, and protection of property rights. As a result, Russia scored highly due to the relative speed of its registration process; but the ranking failed to reflect the institutional hurdles that significantly hamper businesses in Russia once they move past the initial stage.

Looking ahead, Aleksashenko expressed his belief that these hurdles are unlikely to diminish during the remaining term of President Vladimir Putin. As the creator of the present political system, Putin has little incentive to embark upon significant structural reforms. Tying Russia’s economic climate to its political one, Aleksashenko stressed that the downward trend in the economy will continue as long as the political system remains static. This was already seen in the recent downgrading of the economic ministry’s long-term economic growth forecast from 4 to 2.5 percent, putting Russia’s projected growth below the global average. Meanwhile, neither the Kremlin nor the Medvedev government has put forth a clear economic strategy, continuing to subsidize shortfalls in labor and revenue by tapping into national savings and migrant labor. Compounded with the likelihood of reduced trade with Ukraine as it migrates toward the EU and with Russia’s own rapidly aging population, the speaker concluded that despite the recent rankings, there is no reason to expect significant growth in Russia’s economy in the coming years.

Click here to view Dr. Aleksashenko’s presentation and supporting data:

Beyond the Rankings_The Harsh Reality of Russia’s Economy