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Doing Business In Russia Isn't About To Get Any Easier

Pumping it out in Moscow
Pumping it out in Moscow
Evgenii Sigal

MOSCOW – Earlier in June, during the last congress of the All-Russia People’s Front, a movement created by President Vladimir Putin in 2011, Putin announced that one of his primary goals was to create a new era of industrialization in Russia.

Russia's Minister of Economic Development Andrey Belousov announced in the same meeting that by the end of 2013, Russia could rise from 112th place to 50th place in the World Bank’s ranking of best country in the world to do business. Of course, his announcement was filled with qualifiers: it will be possible only if all of the planned measures meant to improve the investment environment are actually carried out.

During the 2012 presidential elections, Putin said that Russia would make the top 20. That’s pretty optimistic, considering that while Russia is 112th overall, it almost ranks last in some specific categories – for instance, in “getting electricity,” Russia ranks 184th out of 185 countries. In the “dealing with construction permits” category, Russia ranks 178th.

In addition, Putin has announced that the public should be at least 90% satisfied with the quality of government services by 2018. That sort of goal sounds more like a fairy-tale than fact, since not even a totalitarian control over the media and Internet could create that kind of public approval.

It seems that even the Kremlin doesn’t believe these words. In May, Putin criticized the government for adopting laws that were notoriously not enforced. Russia intends to rise to the 17th spot worldwide for importing and exporting, although it currently is in 162nd place in the World Bank’s ranking for “trading across borders.” Russian customs services say they plan to have an 80% satisfaction rate among business people by 2018 – up from 35% today. “We all understand that this is impossible,” the president admitted in his critique of the government agencies.

In total, the Strategic Initiatives Agency has prepared nine different “road maps,” which include 520 measures, of which 126 have impending deadlines for completion. Of those, 58 are completed, 39 are not yet completed and 29 were not even started.

Scaring off foreign investors

But the government is not the only thing preventing Russia’s business environment from improving. There is also a psychological element. According to a recent Gallup poll, while “net hope on economy” rose around the world, in Russia it dropped substantially. If businesspeople in Russia don’t believe that the future will get better, then that can cause a drop in business activity and capital in and of itself.

On the other hand, Russia is a big country with a lot of regional differences – while most rating systems base their grades on the business environment in the capital. But among Russian cities, Moscow rates dead last for business-friendliness. In fact, smaller cities in Russia are much friendlier to business and score much higher on metrics like how easy it is to start a business or obtain a building permit. Regional authorities explain their success by saying that unlike Moscow, where there are numerous major corporations, the only chance they have at economic development is to really improve the investment environment.

Unfortunately, success in some of the smaller cities does not necessarily mean the country is on the right track. The measures proposed by the government are merely cosmetic, and they do nothing to address some of the many factors that scare off businesses. One factor is Russia’s very weak protection for investors –rated 117th in the world, alongside Eritrea. There is also too much “gray-market” business – not quite black-market but not quite clean, either. Then there are threats to business and the protection fees a lot of businesses have to pay in addition to their regular taxes.

Foreign investors are also scared off by political factors, too. Pressure on the media, manipulated electoral processes, laws that violate human rights and the persecution of people with differing political opinions all make foreign companies wary about setting up shop in Russia. It is possible that Russia’s official ranking will actually go up in the next couple years, but there will be neither an investment nor a production boom.

It seems that the Kremlin already has an answer to that. At the People’s Front congress, one of the speakers said that one of the goals for the future was that “every citizen can reach Putin with two or three handshakes.” Of course, the companies that are large enough to be able to discuss their problems with the president don’t have much to complain about even now. But the other companies should pay attention – they have been warned that it might not be worth waiting for a real improvement in Russia’s business environment.

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