Country Analysis Report
a. Establishment/ History of the country.
One of the first modern human bones of 35,000 years old was found in Kostenki on the Don River banks. In prehistoric times, the vast steppes of Southern Russia were home to tribes of nomadic pastoralists. In classical antiquity, the Pontic Steppe was known as Scythia. In the beginning of the second millennium it consisted of independent states populated by mostly free people with highly developed self-government (Kievan Rus, Novgorod Republic etc). These states had very intense connections with European traders and Hanseatic League. Starting from the 12th century Byzantine Empire sponsored ambitions of some dukes, injected the fifth column in many independent cities in form of Greek (Russian) Orthodox Church institutions, and unleashed a civil war. This grand war was later called Mongol-Tatar Raids, although there were never any Mongols there. Modern Russia is still proud of its expansion wars and always claims them as «liberation wars». The power was eventually grasped by Moscow. During the rest of the centuries Moscow was constantly expanding its territories through raids and wars. Many dukes fought fiercely against Muscovites. However, gradually it was able to subdue the most of the territory of today's Russian Federation.
Today Russian Federation (Russia) is a successor of the USSR. It inherited Soviet nuclear arsenal in exchange for the debts of the USSR. USSR was officially recognized by the British Empire (West) in 1924. After the February Revolution made by democratic forces in February 1917, Provisional government was set. Communist international terrorists-Bolsheviks led by Leo Bronshtein (Trotsky) seized power from Provisional government in October 1917. Unfortunately, democratic forces were too weak to fight against totalitarian machines of White revanchist Tsarists and Red communists. Bolsheviks promised land and state power to people, and won the bloodiest ever civil war. Then they terrorized people by creating first in the world concentration camps, collectivization and bloody terror against Russian people. During the quell of Tambov uprising in 1918-1921 occupational Red Army used chemical weapons, aviation, artillery and mass shooting of peasants. Red Army actively took hostages and completely annihilated many villages. Whoever doubted the right course of Communist party was sent to concentration camps or killed. Historians estimate 50-100 million people were killed during Soviet regime. After the collapse of the Soviet Union, separatism sentiments were dragging Russia to dissolution. In 1993, Russian President Yeltsin ousted Parliament and forged the results of all-Russian referendum regarding new Constitution. Rebellions were shot with help of tanks and Special Forces. In 2000, Vladimir Putin became a President and quelled all kinds of protests both by political and brutal force. Russia continues to implement the international commitments of the USSR, and has assumed the USSR's permanent seat on the UN Security Council, membership in other international organizations, the rights and obligations under international treaties and property and debts.
b. Geographic Location.
Russia is located in Northern Asia (the area west of the Urals is considered part of Europe), bordering the Arctic Ocean, between Europe and the North Pacific Ocean. Its area totals 17,098,242 sq km, of which only 14% is suitable for living. The rest is permafrost (60%), swamps (22%), lakes and rivers (4%). Terrain consists of broad plain with low hills west of Urals; vast coniferous forest and tundra in Siberia, uplands and mountains along southern border regions. Weather ranges from steppes in the south through humid continental in much of European Russia; subarctic in Siberia to tundra climate in the polar north; winters vary from cool along Black Sea coast to frigid in Siberia; summers vary from warm in the steppes to cool along Arctic coast. Land boundaries total 20,241.5 km. According to the CIA facts book, Russia borders Azerbaijan 284 km, Belarus 959 km, China (southeast) 3,605 km, China (south) 40 km, Estonia 290 km, Finland 1,313 km, Georgia 723 km, Kazakhstan 6,846 km, North Korea 17.5 km, Latvia 292 km, Lithuania (Kaliningrad Oblast) 227 km, Mongolia 3,441 km, Norway 196 km, Poland (Kaliningrad Oblast) 432 km, Ukraine 1,576 km. Moscow is the capital. Its geographic coordinates are: 55 45 N, 37 35 E. Russia is divided into 9 time zones. It is the largest country in the world in terms of area but unfavorably located in relation to major sea lanes of the world; despite its size, much of the country lacks proper soils and climates (either too cold or too dry) for agriculture; Mount Elbrus is Europe's tallest peak.
Estimated by CIA population of Russia is around 139,390,205 people. The country is suffering severe demographic problems as its population growth rate is one of the worst in the world (-0.465%). At the same time country's death rate is one of the highest in the world (7th place) and equals 16.04 deaths per 1,000 people. Infant mortality rate is 10.32 deaths/1,000 live births, which is about average in the world thanks to some infrastructure left from the USSR legacy. Officially estimated by Word Bank Net migration in Russia is almost 1 million a year. Population balance is supported by unskilled and ready to tolerate everything labor that is arriving from Central Asian countries both legally and illegally by millions a year through open borders. Russia takes 160th place in the world lifespan rating. Its urban population is over 73% and is growing. Many villages could not revive after communist policies of annihilation of villages. Ukrainian Golodomor that left 10 million people dead was common in all parts of Russia too. However, in Russia, modern successors of KGB still have not recognized it as Bolsheviks' genocide. Russia holds 13th place on the world countries' HIV/AIDS rating. According to census 2002, ethnic content looks like this: Russians 79.8%, Tatars 3.8%, Ukrainians 2%, Bashkirs 1.2%, Chuvashes 1.1%, other or unspecified 12.1%. However, taking into account high mortality rate of ethnic Russians, rising ethnic identification of other ethnic groups who were assimilated during the everlasting time of Russian Empire, and high net immigration number, today the amount of ethnic Russians would be no more than 70%. Demographers state that that Russians may become a minority already by 2030. Long ago RAND expressed its concerns about Russia's alarming population reduction rate. In 2001 it estimated the most pessimistic projection predicting a population of less than 100 million by the year 2050. RAND also believes that Russia will not be able to support its elders because of the very fast changing Age structure. Religion: Russian (Greek) Orthodox, Islam, Paganism or Native religion, Judaism, Roman Catholicism, Protestant, Buddhist. Literacy—99%.
