Roger Bootle: No one wants Russia to implode but optimists have their work cut out
Comment of the Day

November 26 2013

Commentary by David Fuller

Roger Bootle: No one wants Russia to implode but optimists have their work cut out

Here is a section from this interesting article published by The Telegraph (UK):

Most emerging markets that have low investment rates tend also to have low domestic savings rates. But this doesn't seem to be Russia's problem. (The savings rate is just under 30pc of GDP). Instead, the difficulty lies in persuading firms to invest.

Part of the problem may be a dysfunctional banking system, which tends to restrict lending to small and medium-sized businesses. But over and above this, there is substantial capital flight. The central bank reckons that $55bn of capital will flow out of the country this year (equivalent to 2.5pc of GDP.)

The fundamental issues are the political and legal system, the appallingly high level of corruption and the dreadful demographics. The first two factors seriously inhibit investment, both foreign and domestic. They also directly reduce productivity since even mundane bits of economic activity or investment have to be liberally laced with pay-offs and bribes, with the result that the ultimate return is not as large as it should be.

This is another often under-appreciated factor in the demographics. Russia suffers from both a low birth rate and a high death rate, not least because of alcohol-related illnesses. But she also suffers from a high rate of emigration, largely because people are fed up with the corruption and the poor standards of Russian life. On the whole, these are the people that a country can least afford to lose - educated young professionals, hard-working and ambitious. At present, immigration from central Asia is more than offsetting these in terms of numbers of people, but not in professional expertise.

Is there hope for the future? In Russia there is a strong tradition of corruption going right back to Tsarist times. So it would be naive to imagine that a benevolent dictator could simply wave a magic wand over it. On the other hand, before the First World War, despite endemic corruption, Russia managed to be one of the fastest-growing industrial countries in the world.

David Fuller's view

One of the tragedies for Russia is that it is still classified as an emerging market, albeit without the promising cachet that sometimes implies. How can this be, given that Russia was one of the fastest-growing countries before World War I, as Roger Bootle points out in the paragraph above? Moreover, Russia has a particularly rich cultural heritage in the arts. Additionally, its population is generally highly educated, so what went wrong?

The obvious answer is communism, although not of the command-capitalism variety that we see in China today. Instead, Russia has been a kleptocracy run by the KGB until that was replaced, in name, in 1991 by the secret police agency FSB (Federal Security Service of the Russian Federation) and also the espionage agency SVR (Foreign Intelligence Service).

Additionally, Russia was rich in industrial resources so it had less incentive to develop further industries, other than military hardware. Russia's stock market has always been cheap on a PER basis because private shareholders will never participate in the true earnings of these oligopolies. Also, it has seldom performed although it did from 2005 to 2008, when foreign investors briefly became interested following Russia's inclusion in the BRICS.

Russia's economy will thrive one day, but probably under a different regime and political system.


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