How Putin's cronyism is strangling Russia

Russia's vast population and wealth of resources should be boosting growth. There’s one man holding it back: Vladimir Putin

Considering its massive potential, investors should be getting behind the most forgotten of the Brics (Brazil, Russia, India, China and South Africa) – Russia. To some degree they have been. Over 2019, Russia’s was the best-performing major stockmarket in the world, rising by 39%, just slightly ahead of Greece. The recovery in oil prices, a gradual thawing of tensions with the West, and some cuts in interest rates, all combined to push equity prices higher.

The wrong kind of reforms

In normal circumstances, you might expect political reform to accelerate that – and for investors to pile back in. In the last week, President Vladimir Putin unveiled sweeping changes to the constitution. If they had been about making the system more democratic, strengthening the rule of law and encouraging a more diverse range of parties to flourish, it would have been widely welcomed. Instead, it seemed more like part of a plan to keep Putin in power after his latest term as president expires. And that is the real issue. The autocratic president, with his icy grip on power, is the biggest barrier to growth in Russia.

It is now 20 years since Putin emerged as the dominant force in Russian politics. Over that time, former communist states such as Poland, the Czech Republic and Hungary have grown rapidly. Still nominally communist countries such as China and Vietnam have boomed. By contrast, Russia has stagnated. Its growth has been pitiful, its population has started to shrink, and it remains dominated by oil and mining, with its leading companies controlled by a handful of oligarchs. If there are any Russian manufacturing, design, technology or media companies of any significance they are keeping themselves well hidden. Russia could have been the next China. Instead, it is turning into the new Argentina. 

Putin's three big errors

There are three ways Putin has crippled the Russian economy. First, geopolitical meddling. The Russian leader’s aggression towards the West and his territorial ambitions have created tensions with the countries that should be Russia’s biggest trade partners. Sanctions were first imposed in 2014 during the crisis in Ukraine and have only been partially lifted since. Russian companies and banks have faced restrictions on their ability to operate abroad and investment into the country has been limited. It is hard to see that Russia has gained anything from this, nor was it defending itself from any potential threats. The economy has paid a heavy price. 

Second, cronyism prevents entrepreneurs seizing opportunities and building new companies. Putin operates by dividing up the country’s oil and mineral wealth among a few favoured companies and oligarchs, all of whom owe their loyalty to the regime rather than to their customers and shareholders. Other businesses operate only with the toleration of local officials. There have been attempts to stimulate entrepreneurship and create science parks, but they have amounted to nothing. A country that was a leader in technology – the Soviet Union was the first to put a man into space – has failed to produce a single internet or biotech business of any note. Nor are there any Russian brands any of us have ever heard of. Putin’s suffocating system of kickbacks and cronies has stifled the economy. 

Finally, the president’s nationalist conservatism prevents reforms being made. The oil and gas industry could be broken up to make it more competitive. Markets could be made more competitive. The banks could be opened up to more competition and encouraged to lend more to small businesses. Government contracts could be put out to wider tender to create new firms, and restricted professions forced to allow new players to come into the market. All of that should kick-start growth and expansion, as it has in other countries. But Putin is only interested in stability, military strength and shoring up his own power. 

Russia remains an economy with huge potential. But it won’t really flourish until Putin has finally left the stage. Don’t hold your breath.

Recommended

Amazon halts plans to ban UK Visa credit card payments
Personal finance

Amazon halts plans to ban UK Visa credit card payments

Amazon has said that it is to shelve its proposed ban on UK customers making payments with Visa credit cards.
17 Jan 2022
Russian stocks suffer as the world fears it will invade Ukraine
European stockmarkets

Russian stocks suffer as the world fears it will invade Ukraine

Despite a booming economy, Russian stocks look extraordinarily cheap – but if it invades Ukraine, the Russian stockmarket will become all but uninvest…
14 Jan 2022
The booming jobs market points to inflation lasting for longer
Economy

The booming jobs market points to inflation lasting for longer

It’s a good time to be looking for a job, with plenty of vacancies and wages rising. But higher wagers are driving inflation up – and it’s not just a …
11 Jan 2022
The MoneyWeek Podcast: happy new year! Are we in for a year of misery?
Investments

The MoneyWeek Podcast: happy new year! Are we in for a year of misery?

Merryn and John ring in 2022 with the first podcast of the new year, discussing energy prices, house prices and interest rates, plus the definition of…
7 Jan 2022

Most Popular

Five unexpected events that could shock the markets in 2022
Stockmarkets

Five unexpected events that could shock the markets in 2022

Forget Covid-19 – it’s the unexpected twists that will rattle markets in 2022, says Matthew Lynn. Here are five possibilities
31 Dec 2021
US inflation is at its highest since 1982. Why aren’t markets panicking?
Inflation

US inflation is at its highest since 1982. Why aren’t markets panicking?

US inflation is at 7% – the last time it was this high interest rates were at 14%. But instead of panicking, markets just shrugged. John Stepek explai…
13 Jan 2022
Tech stocks teeter as US Treasury bond yields rise
Tech stocks

Tech stocks teeter as US Treasury bond yields rise

The realisation that central banks are about to tighten their monetary policies caused a sell-off in the tech-heavy Nasdaq stock index and the biggest…
14 Jan 2022