Russia: Economic Growth Stalls

R andy Black sends this Canadian Press release (2/13/05) from Moscow by Fred Weir, "State intervention, slowing economy give Russian business the chills".  Here is the abridged text:
Mikhail Sagirov struggled to start up his business, a suburban Moscow health club, and thanks to five years of relative prosperity and order under President Vladimir Putin, he's finally got it going. If it weren't for the suffocating "hidden taxes" that have to be paid to local officials and police in the form of favours and bribes, he says, it might even be profitable one day. "Some want free memberships, others demand you provide a party for their friends. You can't refuse these guys," says Sagirov, a 30-year-old business school graduate.
"The mentality of every bureaucrat is to use his power to squeeze something out of an entrepreneur. There are way too many of them in this country and they all want to get something from you." Experts say predatory officials, from the Kremlin down to village health inspectors, could be the main cause of a surprise plunge in Russia's formerly booming economic growth rates.  Russia's official statistical centre, GosKomStat, announced this month that Russia's growth stalled in the second half of 2004.  The forecast for this year is around four per cent, which would be healthy in a developed economy but is barely half the rate of Putin's first year in power.
"There is no economic growth, despite extremely favourable external conditions" including the high price of oil, Russia's main export, says Anton Struchenevsky, an economist with Troika Dialogue, a leading Moscow investment firm. "The economy is stagnating. That is disastrous for all (the Kremlin's) plans for modernization and reform." Over the past year the economic mood has been chilled by increasingly harsh Kremlin interventions, such as the effective re-nationalization of the oil giant Yukos, reports that Russia's secret police are spying on private business, and an official reassessment of the way major companies acquired their property - due to be released in March. "There has not been such a difficult situation for 15 years," Anatoly Chubais, architect of 1990's privatizations, said recently. "When entrepreneurs don't know what will happen, they will base their views on a pessimistic scenario."
The downturn is bad news for Putin, who came to power five years ago pledging to revitalize Russia's flagging economy through rapid reforms and market-driven modernization. But the tough, centralized and increasingly authoritarian regime Putin brought in could be leading to opposite results. Yukos, once Russia's most profitable company, has been hounded to the verge of bankruptcy by a barrage of back-tax bills that now total $29 billion US. The company's founder, Mikhail Khodorkovsky, has been imprisoned for more than a year on charges related to illegal privatization and tax evasion. Many experts believe he was singled out for prosecution on political grounds.

RH: Does Cameron Sawyer have any comment? Has he met Fred Weir?

Tim Ashby writes: I shared Randy Black's posting, "State intervention, slowing economy give Russian business the chills," with my research assistant Yulya Felender, a Russian law student here who plains to practice commercial law in Russia after receiving her JD next year.   Her comments follow:  The Canadian press release is very interesting, although it misses some of the important points in its analysis of what drives the Russian economy down.  Without a doubt, the widespread corruption is one factor. The other factor, which actually breeds corruption, is that no one really pays taxes in Russia.  Every single business there has what is called "white" and "black" accounting books.  If it attempts to pay all the applicable taxes on all of its profits, not only it does not stand a chance to ever be profitable, it simply will not survive more than a few months.  Hence the corrupt tax police that leaves alone those companies who pay bribes to have "clean" auditing reports.  Hence the corrupt administration and prosecutors that the tax police share bribes with to be allowed to take the bribes, etc, etc, etc.  That's why instead of declaring 100% of profits, companies declare only 30%. That's why when a company hires a worker, it asks how much of her salary she prefers to be deposited into her checking account and how much she prefers to receive in cash in a closed envelope.  It is everywhere. I guess that's why Putin started his crackdown on corruption with a crackdown on tax evading companies.  Ironically, though, Yukos was the only Russian company with transparent, "all white" accounting."

Randy Black writes: I would hazard a guess that Cameron Sawyer in Moscow will take exception to much of what law student Yulya Felender claims (no one really pays taxes in Russia) regarding tax fraud and financial transparency in Russia. The statement that Yukos was the only Russian company with transparent, "all white" accounting” is factually untrue to the point of absurdity. I can think of dozens of totally transparent Russian firms, including 13 Russian companies which are traded on the London Stock Exchange’s Main Market. In 2004, the Exchange’s member firms traded approximately US$ 64 billion of Russian securities, and all meet GAP accounting rules. Vimpel-Communications, a leading mobile telephone network operator in Russia trades on the New York Stock Exchange after passing extensive publicly transparent audits over several years.
Randy Black sent a Canadian Press release (2/13/05) from Moscow by Fred Weir, "State intervention, slowing economy give Russian business the chills".  From Moscow, Cameron Sawyer says: I have not met Fred Weir. It is really not true at all that the Russian economy has "stagnated".   After one quarter at an annual growth rate of "only" 4% (a rate which Germany has not seen in many years), growth is up again at its old level of 6% to 7%, the long term trend line for more than six years already.  The last forecast I've seen for this year's growth is 7.3%, a fairly blistering rate by any standards.  The Russian economy is, in fact, extremely strong, with enormous trade and budget surpluses, rising personal incomes, and rising industrial production.  The last of the big three rating agencies, Standard & Poors, has just raised the international rating of Russian bonds to investment grade.  The real driving force of the Russian economy is the Russian consumer, who is earning and spending tons of money, having bought 1.3 million new cars last year (a 30% increase on 2003), and enough new housing to have made Moscow the second biggest construction market in the world after Shanghai.
It is true that many businessmen are angry with the current administration for its heavy handed treatment of Yukos and of journalists.  It is possible that this disappointment has curbed growth a little.  As to "predatory officials", this exists to some extent with regards to certain kinds of cash businesses, but ought not to be exaggerated.  It has never affected my own business in the least.  I'll bet Sagirov is making a lot more money than he lets on.
As to Khodorkovsky, there is little doubt that he is guilty as can be of the charges against him.  On the other hand, so are the other so-called "oligarchs", so why did the Kremlin decide to pick on him?  Selective prosecution, indeed, but again, one ought not to exaggerate the effect on the Russian economy, which has been fairly slight so far.

Ronald Hilton 2005


last updated: April 16, 2005