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Why Russia should not be a B(R)IC member

Monday, November 15, 2010 · Category Economy · comments 2

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After 9/11 economist Jim O’Neill of Goldman Sachs Group, created the term BRIC to describe the four major emerging countries in the world. He made a series of projections for the future, imagining what the world would look like - economically speaking - in 2050. Since than the media has used the term as an acronym to refer to Brasil, Russia, India and China. Russia should not be in the BRIC, because the country's crisis is not financial but systematical.

Economic development criteria

According to Goldman Sachs, long term economic development is determined by the following criteria:

  1. The quality of a countries institutions
  2. The macro-economic stability
  3. The openness of a countries economy
  4. The presence of a highly educated population

If we take a closer look at Russia, one can conclude that the country is having problems dealing with all four criteria.

The Economic boom

Between 2000 and 2008 the Russian economy grew with an average 7% a year. This seems huge, though if we take into account the termoil, chaos and stagnation of the 90's it all looks less sensational. In fact; it only reached it's 1990 GNP again in 2007. Most of the economic growth was due to two main factors:

  1. A very high oil price
  2. The large influx of foreign capital into the country

The quality of Russia's institutions

This is probably the biggest restriction for economic growth in Russia. Bad governance and the short term focus, corruption and lawlessnes inhibit the development of SME companies and the dynamics of it's economy. Competition isn't based on quality and price but on access to power. The inefficiency of the government is an obstacle to the developement of public goods and services.

The financial market is underdeveloped and lacks strong long-term foreign capital, giving Russian businesses only access to short-term capital or finance in foreign currency. The rule of law, already low, has worsened over the part years.

According to the Corruption Perceptions Index from Transparency International Russia's scores 147th of the list of 180 countries, together with such countries like Bangladesh, Kenia and Syria, while the RIC countries score is much higher (Brasil 80th, China 72th and India 85th)

The macro-economic stability

Russia doesn't have much diversity in it's economy. It's largely based on raw materials like gas and oil. Although Russian public debt is very low and it had more than $ 600 billion dollar in foreign reserves the 2009 economic drop of -8.5% shows the economies fulnerability. On the other hand Russian companies have borrowed large amounts of foreign loans. The increasing inflation led to an increase in real exchange rate, quickly undermining the competitive position of Russian businesses. Another big issue is the strong reflex to export capital when a crisis seems at hand.

The openness of a countries economy

Openness in the Russian economy is large based on the wrong model. Capital influx was largely based on the import of bank loans. These loans tend to dry up in times of crisis adding to the fulnerability of the economy.

Russia is suffocating from the dominance of corrupt state corporations and red tape. The government bailed out the worst-hit state corporations and banks from financial crisis with its reserves last year, still among the largest reserves in the world. The massive misallocation of capital to state crony companies has depressed economic dynamism.

The presence of a highly educated population

Largely due to heavy investment in Soviet times, Russia has a relatively high educated population. Sinds the fall of communism though a large "brain drain" has taken place.

Add to that, eroding human capital in part due to alcoholism, the sharp decline in life expectancy, the shrinkage of the population, the high devorce rate (almost 9 in 10) and low government interest in education and the outlook here also looks quit bleak. Government investment is primarily aimed at welfare programs. Only 1% goes to education

A weak innovation capacity: Investments in R&D have substantially decreased to a mere 1% of the GNP, while the average among OESO countries is 2,25%

The productivity of many Russian researchers - 13 on every 1000 inhanbitants - is very low. It lacks far behind the other BRIC countries in patents, which are mostly requested by foreign companies.

Last but not least there is a cultural issue. In Russian companies, generally, a charismatic and paternalistic leadership is conducted. Since the introduction of glasnost and perestroika by Mikhail Gorbachev, much has changed in Russia, but mainly things that are immediately visible such as fashion, cars, night life. The legacy of communism still bears on virtually every Russian. This means for example that the Russians are not accustomed to taking initiative, because of the risk of making mistakes.

Conclusion

Right now there isn't one reason to talk about BRIC. Russia has no place inside the top 3 emerging countries. China has just surpassed Germany as the 3rd largest economy in the world and Brasil is showing a strong performance entering the top 10, while Russia has shown the worst performance in years, lacking far behind the G20.

Let's hope a change will come fast. Russia is too rich, too well-educated, and too open to be so corrupt and authoritarian.

Comments

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