According to the US Department of State, the Russian labor force, amounting to nearly 76 million workers in 2009, is undergoing tremendous changes. Although well educated and skilled, it is largely mismatched to the rapidly changing needs of the Russian economy. Official unemployment dropped to its lowest rate of 5.4% in May 2008, and labor shortages appeared in some high-skilled job markets. The economic crisis that began in late 2008, however, quickly reversed this trend and the ranks of unemployed swelled to an International Labor Organization (ILO)-estimated 8.2% in 2009; 1.8 million Russian lost their jobs in the first quarter of 2009 alone. Unemployment, still at more than 8% in the first quarter of 2010, is highest among women and young people and shows signs of remaining near that level throughout the year, according to a World Bank report. GNI per capita (US$): 9,622.53.
d. Political System.
Formally Russia is a federation of 46 oblasts, 21 republics, 4 autonomous okrugs, 9 krays, 2 federal cities, and 1 autonomous oblast However, the privilege of electing governors was abused by former president Putin. Today all governors are officially appointed by the President. Formally Russia is a semi-presidential republic, wherein the President is the head of state and the Prime Minister is the head of government. Russia is not an electoral democracy according to the Freedom in the World Russia report by Freedom House. It is rather a selective capitalism and cleptocracy. All ministers are chief executives of the biggest nation-wide state-controlled corporations.
Although Russian constitution separates three branches of power, Legislative and Judicial branches are in fact submitted to Executive branch by numerous secondary laws and forged elections.
Legislative branch is the bicameral Federal Assembly, made up of the State Duma and the Federation Council. Upper house, the Federation Council or Sovet Federatsii consists of 176 seats. Its members are appointed by the top executive and legislative officials in each of the 84 federal administrative units — oblasts, krays, republics, autonomous okrugs and oblasts, and the federal cities of Moscow and Saint Petersburg; members to serve four-year terms. Lower house, the State Duma or Gosudarstvennaya Duma consists of 450 seats; all members elected by proportional representation from party lists winning at least 7% of the vote; members elected by popular vote to serve four-year terms.
Executive is presented by the president who is the commander-in-chief of the military, can veto legislative bills before they become law, and appoints the Cabinet and other officers, who administer and enforce federal laws and policies.
Judicial branch consists of Constitutional Court, Supreme Court, and Supreme Arbitration Court. Judges for all courts are appointed for life by the Federation Council on the recommendation of the president.
Political parties are infiltrated by FSB (KGB) agents and form a desirable for Kremlin political climate while imitating democratic process in the country. Andrei Illarionov, former chief economic adviser of Vladimir, and a senior fellow at the Cato Institute's Center for Global Liberty and Prosperity, stated in his testimony before the House Committee on Foreign Affairs that by 2006 people with security background filled 77% of Russia's top 1,016 government positions.
Russia's 160 ethnic groups speak some 100 languages. According to the 2002 census, 142.6 million people speak Russian, followed by Tatar with 5.3 million and Ukrainian with 1.8 million speakers. Russian is the only official state language, but the Constitution gives the individual republics the right to make their native language co-official next to Russian. Despite its wide dispersal, the Russian language is homogeneous throughout Russia. Russian is the most geographically widespread language of Eurasia and the most widely spoken Slavic language. Russian belongs to the Indo-European language family and is one of the living members of the East Slavic languages; the others being Belorussian and Ukrainian. Written examples of Old East Slavic (Old Russian) are attested from the 10th century onwards.
a) Legal system.
Russia's Legal system is based on civil law system and judicial review of legislative acts. Russia has not accepted compulsory International Court of Justice (ICJ) jurisdiction. According to the Freedom House report «Nations in Transit», Russia's courts serve the interests of the country's ruling elite. Many citizens have lost faith in Russian courts and appeal to the European Court of Human Rights (ECHR) to obtain justice. At the same time Russia refuses to ratify Protocol 14 of ECHR, preventing the streamlining of the court's work. Freedom House underlines that along with the baseless detention of citizens before sentencing, lengthy delays in court procedures, lack of public information regarding court cases, and inhuman conditions, including overcrowding and torture.
The Russian judicial system consists of the Constitutional Court, courts of general jurisdiction, military courts, and arbitrage courts (which hear commercial disputes). The Constitutional Court of the Russian Federation is a court of limited subject matter jurisdiction. The 1993 constitution empowers the Constitutional Court to arbitrate disputes between the executive and legislative branches and between Moscow and the regional and local governments. The court also is authorized to rule on violations of constitutional rights, to examine appeals from various bodies, and to participate in impeachment proceedings against the president. The July 1994 Law on the Constitutional Court prohibits the court from examining cases on its own initiative and limits the scope of issues the court can hear. The system of general jurisdiction courts includes the Supreme Court of the Russian Federation, regional level courts, district level courts and justices of the peace.
