Russian capitalism is a very interesting animal as prof Lajos Bokros of the CEU would say. As opposed to its EU neighbours and its long time arch enemy the US, who had capitalism first and democracy a hundred years later Russia got both at the same time. And obviously didn’t come out of it unscathed. After a long economic slump during the 90’s following the aftermath of communism Russia is once again one of the major players on the international stage. One of the world’s 10 largest economies, the EU’s 3rd trade partner and an essential energy supplier Russia is now in one of the strongest positions it has ever been in relations with Europe ( and not only ).

However while its current growth rate averages around 8% it won’t reap its rewards on energy forever. It can no longer afford to subsidize CIS and meet demand from other consumers. It has become more dependant on oil and gas than ever and its strict tax regimes and volatile gun point tax inspectors turn back valuable investors needed to keep production up. Not only that but after taming inflation from the high point it reached in 1998 it has yet to master the trade of monetary policy and risks fuelling inflation through loose government spending . And as if all that wasn’t enough international reports still rank it high in terms of corruption, crumbling infrastructure, disgraceful public service and lack of proper regulation in regards to property rights.

Given all these one may ask how it’s managed to stay on top all this time. The answer is simple: high levels of ODI attract in turn big levels of FDI ( which may or may not be recycled ODI ); the natural resources in Russia are by far the closest and most convenient for EU countries; most CIS countries rely entirely on Russia for capital sustenance; but most important of all the man in charge is every bit as efficient at his job as he was in the days of communism: Vladimir Putin’s management skills are every bit as ruthless as were his ways during KGB days.

While these facts convey today’s reality they do not speak about the future: Russia’s past endeavors are not a guarantee for a bright one. And partly Putin has understood this; by investing increasingly more in countries which are for the moment not under the scrutiny of other world power the road map for diversification has been set. But diversification alone is not enough: one also has to keep a tight control over it’s neighbours: keeping NATO out of it’s back yard is every bit as important as keeping the EU in it.

So how do you make capitalism sustainable in the long run? Well a good insight on what sustainable capitalism, albeit a very twisted one, can be taken from China.

Yes China with its Communist Party, centralised planning and dog soup. While it has kept central governing a thing of the party the rest of China is a very big capitalist cash cow. Decentralising local government only, astute economic and strategic planning have made it a force not to be reckoned with. But getting back to Russia what can IT do? For starters diversify its investment portfolio towards including investments that have more to do with the IT and telecommunication sector and less with resource based industries, which on the long run is not that wise. Second – adopting measures to improve competitiveness would be most welcome as would a fair bit of legislation on property rights. And third diversifying export routes for end consumers in its main market – the EU.

Russia has traveled a long road to get to where it is today. From the highest peaks to the lowest slump and back again. Today it stands on the edge of a new era and, just like anyone on the edge needs but a little push to go over. In Russia’s case capitalism is doing fine; the factor that would take it over the edge is demographics. Whether it actually will remains to be seen. But on that in a different article…

Gabriela Radu

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