Russia: new president, same old economic problems

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Russia: new president, same old economic problems

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At the vanguard of recent political protests in Russia is the so-called “creative class” – well-educated, successful, young urban professionals.

At a Moscow demonstration, Pavel Jarikov told euronews he was there: “Because of injustice, political and economic, it’s everywhere.”

Jarikov is a businessman who in the 1990s revitalised a former Soviet collective farm and then set up a chain of shops selling kitchens, which he says he lost to an illegal takeover.

He is the founder of the Russian Business Union and gave a devastating critique of Russia’s economy: “If you exclude the commodities sector, we can say that just 20 percent of the Russian economy works effectively. But Vladimir Putin can’t claim the credit for that, it’s due to the efforts of private businessmen. These people, who want to do something important for their country, studied what was being done in Western countries and then they integrated their western experience into the Russian economic realities.”

Vladimir Putin became president in 2000 when Russia was just starting to recover from the financial crisis of 1998 and a default on its debt.

The main tasks were to cut debt, restore economic growth and reduce the economy’s dependency on oil exports.

Now Russia’s economy is the sixth largest in the world, in terms of purchasing power, and it is becoming a member of the World Trade Organisation.

People are better off than in the 1990s and are consuming; inflation is lower than for many years and Russia has the third-largest gold and foreign currency reserves in the world.

But beyond the headline figures things are far from rosy.

Energy exports have increased as a proportion of total exports, and the crisis of 2008-2009 demonstrated how much the country is exposed to the volatility of global oil and gas prices.

In late 2008 and early 2009 Russia went through its first recession after 10 years of economic growth. There is a direct correlation with the price of Russian oil.

Igor Rudensky, the head of the Russian parliament’s Economic Policy Committee, has an explanation for the slow progress on reforms.

Rudensky told euronews: “When we started work in 2000, we had to pay off our external debt, that’s why we were unable to fully diversify our economy early on, and that has to be recognised. Development was held back by the huge — the immense — external debt of nearly 160 billion dollars (120 percent of GDP). So we paid off almost all our foreign debt and then immediately focused on all areas of the Russian economy, starting to help them to develop.”

The Russian government does have very low debt levels – 33.5 billion dollars or less than three percent of GDP – but Russian companies owe 500 billion dollars, almost a third of GDP.

There is also a problem with money leaving Russia, the rate of capital outflow doubled last year from 2010. A preliminary Russian Central Bank report says 84.2 billion dollars left the country in 2011.

Sergei Aleksashenko, the director of Macroeconomic Studies at Moscow’s Higher School of Economics, pointed out Russia’s commodity-driven economy does not attract investors: “Revenues from oil and gas exports accounted for a quarter of the Russian federal budget in 2000, now they account for half of the budget. So how we can talk about actually reducing our dependency on oil? It’s not difficult to see why this dependency is increasing. The investment climate in Russia is deteriorating. During the presidency or premiership of Vladimir Putin, Russia has dropped sharply in all world rankings — of competitiveness, of corruption perception rankings, of investment climate rankings. So, every year it’s becoming more and more difficult to do business in Russia.”

Now with Putin trying to return to the Kremlin for the third time, Russia faces the same challenges as 12 years ago.

It still has to reduce its energy export dependency and modernise the economy.

Top politicians talk all the time about tackling corruption and reducing bureaucracy, but both have risen dramatically since 2000.

And a major priority for the next Russian president, as for leaders worldwide, will be coping with the latest global economic crisis, more serious than the one of 12 years ago.