Discouraging Growth

Russia’s former Deputy Finance Minister Sergei Aleksashenko gave an interview to RFE/RL the other day identifying the problems currently facing the Russian economy.

According to Aleksashenko the Kremlin is lying about the drop in GDP last year. Rosstat says “GDP fell by only 3.7 percent last year.” But according to Aleksashenko, the real number is 9 percent.

“Aleksashenko said that the real problems facing Russia’s economy are lack of investment, high inflation, and the declining ruble, which lost half of its value against the U.S. dollar since early 2014.”

But these are still symptoms rather than the root problem: lack of rule of law.
Russia’s economic problems are, as I often discuss here, systemic. In a country with no property rights, and little or no recourse to the courts when those rights on infringed on, the level of risk that people are willing to take on is minimal, if not non-existent.

Russia’s Supreme Court ruled last week that only 6% of the businesses destroyed by Moscow’s city government were illegal. How many people have lost their livelihoods as a result of the government’s illegal act? And how many would be willing now to take a similar risk, or even to start over again?

When Prime Minister Dmitry Medvedev talks about economic growth, where does he think this growth is going to magically come from? It certainly will not from small businesses, who are afraid to take the risk required to expand their businesses and much less open one.

And who is going to invest is projects that will stimulate growth? The oligarchs? As I so often like to repeat, the oligarchs are nothing more than glorified state bankers. They “invest” where and when they are told to by the Regime. But, in general, these are not projects to help the economy. These are special projects that the State needs either to line its own pockets, or, as in the case with the privatization of the oil company Bashneft, when the State needs a bailout.

The Regime can continue to gloss over the problem, and hope for higher oil prices to return to the previous status quo. But unless and until Russia reforms legally, these issues will always be there, blocking real growth.


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