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Russia Country Report
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Russia Country Report: BTI 2016

Bertelsmann Stiftung’s Transformation Index BTI 2016 for Russia was recently released. The Russia Country Report contains comprehensive characterization of economic, political and social developments. You may find the full text here. Below are excerpts from the report.

Russia Country Report
BTI 2016 index ratings: Russian Federation

Summary

“At the time of writing, Vladimir Putin has been in power for more than fifteen years. Putin served an initial two terms as president from 2000 to 2008, followed by one term as prime minister between 2008 and 2012, before beginning a third term as president in 2012. As a result, Putin has heavily influenced the political and economic development of Russia over these fifteen years.

Putin’s return in 2012 to the Kremlin was accompanied by large public protests, which were directed against the fraudulent December 2011 parliamentary elections and March 2012 presidential elections. The political transformation that these protests provoked has been marked by an increasingly autocratic approach. While also overshadowing the Sochi 2014 Winter Olympics, which would have been an opportunity to demonstrate Russia’s economic and political development under Putin’s leadership.

Furthermore, the Maidan uprising in Kyiv led to the collapse of the Yanukovich regime in Ukraine, which the Kremlin (i.e., Putin and his administration) regarded as a Western conspiracy against Russian interests. In response, the Crimea was annexed by Russia and a military insurgency began in eastern Ukraine. These events were justified by the Kremlin under the slogan of protecting the “Russian World” and giving rise to “Novorossiya” (i.e., New Russia). As a consequence, relations with the West deteriorated dramatically, dropping to levels reminiscent of the Cold War. For the Kremlin’s part, it has not hesitated to display open hostility toward the West and acknowledges its authoritarian tendency. In domestic politics, the Kremlin has reverted to exercising power through military strength and the suppression of semi-autonomous actors, including private businesses, local administrations, non-state media, politically relevant NGOs and even the Academy of Sciences.”

Novorossiya (translated as New Russia) is a well known historical name of the territory, that was not in use for over 100 years. Putin brought it back to use as a symbol for his geopolitical project.

“In an effort to consolidate power and to increase control over Russia’s elites, Putin – now looking more like a tsar than a president – has effectively facilitated the creation of an authoritarian-bureaucratic nomenklatura system. Russia is characterized by:

1. the dependence of private individuals on their official position and support of their direct superior;
2. short-term, hierarchical decision-making processes;
3. dominance of vertical over horizontal networks, which is ensured by, among other things, frequent bureaucratic rotations at the regional level;
4. temporary rather than permanent property ownership patterns, which supports a system of patronage;
5. moral and legal norms for those in power are much broader than for ordinary citizens.

Most notably, the role of the Siloviki (i.e., politicians from the security and military services) has become much more pronounced, while the role of the judiciary has decreased.

The international financial and economic crisis, which hit Russia in the fall of 2008, marked the end of a long economic boom. Since then, economic growth has been sluggish and the public funds saved during the previous period of favorable economic growth have been spent on easing the economic and social consequences of the crisis. In 2014, without having completely recovered from the previous crisis, Russia was hit by further economic difficulties. These difficulties were caused by structural deficiencies within the economy, economic sanctions imposed by the West and, most importantly, a drop in the world oil price. Despite these difficulties, the Kremlin has chosen to prioritize security interests over the requirements of Russia’s economic development – for which it is bound to ultimately pay a high price.”

Economic Performance

“Until 2008, when the global economic crisis hit Russia, the country’s macroeconomic performance had been strong. GDP grew by 70% from 2000 to 2008. In 2006, GDP grew by 8% and fixed investments increased by 17% (though they were at rather low levels to begin with). At 9% in 2006, the rate of inflation based on the Consumer Price Index (CPI) was much lower than the 20% recorded in 2000. Unemployment also fell from 10% in 2000 to 6% in 2006, and the state budget recorded a surplus equal to 7% of GDP in 2006. For the same year, Russia ran a current account surplus of nearly $100 billion thanks to massive exports of raw materials (oil, gas and metals), and the share of tax revenue as a percentage of GDP stood slightly above a 33%, which was roughly equal to the OECD average.

Then the economic crisis hit. From 2008 to 2009, GDP fell by more than 8%, fixed investments dropped by 17%, inflation (CPI) rose to 12% and unemployment to 8%. The current account surplus was reduced to $50 billion. Falling oil prices in 2009 delivered a heavy blow to the state budget, which depends heavily on tax and customs payments from the oil and gas industries. As budget revenues shrunk by nearly 15% from 2008 to 2009, Russia’s budget shifted from a 6% surplus to a 4% deficit during the same time period. Although this indicates a severe macroeconomic crisis, Russia’s performance was not extraordinarily bad by international comparison. The impact of the crisis was mitigated by heavy state spending. From 2008 to 2010, the Reserve Fund was reduced by $100 billion, but central bank reserves were soon stabilized and foreign debts remained at an extremely low level (equal to 2% of GDP).

Since 2010 and in line with global trends, the Russian economy at the aggregate level has started to grow. However, the national economy has not reached its pre-crisis levels. Furthermore, this recovery has not been felt across Russia, nearly half of the country’s regions have not recovered positive growth rates. After reaching 4.5% in 2010, Russia’s economic growth rate slowed dropping to 3.4% in 2012, 1.3% in 2013 and 0.6% in 2014. For 2015, Russia is expected to enter into a period recession with a growth rate between -2 and -3.5%. The reasons for this downturn are hotly debated and include the adverse effects of the depression on world energy and raw material markets, the collateral damage of the Ukrainian crisis, the exhaustion of Putin’s resource-based economic model, and the failure of this economic model to modernize and diversify Russia’s economy.”

You may find the full text here: BTI 2016: Russia Country Report