The Duma passed a Criminal Procedure Code and other judicial reforms during its 2001 session. These reforms help make the Russian judicial system more compatible with its Western counterparts. The reforms reintroduced jury trials in certain criminal cases and created a more adversarial system of criminal trials that protect the rights of defendants more adequately. Another significant advance in the Code is the transfer, from the Procuracy to the courts, of authority to issue search and arrest warrants. There are rising concerns, however, that prosecutors have selectively targeted individuals for political reasons, as in the prosecution of Yukos Oil CEO Mikhail Khodorkovskiy.
Throughout Russia there are about fourteen thousand judges in some two thousand five hundred courts of general jurisdiction on various levels. The vast majority of litigation in Russia is heard by these regular courts. In 1993 these courts handled, for instance, one million eight hundred thousand civil cases. The major link in the regular court system is the people's court. It serves each city district or rural district. Apart from the arbitration court system, there are no courts of special jurisdiction in Russia like those handling domestic relations or probate disputes. As trial courts of general jurisdiction, the people's district courts handle over ninety percent of all civil and criminal cases. Only a limited category of cases involving the most serious crimes falls directly under the original jurisdiction of the next level of courts—the oblast (region, province) courts. Cases are tried by one of several methods: a case can be tried by a presiding, professional judge and two lay judges called «people's assessors,» or by a panel of three professional judges, or by a single judge.
In 1993 Russia started to experiment with jury trials (panels of twelve jurors). A jury trial is only available in serious crimes—those where jurisdiction originates in the oblast courts. However, recent initiatives from Kremlin are aiming to eliminate jury trial as many politically important cases were failed by appointed judges thank to jurors. Decisions of the lower trial courts can be appealed through intermediate courts up to the Supreme Court of Russia.
Law enforcement functions are performed by the Procurator General's Office (procuratura) with subordinate agencies in cities and provinces, by the Ministry of Internal Affairs with subordinate agencies, and by the Federal Counterintelligence Service (former sized down counterintelligence department of the dismembered KGB). The Procurator's office supervises the legality in the activities of all law enforcement agencies, investigates crimes and prosecutes criminals. The Ministry of Internal Affairs is the headquarters of all police agencies (called «militia» in Russia), but this ministry also runs correctional institutions and fire forces, and performs some administrative functions. The Federal Counterintelligence Service is responsible for counterintelligence work, and it also investigates (jointly with other agencies or separately) organized crime and terrorist acts. In spite of some efforts to increase judicial independence (for example, through a considerable salary increase for judges several years ago), many judges still see their role not as impartial and independent arbiters, but as government officials protecting state interests.
b) Economic system.
Russia has undergone significant changes since the collapse of the Soviet Union, moving from a globally-isolated, centrally-planned economy to a more market-based and globally-integrated economy. Economic reforms in the 1990s privatized most industry, with notable exceptions in the energy and defense-related sectors. Nonetheless, the rapid privatization process, including a much criticized «loans-for-shares» scheme run by Anatoliy Chubais that turned over major state-owned firms to politically-connected «oligarchs», has left equity ownership highly concentrated. The protection of property rights is still weak and the private sector remains subject to heavy state interference. Reliance on commodity exports makes Russia vulnerable to boom and bust cycles that follow the highly volatile swings in global commodity prices. The government since 2007 has announced an ambitious program to reduce this dependency and build up the country's high technology sectors, but with few results so far. The problem of Russian government is that it has no operating levers to implement any reforms on the state level. Because of huge bureaucracy, any attempts to do modernization are futile. A researcher should be careful when learning Russian government agencies' statistics and data because of tendency to cooking the books on the highest level of Russian government and lack of control over the government.
The economy had averaged 7% growth since the 1998 Russian financial crisis, resulting in a doubling of real disposable incomes and the emergence of a middle class. The Russian economy, however, was one of the hardest hit by the 2008-09 global economic crisis as oil prices plummeted and the foreign credits that Russian banks and firms relied on dried up. The Central Bank of Russia spent one-third of its $600 billion international reserves, the world's third largest, in late 2008 to slow the devaluation of the ruble. The government also devoted $200 billion in a rescue plan to increase liquidity in the banking sector and aid Russian firms affiliated with government who are unable to roll over large foreign debts coming due. The majority of these financial injections into oligarchs' firms were undertaken through offshore companies and lacked transparency. Oleg Deripaska, allegedly Putin's relative, the biggest owner of Rusal was even allowed to IPO in HongKong. More than $2 billion were collected and paid to partly cover the debt.
Tighter credit, collapsing global demand, global uncertainty, and rising unemployment hurt investment and consumption, the main drivers of GDP growth in recent years, particularly in the first half of 2009. After a decade of growth, estimated GDP growth and industrial production growth for 2009 were -7.9% and -11, respectively—a sharp contrast to the pre-crisis performance of 8.1% and 6.3% in 2007. But true growth and prospective of the economy can be estimated by look at Industrial Production Growth rate. Russia's industrial growth or the annual percentage increase in industrial production (includes manufacturing, mining, and construction) is -11.5 and 149th place in the world.
Although Russia is one of the most industrialized of the former Soviet republics, years of very low investment have left much of Russian industry antiquated and highly inefficient. Besides its resource-based industries, it has developed large manufacturing capacities, notably in metals, food products, and transport equipment. Russia inherited most of the defense industrial base of the Soviet Union, so armaments remain an important export category for Russia. Efforts have been made with varying success over the past few years to convert defense industries to civilian use, and the Russian Government is engaged in an ongoing process to privatize many of the state-owned enterprises. However, privatization is done throughout fake auctions were few government affiliated oligarchs participate under different mask- companies.
