Carnegie Moscow Center
There’s one thing that perhaps says more about the investment climate in Russia’s Far East than all the swish presentations put together, and that’s the unfinished buildings of two five-star Hyatt hotels in Vladivostok.
The obstacles hindering growth are well known, and it would seem that the government has every opportunity to tackle these problems. It could easily resist lobbying by state capitalists: both the law and regulations would allow that. Instead of embarking on a path of empowerment, however, the government has turned into a place of ceremonial meetings for people with influential positions who are manipulated by officials from the presidential administration and by state capitalists.
Financial sanctions that limit Russia’s borrowing are for now ineffective, as Russia currently has three surpluses: in the federal budget, balance of trade, and current account. The Russian state and most Russian business (at least the kind of business that could in theory raise investment abroad) simply don’t need major credit lines.
The greatest risk, which will grow together with funds and reserves, is that of the open or creeping politicization of investment. In other words, the state will choose to invest in “friendly” but unstable currencies, as well as to extend loans to even “friendlier” states and companies. Experience of past crises should make the responsible government agencies stay well away from such initiatives—as far as it’s politically possible.
Sanctions have thrust Vladimir Putin’s inner circle into the public domain. In response, the state has lent sanctioned individuals a helping hand. While previously, they would get individual government contracts, the lucky few are now setting their sights on entire industries via the mechanism of public-private partnerships. The president sees state capitalists as patriotic businesspeople, and they realize that sanctions have made Russia the only place where they can make money.
Companies close to the Kremlin are creating a monopoly on data in Russia. Although the data market has yet to take shape, it has already been turned into a monopoly by the president’s decisions. Competition takes a back seat to matters of national importance.
Russia’s crony-capitalist economic model requires an ever-increasing volume of funds to be burned on lavish mega-projects that generate huge profits for a dozen families close to the Kremlin. Now it seems to be pensioners’ turn to make the sacrifices needed to finance the appetites of Russia’s new aristocracy.
Washington thinks punitive measures will change Moscow’s calculus, but the Russian economy is doing just fine.
In an economic system that wasn’t so focused on solving government problems or fulfilling the “public agenda,” the state wouldn’t have to find ways of extracting funds from business to spend on social programs.
The government’s pension reform plan has shocked the majority of Russians, who, in focus group discussions, expressed confusion, fear, and frustration with the government, including President Vladimir Putin himself. Russians expect the proposed measures to pass. But they are also prepared to resist them in various ways, and they want concessions and guarantees of employment and healthcare, especially for society’s most vulnerable members.