Russia ‘Stuck In First Gear’

February 2, 2012


For a once superpower nation the size of an entire continent, Russia is still stuck in first gear and has a major image problem to boot.

At The Russia Forum 2012, Moscow’s version of the World Economic Forum, Lars Thunell, CEO of International Finance Corporation, compared Russia to a powerful vehicle persistently moving in first gear, according to forum transcribers that posted details from the plenary session on line Thursday.

For Thunell, Russia’s ineffective and opaque system of governance and the special status of businesses with government participation are slowing that vehicle down.
The Russian economy remains relatively stable, however, growing by more than 4.5% in 2011 and even beating market consensus estimates of 4.1%. That’s better than Brazil, long a darling of emerging market investors.

But everyone thinks Russia could do better. It’s by far the richest of the big four emerging markets — Brazil, Russia, India and China — as measured by per capita income. It has an image problem that scares away both domestic and foreign investors.

Kenneth Rogoff, Harvard Professor of Public Policy and Economics, said the country lacks the rule of law and an actively developed private sector, all contributing to Russia’s first gear, slow boat status.

Rogoff said, “Russia has amazing potential based on natural resources and human resources. The main challenge is to learn how to use them properly.”

Afterall, this is a country that brought the world Sputnik and outerspace to the world. It’s got the engineering talent behind it, both on the physics side and on the more commercial side in computer software. Kaspersky Lab, a Russian IT security firm, is taking market share away from McAfee and Symantec. Why aren’t there more companies like that in Russia? Everyone wants to know. Instead, Russia is known as a natural resource powerhouse, which would be like the U.S. being known as a soybean powerhouse instead of the guys who created the internet, the iPhone, and the search engine, for example.

Forum panelists all agreed that Russia was the Wild East, stating that the lack of clear rules and fair arbitration was a drag on foreign investments. Corruption also has many of Russia’s best minds heading abroad. Transparency International ranks Russia as being perceived as the most corrupt of the four BRICs.

The country continues to lose too many of its most talented people every year who end up starting businesses and investing outside of Russia, including in cities like London and even Silicon Valley, California. Russia is investing at home, and in high tech endeavors. But the talk at The Russia Forum 2012 suggests that while Russia is doing what it needs to do, it is doing so at a tortoise’s pace.

The faster the state helps make it easier to do business in Russia, especially to start a business, the sooner the trend will reverse in Russia, former Finance Minister Aleksie Kudrin told attendees on Thursday.

Nouriel Roubini, NYU Professor of Economics, is also in Moscow this week. Event organizers quoted him saying, “Korea, Japan and Israel are the most successful countries. Neither Canada, nor Russia nor any other countries with natural resources can match their success. The secret of growth of the first countries mentioned is their investment in human capital.”

Although capital flight, at least, has eased in Russia over the third and fourth quarters, what hasn’t eased up is investor concern over the global economy. The World Economic Forum showed investors were borderline optimistic, if only not to show their full hand revealing borderline panic. In a situation like that, higher risk countries like Russia will struggle to attract investment.

The Russia Forum was launched five years ago by Russia’s biggest bank, Sberbank, and its biggest investment company, Troika Dialog. Around 2,000 economists and businessmen representing 150 global companies are in Moscow to discuss Russia and regional economics until February 4th.