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

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.

The Soviet Union: Lessons in Dissolution, Development & Discovery

The Soviet Union: Lessons in Dissolution, Development & Discovery

The USSR should never be viewed through rose-tinted glasses. In the voyage for utopia, a sea of blood was crossed and a workers’ paradise was never actualised. Nevertheless, a recent poll shows that 57% of Russians would resurrect the old system. Tal Tyagi explores why this is the case and concludes that the Soviet experiment provides important lessons in international development.

Poll after poll provides similar results. In 2009 nearly 60% of Russians severely regretted the demise of the USSR. Even in the former satellites nostalgia is strikingly high. In 2010 a whopping 46% of Romanians said they favoured communism. According to a 2009 poll 57% defended the legacy of the former GDR. So strong are such attitudes that where communist parties are allowed to operate, this is reflected in voting behaviour. In Russia the second largest party is the Communist Party of the Russian Federation. In the Czech Republic they are the third biggest party and in East Germany Die Linker, which is in part made up of former GDR government members, is the largest party.

This certainly contradicts our image of those trapped behind the iron curtain. While it may have been a hunger for food and for freedom that brought about the demands for a new order, the transition to the Western model was chaotic at best and at worse chimerical.

Amidst the turmoil of transition, previously non-existent unemployment and homelessness took hold. In many instances party bureaucrats who controlled the administrations of certain services became multi-millionaires over night. Citizens felt like they had been robbed. Fukuyama´s triumphalism that liberal democracies had swept away the socialist dictatorships was not quite evident in Russia. Far from a golden age of human rights and market miracles, it is widely regarded as an explosion of looting and corruption. Popular protests sparked by a rise in poverty were put down by force when Boris Yeltsin ordered the army to have them killed or arrested.

Manhhai / Creative Commons License
Manhhai / Creative Commons License

While the Soviet system was regarded by Western economists as a failure, since its collapse life expectancy has fallen by ten years and in some republics, GDP fell as much as 50%. Therefore, a re-evaluation of this model is in order.

During the Cold War, the two superpowers competed for hegemony. Nikita Khrushchev´s taunting of Western ambassadors with “We will bury you” seemed laughable and ludicrous. The strength of the American dream was not just reflected in its freedoms but in the fridges of the American people. While it was true that on average Americans enjoyed a higher standard of living, when comparing two models a multitude of factors have to be taken into account. A command economy in the temperate climate of Western Europe would almost certainly fair better than a market system in sub-Saharan Africa. This would not be a fair test.

Russia which suffers from frigid winters was largely still feudalistic even by 1917. Since the USSR´s inception it was surrounded by enemies, ravaged by Civil War and then devastated by WW2. These severe disadvantages cannot be deemphasised when comparing with the US.

The success of the ´American dream´ is as much a result of luck as it is of liberty. Established in 1776 and arising from civil war in 1865, the USA had far more time to establish. Her advantages were being made of coal, oil and uranium, much greater climatic variation and peaceful neighbours either side. In WW2 the US lost around 292,000 compared to the 27 million lost by the USSR.

Even when comparing West and East Germany, the major industrial and agricultural centres were located in the West which also received a large portion of Marshall Aid.

Economist Robert C. Allen argues that the success of the Soviet system can only be seen upon comparing it to the most under-developed regions of the world in Asia, Africa and Latin America. In spite of all its disadvantages and problems, the USSR was the second most developing economy in the twentieth century, just after Japan. The rapid industrialisation, mass literacy campaigns, universal healthcare and education along with its propensity to defeat the Nazi war machine, sparked the imagination of movements across the globe.

Ceri C/ / Creative Commons License
Ceri C/ / Creative Commons License

 

The Soviet claim to ´modernization within a generation´ led to several emulation attempts in the post-colonial world. While the US was widely perceived to be pursuing a project of neo-colonialism, the USSR was seen as the alternative. The Chinese revolution, the Cuban revolution, the Saur revolution… Even those leaders, who were not explicitly communist, borrowed aspects.  India´s Nehru described the Soviet system as a “new civilisation, towards which the world would move” and Ghana´s Nkrumah would receive the Lenin Peace Prize in 1962.   In the early 1950s the Soviet Union began a program of technical and economic aid to the underdeveloped nations. Soviet aid, over $6 billion by 1966, was generally low-interest loans, industrial equipment on credit with technical assistance, and long-term commodity purchase agreements.

Strikingly, even in the West, the Soviet model was taken as a serious challenger. In the 1930s at the height of the Great Depression, since the planned economy was not interlinked, the USSR was relatively unaffected. With full employment, rapid industrialization, dams and spectacular projects like the Dnieper Hydroelectric Station and the Moscow underground, the role of the state was given increased credibility in the eyes of policy makers. This was in part, what set the stage for the New Deal.

