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Russia – and Moscow in particular – has once again placed poorly in a key international ranking. According to a recent report released by the World Bank, the capital is the worst place to do business in Russia, which itself ranks miserably in the bank’s global ratings. But with Russia looking to maintain its steady economic growth much through the help of foreign investment, is this an ominous sign of things to come?
Russia, unenviably, has long been known for its poor business and investment climate. While it placed 120th out of 183 countries in the World Bank’s 2012 global survey, perhaps even more discouraging is the news that Moscow, the country’s supposed nerve center for business, investment, and foreign relations, placed dead last overall – 30th out of 30 cities surveyed – on the bank’s newest Russia-specific report, “Doing Business in Russia 2012,” released on June 21.
The report was based on an analysis of four separate categories, including the ease of starting a business, registering property, obtaining construction permits and wiring electricity, and noted the city’s particular failure in the latter two categories. The news is perhaps expected for Russia’s burgeoning middle class, a layer of society that has emerged prominently throughout the last decade and is increasingly fleeing abroad with its cash. But it also casts a pall over foreign investment, the primary engine for a planned modernization program that seems forever stalled.
While it reveals nothing new about Russia in general, the report is embarrassing particularly for Moscow, which has traditionally and almost invariably been the first place foreign businesses have come to set up shop in the country. City officials, including Mayor Sergei Sobyanin, have spent the recent months wooing both local and foreign businesses in an attempt to convince them that red tape is a thing of the past and that Moscow welcomes their activity.
But according to Moscow Deputy Mayor Andrei Sharonov, the new ratings offer a bitter wake-up call that something – in reality, the bureaucracy – just isn’t working. "This is a serious negative signal for us to change the situation, and that's what we're trying to do,” Sharonov told The Moscow Times on the sidelines of the St. Petersburg Economic Forum last weekend. He added: “We are trying to create a one-stop shop where the applicant could submit a request, and the rest would be the city's problem rather than the problem of the applicant."
The World Bank research also pointed to Russia’s wobbly position in general among the much-touted BRIC countries, noting that “despite the abundance of natural resources, Russia has not grown at the same pace as other large emerging economies” within the emerging economic group. “Over the past 20 years, China’s GDP has increased ten percent a year on average, and India’s by six percent. The global ﬁnancial crisis of 2008 and 2009 drew attention to the fragility of growth based on natural resources,” the report said. “Weak competition, poor investment and lack of innovation constrain growth.”
Some experts, however, caution against taking international ratings too close to heart. According to Vladimir Tikhomirov, chief economist at the Otkritie Capital investment bank, such rankings rarely play decisive roles in scaring foreign investment away from Russia. “Frankly, my understanding is that there are not many foreign companies that leave Russia,” he said. The ones that do, he noted – such as a small handful of European banks – do so because of other factors, such as internal decisions over profit margins. “It turns out that the Russian financial market is pretty crowded for the demand that exists here, and the demand is expected to grow moderately in the coming years, rather than expand dramatically,” Tikhomirov said.
Actually, there are clear signs that suggest that foreign investment isn’t exactly flagging. According to a similar report by PricewaterhouseCoopers released earlier this year, foreign capital inflows have steadily increased year on year. In 2011, they amounted to about $52 billion – a nearly 20 percent increase from the previous year.
But that doesn’t mean serious troubles don’t persist in Russia – for both local and foreign businesses alike. Corruption, cronyism, and red tape all remain the rule rather than the exception. Even the Kremlin has clued in on their effects vis-à-vis potential investment: at the economic forum in St. Petersburg, Vladimir Putin attempted to charm investors and reassure them that he, too, realized corruption was the most significant threat to Russian economic development. The logical next step, he said, was creating a commission overseeing entrepreneurial initiatives, staffed by both Russian and foreign businessmen.
“The current problems, when an entrepreneur faces the violation of his or her rights, bureaucratic pressure, corruption or administrative barriers, need to be resolved today – all of those problems,” Putin said during a speech at the forum. “I want to emphasize that [the commission] will serve both Russian and foreign businesses. The commissioner will have the right to defend businesses’ interests in court, to stop departmental or regulatory acts ahead of courts’ decisions and turn to the courts to quickly halt actions by bureaucrats.”
It’s this sense of self-reflection, Tikhomirov added, that might be where rankings such as the World Bank’s come into play by giving the authorities a clear idea of how difficult things have gotten for investors. “These rankings have more importance for the decision-makers rather than for the investment community – just to get them sort of a benchmark, to see where they fail, why they fail,” he said.
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