Russia has relatively little area for agriculture, but given its massive expanses, the country still accounts for about 9% of the world's arable land. Grain production for export is concentrated in the south of European Russia, with additional grain for domestic consumption grown throughout the rest of non-Arctic Russia west of the Urals as well as western Siberia. Livestock production was in decline from 1990. Small plots averaging one acre in size, urban and suburban gardens, and gardening cooperatives produce over half of Russia's food output. Former state and collective farms have been largely privatized, but management quality is uneven and profitability is highly dependent on proximity to major urban markets. Foreigners are not allowed to own farmland, although long-term leases are permitted. As a result of very poor agricultural policy, Russia imports today about 70% of foods consumed within the country.
c) Transportation system.
Although Russia inherited form USSR a pretty good transportation infrastructure, its performance is on level of African countries. Logistics Performance Index (LPI) of Russia is 2.61. It is 94th place in world rank, right before Tanzania and Congo. To better understand Russian transportation system let's see what it consists of. World Bank estimates Logistics Performance Index (LPI) as the weighted average of the country scores on the six key dimensions:
Efficiency of the clearance process (speed, simplicity and predictability of formalities) by border control agencies, including Customs. For example, it takes Russia 4.62 days to clear cargo with physical inspection. However in Slovakia the same process takes only half a day);
Quality of trade and transport related infrastructure (e.g. ports, railroads, roads, information technology).
Airports with paved runways total 595, however there are only few of them that may accept big Boeings. Most of them are old and need reconstruction.
Pipelines include: condensate 122 km; gas 159,552 km; liquid petroleum gas 127 km; oil 74,285 km; refined products 13,658 km. It is one and only developing area as Russia continues to invest in its national competitive advantage — export of natural resources. Recent achievement is Eastern Siberia Pacific Ocean (ESPO) pipeline that started working in 2010.
Railways total 87,157 km, which makes Russia the 2nd largest in the world. However, density of the railroads is not the highest.
Waterways: 72,000 km system in European Russia links Baltic Sea, White Sea, Caspian Sea, Sea of Azov, and Black Sea. Biggest ports and terminals are Azov, Leningrad, Kavkaz, Nakhodka Novorossiysk, Primorsk, Saint Petersburg, Vostochnyy.
Roadways: 933,000 km. Comparing to the size of Russia it is almost nothing. Russian roads are among the most dangerous in the world as Federal Highways miss dividing barriers. Another problem is missing turnpikes in rural areas. Roads are in horrible conditions as corruption and lack of funds contribute to the poor infrastructure. Russian road construction is the most expensive in the world due to criminal connections on high level of government and attributed to it corruption.
Other indexes of LPI are: Ease of arranging competitively priced shipments; Competence and quality of logistics services (e.g., transport operators, customs brokers); Ability to track and trace consignments; Timeliness of shipments in reaching destination within the scheduled or expected delivery time. All these numbers need significant improvement.
d) Communication system.
All communications in Russia are in area of tight control from security forces as regime monitors and controls all possible ways of information spread. The biggest TV and Radio stations are subdued directly to government affiliated companies. Gazprom controls main TV channels and so called free radio station «Echo of Moscow». State legislative body recently approved wider authorities for FSB regarding the possibility of their total access to internet service providers. It is a long term practice of FSB to chase the most politically active bloggers and prosecute them charging them with extremism.
According to CIA Facts Book, Russian telephone system is experiencing significant changes; there are more than 1,000 companies licensed to offer communication services; access to digital lines has improved, particularly in urban centers; Internet and e-mail services are improving; Russia has made progress toward building the telecommunications infrastructure necessary for a market economy; the estimated number of mobile subscribers jumped from fewer than 1 million in 1998 to nearly 188 million in 2008; a large demand for fixed line service remains unsatisfied. Domestic cross-country digital trunk lines run from Saint Petersburg to Khabarovsk, and from Moscow to Novorossiysk; the telephone systems in 60 regional capitals have modern digital infrastructures; cellular services, both analog and digital, are available in many areas; in rural areas, the telephone services are still outdated, inadequate, and low density international. Russia is connected internationally by undersea fiber optic cables; digital switches in several cities provide more than 50,000 lines for international calls; satellite earth stations provide access to Intelsat, Intersputnik, Eutelsat, Inmarsat, and Orbita systems.
Radio broadcast stations: There are approximately 323 AM, 1,500 FM, and 62 shortwave.
Television broadcast stations: over 7,000.
Internet users: 45.25 million, or 25% of all households. Internet country code .RU
II. National Competitive Advantages.
a) Educational system and its rating.
Education in Russia is provided predominantly by the state and is regulated by the federal Ministry of Education and Science. Regional authorities regulate education within their jurisdictions within the prevailing framework of federal laws. State spending for education is continuously reduced. Private institutions account for 1% of pre-school enrollment, 0.5% of elementary school enrollment and 17% of university-level students. 11-year course has been officially entered for secondary school. Education in state-owned secondary schools is free; first tertiary (university level) education is free with reservations: a substantial share of students is enrolled for full pay. Male and female students have nearly equal shares in all stages of education, except tertiary education where women lead with 57%.
