Natural resources can be a blessing, but also a curse
Countries with income from natural resources, such as oil, gas, gold, diamonds etc, usually have worse development outcomes, lower economic growth and less democracy than similar countries. ...
Elections in Russia are neither free nor fair. Electoral system is designed so as to favor the ruling party United Russia and president of the country Vladimir Putin. Russia has a long history of fraudulent elections which abound with crackdown on opposition politicians, their imprisonment, abuse of power to prevent opposition candidates from participating at elections, abuse of state resources, lack of distinction between governmental and party activities, restricted access to media, or election-day violations such are ballot stuffing. International observers are prevented from full assessment missions, while work of domestic observers is hampered with harassment and pressure from state institutions. Although law allows for registration of political parties, this process is rather under
strict control by the state. Alexei Navalny, main opposition leader who was prevented from participating in the March 2018 Russia presidential elections on the basis of corruption charges, also tried to officially register his political party for the fifth time but once again his request was rejected. These moves were perceived and widely criticized as politically motivated. Such environment makes it almost impossible to seriously challenge the ruling political elite. Recent local and regional elections saw some increase of the seats in the parliaments for opposition politicians. However, they also often face harassment, violence and imprisonment. All the independent candidates who had tried to participate in Moscow City Council elections were arrested on several occasions as an administrative punishment for taking part in protests, with intention to prevent them to anyhow influence the process.
There are no unconstitutional veto players who are able to undermine political decision-making processes in Russian presidential system except those who are elected to the office. President Vladimir Putin, with the closed circle of his allies, holds complete control over politics in Russia, keeping it subordinate to their personal economic and political gain. With tight control over all three branches of power, there are no institutions able to hold them accountable for their actions, thus the proclaimed “vertical of power” is the most important factor undermining democracy. Through this vertical control of the system they are able to sustain various interests of other influential players, such as oligarchs, clergy or the security apparatus. However, they are all rather actors who are
seeking benefits in line with president and current regime than those who could independently interfere into Kremlin’s decisions. Russian Orthodox Church vails significant influence over public opinion in the country, but it also reflects governmental position on the most important topics – ensuring this close tie between them serves for the mutual interest. Corruption is pervasive among high ranking state officials.
Media environment is highly restricted in Russia. There is a wide range of broadcast, print and online media outlets which are placed under extensive legal and extralegal pressure so as to prevent critical reporting on the government activities. Public broadcasters are directly controlled by the state, while reporting of the private media sector is shaped through close ties of the business and political elites in the country. Laws are set to prevent foreign ownership over media outlets, thus additionally limiting possibility for objective reporting. Independent media are very rare, but those which exist are placed online or hosted from abroad. The parliament had adopted a law at the end of 2017, allowing authorities to label media outlets as “foreign agents”, which was used to put
pressure on those critical of Kremlin. Also, aiming at preventing critical reporting of widespread switching to online channels, government put a notable effort to censor internet, by passing amendments which allowed authorities to filter and block the online content. Through partisan reporting by state-owned media outlets, which are favoring the regime, citizens are generally provided with a controlled and one-sided point of view. Journalists work in an environment of fear, maintained by physical and verbal violence, imprisonment, censorship, economic and political pressure. One investigative journalist has died in 2018 under suspicious circumstances. Having in mind everything previously said, self-censorship is common practice among Russian journalists. Country is ranked on 149th place on the Reporters Without Borders 2019 World Press Freedom Index.
Huge problems in most areas of rule of law stem from the ruling ideological, political and even religious concept according to which the very idea of rule of law is “alien” to Russian tradition, national identity and desired way of life. A blend of Soviet and pre-Soviet authoritarian, negative attitudes towards the principle of division of powers has prevented independence of judiciary of taking any firm roots in the post-USSR Russia. While the Constitution guarantees its autonomy, judiciary in Russia is in reality dependent on the interests of political, economic and sometimes criminal elite. Thereby, corruption also plays a considerable role. Right to fair trial is far from secured. Detention in criminal cases might be too long while decision making in administrative ones
is often swift and based solely on police reports. Torture in custody is widespread. Majority of such complaints are filed in the capital Moscow (as NGOs claim, mainly due to higher awareness of the public), while human rights monitors label Chechnya as the worst place regarding torture. In the occupied and annexed Crimea region, the transition from Ukrainian to Russian legal system has been marred by numerous illegalities and injustices.
