Russia’s greatest enemy? Its own economy

There is a lot to be said for this conclusion, even by the standards Russia has set for itself.

In 2007, towards the end of Putin’s second presidential term, the Kremlin approved a national economic strategy that called for Russia to become one of the world’s top five economies by 2020. Propelled by average growth rates of 6% per year, Russia would impose itself as an international financial center and a world leader in technological innovation.

In reality, Russia is woefully short of its own goals. It remains eleventh in the ranking of world economies (exactly where it was in 2007) after being overtaken in the meantime by India and South Korea.

Its innovation record has not been spectacular – it has climbed only seven places to 47th place in the Global Innovation Index – and it has continued to be a net exporter of capital rather than a pole of attraction for international finance. Growth rates barely exceeded 1% on average while living standards plummeted.

Instead of rising to the top rank of world economic power, Russia has achieved stagnation at best.

Two decades of stagnation

This failure is all the more glaring as Russian leaders are fully aware of the reasons for its underlying economic weakness for more than two decades. Overreliance on energy exports and a lack of technological innovation were the themes of Vladimir Putin’s first State of the Nation address in 2000, but high oil prices in the years that followed provided little incentive for reform.

Dmitry Medvedev also lamented his country’s “primitive commodity-based economy and endemic corruption” at the start of his presidential term. He at least tried to act on this concern.

The Skolkovo Innovation Center, launched on the outskirts of Moscow in 2010, was to be Russia’s answer to Silicon Valley and a way to convert the country’s strong science base into commercial success. But, like many previous attempts at top-down economic modernization in Russia, it brought very few significant changes.

What Russian leaders have been unwilling to do other than rhetorically is to address the serious institutional weaknesses that stifle entrepreneurship and limit the growth of an independent business sector.

‘Corporate-raid’, Russian style

Chief among them is the lack of a fair and independent judiciary capable of enforcing contracts and protecting property rights. Tens of thousands of businesses are seized every year in a uniquely Russian form of corporate raids, known as reiderstvo, in which business owners are arrested on trumped-up charges and their assets confiscated. with the collusion of corrupt judges, police and other public officials.

Although Putin has acknowledged the damage done to Russia’s economic interests by this practice, a recent study by a team of academics from Terrorism, George Mason University’s Transnational Crime and Corruption Center (TraCCC) has shed light on this. which she describes as a “raid pandemic” with a 135% increase in the number of cases in 2019 alone.

The impact on business confidence is devastating. As the report notes, Putin’s own business ombudsman reported that: “More than 80 percent of entrepreneurs consider doing business in the country unsafe, [and] Unfortunately, that number is increasing.”

This is partly the reason why net capital outflows from Russia reached $47.8 billion [€40.4bn] Last year.

Putin’s inaction can be explained by the nature of the system he created and his own desire to use the reiderstvo as an instrument of political control and elite enrichment. This has spawned a culture of imitation and impunity throughout Russian society.

While the most famous examples, such as Yukos Oil and Hermitage Capital, have directly involved the Kremlin, the vast majority of raids are staged locally by private individuals using their connections and wealth to take over businesses and destroy competitors.

These affect businesses large and small. Examples cited in the TraCCC study include the attack on Russia’s largest ammonia producer, TogliattiAzot (ToAZ), by rival company Uralchem, and the 2019 seizure of a transport company in the region of Magadan with the collusion of the local FSB.

The poor business climate in Russia is already limiting its growth potential.

The impact will become even more severe as the world moves rapidly over the next decade towards a post-carbon future. Oil and gas revenues typically make up about 40% of the federal budget, but very little effort has been made to generate new sources of national wealth that can replace them.

While the transition to renewable energy is expected to accelerate after the COP26 summit in November, Russia is highly exposed to future changes in global demand.

Putin’s former finance minister, Alexei Kudrin, tried to make the case for liberalization and reform four years ago by pointing to Russia’s poor record of technological innovation as the main challenge to its future sovereignty.

But his pleas fell on deaf ears. As the imprisonment of Alexei Navalny and the recent adoption of a more hawkish national security strategy show, Putin remains concerned about the survival of the regime and phantom threats to Russia’s sovereignty from the West. .

It was this inability to deal with his own internal problems that Biden was referring to in his assessment of Russia’s weakness. There are few indications that it is likely to change.