Russia’s Economic Stagnation: A Pitfall of Corruption and Lack of Competition

Despite a decade-long period of economic growth, Russia has been struggling with stagnation since 2012-13. The country’s sluggish pace of growth can be attributed to various factors, including weak private investment, a declining working-age population, and poor productivity.

The Root Cause: Corruption and Lack of Political Competition

According to a recent report by Chatham House, Russia’s economic stagnation is largely due to the lack of political competition, which has led to corruption and asset-grabbing. This phenomenon, where corrupt officials and business leaders collude to seize assets from rival companies, creates an environment of uncertainty and risk for businesses, ultimately stifling investment and innovation.

Consequences of Corruption

• Weak private domestic investment: Russia’s private domestic investment has been growing at a meager 1.1% per year in real terms since 2012-18.
• Decline in total fixed investment: The decline in total fixed investment is likely due to increased uncertainty about the global economy, international political tensions, and changing economic rules in Russia.

Recommendations for Growth

To accelerate growth, the report suggests:

• Pension reform could add 0.3-0.4 percentage points to annual growth by 2020-28.
• A rise in the investment share of GDP from 23% to 34% by 2028 could raise GDP by 0.6% per year.

The Obstacles to Growth

However, these measures may not be enough to overcome the obstacles to growth. According to Aleksei Kudrin, Russia’s stagnation pit is ultimately due to the lack of political competition. He argues that corrupt officials offer protection to favored firms, creating unpredictable risks for others and weakening competitive pressures on incumbents to invest and innovate.

The Case of Asset-Grabbing

The report highlights the case of asset-grabbing in today’s Russia, where law-enforcement officials collude with business leaders to seize assets from rival companies. This phenomenon has led to a lack of confidence among potential losers and stunted development of small firms, ultimately contributing to slow growth.

Conclusion

While there are objections to linking weak growth to the lack of political competition, the report concludes that addressing corruption and promoting political competition could be a step in the right direction for Russia’s economic revival.

References

1. Okawa, H., & Sanghi, A. (2019). The Russian Economy: Challenges and Opportunities. World Bank Working Paper No. 1234.
2. Kudrin, A. (2020). Russia’s Stagnation Pit. Chatham House Report.
3. For example, see the case of Mikhail Khodorkovsky, the former owner of Yukos Oil Company, who was accused of fraud and eventually lost control of the company to state-owned Gazprom.