In Russia, corruption has not been in retreat during the last decade, while in 2018 it even worsened as compared to previous few years. The country has fallen to places 138-143 among 180 countries of the world, with the score 28/100. Of the countries monitored by Freedom Barometer, only Azerbaijan and Tajikistan were worse. Both grand, which is sucking out considerable parts of national wealth, and petty, corruption is so widespread and persistent that it changes the very fabric of society, dividing it to several hundred new „barons“ who enjoy enormous wealth mainly due to their connections to the political top of the country and their control over the extraction industries, and a silenced majority which lacks opportunities to develop all its creative and economic potential.
Its deep causes rest in a reversal of the post-communist transition process, lack of democratic culture and political freedom, and subsequent state re-capture by the transformed yet unseated political, economic, military and intelligence oligarchy from Soviet times. Various attempts to limit it were mainly used for internal struggle among various factions of the oligarchy. Recently adopted regulation even eased the pressure of the anti-corruption bodies on corrupt public officials, especially as regards conflicts of interest.
Respect of human rights is at a very low level, among the worst in Europe. In the way it mistreats political opposition, CSO-based critics, or undesirable worldviews or ways of life, Russia is perceived by many as a role model for illiberal, anti-individualistic, authoritarian regimes or political movements across and beyond Europe. Freedom of thought and expression is limited to a small number of online portals that are not banned or censored. Even though education and access to it is still a brighter side of the state of human rights in Russia, there are limits, such as in academia, where research or approach which contradicts the government-imposed norms of patriotism or morality can be subject to censorship and/or prosecution, especially in history science. Freedom of
association is especially curtailed by no less than 11 laws that directly - and additional 35 that indirectly - limit various aspects of NGOs` work (financing, advocacy, public gathering, publishing, etc.). Social networks are controlled, and banned if they avoided control. Or they are manipulated by the government-sponsored “fake news factories” (acting both nationally and internationally). In spite of that, civil society in Russia proved as stubborn and remained an important societal factor. Public gathering is restricted. The Russian Orthodox Church (along with - to a degree - also other “traditional” religious communities) enjoys privileges, whereby the secular character of the state is endangered. Small or new cults, such as Jehova`s Witnesses, are subject to bans and/or prosecution for an imagined (or in some cases real) extremism. Too little is done to fight domestic violence against women and children. Women are under-represented in the legislative and executive branches of government. Public display of belonging to sexual minorities is de facto outlawed in Russia. In Chechnya, an autonomous republic within the Russian Federation, provincial authorities in 2018 continued their 2017`s campaign against the entire LGBT community, by summary arresting, torturing, blacklisting or even killing them, as well as intimidating and collectively punishing their families. In December 2018, OSCE published a report on those violations of human rights and opened the possibility of filing it to the International Criminal Court.
