Russia is turning into a Third World country… says Russian expert.

The first step in curing from an illness, is accepting that you are ill indeed. And as far as that is concerned, there might be a glimmer of hope for Russia.

Russia, the former arch-enemy of the Western world, is a country with many faces:

·       There is the official face of the Medvedev-Putin administration, with its power politics towards the Western World and former allies and its regular boasting on the strength of Russia.

·       And there is the face of a world-leading supplier of oil, gas, gold, other precious metals, diamonds and rare-earth minerals, often represented by a group of extremely rich, sometimes ill-reputed business men, called ‘the oligarchs’.

·       There is also the face of extreme corruption, nepotism, clientelism, organized crime, local ‘kingdoms’ and effective (sometimes lethal) suppression of people that have a different opinion: citizens, journalists, lawyers and business men. This is the face, where everything has its price and ‘fair treatment’ can be an unobtainable commodity. If you pay for it, you can have anything. If you won’t pay, you get nothing.

·       And then there is the face of the Russia that I know quite well, due to my lovely, Russian wife Olga. That is the Russia of quite honest, hard-working people, that accept their leaders and politics as a fact-of-life. Instead of fighting it, they just try to make an honest living and ‘go with the flow’ as far as the corruption and bureaucracy concerns.

It is quite seldom that you hear media criticizing the country and the government, unless for some underground newspapers that get substantial airplay in The Western world, but are hardly read by the Russian people themselves.

Therefore it was for me surprising to learn that one of the leading Russian internet and newspaper media, Komsomolskaya Pravda (www.kp.ru), wrote a very critical article on the weak competitiveness of Russia, compared to other countries. The article is translated to English by Google Translate and afterwards edited by me and my wife.

Here is an  integral version of the article (written by Evgeny Belyakov and Alexei Stefanov), called: “Conclusions Expert: Russia is turning into a Third World country” (link in Russian): 

Why is it, that we have so much natural wealth and still we are trailing in the global economy? In an investigation of the Russian consulting firm Strategy Partners, made together with experts of the World Economic Forum, Russia took the 63rd place in the ranking of global competitiveness. This was presented in a report.  

To give you an impression, the exact place of Russia was between Sri Lanka and Uruguay; a questionable neighborhood, to put it mildly.  

But things are even worse than they seem. Where many developing countries are gradually improving their situation, Russia lost 12 places on this list over the past few years and continues to slide downwards. Why can we not become a developed country? 

Experts have listed several reasons. 

To start with our benefits: Russia is extremely lucky. There are enough natural resources available to last the country for dozens and even hundreds of years. Instead of worrying about the development of other industries, we receive the legitimate profits of our mining operations. 

That is what we’re doing, but it is not as easy as it seems. The share of oil, gas and metals in our exports is more than 70%.So, when the price of oil drops to $ 30 - 40 per barrel, we will not last a year without aid from the outside world. 

 After the crisis, Russia's economy returned to growth, but at a disappointing pace, according to German Gref, Chairman of the Savings Bank and former Minister of Economic Development and Trade. Instead of the 6 - 7% growth figures that we’re used to pre-crisis, the current growth is at best 4 - 5% per year. And this growth figure is in spite of the very high oil prices.

 Besides that, the inflation accelerated again, and the budget still comes with a deficit, instead of the surplus of 6% that we had before the crisis. This means that the old Russian models of economic growth, based on high oil prices and capital inflows, are no longer working. 

As estimated by the International Energy Agency, the demand for fossil fuels will rise at least for another 30 years. First of all, because energy is needed to support the rapid economic growth in the developing countries, catching up with the West. And in second place, because there are no alternative sources of energy that are successful and efficient enough, to get a global distribution. 

The second important advantage of Russia is, that it has a fully qualified workforce. Usually developing countries have only one distinct advantage on other countries. For example, China and India have mainly an army of cheap labor. Investors go there for the sake of saving on manpower. Brazil, however, has more natural resources, but lacks a  well-educated or very cheap workforce.  Russia has both factors: well-qualified and inexpensive labor and many natural resources. But the snag is: why is growth in these developing countries so much higher than ours?

 And finally, the third important advantage. The domestic market of Russia is one of the largest in the world (8^th place). This is a big advantage, as the expected sales volumes make the Russian market very interesting for large companies. Therefore large companies come rather to us than to some small country. Especially, because Russia is positioned close to all major centers of economic growth in the world. It shares borders with Europe, and China, and also it can easily supply goods to India, USA and Japan.

What prevents companies from doing business in Russia? (source:www.kp.ru) 

Corruption	21.2%
High taxes	18.9%
Lack of funding possibilities	15.5%
Criminality	9.4%
Inflation	8.5%
Ineffective civil service	8.4%
Inadequate employees	4.9%
Shortage on infrastructure	3%
Other factors	10.2%

Although the price of oil on the world markets is growing, the flow of investments in Russia decreased. In 2011, already by $35 billion. And those investors don’t want to return. Why they don’t like us?!

