Soviet economy legacy haunts Russia

Russia has broken the shackles of state-planned economics but remains tied to oil prices and the whims of a bloated bureaucracy on the 20th anniversary of the Soviet Union’s collapse.

Few modern events seemed as filled with promise or challenge as the prospect of ex-Cold War foe Russia dropping its Communist five-year plans and picking up market economics that harmoniously folded into the Western world.

Not much went as smoothly as envisioned. The Soviet structure crumbled with little there to replace it and few people knowing how private finances worked.

The so-called “robber barons” swallowed up swathes of Siberian riches while industrial cities floundered from an end to state subsidies and scarce demand for their shoddy and antiquated goods.

And the decade of prosperity the country finally feasted on with Vladimir Putin in power evaporated with the 2008 financial crisis—a bitter reminder of the state’s failure to invest in its own sources of growth.

“Two-thirds of Russia’s exports and almost half of its federal revenues are tied to the oil price,” former central bank deputy head Sergei Aleksashenko wrote in a report for the Carnegie Moscow Centre.

“Economic growth cannot occur without investment,” said Aleksashenko. “But investment is not likely to grow until Russia’s investment climate improves dramatically. This will require political reform.”

It is a catchphrase that has haunted Russia for much of the past two decades as it lurched between various forms of government before settling on one with strong traits of its Soviet heritage.

Domineering role
The state now explains its domineering role in business by the troubles Russia had when the rules relaxed in the 1990s and the economy was brought still further to its knees.

Official data show a seven-year stretch after 1991 in which growth shrank by 40 percent—a record for any nation that is not at war.

Many economists now question that figure because it compares to inflated Soviet-era production data for goods of limited worth.

Yet that slide continued until Russia was forced to admit defeat before world creditors and devalue its currency by a painful 60 percent in 1998—a shock that again wiped out savings.

The export boom that followed enabled the state and a few powerful oligarchs to amass amazing wealth that required almost no investment and attracted still new layers of bureaucracy at every level of government.

The country that now stands in the Soviet Union’s place shows a dramatic disparity between rich and poor that only grew worse with time and is slowly transforming itself into mistrust in the current authorities.

Figures from former economy minister Yevgeny Yasin show the richest fifth of the population doubling their income between 1991 and 2009. The bottom 20 percent had their real wages nearly halved.

This divide is hurt further by staggering capital flight and Transparency International data showing Russia actually improving its corruption index ranking this year to 143rd in the world—on a par with Nigeria and Uganda.

“As for the investment climate, here, we probably have to do a great deal more,” President Dmitry Medvedev admitted last month. “Besides writing laws, we have to create conditions in which these laws work.”

A 2011 investment outflow figure of $85 billion—more than five times last year’s total—suggests doubts by the business community in Vladimir Putin’s ability to get the job done on his planned return to the Kremlin in March polls.

“Russia has transformed beyond all recognition over the last 20 years,” Renaissance Capital chief executive Stephen Jennings said in reference to the recent emergence of a new middle class and exploding consumer demand.

But its “fundamental weakness is that it finds it virtually impossible to build quality transparent institutions,” Jennings told a recent investment forum.

“Russia now faces serious economic and social challenges that will threaten growth prospects and stability in the medium term,” the European Council on Foreign Relations concluded in a scathing report.—Sapa-AFP



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