The foundations of what drives innovation were fundamentally challenged. Milton Friedman´s philosophy is that “the world runs on individuals pursuing their self interests” and that genius and discovery is the exclusive realm of entrepreneurs. However, Sputnik, Yuri Gagarin, nuclear power transferable through a grid, laser eye surgery, the AK-47 and Tetris were just some of the achievements the system could boast without the profit motive.

Overall, the Soviet experiment should never be glorified but neither should the entire chapter be dismissed as just a blunder in human history. Shortages of consumer goods and a thriving black market were failures. However, its ability to transform a backward agrarian economy into a superpower, to double life expectancy and to pioneer the space race were not. In today´s Russia nobody misses the secret police or the shortages but they do miss the housing and healthcare. Therefore, surely something from the Soviet experiment can be salvaged?

 

 

 


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.

The $17 trillion handshake: 7th BRICS Summit and the week that was

The $17 trillion handshake: 7th BRICS Summit and the week that was

With the stage set in the capital city of Ufa, Bashkortostan, there was excitement and anticipation in the air. As the EU attempted to reach an agreement on how best to deal with Greece,Mridulya Narasimhan explores the BRICS leaders meeting in Ufa on the 6-7 July. 

Why they matter, why now?

Once seen as an incongruous body with no standing, the BRICS now seem to increasingly be gaining everyone’s attention. Google Trends shows the word ‘BRICS’ increased its search history 12 times between July 2015 to July 2015.

In 2007, the US economy was double that of BRICS – as of last year, the combined BRICS economic output almost equalled U.S’s GDP. Individually, these nations have had their share of stagnations but their collective contribution to global GDP only continues to rise.

But BRICS is not just another economic bloc with the sole intentions of harnessing trade relations- the summit was indicative of an economic partnership between nations as well as a strategic alliance with intent to develop long-term diplomatic ties. With India-China border tensions, China’s closeness to Pakistan, Russia at loggerheads with the West while India reaches out to them, there is little homogeneity amongst the member nations. What seems to however hold them together is the realisation of their growing importance and the common goal of shifting the locus of control away from the West.

©GovernmentZA/Creative Commons License
©GovernmentZA/Creative Commons License

The BRICS solution to break the West’s (including IMF and the Bank) economic monopoly is plain and simple – introducing competition. Headquartered in Shanghai, the New Development Bank finished its first board meeting and will soon be operational to lend internationally. Headed by India’s K.V Kamath, the bank is set to start off with a capital of $50 billion which will be hiked to $ 100 billion in less than two years.

India – The odd man out

India seems like they might be caught between a rock and a hard place. China and Russia see the BRICS as an instrument to do away with the US hegemony while India is looking forward to a new-found albeit tactical ‘friendship’ with the US. Russian relations with the United States have reached boiling point a few times in the recent past.

China too has been in loggerheads with the US over maritime disputes in the South China Sea with the latter alleging that China’s strategic moves are provocative in nature. The relation is no better off between Brazil and US after it was recently made public by Wikileaks that the US intelligence has kept surveillance over President Dilma Rousseff and her aides. It will certainly be interesting to see how India manages to earn its keep at BRICS while continuing to forge a relationship with the U.S.

The new economic order – or just another ‘BRIC’ in the wall?

Without doubt, BRICS seems to make for a great example as far as unity in diversity is concerned. But what does not go unnoticed is also that these nations are not on the same page as far as agendas are perhaps concerned.

Brazil, India and South Africa are thriving democracies while China and Russia are believers of vigilance; wary of liberal ideas and open markets. With such different ideologies, the one main common thread that remains is the trade economics and development.

©GovernmentZA/Creative Commons License
©GovernmentZA/Creative Commons License

Another key question that remains unanswered is where does China’s priority lie? It remains to be seen how China will choose to prioritise the BRICS agenda as China’s main priority is the Asian Infrastructure and Investment Bank. With BRICS members also being a part of the Asian Infrastructure and Investment Bank and India and Russia being its second and third largest stakeholders, there seems to be a clear conflict of interest as so which institution shall get priority and the active role China chooses to undertake with regard to BRICS is yet to be seen.

The BRICS members have made it clear time and again that inclusive growth, economic prosperity and transparency are its raison d’être. But what is yet to be clarified is how much say each nation will have? Brazil, Russia and India will contribute $18 billion each, South Africa $5 billion and China intends to contribute $41 billion to the New Development Bank – a clear indication of their financial clout. If these numbers are anything to go by, goes without saying that key decisions will most certainly be influenced by China.

