Favorable business environment as the key factor of economic growth in Russia

An newly expected growth rate in the Russian economy is very close to the forecast value which was published in the World Bank’s review on Russia in April 2014. The World Bank claimed in April that Russia’s GDP would gain 1.1% in 2014 if the crisis in Ukraine lasts for a short time and has a limited effect.

It has recently appeared that the crisis in the east of Ukraine might become less severe and, as a result, the risk of further sanctions against Russia might be less likely to occur. This fact makes the World Bank’s April scenario a more likely economic outcome for the Russian economy in 2014.

However, one cannot be too careful: since the crisis in Ukraine hasn’t become history yet, neither new escalation in the east of Ukraine, nor, therefore, further sanctions cannot be ruled out.

The Ministry of Economic Development’s statement that “the economy is accelerating” seems to be based on an upgraded forecast for economic growth rates and ignores the fundamental problems faced by the Russian economy which rather is moving slowly, sometimes almost coming to a standstill, sometimes pulling off again. Russia’s slow economic growth rates will remain as such until reforms are made and the effects of the geopolitical crisis eliminated, which was also pointed out in the World Bank’s report in April 2014.

Investment in infrastructure or human capital, which was mentioned as key measures of the economic policy intended to accelerate growth rates, are surely essential: enhancing the quality of motor roads and improving skills of workers can help, all things being equal, boost the output, thereby increasing returns on the investment made.
 

However, it is the entrepreneur who plays the key role in the economic development. And a decision to invest in the economy depends on his confidence in that upon the discharge of all obligations – payment of wages, repayment of loans, payment of taxes, etc. – the entrepreneur will make less money than he would otherwise use his capital. Wh ere the entrepreneur, for some reasons (for example, because of poor ownership protection), has no such confidence, he is unlikely to be willing to launch such projects.

While the environment for doing business, including the development of modern technological industries, still leaves much to be desired in this country, public investment in infrastructure and education may help accelerate growth in the railroad network or increase the population of educated Russians. However, graduates from good programs need jobs which suit their professional qualification. How such jobs can be created if modern technological industries are developed too slow ? Whether the imbalance between the supply of and demand for qualified labor may boost human capital outflow from Russia?

In any case, infrastructure investment alone, which has recently been mentioned frequently as a tool designed to prevent stagnation, is definitely insufficient to ensure steady economic growth rates.

Inan Lyubimov, PhD, Senior Researcher