Salient to Investors:

The $50 billion Sochi Olympics is the largest construction project in Russia’s post-Soviet history and a microcosm of Russian corruption, inefficiencies, excesses of wealth and disregard for ordinary citizens. One member of the IOC thinks about a third of the $50 billion has been stolen.

Russia is almost as vulnerable as it was in 1980, the peak of Soviet economic stability. Oil and gas account for 75% of all exports, versus 67% in 1980, while 45% of what Russians buy today is imported. The state remains the single largest employer, while corporations dominate the economy.

Clifford Gaddy and Barry Ickes say the highly inefficient industrial structure of the old Soviet economy remains intact. In 2013 Russia needed a price of $103 to balance its budget versus $20 a barrel in 2005.

Investment in new factories and equipment is 23%, well below the level of even Soviet investment in capital stock, and China’s. Natalia Orlova of Alfa Bank said half of all new construction in the pre-recession years was of shopping centers, rather than factories.

The excess of money in the economy and the lack of institutions are the problem.

Kirill Rogov at the Gaidar Institute says that by increasing spending in order to fuel consumption-led growth, the government has pushed the cost of labor from 40% to 50% of GDP, the same level of developed countries, but productivity remains at less than half its level in the EU. The result is a Russia trapped between bad institutions and expensive labor, which makes private firms uncompetitive. Buying the loyalty of different interest groups is easy when the pie is growing, but much harder when it is shrinking. Gaidar predicts that when incomes began to fall, Putin would face a choice between repression, which would eventually lead to revolution, and democratization, which might also mean the loss of power.

 Rogov said the unequal distribution of incomes means that, even if the economy continues to tread water, the bottom 40% of the population will see their economic situation worsen.

Russia’s labor force is now shrinking so to grow Russia needs investment, the reallocation of resources and better institutions, especially property rights, but this would inevitably threaten Putin’s power.

During the 2000s the number of bureaucrats almost doubled and 25% of the workforce is employed in the public sector.

Boris Grozovsky said 35% to 40% of the population depend on the state.and bureaucrats have little interest in fostering competition that might cost them their jobs.

Putin-era oligarchs are former KGB men who have used state power to grab private businesses.

Economic activity is waning, mergers and acquisitions are drying up and capital and brains are flowing out of the country. Evgeny Gavrilenkov at Sberbank says the problem is exacerbated by the central bank which, in order to stimulate growth, is injecting liquidity into the market while also trying to support the rouble: allowing banks and their clients to speculate in foreign exchange rather than invest.

The main reasons for the slowdown in investment are uncertainty about the future and the lack of proper legal title to property.

With the rise of fracking, analysts estimate that oil prices could drop by 15% in the next 6 years. The Russian economy is far better equipped to deal with an oil-price drop than the Soviet economy was. It has built up substantial foreign-exchange reserves and has a floating exchange rate, which allows it to adjust to a fall.

Mikhail Dmitriev at the Centre for Strategic Research said even with the oil price at its current level, attitudes to Mr Putin are changing fast and focus groups show him less associated with stability and more with uncertainty. The Levada Centre says almost 50% of the country does not want Putin to remain president after 2018 when his term expires on a growing concern that Russia is fast approaching a dead-end.

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