Russia urged to embrace reform

Russia needs to improve its attitude to business and press ahead with much-needed structural reforms in order to inject vitality into its moribund economy, the World Bank said yesterday.

Speaking to Emerging Markets, Michal Rutkowski, the bank’s chief Russia representative, said the key challenge facing the Russian government was boosting the country’s image among foreign corporates and investors.

He said the strategy was to “improve the business climate”, adding: “There’s a clear and unified consensus at the very highest levels that investment into Russia needs to grow,” he said. “Everyone sees clearly that Russia is operating at full capacity and can’t grow any further without a higher rate of inward investment.”

The World Bank official pointed to four metrics that the government must look to improve, in order to instil confidence in foreign investors keen to break into a market the boasts willing, brand-conscious consumers.

Rampant corruption needed to be tackled, while officials needed to slash the time it takes to secure construction permits. Russia also needed to boost cross-border trade and inject more competition into every layer of the economy.

“Russia creates lots of firms, but too many of them don’t survive,” Rutkowski noted. “They go out of business too quickly, and that is all about the lack of competitiveness that exists across the economy.” Many analysts say Russia’s foremost task should be encouraging more private-sector growth in a country dominated by vested, state-linked interests.

Laura Tuck, the World Bank’s vice president, Europe and Central Asia, said that when it came to doing business with Russia, the most important thing was to “address structural issues and move to a model focused on more investment into the economy”.

Russia was ranked 112th in the Bank’s 2013 Doing Business report, and 178th out of 185 nations in the key measure of securing construction permits.

In many ways, Russia’s ideal economic model – less consumption, more capital investment – is a direct inversion of China’s.

Both economies, members of the BRICS grouping of nations, are on track to grow this year, but at vastly different rates. China gross domestic product is expected to grow by around 7.5% in 2013, with the World Bank tipping Russian economic growth rate to slow to 1.8%.

Russia clearly recognizes the challenge it faces to restructure its economy — and the dangers inherent with inaction. In late September, Premier Dmitry Medvedev said the country was presented with a bleak choice: either to push ahead with “risky” reforms, or to face years of close-to-zero growth. Choosing the latter option, he said, was “a path to the abyss”.

Turning to the thorny issue of Ukraine, long seen as being torn between a closer relationship with the European Union and embracing a future as part of a Russia-dominated Eurasian Union spanning large parts of Eastern Europe and Central Asia, Rutkowski said the country may opt for neither option.

“I have an impression, albeit a distant one, that Ukraine increasingly wants to be friends with both Europe and Russia,” said Rutkowski. “But whether this is do-able or permissible [to officials in Brussels or Moscow] is another thing.”