Russia's+Problems

=Russia's Problems = Russia (main page) Russia's Opportunities Solutions to Russia's Problems Terms 

To see a PowerPoint slide show on the major problems that face Russia, download the file by clicking on the link below.

Russia is at the mercy of a poor government infrastructure. In order to fulfill its economic potential of playing a major role in the global economy, Russia needs to rebuild its government infrastructure as soon as possible, as it is at odds with the growth of the economy. The success of the economy depends on the well-being of the government, which, instead of helping matters by regulating the markets and enforcing its laws, is making matters worse by interfering in markets that should be left alone and leaving corruption to thrive. Furthermore, many of the institutions which existed during the Soviet Era continue to exist in Russia today, which means that many of the same factors which hampered the Soviet Union's economic growth are around to cause problems for the Russian Federation's economic growth as well.

Corruption
 According to Transparency International, Russia's score for the Corruption Perception Index is 2.2 out of a possible 10. Corruption pervades all of Russia at most levels of the government. From police officers to high ranking officials, corruption poses a major problem to the economy of Russia, for several reasons.

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 * //inflation //
 * Because companies, in order to bypass various laws or regulations, need to bribe officials or regulators, they need to charge more for their products in order to turn a profit. Thus, the prices of goods sold reflect the cost of manufacturing, shipment, marketing, and also the bribes which were paid in order to continue doing business. Moreover, often times officials will require bribes to keep them from citing false violations on companies. The result of all of this is higher prices at the consuming end, which means that they must pay more for the goods. In general, this is not healthy for the economy, seeing as the consumers will have less money to buy things.
 * //inability of small companies to form //
 * With corruption so prevalent in Russia, many of the companies that exist are large oligopolies which can afford to pay bribes meanwhile sustaining operation. For smaller or new companies, surviving in Russia is very difficult due to the massive amount of corruption. Thus, for the most part, new companies are rarely successful while large oligopolies dominate the markets.
 * //weakness of government //
 * Perhaps the most extreme (yet not impossible) result of such widespread corruption in Russia is instability of the government. With corruption so rampant, the government does not have any definite authority that goes along with the laws that they enact. This undermines any authority that the government might have, and therefore does not make it a strong enough government which can regulate and help out the economy.


 * //allows organized crime to thrive //
 * <span style="font-family: Georgia,serif;">The Russian Mafia has a major influence in the country at all levels. With corruption so ubiquitous, the Mafia is able to continue its illegal activities which include smuggling drugs, oil, and weapons in and out of the country. The Russian Mafia causes many problems, but two of which are: 1) a threat to stability of the government and the economy, 2) a threat to new businesses. Because the Mafia has so much influence, they are able to continue without a large opposition from the legal side, due to bribery.

**<span style="font-family: Georgia,serif;">Asset Stripping **
<span style="font-family: Georgia,serif;"> Another aspect of corruption that exists has been within corporations by their managers/owners. Oftentimes, managers will divert cash flow into their own pockets. According to Raj M. Desai, "Instead of increasing the value of firms through reinvestment, enterprise manager-owners have typically extracted income streams from firms at the expense of minority shareholders. The managers have diverted cash flows to offshore accounts and shell corporations, concentrated losses among subsidiaries held by outsiders (rather than evenly distributing them between an insider-owned holding company and subsidiaries), and delayed the payment of dividends." Because of this, many companies have been unable to thrive because of their leadership. Asset stripping is quite ubiquitous in Russia, especially—but not limited to—among state-owned corporations. Asset stripping also occurs under the oligarchs who own large corporations. According to Massimo Florio at the University of Milan, "While the government lacked the money to pay pensioners, the oligarchs were sending money obtained by stripping assets and selling the country's precious national resources into Cypriot and Swiss Bank accounts."

Thus, corruption serves a major problem which has been getting in the way of economic growth. To a large degree, the natural resources which Russia contains is diverted to private bank accounts. This does not allow Russia to use the money for further growth of its economy, but instead decreases the potential, since both the resources and the money earned for those resources are lost.

<span style="font-family: Georgia,serif;">Soviet Legacy
<span style="font-family: Georgia,serif;"> With the fall of the Soviet Union and the formation of the Russian Federation, a plethora of things changed. Most of the Soviet Satellites became democracies with complete or at least quasi-capitalist economies. However, one thing that has not changed much is the actual government and its relationship to the economy. This is not to say that the government still takes a Communist approach to the economy; however, it has not changed enough to allow a rapid growth to occur which would allow Russia to be a major player on the world economic stage.

<span style="font-family: Georgia,serif;">
 * //<span style="font-family: Georgia,serif;">political power networks have carried over from Soviet era //
 * <span style="font-family: Georgia,serif;">Many of the same power networks in place during the Soviet Era continue in place now. Although to a somewhat lesser to degree, it nonetheless is a problem. Both in government and in economy, influential figures continue to operate with similar amounts of power as they did before. This in part explains why the "shock therapy" which was proposed in the early 1990s never actually was employed, because many politicians voted against it as they viewed it as a threat.


 * //<span style="font-family: Georgia,serif;">oligopolies and government nationalization of companies //
 * <span style="font-family: Georgia,serif;">Russia's markets are dominated by oligopolies, which do not allow for smaller companies to compete. Furthermore, these oligopolies have enough power that they are very influential with the government. Thus, they have little trouble perpetuating their control. Another problem is nationalization of companies by the government. Many companies, especially ones in the energy sector, have been taken over by the government. These state-run companies make it much harder for private industries to compete, and they also make foreign investors weary, as fears of government takeover cause they to divert their money elsewhere. Furthermore, the state-run companies have little incentive for their employees, and in general are not as productive as private industries would be.

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 * <span style="font-family: Georgia,serif;">[[image:http://upload.wikimedia.org/wikipedia/en/9/95/Rosneft-corporate-logo.gif width="204" height="129" caption="Rosneft, currently Russia's largest oil company, is controlled by the government."]]
 * //<span style="font-family: Georgia,serif;">lack of property protection //
 * <span style="font-family: Georgia,serif;">Many of the laws in Russia which have been implemented to protect the property of companies are vague and not well enforced. This poses a very large risk for investors, as there exists a lack of certainty about the protection of their investments. According to Neil Robinson, a professor at the University of Essex, "Legal enforcement of property rights is weak and lack of clarity in ownership and corporate governance increases the risks of investing in Russia considerably."

<span style="font-family: Georgia,serif;">What This Means
<span style="font-family: Georgia,serif;"> The consequences of the aforementioned problems which face Russia are multiple. Probably the most significant of these, however, is the lack of trust that foreign investors have in Russia. For the most part, Russia has been seen as a rather risky investment, due to its corruption and lack of government protection of companies' rights when it comes to property. Fear of nationalization also scares away investors. Thus, in order for Russia to become a major economic player on the world stage, it needs to reform its government infrastructure, which would purge corruption and modernize its government so as to fix its regulation and make it more effective so that foreign investors feel safer leaving their money in the country.

<span style="font-family: Georgia,serif;">For sources, go to my sources page.