Traditionally, the universities and institutes conducted their own admissions tests regardless of the applicants' school record. There were no uniform measure of graduates' abilities; marks issued by high schools were perceived as incompatible due to grading variances between schools and regions. In 2003 the Ministry of Education launched the Unified state examination (USE) program. The set of standardized tests for high school graduates, issued uniformly throughout the country and rated independent of the student's schoolmasters, akin to North American SAT, was supposed to replace entrance exams to state universities. Thus, the reformers reasoned, the USE will empower talented graduates from remote locations to compete for admissions at the universities of their choice, at the same time eliminating admission-related bribery, then estimated at 1 billion US dollars annually. However, last year teachers and professors in famous universities were surprised to find that many new students could not even write in Russian without mistakes. The level of new students from Caucasian region was so low that they needed another secondary education before they could continue studying in Universities. The matter is that local school teachers in regions with historically high level of hierarchy and tribes connections simply could not downgrade children coming from highly regarded local «nobility». Today Ministry of education is looking for ways out of such a dire situation.
Postgraduate diploma structure so far retains its unique Soviet pattern established in 1934. The system makes a distinction between scientific degrees, evidencing personal postgraduate achievement in scientific research, and related but separate academic titles, evidencing personal achievement in university-level education.
There are two successive postgraduate degrees: kandidat nauk (Candidate of science) and doktor nauk (Doctor of science). Both are a certificate of scientific, rather than academic, achievement, and must be backed up by original/novel scientific work, evidenced by publications in peer-reviewed journals and a dissertation defended in front of senior academic board. The titles are issued by Higher Attestation Commission of the Ministry of Education. A degree is always awarded in one of 23 predetermined fields of science, even if the underlying achievement belongs to different fields. Thus it is possible to defend two degrees of kandidatt independently, but not simultaneously; a doktor in one field may also be a kandidat in a different field.
Kandidat nauk can be achieved within university environment (when the university is engaged in active research in the chosen field), specialized research facilities or within research and development units in industry. Typical kandidat nauk path from admission to diploma takes 2-4 years. The dissertation paper should contain a solution of an existing scientific problem, or a practical proposal with significant economical or military potential. The title is perceived as equivalent to Western Ph.D..
Doktor nauk, the next stage, implies achieving significant scientific output. The dissertation paper should summarize the author's research resulting in theoretical statements that are qualified as a new discovery, or solution of an existing problem, or a practical proposal with significant economical or military potential. The road from kandidat to doktor typically takes 10 years of dedicated research activity; one in four candidates reaches this stage. The system implies that the applicants must work in their research field full time; however, the degrees in social sciences are routinely awarded to active politicians.
Academic titles of dotsent and professor are issued to active university staff who already achieved degrees of kandidat or doktor; the rules prescribe minimum residency term, authoring established study textbooks in their chosen field, and mentoring successful postgraduate trainees; special, less formal rules apply to professors of arts.
UNESCO Institute of Statistics provides the following per-crisis information about Russia.
12.9% of government spending goes to education, average 97.5% adult literacy rate, 77% of the population of tertiary age are in tertiary education.
OECD tells us that about 54% of population aged 25-64 have tertiary level of education.
The level of education is an important part of Human Development Index, published annually by the United Nations. Education is a major component of well-being and is used in the measure of economic development and quality of life, which is a key factor determining whether a country is a developed, developing, or underdeveloped country. Currently Russia takes 71st place in HDI rank with HDI value 0,817 right between Albania and Macedonia, and is classified by United Nations as a country of Medium Human Development.
Russia inherited Soviet system of education. It is characterized by pretty good fundamental education but is weak in practical fields. Secondary schools often lack funds to develop as local authorities infected by all-Russia corruption funnel the funds away. High education is pretty vague. Except for some universities in big cities with specialization in Physics and Mathematics high education plays a role of rather a social status than a modern knowledge cradle. Among problems that do not allow Russia to be on the edge of modern education are extremely low salaries of teachers, imperial bureaucracy, bribery and technological retarded system. Local authorities often simply close schools and leave children on the street.
b) Specialized skills of the population;
OECD provide an interesting index of productivity: Levels of GDP per capita and labor productivity — Percentage gap with respect to US GDP per capita. Strangely enough there is no information about Russia in its report. However in 2008 its number for Russia was -66 which is equal to Mexico, Chili and Turkey.
The structure of human capital in centrally planned economies was distorted. Too many military engineers and too few financial and market specialists. After Perestroika this misbalance was corrected. Even that the quality of economies education was poor as Russia could not all of a sudden produce market practitioners, the lack of specialists was balanced by steep drop in production sector. Traditionally Russia had very good engineers but artificially low wages drove the majority of them out of the country. Moreover, traditional national crafts were left with no subsidies and were doomed to die in the ocean of lawless criminal society. Today Russia specializes only in pipes infrastructure building. Even such internationally competitive industries like mining and steel are mainly outdated and need total and complete renovation.
c) Most important products for export recognized by the world;
Russian industry is primarily split between globally-competitive commodity producers — in 2009. Russia was the world's largest exporter of natural gas, the second largest exporter of oil, and the third largest exporter of steel and primary aluminum — and other less competitive heavy industries that remain dependent on the Russian domestic market. Wide natural resource base including major deposits of oil, natural gas, coal, and many strategic minerals, timber. Note: formidable obstacles of climate, terrain, and distance hinder exploitation of natural resources.