Lastly, even with this new economic order in place there, none of the nations presented a very clear plan of how to take things forward. Although, India did manage to present a ‘ten-step program’, the initiatives that include a soccer tournament, audit cooperation, a film festival etc. seem more like team-building exercises with little significance.

It is far too early to know what the future holds for BRICS but the summit is certainly a step closer to BRICS acknowledging its potential. These nations, together, can either develop a strong esprit de corps or can be the reason why BRICS, like many others before them, fades into oblivion.


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.

USA, the fallen superpower?

USA, the fallen superpower?

The wane of the US as world superpower has long been prophesied. Warwick University student Karan Thakrar argues that recent world events are bringing this moment ever closer, and that one may be replaced by three.

 

Ever since the end of the Cold War, US dominance as a world superpower has been obvious. Their economic strength and the so-called ‘McDonaldisation‘ of global culture have resulted in the relative destruction of communism as a viable modern ideology. US military capacity is also unusually strong. The US spends $640 billion (£377 billion) on its military alone. Its defence budget is so big, it outspends the defence budgets of all the richest eight countries combined. Add to this a widespread feeling of American exceptionalism – the belief that the US is fundamentally different to other nations – which has contributed to some aggressive foreign policy in the 20th century.

A US soldier in Ameriyah, Iraq, 2007. © US Army/Creative Commons license

But is this declining? While the US has displayed willingness to back itself up with hard power, such as the invasion of Iraq in 2003, in recent times this has not been the case, and as a result its influence on the world stage has diminished. The Obama administration has arguably been lacklustre in its performance on the international stage compared to previous administrations. Take the example of Syria. Obama’s famous ‘red line’ comment over Assad’s use of chemical weapons sparked a reaction from the US, who immediately started planning on bombing strategic sites in Syria. However, after the British Parliament voted against military intervention, followed by France, the US felt it did not have the support to proceed. Keep reading →


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.

Human Rights Watch Film Festival 2014 | Dangerous Acts Starring the Unstable Elements of Belarus

Human Rights Watch Film Festival 2014 | Dangerous Acts Starring the Unstable Elements of Belarus

Every March, the Human Rights watch Film Festival showcases a selection of independent films and documentaries that deal with today’s pressing social issues. We sent DiA Communications and Marketing Manager, Tal Gurevich, to the 2014 London premiere.

 

DA_3_795_600_85
Image courtesy of Dogwoof

In the year that marks the 20th anniversary in power of ‘Europe’s Last Dictator’ – Alexander Lukashenko of Belarus – it is only fitting that Madeleine Sackler’s moving documentary about the resolute struggle of an underground theatre movement against his oppressive regime opened London’s Human Rights Watch Film Festival.

The documentary centres on Belarus’s latest presidential elections in 2010 and their violent aftermath. Hope for change was shattered when Lukashenko was re-elected in a rigged election with close to 80% of the vote. A vicious crackdown followed and thousands of protestors were beaten, arrested, imprisoned and disappeared. Opposition candidates were subjected to torture and sentenced to years in prison, often in solitary confinement. Keep reading →


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.

Corruption, controversy and ballooning costs: the dark side of the Olympics

Corruption, controversy and ballooning costs: the dark side of the Olympics

As consumers in a globalised world, it’s all too easy to forget the hidden costs of our daily conveniences. But what about those of international sporting events? As the excitement of the Sochi Olympics fades, Connie Fisher asks us to look beyond the hype and the glory to the human consequences of the greatest show on Earth.

 

Olympic Cauldron Relit for Sochi Winter Games 2014, Feb 21st
Sochi 2014’s Olympic flame © GoToVan (Creative Commons)

No major sporting event comes without its problems, but as we have seen with this year’s Winter Olympics in Sochi, Russia, the pre-games controversy – especially over LGBT issues – was all but forgotten amidst the thrill and excitement of the sport. However, behind the scenes, massively inflating budgets, corruption and health and safety issues require us to ask whether such events ultimately benefit or hinder the host countries, especially considering the increasing number of successful bids from BRICS nations.

With a whopping $51bn price tag (five times the original $12bn prediction), the Sochi Games have become the most expensive Olympics in history, leading the International Olympic Committee (IOC) to question whether it is time to reassess their budgeting and bidding procedures. The blame for the exorbitant price of the Sochi Games, which weighed in at nearly three-and-a-half times the cost of London 2012, has been placed on corruption endemic within the construction industry and, according to opposition politicians, up to $30bn in kick-backs for figures close to Vladimir Putin. Keep reading →


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.