May 19th, 2016

Useless Services

Photo by Vadim Akhmetov / Znak.com

Photo by Vadim Akhmetov / Znak.com

The production of what goods and services accounts for the largest share of Russia’s gross domestic product (GDP)? That is a simple economic question. Amateurs would be wrong as usual in claiming that the right answer to this question is oil and gas. In the modern market economy – and in the last 20 years, Russia has been classified as a market economy unlike, for example, North Korea – the largest share of GDP is attributed to various services. Banking and transportation services, healthcare and education, lawyers and auditors, Internet and cell phone services together account for 55 percent of Russia’s GDP. Just for comparison, in the United States, the same services account for as much as 80 percent of the country’s GDP. The rule is simple: The more developed a country is and the higher the living standards of its population are, the larger the share of the service sector in its economy is.

Legal and auditing services without which private business cannot exist or develop occupy a special place in the variety of services. Businessmen use the results of independent legal analysis and audit to reduce risks and avoid losses. In a more general social sense, the level of independence of lawyers and auditors in their evaluations and opinions indicates the level of development of civil society institutions in the country. A demand for objective information in society usually means that there is a demand for quality legal and auditing services.

Russia’s society, however, does not seem to demonstrate such a demand.  Over the last 10 years, the steadily decreasing percentage share of legal services calculated by the Federal State Statistics Service in monetary terms  has fallen twofold. Data provided by the Federal Chamber of Lawyers of the Russian Federation proves this negative trend. Thus, in 2015, lawyers’ average monthly earnings dropped 17.5 percent. Independent experts observe a decrease in demand for legal services caused among other things by an atmosphere of almost total corruption which makes it impossible for lawyers to effectively defend the interests of their clients due to constant violations of defendants’ rights by investigators, prosecutors and judges.

A similar situation can be seen in the auditors’ community. The importance of auditors’ activity for Russian companies is decreasing while the Finance Ministry’s official statistics show an actual drop in revenues from auditing activities (the nominal revenue growth does not cover the official inflation rate). Meanwhile the number of audit companies and auditors is steadily decreasing year after year. There are currently 21,500 private auditors in Russia whereas the number of legal entities exceeds 4 million. Thus, there are 186 potential objects of examination and analysis per one auditor. An average audit of a business entity can take about a month. Consequently even if auditors carry out inspections single-handedly, which they try not to do in order to avoid mistakes, it will take them 15 years each to examine their shares of the market. If of course there is anything left to audit since the number of joint-stock companies that are required to undergo financial audit under the Russian law has been declining in the recent years.

Generally speaking, specialists notice a considerable drop in demand for professional consultants and their reorientation toward providing services to state-owned companies.

Photo by Valentin Ilyushin / "BaltInfo"

Photo by Valentin Ilyushin / “BaltInfo”

It is quite typical that the Russian authorities do not seem at all concerned about the situation in the sphere of legal and auditing services. The fact that no serious scientific research of this particular economic sphere is available and government officials make no public statements on this topic proves this point. It is no surprise since the Putin regime has no interest in providing society with objective information. The law is being increasingly replaced by lawlessness at all government levels; while audit is substituted by lies and propaganda. The professional services market is shrinking along with other spheres of private business while the Kremlin is actively seeking to replace it with “government services” such as state-owned banks instead of private ones, Russian Railways instead of highway infrastructure, the Federal Tax Service instead of audit. Of course, lawyers will not remain jobless for long. Defense attorneys will retrain to prosecutors and continue to “serve” the population on the other side of the courtroom. Until battleship Aurora fires its next shot.

11 May 2016

Kremlin Imitators: Putin, Medvedev, and Kudrin Who Joined Them

Alexey Kudrin and Dmitry Medvedev / Photo by postsovet.ru

Alexey Kudrin and Dmitry Medvedev / Photo by postsovet.ru

It appears that the Russian authorities have once again turned to their favorite pastime of successfully imitating reforms. After two years of fighting first in Ukraine and then in Syria, Vladimir Putin decided to address the crisis in the country. The elections are close at hand, while the economic situation in the country has been steadily deteriorating for the last two years, and the population is being increasingly affected by it. The quasi-patriotic rhetoric and the “Krym nash” (Crimea is ours) slogan cannot save the government’s poll standings from slumping anymore. Putin decided he needed a program and appointed his loyal colleague and former Finance Minister Kudrin his main “reformer”. However, in 16 years in power, Putin has never successfully implemented any major structural reform. Thus, this new seemingly liberal initiative will be nothing more than yet another step in the process of appropriation of state resources and unsystematic campaigning.

It is obvious that there can be no successful structural reforms in Russian under the Putin regime if only because reformers have no real authority regardless of the informal status granted to them by Putin. Created in 2012, the Economic Council under the Russian President has until now stayed dormant. Putin’s St Petersburg friend, Alexei Kudrin >> Read more

4 May 2016

Endangered Species of Business

Vladimir Putin. Photo by Alexey Druzhinin / "RIA Novosti"

Vladimir Putin. Photo by Alexey Druzhinin / “RIA Novosti”

During a recent meeting on the improvement of the government procurement system, Prime Minister Medvedev declared that it was imperative to involve small and medium-size businesses in this process. One month later, the Ministry of Economic Development came up with draft legislative amendments that are supposed to facilitate the conditions for participation in the process of government procurement for small-size enterprises by dispensing them from the required provision of collateral. It is as yet unclear whether this measure will be effective, since specialists already point to the insufficient and inaccurate character of the proposed changes.

Concern for small and medium-size businesses is one of the favorite topics for both Medvedev and Putin. However, despite the annoyingly regular promises of support, small companies continue to experience difficulties.

The share of small and medium-size enterprises in the country’s GDP is a key indicator of Russia’s economic health. According to official estimates, in Russia it amounts to 20 percent.  According to entrepreneurs themselves, however, it only reaches 3 percent. In comparison, in the United States, the share of small businesses in the country’s GDP amounts to around 60 percent, and in some European countries it reaches 80 percent.

In 2014, more than half of all small enterprises recorded a decrease in financial stability, and more than half of entrepreneurs declared that business conditions had deteriorated. Over the past year the tendency has not changed, >> Read more

27 Apr 2016

Oil and Nickel

"Norilsk Nickel" / Photo: dela.ru

“Norilsk Nickel” / Photo: dela.ru

Oil prices have been going up and down in recent weeks, but they are still nowhere near the coveted $80 per barrel which would allow Russia to balance its budget. The Kremlin’s active efforts at getting other oil-producing countries to agree to an oil output freeze have not yet brought any results. Both the ruble and Russian oil companies’ stock prices remain low. The Russian economy’s pathological dependence on oil is a long-established diagnosis that can only be treated with diversification. Putin’s aggressive empire subject to international sanctions for Russia’s invasion of Ukraine finds it hard to expand industrial production and to attract foreign investment and technologies.   Even without the sanctions, hardly anyone would want to invest in a country mired in corruption and lawlessness.   However, beside the proverbial oil and gas industry, Russia has other traditional sources of export revenues that were in a steady demand for many years.

Thus, according to the Russian Ministry of Industry and Trade, both in 2008 and today, Russia ranked first in aluminum and nickel exports. The Russian-Swiss RUSAL, controlled by Oleg Deripaska, is the world’s largest aluminum producer. RUSAL owns 28 percent of Norilsk Nickel, one of the world’s major producers of nickel and a number of other non-ferrous metals.  Both Norilsk Nickel and RUSAL are ranked among Russia’s top ten exporting companies, with all the other companies on the list being oil and gas producers. >> Read more