d) Labor cost;
Labor force of Russia is about 75 million people which is 7th largest in the world. Wage is pretty high only in priority government affiliated companies like Gazprom. The average Gazprom wage is five times higher than the Russian average. In 2005, the RF Department of Statistics (Roskomstat) has stopped reporting average wage of Gazprom not to irritate the rest largest part of Russians. Monthly salary in Russia averaged $550 in 2007. PPP would be approximately twice more or $1000. Russia is one of the developing countries where government did not care to set an hourly rate. Instead, it set the minimum wage per month at 4,330 rubles ($143). PPP $290. Artificially low wage level is one of the reasons why Russians are dyeing out at war times rate. If it is theoretically possible to survive on $550, then it is absolutely impossible to live on $143 in Russia even if you eat only bread ($1).
e) Trade and economic policies;
Fantastic «innovative» speeches of Russian rulers may sound attractive only to naive readers of the Wall Street Journal when they read exciting, though prepaid by Kremlin, articles about bright innovative and progressive Russian future. Putin and Medvedev still invest a lot of money in image of Russia abroad. Reality is quite different though. Russian rulers long ago made their choice toward export of natural resources and found country's national competitive advantage in it. Oil and gas revenues play central role in Russia's economic development. While the dramatic slump in global energy prices has severely impacted the Russian economy, the world's second-largest oil exporter, under the draft law budget revenue in 2010 will total $232.1 billion, 16.1 percent of GDP. According to the draft budget, oil and gas revenue is to grow 14.2 percent to $106.6 billion, while non-oil and gas revenue is projected to decline 4.1 percent to $125.4 billion. While exporting mainly commodities, Russia imports basically everything else: vehicles, machinery and equipment, plastics, medicines, iron and steel, consumer goods, meat, fruits and nuts, semi finished metal products. Its main import partners are China 12.9%, Germany 12.6%, Japan 6.9%, Ukraine 6%, US 5.1%, Italy 4.1%. Russia's overall trade surplus in 2009 was approximately $100 billion—compared with $180 billion in 2008 and $129 billion in 2007—a reflection of the slower growth in exports and severe contraction of imports.
f) Government's intervention in trade;
Monetary policy. The Central Bank of Russia (CBR) monetary policy tended to be limited to managing the ruble's exchange rate against a bi-currency basket of dollars and euros. The CBR intervened to keep the ruble stable during times of volatile international commodity prices and to manage inflation. In years of record high oil prices, the Central Bank typically purchased dollars to prevent real appreciation of the ruble. These interventions initially had limited effect on inflation, as they were mostly sterilized by budget surpluses and demand for rubles grew in a robust era of economic growth. By 2007, fiscal policy and the balance of payments were the actual drivers of monetary policy, particularly as large capital inflows due to increased borrowing by Russian banks and corporations caused the money supply to swell and added to inflationary pressures. Inflationary pressures eased in late 2008 as energy and commodity prices collapsed and international credit flows virtually stopped, causing money supply growth to halt. Russian Central Bank actively devaluates ruble in order to keep positive balance of payments ($19,949 billion by 2010)
Another good reason to intervene in trade is completely ignored by Kremlin — to resist foreign influence and to protect national identity. As Russia was formed as a nation of state slaves, people mainly do not care about artificially imposed Russian identity. In fact, in Russia, any cultural Russian autonomy is prohibited and native Russians are denied the right to develop their ancient culture. The Supreme Court of Russian Federation explains this by the «fact» that Russians are the majority and they can not have their autonomy. However, Russians are not mentioned in the Constitution at all. While all minorities have their own republics, Russians officially do not exist. And if they do not exist, they cannot have any benefits from government. Not mentioning that authentic Russian pagan (Vedic) religion is not recognized by the state, although the number of the followers is growing and is not much less than the number of official state Christian Orthodox members. Moreover, pagans are fiercely prosecuted by FSB, as the state sees them as direct threat to its totalitarianism supported by «Russian» Orthodox Church of Greek origin. This fact contributes to separatism in many Russian regions as Russian population shrinks at about 2 million people per year rate.
g) Trade promotion techniques.
Government produces cash payments, low interest loans, tax breaks, product price supports and so on. There are many concerns about the benefits of subsidies. They always originate corruption. Before making a decision whether to support any company or industry, government should take care of corruption. As Russian regime cares about himself only, all good reasons for intervention in trade Protecting jobs, preserve national security) do not apply to it. Preservation of national security for Kremlin means preserving only those industries that still have competitive advantage and huge share of stock belonging to inner circle of Kremlin. There is a list of enterprises owned by government members or its affiliated people that specifies those banks and companies of friends-owners who usually get subsidies in times of crisis. If in the US there were only few of such strategically important companies (Freddie Mac, Goldman Sachs), in Russian government nobody even conceals their ownership of strategic enterprises.
Due to its vast territory, Russia determined priorities in its trade with other countries — export of raw materials (oil and gas) and started heavily investing in pipelines and related to it infrastructure. It became obvious that only bordering territories could be potentially attractive to investors. Territories close to China experienced domestic investment boom. To carry out forest, coal, nickel, aluminum and many other natural resources, a net of roads is being built over there. China applauded to it and invested hundreds of billion dollars in the construction of East Siberia Pacific Ocean pipe line. It already paid out by cheap high quality oil of Eastern Siberia.
