A TALE OF TWO INDEXES: SHIFTS IN INVESTMENT ACTIVITY SLOWS RUSSIAN GROWTH

Russia’s investment climate is undergoing profound changes, but expert opinions about the direction of these changes differ far more than traditional quarrels between economic schools should warrant. In mid-November Fitch Ratings awarded Russia one extra step and thus raised its rating to investment level (Kommersant, November 19). The World Bank, however, has published a report that warns of the negative impact of inconsistent state interference in the economy on the investment climate (Vremya novostei, November 22). The sustained flow of petrodollars has allowed the Central Bank of Russia to accumulate a small mountain of $110 billion, which should provide for mid-term financial stability (Gazeta.ru, November 18). The government, however, remains reluctant to admit that its target figure for inflation (10%) has already been surpassed and is struggling to check the undesirable appreciation of ruble against the weakening dollar (Kommersant, November 11).

These simultaneous shifts in opposite directions reduce “scientific” economic forecasts to guestimates about the cyclical or structural character of an observable slowdown in the growth (Ekspert, November 8). There are few doubts that the slowing down of the economy, against Putin’s strict orders to double the GDP, is caused primarily by the decline in investment activity (Nezavisimaya gazeta, November 12).

Evgeny Yasin, a grand master among Russian economists, argues again and again that such key indicators as the volume of money confirm the sustained decline in demand for investment capital (Ekho Moskvy, November 16). Presidential economic adviser Andrei Illarionov boldly asserts that this decline is caused by the political attack on the oil company Yukos, even if Putin himself denies any political agenda (Izvestiya, November 12). Indeed, several contradictory signals that tax authorities are preparing to strike several other companies with huge bills for past “optimizations” have created a panic on the market (Kommersant, November 12; Ezhenedelny zhurnal, November 16). The tendency to sit on profits has spread, however, far beyond the energy sector and is distinguishable even in a fast-growing industry such as beer production (Polit.ru, November 12). In the meantime, Russian investments abroad in the first nine months of 2004 increased by 55% compared to the same period of last year (RosBusinessConsulting, November 18).

There is, therefore, a visible contradiction between the complex changes in the investment climate and the very straightforward downward trend in domestic investment activity. Two recently published indexes might help to explain this contradiction. The first one is the Corruption Perception Index released by Transparency International in late October (Economist, October 21). For 2004, it places Russia in the “rampant” category, tied with Tanzania and Mozambique for 90th place. Many Russian experts are even more critical about the scale of this problem, arguing that the market for corruption has grown to $40 billion in volume and is the only one that is actually booming (Ekho Moskvy, November 18). They also point out a new mode for this traditional phenomenon, as Putin’s trusted siloviki from the special services prefer to camouflage their administrative racket as a “patriotic duty.”

The second index was compiled by the Economist as a part of its “World in 2005” overview and ranks countries by their “quality of life,” which is measured by a wide range of indicators, from GDP per capita to life-satisfaction surveys (Kommersant, November 19). Russia comes out in 105th place, below Pakistan but above Nigeria. Some middle-class Muscovites might accuse the respected newsmagazine of an anti-Russian bias, since their life in one of the most expensive cities in the world might appear not that bad (Moskovsky komsomolets, November 19). But those 74% of Russians who dismiss Muscovites as selfish rentiers who consume a disproportionate share of the oil profits might have a point (Kommersant-dengi, November 22). The dramatic decline of public health services that leaves the epidemics of HIV/AIDS and hepatitis-C unaddressed makes an even stronger case for Russia’s deteriorating quality of life, a case that the government has chosen to ignore (Gazeta.ru, November 22). While there is no direct connection between public health and the investment climate, apparently many entrepreneurs find few incentives to invest in this environment, whatever ambitious goals were proclaimed at their November congress (Kommersant, November 17).

Prime Minister Mikhail Fradkov has recently expressed his disappointment in the “lack of enthusiasm” among the Russian business community (RosBusinessConsulting, November 18). It would be easy to point out that Fradkov’s own policy, including the botched administrative reform, is the main source of this attitude (Ekspert, November 22). It would not, however, be quite fair. He was brought to this prominent position, far above his level of incompetence, in order to impersonate “stability,” so it cannot be his fault if the oil bonanza gives way to stagnation.