Thursday, April 5, 2012

The continuing Russian problems and capital flight

Protests are not new to Russia, so as oil and oil money. But what will happen if the money coming from oil and gas route moving out of the country with much higher speed? Obviously less amount to investment, development, social welfare etc.

In the first quarter alone the capital outflow from Russian economy was $35.1bn (last year it was $19.8). According to the reports, in March the amount is $12.5bn; $9bn more than previous year!!!

The problem with oil economy is it will give huge amount of foreign currency in to the hands of a small number of companies and government. This may enable the government to tax the people less or no tax at all. Well, people can enjoy a tax holiday (this may not be the case in all countries) but at the mammoth cost of 'less influence' in government policies.

Another problem with oil economy is, it will reduce the attraction of other labour intensive businesses – like manufacturing, services etc (of course not a common rule). Just imagine how a small stretch of land in sea - Taiwan - is such a big name in manufacturing and services. How many brands, originated from oil economies, you remember?

Capital flight, shrinking population, widespread accusations of corruption, protests in streets, not so friendly business atmosphere, shrinking investments in defence production, heavy bureaucracy etc are the severe diseases Russian Federation currently facing. Polishing the economy here and there by pumping oil money in to it may not work for longer. Economy requires deep structural reforms for survival.

The question Putin faced on his first round of presidency was about stability of the country. What the state now requires is reforms.

New administration have to stop this huge capital outflows by providing a friendly business environment, stable and enforceable laws and contracts, proactive government policies etc for business. Otherwise Russian Federation may simply end up as a country valued by the amount of natural resources it holds instead of her values or institutions. The challenge is very high, tough and unpleasant but not the one that can be postponed. One positive thing is Russia will join WTO this summer; hope that this will transform the Russian economy for the better.


Photo courtesy: Wikipedia, later edited to suit this article.

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