Thursday, March 01, 2012

State is Greatest Enemy to Russian Economy

For Veckans Affärer: In 2010, business paper Euromoney Magazine awarded Russia's Alexei Kudrin finance minister of the year in the world. Less than a year later, he was sacked by president Medvedev and joined a fragmented Russian opposition. This is just one example of how state and politics become Russian economy's greatest enemies. Growing political unrest in the runup to Sunday's presidential elections emanates from middle class discontent with failing governance, corruption, and political parasitism. "Stability, stagnation, and then what?" is what an increasing number of Russians ask themselves. Uncertainty about the future has suddenly increased the political risks with Russian economy.

Russian economy is in good shape. With a budget in balance, one of the lowest state debts among major countries, just over 4% growth and 5% inflation in 2011, the country's prospects seem bright. Threats are the usual: Falling oil prices and turbulence in the financial markets. Despite positive signs, we now see a lapse in recent years' dynamic developments. A temporary "wait and see" in the runup to Sunday's elections may lead to a more permanent economic slow-down because of political inability to cater for long-term economic needs.

January witnessed the greatest financial outflow from Russia since the 2008-2009 financial crisis. Growth was at zero and inflation is expected to rise during 2012. Where political analysts are silent, the market speaks out clearly. Trust in state and politics plummets, as the failed December parliamentary elections have dislodged the power and interest balance within United Russia - the country's ruling politico-economic cartel.

Even if fears prove exaggerated, it will take much time before the system reaches equilibrium again. The effects of prominent politicians' resignations become increasingly clear. Above all, Kudrin's sound financial policy has been replaced by overbid policies and pork-barrelling. Increased state expenditures is like throwing money into a black hole, believing it is a wishing-well. The flow of money instead runs from the oil wells, where energy constitutes a third of state income. Outside the energy sector, only middle class consumption drives the economy.

Putinism's political strategy - to promote the middle class in exchange for power - has failed. Instead, they have to bear the burden of a bureaucracy, which has grown by 40% since 2000. State efficiency has constantly fallen since 2003, with a corruption that affects everyday life of an increasing number of Russians. Only during 2011, the level of bribes tripled, accordning to the Interior Ministry. Bureaucracy and corruption are poisoning the flexible and dynamic business climate, where everything was forbidden, but everything also possible. Opportunities have decreased and hopes for the future changed to skepticism and discontent. Recent popular protests have thus greater depth than ordinary political opposition, as the state obstructs basic preconditions to earn money and make a decent living.

Except for the country's dependence on oil prices, Russian society is confronting fundamental structural challenges, which demand an increase in economic diversity. Declining demography reduces the number of Russians of productive age. Mounting flaws in infrastructure, health, environment, and education threaten to shrink productivity. Politics has not only failed to address these flaws. It has also reduced the economic incentives of the middle classes to contribute to diversification. 

What worries most, is the increase in political polarization that Putin now propels. The protesting middle class, with reasonable demands on those in power, is portrayed as traitors. This is a dangerous message and illustrates a contempt for those, who until recently were seen as Russia's future. As derision turns into threats against protesters, Putin alienates and provokes the very groups that have greatest potential to contribute to the country's further development and shows that material more than human resources are seen as the source of Russian growth. The economy may be sound, but as long as political malaise is spreading in the social body, risks will grow for Russian economy as people now have had enough of Putin.

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