Russia: progress seen, but more can be done

14th February 2014

MGI World Russia: progress seen, but more can be done

As the eyes of the world are on Russia with the Winter Olympics in Sochi, the massive spending on the games suggests the country’s growing standing. But while major projects like building the Olympic park have been shown to be achievable, it’s harder to see how progress is being made for the nation’s small and medium-sized enterprises.

The Russian economy, says a major new report from the OECD, is doing well “on a number of fronts”, but future growth is being checked by “poor governance and rule of law issues”. Just like a similar World Bank report on neighbouring Ukraine, the study highlighted a key problem in the level of corruption that exists in Russia as a barrier to businesses seeking to expand.

Russia must work to create “a transparent, coherent and predictable business climate”, say the authors, who call for “sustained and effective anti-corruption measures, greater judicial independence, and a reduction in barriers to market entry and competition”.

“The Russian economy is at a crossroads,” said OECD secretary-general Angel Gurría. “It has tremendous potential but is still heavily reliant on volatile revenues from natural resources. It would do well to invest more in infrastructure, human capital and innovation, so that larger segments of society can partake in Russia’s transformation.”

Certainly the economy is overly dependent on natural resources like oil and gas and diversification must be encouraged, but there are already signs of life in new sectors.

Alexander Kostin, partner at the MGI member firm in Moscow, Consulting Services Group, agrees with the assessment of the OECD, but says there has been a “real boom” in tech start-ups in the last two years.

“Some of them become profitable, others fail. But the main idea is in the great movement to this industry,” he says.

Over the coming two years, Mr Kostin hopes to see more law and tax support for new tech businesses, more effort to tackle corruption and reforms to education.

Indeed technology and education are key. When it comes to innovation and making sure Russia is properly active in global value chains, the OECD recommends greater support for the adoption of new technologies, particularly to improve energy efficiency.

The report also notes that Russia has one of the highest shares of tertiary educated people in the world. However, there have been problems in supplying the right mix of skills for employers.

“Increased educational spending should be a priority, in particular in poorer regions, and restructuring of vocational and higher education institutions should continue, improving curricula and links with business,” says the OECD report.

Progress in Russia is happening. The move away from natural resources dependence is vital and there are some encouraging signs of dynamism, particularly in the tech sector. But, as the report shows, much more needs to be done to unleash the kind of private sector-led growth that Russia is capable of.

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