Another huge investment was made in the border town Sochi, which became a city of 2014 Olympic games. It is a personal Putin's project. However, political decision was not supported by mother-nature this time. Although construction is on the go and tens of billions of dollars have been spent, proper geological researches were not carried out and construction is under threat of constant geological hazards. Russian scientist and chief expert on ecology and geology in the region Dr. Sergey Volkov was persecuted and had to flee Russia.
h) Trade restriction techniques
As main Russian companies are controlled by oligarchs closely related to Vladimir Putin, government protects them with quotas and tariffs. Another reason for restrictions is that developing nations have difficulties to keep records of their sales and other taxes. Trying to save dead and outdated companies that they own, self-appointed Russian government members simply raise revenue through import and export tariffs Recently, in Russia import tariffs for autos in Far East region sparked separatism movement over there. Demonstrations are being brutally quelled by moscovites.
According to the 2010 U.S. Trade Representative's National Trade Estimate, Russia continues to maintain a number of barriers with respect to imports, including tariffs and tariff-rate quotas; discriminatory and prohibitive charges and fees; and discriminatory licensing, registration, and certification regimes. Discussions continue within the context of Russia's WTO accession to eliminate these measures or modify them to be consistent with internationally accepted trade policy practices. Non-tariff barriers are frequently used to restrict foreign access to the market and are also a significant topic in Russia's WTO negotiations. In addition, large losses to U.S. audiovisual and other companies in Russia owing to poor enforcement of intellectual property rights in Russia are an ongoing irritant in U.S.-Russia trade relations. Russia continues to work to bring its technical regulations, including those related to product and food safety, into conformity with international standards.
IV. Engines for Economic Growth
a) Private-owned versus public-owned businesses;
Today's Russia is neither capitalist nor socialist. It is rather mixed. It may be called socialist in a way that it controls all money flows, organizations and businesses through politically influenced KGB (FSB) affiliates. Moreover, state tends to increase its share. Recently state demanded its share in the biggest OAO GMK Norilsk Nikel company — worlds biggest nickel producer. Neither one of two oligarchs Oleg Deripaska's United Co. Rusal and Vladimir Potanin's Interros Holding Co., each owning 25 percent of Norilsk, wants to sell his shares. They vow to fight each other till death. The chairman of the company is Alexander Voloshin, former chief of Presidential administration, who left Kremlin in 2003. The government is an indirect stakeholder because Rusal's shares are pledged as collateral for a $4.5 billion loan from state bank VEB. Meanwhile the shares went down 11 percent during three days. The Kremlin has indicated it might want a state company to take a large stake in OAO Norilsk Nickel, as a battle for control between the metals giant's two oligarch shareholders heats up.
Generally speaking, officially all major companies are private-owned, but in reality, state has a huge share in their stocks.
International organization DoingBusiness.org (by World Bank) provides objective measures of business regulations and their enforcement across 183 economies and selected cities at the sub national and regional level. Russia's conditions are very poor.
Doing Business 2010, Russian Federation.
The International Bank for Reconstruction and Development/ The World Bank
b) Government attitude towards small business;
Government is afraid of independent business and suffocates as much as it can. All possible programs to help small business initiated by government went futile because of lawless business environment where every FSB officer is a shareholder of something.
c) Public attitude toward business ownership;
Russia's official ideology is artificially imposed on the individualist culture or a mix of cultures (Russia was formed mainly by forceful unity), people tend to avoid collectivism in any form. Their form of protest brings up immense corruption and bureaucracy together with total disregard of collective values. When people want to have individual property and individual life and security, but they cannot afford it because of tremendous pressure on business (small and big) from government and its repressive machine, they simply start taking their own share by becoming a part of this machine that lets them become rich unofficially through the systematic raids, stealing, killing and bribes. As a result, in Russia we can see complete disregard to collective values when individualism has gone to its extreme level. Human Development Index has gone to its minimum level ever. Municipal authorities close schools and kinder care centers, development centers for youth, nursing homes, hospitals. There is no money to provide subsidies for elders because money does not reach them. Mortality rate is one of the highest in the world. In every government initiative an administrative official sees an opportunity to steal some money and get rich at the expense of those who have no access to governmental power.
d) Research small business issues
1) Factors contributing to success.
Hopefully, Russia's World Trade Organization (WTO) accession process is going to help bring the country's legal and regulatory regime in line with internationally accepted practices. Another factor that is going to help is extremely individualistic culture of Russians. But individualism does not guarantee prosperity if artificially set government is preoccupied with its political ambitions to save unity of the country at all costs and to restore influence on post-Soviet territories. There are no other factors that may contribute to small business success.
2) Sources of finance.
The banks in Russia will not be glad to meet you. The functions of banks are usually limited to currency exchange and process of getting subsidized loans through mafia associated Kremlin bankers. Businessmen have to rely on their own means of financing unless they are risky enough to try to play Russian roulette with Russian businessmen. Special services of the developed countries have long been investigating all activities connected to Russian business.
3) Sources of advice.
Chambers of commerce are the most common way to get advice on business environment, law and tax regulations. However, once you appeared in a Chamber, you may be sure that local FSB will start sniffing around to check how much money you have and what regulations you may violate. They may even help you in the beginning but later on behold! It's recommended to have a personal friendly adviser who may guide you through tough sea of Russian business. Another option, however, is direct talk with Russian local state officials. Information from Russian statistic agencies should not be taken for granted.
4) Problems faced by small businesses.
Russia has a body of conflicting, overlapping and rapidly changing laws, decrees and regulations, which has resulted in an ad hoc and unpredictable approach to doing business. In this environment, negotiations and contracts from commercial transactions are complex and protracted. Uneven implementation of laws creates further complications. Regional and local courts are often subject to political pressure, and corruption is widespread.
a) State of Economic Development (using Rostow model).
