World Economic Forum report on boosting Russia’s competitiveness

Adrian Pabst is a lecturer in politics at the University of Kent, UK, and a visiting professor at the Institut d’Etudes Politiques de Lille (Sciences Po).

As the annual St. Petersburg Economic Forum gets under way on Thursday June 16, discussions will almost certainly focus on Russia’s competitiveness. While the other BRIC countries of Brazil, India and China are seeing strong growth that is sustaining the global recovery, the Russian economy is currently characterized by a modest increase in national output and stagnating levels of productivity. What is urgently required is an overarching strategy by both government and the business community to boost Russia’s competitiveness and thus to translate its considerable – as yet unrealized – potential into greater prosperity.

Following the financial crisis of 2008 and the recession of 2009 when Russian GDP fell by 10 percent, growth has returned but at a disappointing pace of 4-5 percent per annum – despite soaring energy prices and rising corporate profits. Among emerging markets Russia seems to be in a league of its own, but for all the wrong reasons. It neither has the democratic credentials of Brazil nor the economic dynamism of China and India. This – coupled with demographic decline, high levels of corruption and limits to the rule of law – has diminished the confidence of both domestic and foreign investors. As a result, funds and technology are lacking. That is why Russia’s President Dmitry Medvedev, in his Magnitogorsk address to the Modernization Commission on March 30 2011, described the country’s general investment climate as “very bad”.

A recent report by the World Economic Forum provides the most comprehensive up-to-date assessment of Russia’s competitiveness. It concludes that without radical reform the country will further fall behind other emerging markets. The report suggests that the main obstacles are "underdeveloped institutions, stifled competition, declining quality of education, underdeveloped financial markets and low business sophistication." In different yet complementary ways, these factors undermine productivity on which competitiveness so clearly depends.

At the same time, there can be little doubt about Russia’s unique potential. Compared with other emerging economies, its key competitive advantage centers on "an educated labor force, large market size, and natural resources." To boost competitiveness, the report’s recommendations include sensible steps such as:

1. Strengthening institutions;
2. Improving education at all levels;
3. Promoting competition and entrepreneurship; 
4. Reinforcing financial markets and access to finance; and
5. Expanding business sophistication.

The report also shows how technological innovation could become a key driver of growth, provided that "a comprehensive national framework [is] put in place." In addition to maintaining and improving human capital, such a framework would have to combine higher public expenditure on R&D with support for innovative small- and medium-sized enterprise (SME).

To achieve these aims, the Russian President and the government have set out two closely connected policy priorities: first, implementing an ambitious privatization program and, second, transforming Moscow into a global financial center.

Last October, the authorities approved a five-year plan to privatize a wide range of state-owned assets from banking to energy and agriculture to transportation, including stakes in the banking conglomerate Sberbank. The goal is not simply to replenish state coffers at a time when Russia is running its first budget deficit in ten years but above all to improve efficiency and thus competitiveness. As Alexander Uvarov, head of the property relations department of the Russian Ministry of Economic Development, recently stated, “Privatization will have a good effect on the companies, which will become transparent and understandable to international investors, as they will be brought to the same high standards as in the West. We want our companies to meet this standard.”

Further evidence that strengthening competitiveness is the top priority is the sale of stakes in companies from so-called strategic sectors that were previously out of bounds for foreign investors, including the oil company Rosneft and the major international shipping corporation Sovkomflot. To underscore the Kremlin’s determination to improve efficiency, President Medvedev recently decided to have government ministers removed from the boards of state-owned companies. This move is aimed at increasing transparency, accountability and other governance standards, which would be a further boost to competitiveness.

Here the Russian leadership could go further and promote the introduction of employee-ownership across the economy. By giving employees a stake in the enterprise and involving them in the management of companies, businesses can boost motivation, efficiency, innovation and productivity – precisely that which delivers higher competitiveness.

The second priority – turning Moscow into a global financial center – is right for Russia and for the world economy but carries enormous risk. As is well known, Russia needs to diversify and re-balance its economic structure away from an excessive dependence on energy and other commodities and towards high-tech production such as nanotechnology. This process of modernization requires both greater foreign direct investment and the transfer of technological know-how. A global financial center is a necessary condition to bring that about.

At the same time, Russia needs to avoid the mistakes of other countries that have banked on finance to modernize their economies, such as the UK or some Gulf states. All too often, financial centers have benefited banking conglomerates and other financial corporations at the expense of the ‘real economy’ composed primarily of SMEs. The risks are, first of all, increased volatility and greater systemic risk; secondly, sucking in domestic savings; thirdly, diverting funds from local, regional and national projects to global financial instruments.

For these and other reasons, the establishment of a global financial center in Moscow should be accompanied by the creation of a national investment bank that can channel global capital into productive activities. Examples include environmentally sustainable agriculture (for domestic consumption but also exports to the emerging markets of China and India), high-tech manufacturing and industry and a host of service sectors that can help diversify Russia’s economy (including the arts, new media, film and TV).

Such a bank would complement the establishment of a Direct Investment Fund first announced by President Medvedev in April, a fund that will co-finance capital investment of foreign funds and companies in Russian projects. As the case of Skolkovo illustrates, individual initiatives will succeed only if they are part of an overarching economic and industrial policy strategy that the World Economic Forum report calls for.