Committee for Russian Economic Freedom

President Medvedev

Russia Profile begins an article summing up Dmitry Medvedev’s presidency, which is coming to a close Monday, in a rather stark and negative manner:

Russia’s outgoing President Dmitry Medvedev probably never wished to end his term this way. His economic achievements, after four years in office, were minimal, and often had no visible impact in peoples’ day-to-day lives.

But the truth hurts sometimes. Medvedev came in with all the bluster of a reformer, but that sentiment wore off quickly, as he proved to be unable to enact meaningful economic reforms or emerge from the shadow cast by his predecessor / successor. The British Independent also has a scalding look-back on Medvedev’s tenure, quoting a Russian woman named “Masha,” who oversees the fake “Kermlin” Twitter handle:

[Medvedev's term] was like when it snows in the night and the machines come and clear it up before dawn. When you wake up, there is a vague feeling it has been snowing, but hardly any sign of it. That’s the level of impact he has made.

Read more on Medvedev in Russia Profile and the Independent.

Reporting from the 13th annual International Academic Conference on Economic and Social Development in Moscow, Russia Profile’s Tai Adelaja adeptly details some of the reasons Russia is falling behind other BRICS and CIS nations in measures of entrepreneurship and economic freedom.

“There is a 50 percent chance that any entrepreneur doing business in Russia will sooner or later end up behind bars,” he writes, citing a conference speaker.

Not helping the situation is the fact that in the last few years the Russian government has enacted only two laws to help improve the country’s business climate (banning pre-trial detention for economic crimes suspects and requiring an audit before tax evasion charges are filed), while the acquittal rate for economic crimes has remained less than one half of one percent.

Other data that the conference speakers pointed to while explaining the disappointing state of the Russian economy:

• Two million Russians have lost their jobs over the past several years as a result of systematic persecution of businessmen by state officials. (Leonid Grigoriyev, Higher School of Economics professor)
• Only about four percent of Russians said they are planning to open new businesses within the next three years, compared to about 25 percent for other emerging nations. (Global Entrepreneurship Monitor)
• While about 60 percent of Russians see entrepreneurship as a desirable career choice, only eight percent consider it worthwhile. (Olga Verkhovskaya, St. Petersburg University professor)
• Without rising global oil prices and changes in legal policy toward businesses, the Russian economy may only grow by 1.2 percent annually. (Yevgeny Yasin, former Russian Minister for the Economy and Higher School of Economics professor)
• Bribery and corruption have forced manufacturers to raise the price of food 15 percent.

“There is a perception in government that business people are dishonest,” Yasin added. “Sadly, this appears to be the prevailing mindset.”

Read more about the conference here and here.

CREF Founder & Chairman Pavel Ivlev

Writing on CNN.com’s Global Public Square, Committee for Russian Economic Freedom Founder and Chairman Pavel Ivlev writes that the recent push for political reform in Russia is tied to the compulsion for economic reform:

[M]ore than just a rigged election, Russians are protesting the inability of the current regime to lead the nation on a path of modernization. While various statistics show that wages on the whole are rising, millions of Russians are in fact experiencing worsening inequality, decreasing opportunities and a repudiation of basic free market principles.

You can read Chairman Ivlev’s full op-ed here: http://bit.ly/xlZr8a.

Russian President Dmitry Medvedev looks through 3D glasses at an exhibition at the economic forum in St. Petersburg, Russia, Saturday, June 19, 2010. (AP Photo/Dmitry Lovetsky)

Just a few weeks ago Putin was front and center with his visits to Istanbul and Paris, negotiating foreign policy disputes over UN sanctions against Iran. He even made comments about his tandem leadership with Medvedev that Kremlinologist have interpreted to mean that Putin as no choice but take over the reins in 2012, lest Medvedev actually execute his modernization plans by reducing 160,000 bureaucrats and nearly 300,000 policemen. Of course not all of these government employees have profited from Putin’s rein at the helm but they benefit from the existing “old” system (“budget inefficiency and a resource-based economy” as Arkady Dvorkovich, Medvedev’s top economic advisor put it.)

What a difference a few weeks make.

This week President Medvedev is visiting Silicon Valley to drum up support for a Russian Silicon Valley in Skolkovo outside Moscow. Despite a more promising outlook for Russia’s growth this year, in order for Medvedev’s modernization to be realized, laws must be enacted and enforced.

Another hinderance to Medvedev’s efforts is widespread corruption in the country, equivalent to a third of the country’s GDP annually. The death of Sergey Magnitsky while in pre-trial detention hangs like a cloud. Today, Magnitsky’s business partner Jamison Firestone released a video documenting what the government officials who are responsible for Magnitsky’s death are doing with their ill-gotten fortunes.

Beyond the Magnitsky tragedy the Khodorkovsky trial is a symbol of the lack of property rights in Russia and is costing Russian companies a risk premium as foreign investors demand greater compensation for this political risk.

Leon Aron, director of Russian studies at the American Enterprise Institute wrote in the Los Angeles Times that:

The road to a Russian Silicon Valley starts not in California, Mr. President. It begins with unlocking the door to Mikhail Khodorkovsky’s jail cell.

This is a critical time for Russia’s development as an emerging market. It remains to be seen if Medvedev’s modernization initiatives will be allowed to proceed and allow Russia to develop in an ever crowded global economic playing field or will the presidential election of 2012 reaffirm the Kremlinologists prediction that Putin will rein in liberalizing efforts and lead Russia down the path of increased centralization in government and government oversight of business and trade.

Musings continue about the Foreign Ministry’s leaked policy document on engaging with the West to help Russia modernize. This new leaked policy seeks to import Western techonology and expertise to improve Russia’s infrastructure and jump start its techonolgy sector.

While Deripaska looks towards East for future initial public offerings of his other companies, notably EN+ Group, Rusal’s holding company, and OAO EuroSibEnergo, a power utility company. Rusal is the trailblazer Russian IPO on the Hong Kong Stock Exchange, but with it’s dismal performnace its first six months, it could leave a bad taste for other Asian investors. Additionally, institutional money managers are wary of Russian companies with opaque management rules and only promises of profits.

Investors both from the West and from Asia need to see commitment from the Russian government and the Russian business elite that they are serious about developing the technology and financial sectors in Russia. Russian businessman routinely top Forbes list of the world’s wealthiest; they clearly have the means to invest in domestic techonology firms. Russia’s political system as it has concentrated power to the executive branch has the political will to end corruption and strengthen the rule of law and improve its perception among foreign investors. But so far Russian businesman prefer to use their money on overseas investments while Russian politicans strengthen their own power at the expense of the country’s economic development.