Russia needs to change its economic model to compete?
The Russian economy is facing serious challenges, and it should undergo some structural changes to overcome the crisis. The problems go deep into the Soviet era, continue under the current government, and it would be difficult to transform, considers The Economist.
Tatarstan-based Innopolis was founded in 2012 as a technology park. Now it is the smallest Russian town, yet enjoying an advanced urban infrastructure with comfortable housing, sports and educational facilities and even Wi-Fi on its playgrounds. Welcoming high-tech companies of all sorts, the city's free economic zone is already having over 20 residents and awaiting for another half-dozen. However, The Economistdoubts whether the Russian economic climate fosters modernisation and technological progress.
Answering Herman Gref's question 'can Russia compete?' at the 2016 St. Petersburg International Economic Forum 2016, Loren Graham from the Massachusetts Institute of Technology stated that Russia fails to reap any economic benefit from its scientific brilliance not because of the lack of business talent but the due to adverse social, political and economic environment.
Part of the problems are inherited from the Soviet Union. Stalin's economy was designed to achieve a result at all costs. Plants, roads and houses were built by means of forced labour, and the factories' output was sometimes worthless than the input. When the Union broke up, many of the former factory managers (also known as 'red directors') kept their offices. Later through a questionable 'loans for shares' scheme, the factories were privatised by the Russian oligarchs, who started development and modernisation. Of course, it wasn't yet an open market economy as the state control was still strong. According to Mikhail Khodorkovsky, Yukosoil company was forced to sell 70% of its oil in the domestic market, and its buyers accumulated huge debts that were written off in the end.
Unlike his predecessor Boris Yeltsin, Vladimir Putin prefers valuable assets to be the state's property. He did not destroy the oligarchy but changed the oligarchs, strengthening ties between property and political power. From 2005 to 2015, the share of the state in the economy doubled, from 35% to 70%. The first years of Putin's rule were a prosperous period when the economy grew by an average of 7%. Oil prices' rise in the middle of the 2000s inspired a considerable growth in services and construction sectors, but at the same time the country's economy started to overheat to collapse in 2008. A further recovery required substantial government's support, but oil prices rose again, so Russia could afford it. The 2014 brought a new oil price drop, which caused a deeper recession alongside with the Western sanctions. Thus, the development is suspended again.
A Russian political economist Kirill Rogov says that the main problem with Russian modernisation is that the new, competitive urban middle class that has emerged as the economy has developed has no place in the current authoritarian model, which is designed for those who depend on the state but cannot compete. Rogov describes the existing system in Russia as 'soft legal constraints'. The rules here, in his opinion, are created in such a way that it is either prohibitively expensive or downright impossible to observe them than handing out informal licences to break those rules.
Real modernisation is not a matter of technology but an open access based on the rule of law, and the Russian economy should subject to a political reform for the further progress.