EXCLUSIVE: MNI Indicators chief economist Philip Uglow comments on Russia’s economy in interview with EmergingMarkets.me

How would you explain Russia’s current slowdown? Can it be that the global crisis has finally got to Russia – it seems that what happens in Western economies takes a while to reach Russia?

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The global economic crisis has clearly had a negative impact on Russia – there’s no getting away from that. Russia will be lucky to grow by 1.5% in 2013, and 2014 isn’t looking much better. Europe is, and has always been, Russia’s main trading partner, and the slowdown in Europe had an adverse impact on Russia’s economic growth.

While China and other East Asian countries have been rapidly growing in importance, and China is now Russia’s single largest trading partner, the fact is that the Eurozone countries are, collectively, far more important. In a global world with strong trade, financial linkages, then slowdown in one part of the world is bound to have repercussions on the other.

But the slowdown is not just because of the negative global economic winds. Mr Putin has himself acknowledged the problems are mainly domestic. “Of course we are experiencing the consequences of the global crisis, but we have to say openly: the main reasons for the slowdown aren’t external but domestic.”

The Russian economy faces a daunting list of troubles –- a declining population, the re-emergence of the United States as a rival energy superpower due to shale gas, and the government’s colossal spending on defence that stretches the fiscal budget.These factors are compounded by Russia’s failure to stimulate private enterprise, reform the judicial system, improve labour productivity and turn the Russian economy into more than an energy producer. Spare capacity has now run out, and domestic and foreign investment is too low.

Russia has actually done most things right in response to the crisis: it cut borrowing costs and ran large budget deficits to bolster domestic demand when its economy was shrinking rapidly. Rates were hiked as inflation is a sensitive political issue in Russia and the authorities are now trying to maintain some semblance of price stability even if that means sacrificing some growth.

What do you think of the theory that Russia has hit a middle income trap?

I think there are elements of Russia facing some sort of middle income trap and they’ve done little to help avoid such a situation occurring.

The reason why Russia grew so fast from 2000 to 2008 was essentially the growth in oil prices. As oil prices grew Russia became much wealthier. Now that oil prices have stabilized this source of growth has receded. And meanwhile the authorities have done little to diversify growth.

President Putin has followed electorally friendly policies; sizeable pension increases, increased welfare, increased wages and frozen utility bills to name a few. The effect of many of these has been to price Russia out of the global market.

What do you think of the plan to make Moscow an international financial centre? Tim Reucroft, director of research at London-based consultancy Thomas Murray says there is “zero chance” of Moscow being an IFC in the sense London, New York or even Dublin or Luxembourg is. He believes that what the Russians are actually doing is to build a domestic financial centre with strong international links. Moscow is, by the way, 69th on the latest 80-rung Z/Yen Global Financial Centres Index, having sunk 8 points since 2010.

Agreed that it is difficult to currently see Moscow as a world financial centre, there are whole host of issues:

 – Lack of transparent legal system and rule of law.Moscow lacks an independent judiciary and rule of law and it is perceived to be a difficult place to do business by many Russians themselves.

– Efforts made to move towards global accounting norms but not there yet. Given the history, need to see a strong track record of a trusted accounting and regulatory environment.

– Poor physical infrastructure of the city:Moscow has one of the worst traffic jams of the world. A lot of effort is required so that the standards and quality of living could be significantly improved to make Russia’s capital desired destination for the people worldwide. There is an increased emphasis on improving the transportation links of the city in next five years.

– Corruption, security and issues such as strict immigration rules, bureaucracy, corruption and a lack of transparency.

– Financial centres are based around people meeting people in an atmosphere of trust and security. The right employee skill set is a must and with the prevailing problems of Russia such as slowing growth and lack of suitable opportunities, most high skilled people are leaving the country. Human capital flight is a grave issue in Russia.

– Lack of English as a business language also remains a hindrance.

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