The Land of Frightened Investors

Yesterday, two international organizations – the Organization for Economic Cooperation and Development (OECD) and the World Bank – simultaneously directed sharp criticism at the Russian government. Reports published by the organizations point out that there has not merely been a slowdown of reform in Russia but an actual return to repression of the market by an ineffective and corrupt state.

Reports by international organizations on the state of affairs in Russia's economy have recently become increasingly critical. The latest IMF mission came to the conclusion that the Russian authorities are excessively wasteful and that current economic policy is leading the country toward a crisis [see Kommersant of June 4]. The OECD report Russia: Constructing Market Rules of the Game and the World Bank report The Legal System in Countries with a Transitional Economy: An Evaluation of the Past and a Look at the Future, both published yesterday, are even more critical. The West is increasingly making it clear that Russia's pretensions to the status of a developed market state are not supported in any way in practice.

One of the key topics of the OECD and World Bank reports is that Russian institutional reforms have sunk into a stupor. The emphasis is not even on the fact that administrative and health system reforms have simply stopped. “The weakness, ineffectiveness, and corruption of all government departments are the main obstacles to progress in carrying out reforms in Russia,” the OECD report notes. It turns out that there is simply no one to carry out reforms. Therefore, in the recommendations, it is stressed that Russia needs to “set up an administration that would be capable of, and desirous of, fulfilling the role demanded of it in a market economy.” This is nothing less than sharp criticism of the Russian authorities. The World Bank and OECD stress that the level of trust of citizens and business in the legal system is extremely low. The World Bank in general considers that “in terms of honesty and effectiveness, Russian courts are in last place among countries with a transitional economy.” In other words, one cannot say that Russia adheres to the principle of supremacy of the law. “The special services, the prosecutor's office, and the police remain politicized,” the OECD adds. “They are often used against businessmen involved in a dispute with federal and regional authorities.” The conclusion is that Russia is “a weak state with strong bureaucrats.”

In the opinion of both organizations, the only way to change the situation is to carry out administrative reform and grant the courts full independence in the shortest possible time. The most important thing is to make the activities of the administration and judges as open and as accountable to the public as possible. AS OECD economists point out, in Russia, “the ten largest industrial groups and state-owned companies account for half of the country's industrial production.” The main sectors that in the OECD's opinion require immediate liberalization are the power and gas industries, the railways, and the banking sector. But Gazprom took the brunt of the criticism. “There has been almost no progress in reforming the gas industry – perhaps the least reformed sector, and without a doubt one of the least efficient. Gazprom more than stands out against the background of Russia's underdeveloped corporate culture with its exceptional opacity.” On top of everything, economists cite data on changes in labor productivity in the gas sector in 2003, when it decreased 8 percent compared with 1997.

As a result, the OECD recommends that the Russian state separate its functions as market regulator and company owner. But it seems that the OECD no longer really believes that anyone in Russia is heeding these recommendations. The report notes that today Russia is moving in the opposite direction by expanding the role of the state in strategic industries. “It is unclear whether meaningful reforms will be carried out in the foreseeable future,” OECD experts conclude.

Russians are falling into another trap. Is there something in the Russian soul that loves authoritarian leadership? Why else would Putin be so popular? Perhaps there simply isn't a viable alternative? After 70 years of Communism, the only trained leaders in Russia are trained in Black market corruption and Kremlin political maneuvering. Putin seems to be a master at that. He's even good at propaganda.

I fear Russia will remain a minor economic power for some time to come. The Russian people will remain in economic bondage.

Russians are falling into another trap. Is there something in the Russian soul that loves authoritarian leadership? Why else would Putin be so popular?

- Putin is always better than Yeltsyn
- Kremlin control the most important medias. He is painting himself as a bit nationalist, great reformer and true Christian Orthodox. Actually he is the enemy of the oligarchy, what a BS! :-)
- Large number of Russians have nostalgia to the Soviet era, not because of communism but because they were an empire. Putin is smartly playing with their feelings to achieve his aims, for example WWII anniversary was organized with Soviet style. He is justifying many historic sins of the Soviet Union towards foreign countries. Their media still often using the rhetoric of the bad west. Putin also recovered old Soviet anthem.

I fear Russia will remain a minor economic power for some time to come. The Russian people will remain in economic bondage.

I also think so, without serious economic reforms it is impossible to become a real power. Gas and oil it is definitely not enough.

Unfortunately, in Russia there is still no strong civic society. 70 years of communism, decade of post-communist chaos and centuries of autocratic rule really created a culture of viewing authocratic figures as something as natural as rain, snow or sun in the sky. It will take time to transform this culture, but life will force Russian society to transform. Its impossible in the modern age to develop effectively under centralized authocracy.

"...It will take time to transform this culture..."
Well, more power to them in doing so, but it is known that the cultures (=identities) are extremely resilient at the group level, and very resilient even at the level of a single individual.

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