Risky business

Economic growth was all the talk in Russia in recent weeks. The debates that have started earlier this year seem to have identified the problem – a chronically low investment rate – correctly. The solutions offered, however, reflect an inability to move beyond the thinking that resulted in this situation at the first place.

It started in July with a public spat between Elvira Nabiullina, the governor of the Central Bank and economy minister Maxim Oreshkin about consumer lending. It continued with an increasing frustration over the sluggish implementation of the “National Project”, a significant investment scheme that is the flagship policy of Vladimir Putin’s fourth presidential term. Most recently, the government tabled an investment protection bill put forward by deputy prime minister Dmitry Kozak, which was chosen over the more radically liberal proposal of the Ministry of Finance.

All these debates and proposals revolve around the same idea: namely that investments in the Russian economy are chronically low and should be significantly higher if the country is to grow faster than current prediction of 1.3% for 2019 and 1.7% for 2020. Finance minister Anton Siluanov was abundantly clear about this in a speech in a speech at the Russian Financial University in October. Siluanov lamented that Russia’s investment rate is only 20.6% of its GDP, well behind its competitors, all while about 30 trillion rubles were sitting on corporate bank accounts. The problem was definitely not a lack of money.

Neither is the problem fiscal instability. In recent years the Russian government has carried out a remarkable rebalance of the federal budget, triggered by a precipitous fall in global oil prices. The National Welfare Found has been replenished and it is widely expected that the money in it will be soon reinvested as the fund hits 7 percent of GDP.

The Doing Business illusion

In 2012 Putin ordered the Russian government to improve Russia’s ranking in the World Bank’s “The Ease of Doing Business” index – Russia was 118th that year – so that Russia is within the top 20 on the list by 2018. The government missed this goal, but not by much. Last year, Russia was 31st, and on the newest list, published in late October, 28th of 190 countries, one notch below Austria, but one above Japan, after – we learn from the description – authorities made it easier for businesses to get electricity and pay taxes last year and tightened rules on corporate transparency.

If you smell something fishy here, you are not alone.

The “Doing Business” index has been a favorite of politicians around the world who prefer smoke and mirrors to complicated reforms. This is because it’s a deeply flawed index that is relatively easy to trick. It only measures the ease of doing business in each country’s biggest business city (in certain cases, including Russia, the two biggest business cities) and disregards conditions in other regions. It monitors circumstances for very specific companies in very specific situations, regardless of the economic profile of the country in question. It does not take into account circumstances such as the state of the country’s financial system, its macroeconomic stability or the predictability of regulations and their enforcement, which are of vital importance to investors. Results are also revised every year in light of new evidence, which often greatly upsets the original ranking.

In short, “The Ease of Doing Business” has, due to the credibility that the World Bank lends it, been a great marketing tool. Regrettably, it says little about the ease of doing business. But the fact that the Russian government has pursued an improvement in the ranking tells a lot about the way it has tried to paper over serious problems with the country’s investment climate.


What the World Bank’s index misses is that a top-down massaging of regulations – and sometimes, statistical data – is unlikely to do the trick. As a recent study published by researchers of Oxford Economics pointed out, so are the National Projects. Evgenia Sleptsova who led the research pointed out that tax hikes adopted to pay for the projects could wipe out the growth expected from the $400 billion investment package, even if it is implemented according to schedule, which seems highly unlikely, especially that about one-third of the spending is expected to come from the private sector.

Sleptsova points out constrained productivity as one of the reasons why the targets will likely be missed, but investors have a range of other issues to worry about. First, the increasing propensity of power groups within the Russian political elite to settle scores in order to cash out or establish territories as uncertainty over Putin’s 2024 plans is growing. Examples from recent years include the seizure of Bashneft, an oil firm that was nationalized and then “privatized” to the state-owned Rosneft following a flawed legal case against its previous owner; the 2018 arrest of Ziyavudin Magomedov, the owner of the Summa Group investment company who was jailed following a spat with the state-owned Transneft over a Black Sea port.

Attempts to nudge potential domestic investors to repatriate their assets have seen very mild successes at best. The “domestic offshore” regions created by the government last year in the far-eastern Primorsky Krai and in the Kaliningrad region for investors to register their earnings have only seen 10 companies registered, of which seven were owned by Oleg Deripaska, a businessman sanctioned by the United States in 2018. A 2018 report by the Center for Strategic Research, a think tank warned that the criminalisation of the failure to repatriate earnings in foreign currency provides the authorities with just another instrument to extort businesses, as well as deterring exports. On 1 November, Andrei Kakovkin, the first entrepreneur to return to Russia under a program spearheaded by business ombudsman Boris Titov to repatriate businesspeople who left because of the threat of criminal prosecution, was jailed. Titov essentially spread his arms and said that he was unable to help. Bigger investors are wary of the Kremlin’s attempts to fork part of the price of Vladimir Putin’s foreign policy posturing on them. In May 2018 it took loud protests by business leaders to stop the State Duma from adopting a law, which would have allowed the government to punish, both by fines and by prison, the act of observing foreign sanctions, calling for new ones or releasing information that could lead to new sanctions.

Foreign investors, in turn, were alarmed by the arrest of Michael Calvey, a US investor and his associates at the Baring Vostok private equity group in February. Seven months later Calvey remains under house arrest, in spite of Baring Vostok having ceded a 9.99% share in Vostochny Bank, which was at the center of the case, to Artem Avetisyan, Calvey’s business rival, and in spite of Titov and other ostensibly influential people speaking up for Calvey. The Kremlin’s attempts to restrict foreign ownership in media and in tech firms did not only send Yandex shares tumbling, but also made investors question what sector might be the next. Despite the evolution of economic ties with China in recent years, the Chinese government and Chinese companies continue to regard Russia mainly as a provider of natural resources, which China lacks.

An investment protection law is not what is missing. What is increasingly missing is a reliable implementation of laws or at least a calculable chain of command in the “deep state”.

One of the major mistakes that Vladimir Putin made in recent years was relying too much on his foreign policy agenda, a field in which he is confident. This could very well be happening again: as France’s president, Emmanuel Macron is pushing for a European “reset” with Russia – though to several European leaders it is still unclear how and why this should happen – the Russian president clearly trusts that the era of sanctions will soon be over and the Russian economy will receive a much-needed investment boost from Western investors. But this may turn out to be a vain hope. The removal of sanctions may indeed bring some windfall, especially if the unexpected foreign policy success leads to the elite rallying around the president, thus making politics more stable. But the removal of sanctions would also mean a significant weakening of the rule of law. Many risk-takers have found ways to work with Russian companies in the past years, while for risk-avoiding investors a country, in which institutional and procedural safeguards – flawed, but calculable – are increasingly eroded by uncertainty, score-settling and extortion, is unlikely to be an attractive market.

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