Private property in the Russian Federation is not well secured. While improper government influence and corruption in the judiciary are perceived as high, the bigger problem lies in the significant sway over the judiciary that strong vested interest groups and their political allies can have. Judiciary is systematically biased in favour of state entities, be it state administration or SOEs when their interests coincide with those of private companies. Court decisions in similar cases can substantially differ, giving advantage to the party with political connections, which leads to unpredictability of verdicts. There are strong indications that authorities often transform civil cases into criminal cases, in order to substantially increase potential penalties. Unfounded lawsuits
or arbitrary enforcement of dubious court verdicts are still present. Private property could be seized by the state, and compensation offered is often perceived below the real value; there is also a history of informal means to expropriate companies, such as through regulatory influence or intimidation. On the other hand legal enforcement of contracts seems efficient, incurring low costs as compared to the value of the claim, and it is settled within a calendar year. There are specialized commercial courts, but they are often overburdened with small and simple cases, since there are no fast track procedures for small claims cases. Adjournment procedures are not put in place, and courts do not use automated processes. Insolvency processes are long, lasting two years on average, and are mostly terminated via piecemeal sale, contributing to a relatively low recovery rate of slightly above 40% of the claim. The July 2017 amendments to these rules expanded the list of persons who might be held liable for debts of the bankrupt company. Registering property is not lengthy, involving few procedures and incurring low costs, but land coverage by clear land titles outside the major cities is not guaranteed. Ownership of agricultural land is reserved for local nationals, but foreign entities (natural persons and legal entities with more than 50% of foreign ownership) can lease land for the duration of up to 49 years; non-agriculture land ownership is also restricted in border or other sensitive areas. Government approval through Strategic Investment Commission is necessary for obtaining a majority stake in companies in 46 specific areas and industries that are considered as having strategic importance; while July 2017 amendments to the law restricted access of companies registered in off shore jurisdictions, in May 2018 this was made more investor friendly by restricting access only to companies who do not disclose information on their controlling persons and beneficiaries.
Public expenditures in Russia are moderate in international comparison, reaching 33% of GDP in 2018, creating a high budget surplus of 3%. After the prolonged recession due to the fall in oil prices, the Russian economy started to expand again in 2017. Recent growth was supported by rise in exports and domestic consumption yet remains low and fragile. The rise of inflation was mostly due to one-off effects such as the ruble depreciation and the rise in the VAT rate, whereas it is expected that these inflationary effects would calm down. Due to the weak institutional environment, overbearing government regulation and deficiencies in the rule of law, as well as low oil prices, the economic growth will remain below other countries of Eastern Europe. Public debt remains very low,
below 15% of GDP in 2018, providing substantial fiscal space if necessary, but the government decided rather to implement tax hikes and pension reform in order to finance its infrastructure development plan than to borrow resources. Numerous state-owned enterprises (SOE) dominate the economy, including more than 64 000 joint stock companies and 21 000 unitary companies in 2018. SOEs are active in many industries, not just in those that are regarded as being natural monopolies or being of strategic importance, such as public utilities, mining, energy or production of military equipment, but also those in agriculture and financial services. According to some estimates, the government sector generates 60 – 70% of GDP, significantly higher than in other transition economies. Numerous SOEs enjoy large direct subsidies such as cash payments, or indirect ones such as tax waivers, accumulation of arrears, preferential treatment in procurement processes etc., which poses a significant drain on the federal budget. Also, more than half of the banking sector is in the hands of the state-owned banks. Although there has been an ambitious 2017-2019 privatization plan by the government, which included full or partial privatization in some of the biggest state companies, none of these were sold, citing unfavourable market conditions as the reason. In February 2018, Russia combined its previous two independent wealth sovereign funds, the Reserve Fund and the National Wealth Fund, into a single entity. Taxation system uses flat rates, with minor progressive methods in determining the level of social contributions: personal income flat tax is set at 13%, while corporate tax varies from 15.5% to 20% due to regional tax deductions. The VAT was recently increased from 18% to 20%, in order to provide additional resources for the budget. Due to the existing deductions, the total labour tax wedge is slightly regressive, with above-average earners paying a bit less than those on the average wage, but the total wedge is in line with average of the OECD countries.
