The emerging market myth and why there is still hope for Russia

Russia like China, India and Brazil has had enormous problems escaping the heavy hand of a command economy. But the political establishment that has run companies and ministries as personal fiefdoms, handing out patronage and ignoring corruption, may be changing due to the power of the electorate that’s looking for an alternative

Russia is in many ways a paradigm of what is wrong with the BRIC/emerging market myth. According to the 'story' marketed and believed by many investment firms, financial analysts and economists, Russia, Brazil, India and China are supposed to be the biggest and fastest-growing economies in the world. These young dynamic markets are theoretically in the process of inevitable exceptional growth. Not so. These economies and other emerging markets could go either way.

Part of the assumptions concerning emerging markets is the process of economic and political reform. All of the BRIC's growth has occurred after major reforms that limited government power. For India it was the end of the 'License Raj'. For China it was the opening up of its economy to foreign investment. For Brazil it was the taming of inflation. For Russia it was the collapse of communism. Most people have assumed that these changes put these countries on an inevitable path to full development, but as Russia shows, the reverse can happen.

Russia like China, India and Brazil has had enormous problems escaping the heavy hand of a command economy. Renationalisation is a steady and progressive process especially in Russia and China. One example is the banks. While there are many different banks, including foreign banks operating in Russia, the market is still dominated by the state banks.

The two state banks, Sberbank and VTB, have always held more than 50% of the nation's retail and corporate banking market and that is increasing. It is difficult to compete with powerful companies with state backing. As one western banker remarked, "Most Russian businessmen are now mainly financed by Russian state banks. They are now lending on terms which would not get past credit committees in western institutions, and the western banks are moving out."

A socialist, totalitarian past has left a legacy of voracious powerful bureaucrats who still regulate large parts of the economy at a price. Russia is one of the most corrupt countries in the world. It ranks 154th on Transparency International's list. According to the Russian edition of Esquire, one road in the 2014 Olympic venue in Sochi cost so much that it might as well have been paved in nine inches of foie gras, or three and half inches of Louis Vuitton handbags. China is slightly better, but in both countries the system that fostered corruption is making it worse, despite the optimistic predictions of BRIC boosters.

Investors in Russia might point to signs that the economy is growing. Like other emerging markets Russia is growing at a respectable 5%, but about 1% of that growth is due to the high price of oil. During the 2008 crash, Russia's reliance on oil resulted in a contraction of 8%, one of the worst among leading economies. Like most emerging markets, inflation is out of control at 9.5%.

What the emerging market story fails to understand is particularly important in Russia. Sustainable growth is predicated on the legal infrastructure, the institutions. According to Vladimir Mau, economic advisor to prime minister Putin, "We can't compensate for the failings of institutions through [spending] money anymore. There is little room for Russia to improve further the efficiency of its legislation without improving the institutions that enforce and adjudicate on the laws."

But how do you reform institutions? How do you make them work? Institutions of government tend to sclerose like any mature business. What businesses have is the discipline of the market. If they fail to adapt, they go out of business, which is why the average age of a blue chip Dow 30 company is only 40 years old. Governments don't go out of business, but some can change due to the discipline of democracy, which just might be on its way in Russia.

Russian government used to be the preserve of Mr Putin's cronies from the security services, so-called siloviki or "strong guys", who ran state companies and ministries as personal fiefdoms handing out patronage and ignoring corruption. President Medvedev and his band of former economists, lawyers, and bankers, so called slaboviki (weak guys), have been cleaning house. The number of siloviki in government has declined from 66% in 2007 to 27% in 2010.  As of 31st March, the most powerful of all, Igor Sechin, deputy prime minister, and one of the most powerful men in Russia was fired from the state oil company Rosneft.
Why? Might be elections. The electorate might want change. Russians were happy to support Mr Putin and his gang because real wages doubled in less than a decade until 2008. Since then they have barely risen. When the government fails to deliver the goods, an electorate usual goes shopping for an alternative. If a government can change, then so can its institutions. So, there might be some hope for Russia if, and only if it can subject itself to the discipline of the political markets. The Chinese might want to take note.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected])



Robin Hobbs

6 years ago

Change through the electoral process is all well and good, but this assumes free and fair elections. What is the author's opinion on the likelihood of this?

SC seeks report on action taken on “cash-for-vote” scam

According to the petition filed by former CEC JM Lyngdoh, neither the Delhi Crime Branch nor the chairman of the joint parliamentary committee headed by Kishore Chandra Deo had so far taken any tangible steps to initiate action against those responsible for the scam

New Delhi: The Supreme Court today sought a status report from the Union government on the action taken against parliamentarians for allegedly attempting to bribe BJP Members of Parliament (MPs) during the trust vote faced by the United Progressive Alliance (UPA) government in July 2008, reports PTI.

A bench of justices Aftab Alam and RM Lodha sought the status report while issuing notices to the Centre and the city police commissioner on a PIL alleging inaction against the alleged offenders.

Senior counsel Rajiv Dhawan and counsel Prashant Kumar appeared for petitioner and former chief election commissioner JM Lyngdoh.

In the PIL, Mr Lyngdoh had sought directions to the government to set up an independent special investigation team (SIT) to probe in a time bound manner the ‘cash-for-vote’ scam during the trust vote faced by the UPA government in July 2008.

He also pleaded that the SIT chief should be given absolute powers and independence to choose the best officers to complete the probe in six months.

The petition alleged that though the entire nation was shocked by the spectacle of three BJP MPs displaying wads of currency notes in Parliament as bribe money to vote in favour of the UPA during the 22 July 2008 trust vote, yet no action has so far been taken against the guilty persons.

According to the petition, neither the Delhi Crime Branch which registered a first information report (FIR) nor the chairman of the joint parliamentary committee headed by Kishore Chandra Deo, which inquired into the allegation, had so far taken any tangible steps to initiate action against those responsible for the scam.

On 22 July 2008, three BJP members had placed Rs1 crore cash in the Lok Sabha alleging that they were given to them by floor managers of the UPA government to secure their support during the no-confidence motion after Left parties withdrew their support over the Indo-US Nuclear deal.

The BJP leaders had claimed that the floor managers had sought to purchase them through a Samajwadi Party leader.

The allegation was levelled by the BJP MPs Ashok Argal, Faggan Singh Kulaste and Mahavir Bhagora.


Maruti Suzuki sales up 4% in April

The country’s largest car-maker Maruti Suzuki India (MSI) reported a 4.40% jump in April sales to 97,155 units.

Sales for the same month last year stood at 93,058 units, MSI said in a statement.

The national capital-based company recorded sales of 87,144 units in the domestic market last month, an 8.88% increase from 80,034 units in April, 2010.

MSI’s exports, however, declined by 23.13% in April to 10,011 units from 13,024 units in the year-ago period, the company added.

Sales of the company’s once bread-and-butter model M800, went up 11.96% to 2,528 units during the reporting period from 2,258 units in April, 2010, the statement said.

Sales in the A2 segment (comprising Alto, WagonR, Estilo, Swift, A-Star and Ritz) witnessed 1.82% growth to 57,443 units from 56,416 units in the same month a year ago.

A3 segment sales (comprising the SX4 and DZiRE models) increased by 39.07% to 13,899 units from 9,994 units in the corresponding period a year ago, the company said.

MSI’s total passenger car sales rose 7.63% to 73,905 units in April from 68,668 units in the same month in 2010, it added.

In the early afternoon, shares of MSI were trading 1.8% down at Rs1,296 on the Bombay Stock Exchange.


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