A New President: Future Changes in Russia?

Russia experienced a solid annual GDP growth rate of 7% during the last eight years under the control of former president, Vladimir Putin. With public approval ratings as high as 81%, Russians claim him responsible for the rise in higher living standards and the reemergence of Russia onto the world scene. On March 1, Dmitry Medvedev, seen with Putin in the image to the right, was elected to be the presidential successor after winning over 70% of the votes. Being handpicked and directly supported by Putin to inherit the throne, Medvedev has much to prove that he is competent to continue and build on the legacy that Putin has established. However, there are some prevalent shortcomings with Russia that Medvedev must consider and amend during his tenure, such as its legal structure, overreliance on petrodollars, and development of its infrastructure. Whether he does exercise power that is independent from the influence of Putin and how effective he is in implementing his policies will determine the extent to which Russia will be a world power.

In 2003 the destruction of Yukos, Russia’s largest oil company, and the imprisonment of its owner, Mikhail Khodorkovsky, on accounts of fraud and tax evasion negated any moves to strengthen Russia’s legal system. Consequently, this symbolic move to crackdown on Russia’s oligarchs has instilled a sense of trepidation in many business owners. Putin’s economic advisor, Andrei Illarionov, best summarizes the past and current feelings toward its judicial system when he states, “Instead of cultivating the rule of law, as Mr. Putin promised, Russia was subjected to the rule of thugs.” A byproduct of the backward legal system is the rampant corruption that has risen to worse levels since the 1990s. Unfortunately, it is still common to read news of the mafia carrying out illegal operations and making mob hits. Although the Kremlin acts as an activist against corruption, media headlines often verify the inextricable link between the government and the mafia. On the corruption perceptions index, Russia ranks a mere 143 out of the 179 countries surveyed. At such a poor standing, eradicating corruption is an imperative step for Russia to become a more globally reputable nation.

Reforms have to be made to Russia’s judicial system to infuse a stronger sense of trust between the business people and its leaders, which will assuredly promote economic growth and healthy competition. Widespread corruption has served as a hindrance to reaching the country’s full potential. One of the primary reasons why corruption is so pervasive stems from the high levels of regulation and bureaucracy that have remained with Russia since the fall of the Soviet Union. In Russia it is accepted that in order to get anything done, forms of bribery have to be given to officials to turn a blind eye to the rules, as seen in the following quote from a citizen, “If everyone followed every rule and instruction in Russia, the country would grind to a halt.” The more insidious form of bribery comes directly from the Kremlin, which entails state officials and their friends acting in collusion in unscrupulous business deals. The extent to which Medvedev and his administration can abate corruption is a fundamental challenge that the rest of the world will be expecting him to stand up to, in hopes of being perceived as a more lawful and first world superpower.

The collapse of the Soviet Union led to the privatization of large scale state run corporations, usually in the oil, gas, mining, and metal production industries. The ability of powerful businesspeople to acquire, reorganize, and turn poorly run Soviet-era assets into lucrative entities is the primary reason for Russia’s influential economic position today. The fact that its economy is still supported by a few of these giant companies poses a problem in terms of insufficient competition, bureaucracy, and lack of diversification. According to the World Bank, small and medium sized businesses make up less than 15% of the GDP, while only 5% of firms have been newly formed in the past ten years. The limited effect that these startup companies have on large incumbents to generate greater productivity is a clear factor of weak competition. Despite foreign direct investment doubling to $27.8 billion last year, this amount accounts for only 2.2% of its GDP. Investment from overseas investors could be significantly increased if Russia were to eliminate the unnecessary red tape that is deterring them from recognizing its true value.

According to the Institute of Economic Analysis, oil and gas made up 31.6% of Russia’s GDP in 2007, up from 12.7% in 1999. Oil, being refined in the graphic to the left, has saturated its economy due to its overdependence on natural resources, which make up 80% of the nation’s exports. A major problem is occurring as petrodollars are flowing into Russia and are raising the disposable income of consumers; however, domestic manufacturing is growing at a much slower rate. The ruble has been appreciating rapidly and as a result, has hurt Russian producers. In addition, there is a lower demand for Russian produced goods that are often seen as low quality, compared to the highly desired foreign brands. The emergence of Russia’s state capitalism is attributed mainly to a combination of its appreciating currency and rising oil prices around the world. The reality is that no economy can have sustainable growth in the long run if it is over reliant on oil; the nature of this commodity creates instability because it is highly volatile in the global markets, especially for a natural resource that will eventually be depleted. In order to capture the vision of a promising economic outlook, Russia must make every effort to diversify from petrodollars and concentrate on developing its domestic manufacturing, which will serve as an alternative stimulus to its economy. To build upon its domestic production capabilities, Russia should focus on developing its infrastructure.

A common theme amongst the BRIC nations is the necessity of solid public services that should be able to support high levels of growth in developing nations. Although it has been seventeen years since the demise of the Soviet Union, Russia’s infrastructure is still the key piece of the puzzle that is missing. Encompassing the largest land mass of any country, Russia faces a colossal challenge to renovating and constructing roads and highways that will allow for the efficient transportation of goods and humans. One initiative, that the government has proposed to spend $170 billion on, is its long-term Modernization of the Transportation Infrastructure in Russia program. This proposal led to a 80% increase from 2006 to 2007 in the federal budget for road building. The Kremlin’s ambitious plans for improving its streets and highways is just one of the many initiatives needed for Russia to sustain its future growth through diversifying its oil dependent economy and ensure its emergence as a global superpower. Hopefully under the reign of Medvedev will Russia be able to reform its legal system, diversify its economy, and develop its infrastructure.