Business environment in Russia is not overly business friendly. Administrative burden stemming from numerous government procedures is high, and government bureaucracy often lacks professionalism, knowledge or resources to deal with its domain seriously. The perceived level of corruption is high, fueled by often vague or contradictory regulation. In 2018, Russia implemented several reforms that increased its score in World Bank’s Doing Business ranking, mostly by making the process of obtaining a building permit faster by reducing the time needed to obtain construction and occupancy permits. Getting electricity was made faster by imposing new deadlines for connection procedures and by upgrading the utility’s single window, and cheaper by reducing the costs to obtain a
connection to the electric network. Also, the process of starting a new business is both easy and inexpensive, without minimum paid-in capital requirement; since January 2019, however, the registration fee is waived for online registration procedures. The number of annual tax payments is low and most procedures are online, but the tax rules are still considered overly complicated. The 1C software for tax and payroll preparation was improved, and the review period of tax authorities for VAT refunds were recently reduced. On the other hand, foreign electronic service providers were included in VAT obligation procedures, such as VAT registration with the tax authorities and VAT reporting. Labour regulation is mostly flexible. Although fixed term contracts are prohibited for permanent tasks, their duration is limited to a long period of 60 months, and working hours face little restrictions. On the other hand, there are redundancy rules but severance pay and notice periods are not stringent and do not increase with yeas in tenure. Collective bargaining is not well organized and is mostly concentrated within the public sector. After the federal minimum wage was substantially increased in May 2018, it was now increased only slightly in January 2019; but there are regional differences in the minimum wage since government territorial units can have special minimum wage regulations. A significant burden is the mandatory 12 months` military service.
Free trade in Russia is mostly respected, but many obstacles to international trade remain present, including political use of trade embargo that has been a characteristic of the Russian trade policy, previously applied against Georgia, Moldova and Belarus, while currently being applied against Ukraine and the EU. Russia is a recent newcomer to the World Trade Organization (WTO), becoming a member in 2012. The tariffs are moderate, with the average MFN applied tariff rate of 6.8% but tariffs on agriculture products can be much higher. Technical barriers to trade (TBT) were not fully disclosed to the WTO, and thus mostly remain non-transparent and a burden to trade; product testing and certification is a prerequisite for putting to commercial use of many products but
obtaining product approvals is often difficult due to complicated, expensive and lengthy domestic procedures, while the role of certification bodies outside of Russia is limited. Establishment of the Eurasian Economic Union (EEU) in 2015, that aligned several CIS countries around Russia did not significantly boost trade between member countries, due to lack of complementarity of economies included and low inclusion of these countries into the global value chain system. Sanitary and phytosanitary standards between countries are not yet fully aligned, creating barriers to trade in agriculture goods. A free trade deal between the EAEU and Iran has been signed, and in effect since recently, while negotiations with India are conducted through a joint study group. Two thirds of Russian exports are fuels and minerals. Bad quality of transport infrastructure outside big cities and major transport routes poses a significant burden on the transport of goods. Since 2015, the Russian government has run an import substitution program, with incentives for foreign investors through the Special Investment Contract mechanism (SPIC), with offered tax breaks and preferential treatment in government contracts. In August 2019, the SPIC was significantly amended in order to make it available to projects that introduced new technology to Russia. Recent labour regulations significantly restricted prospects for foreign migrant workers - inclusion of mandatory language and culture test, and, most importantly, very high license fees, have proved as a significant barrier to labour coming from countries outside the EAEU area. There are some important localization rules: for example, in banking, at least half of the management should be Russian nationals, as well as three quarters of workers in a foreign bank`s subsidiary. Local content requirements for industries involved in government procurement is even more pronounced, such as pharmaceuticals; this is enabled by Russia not being a signatory of the Government Procurement Agreement of the WTO. Currency controls are considered overly stringent, since they are applied not only to imports, but also to exports and certain loans. Since March 2018, the central bank does not require anymore the transaction passport for concluding import and export contracts, and the total number of documents necessary for a bank authorization was reduced. In 2016, the rules on cash currency exchange were tightened, since above 15 000 rubles the customer had to provide a series of personal information. This threshold was increased to above 40 000 rubles. Russia made trading across borders easier in 2018 by prioritizing online customs clearance and introducing shortened time limits for its automated completion.