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].)