The main reason, according to experts, are the double standards in Russia that are flourishing everywhere: on the road and in court. As a result, the factor of protection of property rights in our country is among the worst in the world, only surpassed by the most backward African nations. There is no sane entrepreneur that will invest in the country, knowing that tomorrow all his factories and ships can be taken away!

The second reason for lagging behind the developed countries is, that we don’t have the education anymore, that was once the pride of the Soviet Union. We have still relatively skilled personnel, but the quality of our education and training has fallen over the last five years. According to the World Bank, the Russian student is inferior to his Turkish or Polish colleague, based on the general level of knowledge. You can’t call that meeting the requirements that you need for innovation and nanotechnology?! 

The third significant disadvantage: on most of our markets, there is no real competition.

 Countries with efficient markets are characterized by a fairly high level of entrepreneurial activity”, according to the authors that wrote the report. “Under the constant threat of competitors, that could eventually lead to your company getting into trouble, companies become more efficient, creative and innovative. In Russia, the entrepreneurial activity is less developed. Where in countries with efficient markets the birth/death rate of companies is up to 20% each year, in Russia this figure is only about 5%.

The reason is simple: someone has to spend at least one month to establish a company in Russia, while in Europe a week is sufficient in most cases.

Yes, and taxes in our country are too high. Experts state: "In Russia, there is a fairly high burden of corporate taxation”. With corporate taxes as high as 48%, this indicator is significantly higher than in most EU countries, according to the World Bank.

 Besides that, it is very hard to get a loan for business development in Russia. This is the fourth reason for our lack of competitiveness. There is a bank building at every corner of the street, but that doesn’t matter, as these banks usually don’t invest in enterprises. Entrepreneurs put the "funding gap" at the third place in their list of major problems (see table).

"The three main advantages of the Russian economy - the large size of the internal and external markets, an educated population and abundant natural resources - provide unique opportunities for growth and prosperity, according to the authors. But to realize this potential, problems should be solved in all areas of the economy. " 

And solving these problems is a big issue. Of course, the principal obstacle to the development of Russia is the pervasive corruption, that has the country in its grip. Some entrepreneurs can handle it, while running their business. The others go away themselves. But here's the problem: there are enough methods in the world to combat bribery and bribe-takers, but for some reason nobody is in a hurry to implement these methods in Russia. 

“The initial conditions are, of course, raw materials and people”, says Natalya Volchkova, a professor at the School of Economics.  “But if these circumstances are present, the state must create the boundary conditions, like a judicial system, a trading and transport infrastructure and a ‘level playing field’ for all companies”. These are tough decisions. And that is exactly the problem: we don’t want to make tough decisions and we don’t want to introduce unpopular measures. Officials are looking for the convenient way. They make a lot of noise and in the end, nobody is responsible for anything. And there is no system yet to penalize civil services and people that are systematically underachieving. 

According to experts, this is a serious problem in a large number of developing countries. We can say this is the barrier that separates Russia from the already developed countries. Many states that suffered from the same circumstances, couldn’t cope with this in the end. 

“Ghana, for example, was the leading African country during 50 - 60 years of the last century”, says Natalya Volchkova. “This was originally the country with the best conditions and prerequisites for developing on the continent. Just like us: ample resources, good education and a good location. But the authorities have chosen for a one-party system. And this is a direct route to corruption. And a dead end. Because if this party and its representatives have no serious opponents,  the people are not accountable towards their electorate and don’t have any need to reform. For Ghana, this resulted in being one of the most backward countries in Africa. 

This article draws a very grave picture of the situation in Russia. The situation there is indeed very serious, as corruption spreaded its venom throughout the country.

This corruption starts at a very low level with people:

·         bringing a bottle of cognac to the municipal official, if they want to have their new passport more quickly

·         paying the police to skip a fine or to get a drivers’ licence.

·         Rendering a service to other persons that can eventually render a service to them

At the highest level this leads to corrupted, untouchable officials (mayors, MP’s, governors and high city officials) with an army of strong-arm boys that threaten, beat up and even kill people that stand in their way. Wifes of political officials make millions of dollars in property deals or by owning companies that get favorable decisions on their behalf. Private possession of properties can be finished the next day and if a person makes too much noise, there is a slight chance that he won’t survive it.

Is there hope for Russia?! I truly hope so. There live some people there of which I´m proud to call them my friends and that are absolutely honest and good people. But there are also people that are corrupted and rotten to the core. And unfortunately, a lot of those people live in the Moscow area.

This article in a popular Russian newspaper that is normally quite pro-government, might be a small beginning. But as Todd Harrison of Minyanville (www.minyanville.com) always says: `Hope is not a viable investment strategy`. So beware and hold your horses, before investing in Russia…