What Type of Economy Does Russia Have?
Russian society is divided by social tensions and economic inequality. There are “haves” (Putin’s political elite) and “have-nots” (the rest of the population). The conflicting interests of the two groups are causing a battle of interests that has to be resolved in order to create a more equal balance.
Transition to a market economy
In the fall of 1991, Russia was in utter chaos. All fiscal and monetary discipline had been lost. Prices had become heavily regulated, many shops were practically empty, and there was little reason to work. Rent-seeking had become a widespread problem. The country was subject to multiple shocks, including an external default, which created an opportunity for fundamental systemic change.
In recent years, there has been a great deal of attention paid to Russia as it undergoes political and economic reforms. Russia is currently in the process of transitioning from a top-down command-and-control system to an open market economy. Because the transition is occurring rapidly, it can be difficult to obtain reliable information on various aspects of the process. However, the international community should continue to closely monitor current events and the driving forces behind these reforms.
While both Russia and China have made progress in their transition to a market economy, China’s economic reform process is much slower than Russia’s. While the transition process in Russia has made many important advancements, it has faced several obstacles, which may impede its implementation.
Lack of entrepreneurial spirit
Entrepreneurship is the driving force behind strategic leadership. The entrepreneurial spirit is a key component of innovation and tolerance of ambiguity. The Russian economy is made up of about a million small and medium-sized enterprises, which account for 13 percent of the labor force and twelve percent of GDP. However, the exact number of small and medium-sized enterprises is not known because the informal economy plays a major role in the Russian economy.
Most Russians lack the entrepreneurial spirit. The result is that they tend to buy anything. The most successful joint ventures are those that produce high-quality goods. Although Russians are prone to buy junk, these products have no permanent place in the market. Thus, selling high-quality goods to Western consumers is a lucrative niche. However, Russia’s native population remains the biggest market.
A lack of entrepreneurial spirit in the Russian economy can be attributed to a number of factors. First, the Russian currency is not convertible, and businesses cannot easily access basic services and materials. Another factor is the lack of political support. Many smart Russian programmers hesitate to create start-ups in their home country because they fear that their intellectual property will be seized by politically connected competitors. As a result, Yandex, the biggest tech company in Russia, is incorporated in the Netherlands. These factors contribute to the brain drain of top Russians.
Poor protection of property rights
The lack of a strong property rights regime has contributed to Russia’s ill-defined economic organization. In Russia, the lack of well-defined property rights has impeded the formation of business classes and reduced the need for market infrastructure. A strong property rights regime would have prevented this and resulted in more than one competing hierarchy and long-term economic growth.
The RSPP has been a leading force in lobbying efforts to ensure Russia’s long-term economic prosperity. RSPP leaders have lobbied for low taxes, a competent judiciary, reform of the bureaucracy, small business development, and a pragmatic foreign policy. These efforts have helped the RSPP gain political influence.
Property rights protection in Russia remains a contentious issue. While it is not a new phenomenon, Russian business has long been subject to predatory pressure from state and business elites. There have been many articles and reports documenting the problem. For example, Kazun and Rochlitz have both written about predatory pressure on Russian businesses and the resulting consequences. Similarly, Frye and Yakovlev discuss the negative economic consequences of insecure property rights in Russia.
Despite these issues, the Russian government has been taking steps to protect property rights. In 2010, the government introduced a new law that made it illegal for entrepreneurs to be arrested during an investigation. In addition, the state supported the Business against Corruption movement, which is a nonprofit organization that offers defense to firms under attack.
Unattractive business environment
Russia’s unattractive business environment has a few causes, some of which are less obvious than others. In particular, a declining work force and low pension payments make it difficult for companies to attract new talent. Additionally, many former weapons scientists are losing touch with defense developments and are looking for foreign contract opportunities. In addition, there is little hope for an early economic revival in Russia. However, one potential solution is a shift toward outsourcing and foreign contract opportunities.
The recent growth in education will be crucial to the development of Russia’s emerging market economy. There are several newly-established business schools and management training courses. The growth of global communications and the internet has opened up new horizons for education and knowledge absorption from abroad. However, the recent tightening of controls on information flows raises questions about Russia’s ability to benefit from increased interconnection with other countries.
Growth in the trade and service sectors
The Russian economy is segmented into two major sectors: the primary and the service sectors. The former provides the bulk of the nation’s workforce. Agriculture, mining, and manufacturing employ about one-fifth of the country’s population. Meanwhile, the service sector, which includes banking, insurance, and other financial services, has grown significantly. Now, it employs about three-fifths of the country’s workforce.
While the Russian economy is currently in a recession, it is not yet as deep as in previous crises. For example, the recent World Cup has boosted domestic demand, with a sharp rise in business activity in host cities. However, the growth in the service sector is still below pre-crisis levels. The S&P Global Purchasing Managers’ Index for the services sector rose to 51.1 in September, a level that separates expansion from contraction. While new orders for goods increased at the slowest pace in the last four months, employment has fallen at its fastest pace since May.
In August, Russian exports totaled USD 25.0 billion, a contraction of 39.7% in annual terms. Exports from Turkey to Russia, meanwhile, rose by 52 percent month-on-month. This marked the highest level since 2010.
Decline in industrial production
The decline in industrial production in Russia can be attributed to a number of factors, including the need to cut production of unnecessary products, a change in the structure of demand in Russia and global markets, and tough competition from fast-growing economies such as China. Regardless of the reasons for the decline, the situation remains very difficult for the Russian economy.
During August, industrial production in Russia fell by 0.1% compared to the same period last year. The decrease was the second-largest since February last year. The decline was primarily due to a decline in the automobile and metals industries, while the agricultural sector had a strong performance, increasing 4.6% between January and August.
The pace of the decline in industrial production in Russia appears to be slowing, however. This is due to two factors that may mitigate the impact of the economic downturn on the country. First, a large part of Russian society believes that the situation is improving. According to a survey conducted by the Levada Center, 68 percent of respondents said they were optimistic about the future.
Second, sanctions imposed by the US have affected the Russian semiconductor industry. The country’s exports of semiconductors have dropped by 90 percent since the war began. This further puts Russia behind in the global technology race.
Increase in oligarch influence
Increase in oligarch influence in a country’s economy has a number of implications. First, it means that a small number of industrial tycoons control a significant portion of a country’s economy. This concentration of power and wealth is likely to serve as both a source of economic change and a source of opposition.
Second, the oligarchs have increasingly captured state and federal politics. In Russia, for example, there are currently four oligarchic clans, each with their own agendas. These clans include Putin’s close associates, such as the Rotenbergs, Koval’chuk brothers, and Timchenko. They have also formed multiple taskforces to implement reforms in particular sectors. These groups meet regularly with President Putin, and their leaders have drafted and provided advice on important pieces of legislation.
Another concern with the increased oligarch influence in Russia’s economy is the lack of accountability of the elite. While the Kremlin has pushed for greater accountability for the ruling elite, it has failed to impose any significant reforms on the oligarchs. In addition, it is difficult to determine the extent to which the oligarchs can influence the development of the country.