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. Last Updated: 07/27/2016

WB, OECD Warn on Economy

Size matters in Russia, whether you are in the driver's seat of a Toyota Land Cruiser with a grill-guard or an industrial giant like Alfa Group or the newly created Millhouse.

The little guy is left in his Lada out in the cold.

That is the finding of two new Western reports about the Russian economy that give the government a slap on the wrist for not being more expedient about leveling out the playing field and cutting red tape. The reports, by the World Bank and the Organization for Economic Cooperation and Development, say the economy is strong, but the government needs to work harder to root out corruption and create an investment climate that discourages capital flight.

The World Bank's Russia Economic Report, released Thursday, said Russian business is becoming increasingly concentrated in the hands of a handful of powerful holdings, a nod to natural giants such as LUKoil and Gazprom and groups like Alfa, Interros and Millhouse.

Capital is available only to those huge companies that are already thriving, while small and medium-sized firms are starving from lack of investment, said the report, drawn up by the bank's Moscow office.

"Business becomes highly concentrated in energy, oil sectors or natural monopolies, while the share of new investment remains low and there is a lack of diversification," Christof Ruehl, World Bank economist for Russia, said Thursday in presenting the report.

Also, billions of dollars continue to leave the country for offshore accounts, the report said. "It is too complicated and too risky for those who own this money to trust it to Russian banks or other financial intermediaries so that they could lend it further to those who need it," Ruehl said.

The report, citing Central Bank estimates, found that capital outflow from Russia reached $10 billion in the first half of 2001, an amount comparable to the same period in 2000.

Fixed capital investment will amount to roughly $40 billion this year, an increase of 8 percent from last year, but far short of the estimated $70 billion needed to maintain existing capacity. Of this amount, foreign direct investment is unlikely to account for more than $5 billion. This means that the balance will have to come from domestic investors.

The needs of the private sector and startup businesses is a main theme in a new Russia survey by the OECD that is currently under discussion with the Economic Development and Trade Ministry.

"Despite positive developments in the Russian economy, the business climate remains unfriendly to newly founded companies and difficulties with access to new financing remain," says a draft of the report provided to The Moscow Times. The report is scheduled to be released in mid-November.

According to the OECD, official statistics show stagnation and even a drop in the growth of new small and medium-sized enterprises in Russia. Production levels showed a similar trend last year. "This is a big contrast with the situation in the economy as a whole," the OECD said.

Small businesses currently face many bureaucratic barriers and are subjected to multiple inspections whose only purpose is to take bribes, the report said. Many small businesses also still prefer to stay in the shadows to avoid taxes.

This makes the business climate in Russia worse than former Eastern Bloc countries like Hungary, Poland and even some CIS nations, the report said. As a result, small business accounts only for 12 percent of Russia's gross domestic product.

Ruehl said the problem goes back to a lack of capital.

"It happens because people don't have ways of investing money in Russia. They can either buy other large companies or keep money with their own banks or invest it abroad," Ruehl said.

But there are areas, mainly in infrastructure and the social sphere, where even large companies balk at investing.

In a separate piece of research, the World Bank has analyzed the efficiency of public investment programs in Russia and the findings are far from positive.

Though total public investment in Russia is currently 4 percent of GDP -- which corresponds with the 3 percent to 5 percent level in most OECD countries -- the real challenge for the government is now "not so much over the quantity but over its quality and efficiency," the World Bank said.

Thus, the government's participation in every project should be better clarified, investment decisions should be weighed against other opportunities and cost-benefit analysis used for every case, the bank said.

Both the World Bank and OECD reports found that the Russian economy is doing well and has enough strength to face external shocks in the short run.

"However, the medium- and long-term prospects for sustaining today's high growth rates remain overly dependent on volatile natural resource prices, as productivity growth lags real exchange rate appreciation, capital flows remain high and growth rates of investment and real income have slowed," the World Bank said.

Without an effective financial intermediary system and small business with an active role, the economy has little chance to sustain its record growth once oil prices fall from yearlong highs, the bank said.