Risky Business: A Lack of Governance, Law, and Russia’s Economic Decline

In the past year, the Russian economy has struggled greatly and foreign investment has plunged.  Here, Adam Grech looks to explain the driving political forces behind the decline of an economy that until recently held great promise.

A Prosperous Future

In the early 2000’s, the term “BRICS” was dubbed by Goldman Sachs in order to describe the rising economic powers of Brazil, Russia, India, China, and South Africa. As an oil and natural gas giant, Russia looked to benefit greatly through this association via its proximity to Europe, its size, and bounty of natural resources. Today, much of the optimism about the future of Russia as an economic powerhouse has diminished. Though much of the stagnation of the Russian economy can be attributed to the over-reliance on oil as a means to produce wealth, a lack of governance at the local, national, and international levels has exacerbated this effect. As we will see, the lack of Russian willingness to adopt global norms on corruption, as well as the frequent disregard for the rules of international law, have increased the costs of doing business, hampered foreign investment, and have led to the downfall of Russia’s once bright economic future.

Mariano Mantel / Creative Commons License

Mariano Mantel / Creative Commons License

Russia and the Absence of International Law

Over the course of the past two decades, Russia has frequently shown it believes it acceptable to violate state sovereignty when Russian foreign policy deems it necessary.  First with its invasion of Chechnya, then again Georgia, and most recently with the annexation of Crimea in 2014 that led to globally imposed sanctions. By failing to adhere to standards of international law, Russian foreign policy has inadvertently hampered economic growth by creating an unpredictable climate within the region that has caused foreign investment to plunge since 2014. With the ongoing possibility of future territorial exploits by Russia and the risk of persistent conflict in the future, those looking to invest remain hesitant due to the lack of Eurasian stability. As long as Russia remains intent on projecting their power within the region, it will be difficult for foreign investors, particularly Westerners, to feel comfortable spending in such a high-risk state. In addition, the over-reliance on natural resources leaves the state’s economy particularly vulnerable to economic sanctions and commodity market trends, making it an unlikely stop for those looking for a stable economic environment, especially while under the current political regime.

Corruption and Foreign Investment

When attempting to do business in Russia, one of the greatest hurdles to overcome is the vast amount of corruption that exists within the state’s bureaucracy.  In order to secure permission to build or bid on a job contract, foreign investors are often forced to bribe government officials, a practice that has become the norm in Russia even for everyday citizens. Although most bribes range between one and ten thousand USD, an extortion scandal involving Japanese technology firm Toshiba, involved an amount of one million dollars to be paid to Russian officials in order to be removed from a fabricated state blacklist.4 Unfortunately for the Russian economy, this is hardly an isolated case. According to Transparency International’s corruption index, Russia ranks 119th out of 168 countries in levels of corruption within the state, with 26% of Russians reporting to have paid a bribe in 2010. Facilitated in part by the lack of a strong democratic process which has allowed political elites to remain in power where they can benefit economically from holding office, it is unlikely that a major change in the culture of corruption will occur unless a fair and transparent electoral system is put into place.

Global Panorama / Creative Commons License

Global Panorama / Creative Commons License

The Future of the Russian Economy

Looking forward, the future of the Russian economy remains uncertain at best. Until the prevalence of corruption is eliminated, or at the least dissipated, major foreign investors will remain wearisome about heavily spending in Russia. Additionally, with the price of commodities remaining low, it will be difficult for the Russian state to prosper relying solely on its reserves of oil and natural gas. Without a sizeable increase in the level of foreign capital invested into the state, Russia’s economy will continue to struggle. Therefore, the only likely fix for Russia’s future will be a widespread crackdown on the level of corruption, and a move towards a more predictable foreign policy, making for an increase in the ease of doing business. Whether this will be achieved, however, remains to be seen. For the moment, Russian President Vladimir Putin seems determined to exercise his bullish foreign policy and maintain tight political control with a disregard to the economic consequences, and although increased anti-corruption policy had been put into place, so far little change has been seen. It is safe to say that without significant change in Russian political culture, foreign investment will continue to decline, and Russia’s economy will fall short of the “BRICS” promise it once had.

 

 

 


The views expressed in this article are those of the author and do not necessarily represent the views of Development in Action.

***

Have an opinion on this or another topic? Why not write for our blog? Click here to find out more and get in touch.