Philip Hanson
Associate Fellow, Russia and Eurasia Programme

Russian economic policy is in a curious condition.  

Leading Russian economists revising the government's strategy to 2020 are calling called for radical economic reform. The Central Bank of Russia puts the net outflow of private capital last year at $84 billion. The country's GDP has been growing at 4% a year; the federal budget was in surplus in 2011; so was the balance of payments current account, and sovereign debt, most of it domestic, is around 11% of GDP.  On the face of it, Russia is doing better than most, yet the talk is all doom and gloom. Why?

The immediate problem is that things are not what they used to be. The economy has not returned to the boom times of 1998-2008, when GDP growth averaged 6.8% and personal real incomes were – thanks to rising oil prices – growing faster still. Nor do the government's projections envisage anything much better than this in the years ahead. 

The main reasons for Russia's lack of growth are a declining workforce, much slower growth of international credit to Russian banks and non-bank corporations, the weakness of the European economy, and greater uncertainty about future oil prices. Of these Russia's declining workforce is probably the most important and the least tractable. 

Last year the Moscow Higher School of Economics Institute of Demographics projected an 11million decline in the working-age population over ten years, in the absence of net immigration. This is a profound change. During the boom, employment was growing at about 1% a year and the working-age population was also increasing, even while the total population was in decline. Now the state statistical agency projects a fall of just over 10 million in working-age population between 2010 - 2030, after allowing for net in-migration of 4.5 million. 

The most striking feature of these projections is the steep fall in the number of young labour-force entrants. This means that the problem is not just one of reduced labour inputs. Young people are more geographically and occupationally mobile than older workers, and more open to the upgrading of education and skills. The drop in their numbers will slow productivity growth from occupational shifts and improvements in human capital. 

The slowdown or reversal of credit from abroad, well-nigh universal in a balance-sheet recession, is in Russia's case numerically startling. International credit outstanding to Russian banks rose four-and-a-half-fold in the three years to October 2008; three years later it was down by about a fifth. The corresponding figures for non-bank corporations are three-fold and 5.7% up. The resulting constraint on growth would be less of a worry if lending was expected to resume its former rapid growth, but it isn't.    

Europe's weakness matters because about half of Russia's exports go there.  To re-orient the Russian economy eastwards would be a long-term exercise at best. 

Strategy 2020, an advisory document, calls for fundamental changes that liberals inside and outside Russia have been demanding for years: more competitive markets, supported by independent courts providing a proper legal order and security of property rights, and a reduced role for the state. What it does not say is how, politically, this is to come about.  The barriers to market entry and to free competition generally are there because of the ‘unequal rights of market participants': in other words, the corrupt links between officials and politicians, on the one hand, and incumbent firms, on the other.  

As long as a Russian firm needs political protection to grow large and stay large, there will be less competition and less investment than there could and, for the people's benefit, should be. That will not change so long as politics itself is uncompetitive. The present political leadership wants to see economic results that are achievable only if its own power is undermined. 


Chatham House Report
Philip Hanson, James Nixey, Lilia Shevtsova and Andrew Wood, February 2012