Today's Russia can be placed in stage 2 -Transition, according to Rostow's Model — the Stages of Economic development. Some experts note that Russia slipped back from high mass consumption (or almost) to a country in transition. Soviet economy developed long time in itself and passed all stages in a «closed space». Stage three, characterized by growing investment, industrialization and regional growth, was imposed by central government. Stage 4 with its less reliance on imports and diversification was also centrally planned. USSR was selling military equipment, oil and gas to many countries of socialist bloc. After perestroika people simply started using all the things that were not previously available for them, and that stage can be called High Mass Consumption Stage number 5. However, manufacturing goods produced in the USSR, became obsolete very quickly. Another factor contributing to slip back to stage 2 was absence of national bourgeoisie. Tsarist Russia was mainly agrarian country and tsarist regime relied on nobility, or simply put feudal lords. The pillar of the Russian Empire — totalitarian «Russian» Orthodox Church quelled reformation movement in the 17th century and prolonged the life of feudalism in Russia. German communist were very skeptical about possibility of Russian revolution in the country where there were no industrialization and proletarians. However, Bolsheviks and their successors raped the normal flow of history and by force, with millions of victims, passed three stages of Rostow's model during 80 years. But without national bourgeoisie and private property all achievements were in vain. Now Russia is back to stage 2 with specialization in commodities exports and high risk of unforeseen political change. It will continue its stay on stage 2 until it recognizes the fundamental human values of Reformation and condemns totalitarian Orthodox Church approach to human life.
b) A potential product or service to introduce to this country. Recommended entry mode.
Russia suffered from severe drought and fires this summer. Drought and fires destroyed about 1/3 of all crops. Unprepared farmers, regulated heavily by government, with poor infrastructure and zero financing were not ready as usually. In Russia even winter comes all of a sudden. This will affect Russian livestock badly. Considering the fact that Russian government still has money in stabilization fund and that 70% of all food consumed by Russian cities is imported, it makes sense to weigh the possibility of food exports to Russia. South America has become a major supplier of beef to Russia, and with the EU giving up most of its quota; opportunities are now opening for competitors like the United States. A bilateral trade agreement signed Nov. 19, 2006 between the United States and Russia provides access for both boneless and bone-in beef from animals 30 months of age or less and leads to broader access to U.S. Beef. U.S. Meat Export Federation is investigating the changes to develop an effective re-entry plan for the U.S. beef industry.
Recommended entry mode will be exporting and counter trade. In times of trouble local governments will be looking for any ways to feed people. Different regions have different sources of financing the imports of food. Of course, border regions are less risky to deal with because of less transportation problems. Proven distributing channels that have developed relations with bureaucratic government agencies are preferred. However, rapidly changing environment may suggest new ways of delivery of food to Russia. Anyways, direct consultations with regional governments would be necessary.
c) Summary comments.
Long-term challenges include a shrinking workforce, a high level of corruption, and poor infrastructure in need of large capital investment. Tax enforcement of disputes continues to be uneven and unpredictable. In June 28, 2010, IMF experts wrote in their report «Russian Federation-Concluding Statement for the 2010 Article IV Consultation»: Russia's labor force is shrinking and demographic trends are not favorable. Moreover, the unfavorable investment climate-confirmed by Russia's low ranking on international comparisons in this area-suggests that investment is likely to remain far more subdued than in the pre-crisis years, when high commodity prices powered strong investment growth. Finally, the scope for further catch-up gains in productivity will inevitably decline over time. As a result, post-crisis potential output growth is likely to be lower than pre-crisis levels. This points to the need for rapid and decisive action to advance structural reforms, with a focus on improving the investment climate and boosting the potential for productivity gains. As we can see, IMF actually played requiem to Russia. Theoretically speaking, Russia's economy could be saved by injection of its financial funds in its economic sector and industry infrastructure. This might be true if the system of central ruling built by Mr. Putin worked. But reality is that whatever money is invested in Russian largely state-affiliated economy, they will be stolen by state officers and bureaucrats, what actually is happening today. Unfortunately by some reason IMF can not recommend to change the political system of Russian Federation. The reason is that it probably understands that any change in vertical structure would bring imminent collapse of Russian state and this time it will be final collapse without a possibility of revival. IMF cannot afford such a risk. So all that is left in its advice arsenal is recommendations of cosmetic changes that may only prolong the decay of Russian nonviable monster, being torn apart by its demanding regions.
There is no way to reform this monster-country. Any reform will lead to a bigger disaster. Many experts say that only demolition of Russia may save its people from oblivion, despite of what its President tries to do. Although we can say that Russia lacks political stability and stable investment climate, today's Russia has no future as its soviet infrastructure is worn out, regions start demanding independence and the war in the Caucasus does not cease but actually spreads out. Blasts and killings are everyday routine. Militia's abuse of power is occurring everywhere. The country is divided into the areas of influence of lawless FSB officers. The latest examples of the foreign companies' disasters in Russia are the flee of IKEA and the killing of Mr. Magnitsky in jail who was an attorney, representing American Investment advisory firm Hermitage Capital Management. He happened to go behind the bars on fraudulent charges of tax evasion and tax fraud. His death in police custody generated international media attention and launched an investigation into allegations of abuse. So while some nations still need light improvements after transition, others continue free falling into the oblivion rejecting any civilized advises.
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