Russia’s economy less free than Communist China’s

Index of Economic Freedom coverThe Heritage Foundation have released their 2007 rankings of Economic Freedom, and it will make difficult reading for the Kremlin, as capitalist Russia apparently has a less free economy than communist China.

Out of 157 countries ranked, Russia places a rather dismal 120th, and 9 of the other 12 former Soviet states ranked higher – most by quite a long way.

I’ve been racking my brains to think of something positive to say about this for Russia, and about the only thing I can think of is: if Russia has the world’s 10th largest economy, but is this unfree… imagine what it could do if it took deregulation seriously.

Anyway, for completeness, the Former Soviet countries that rank above Russia are:

  • Estonia (12th) – higher than most European Union countries
  • Lithuania (22nd)
  • Armenia (32nd)
  • Georgia (35th)
  • Latvia (41st)
  • Kazakhstan (75th)
  • Moldova (81st)
  • Tajikistan (98th)
  • Azerbaijan (107th)

Ranking below Russia:

  • Ukraine (125th) – a bit of a failure for the reforms promised by the Orange Revolution
  • Uzbekistan (132nd)
  • Turkmenistan (152nd)

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31 Responses

  1. I think you are very dramatically underestimating the Kremlin. I think that far from being “difficult reading” for the Kremlin, it’s denizens will be delighted with the results of the Heritage study. It’s the goal of the KGB spies who run the Kremlin to deny freedom to Russia’s citizens, and not merely economic freedom but also political, social and artistic freedom. As I’ve been warning for some time now, in fact, the Kremlin is erecting a neo-Soviet state in Russia. Therefore, they will view this news as a brilliant success. This brilliant cartoon from a Russian artist says it all:

    http://russophobe.blogspot.com/2007/02/sunday-funnies-part-i-on-fate-of.html

    To be sure, though, it’s “difficult reading” for any rational person who actually cares about Russia, instead of hating it the way the Kremlin does (and as those who rule Russia nearly always have). It means that Russia has learned nothing from the past and therefore cannot hope for a better future. Anna Politkovskaya said it well, quoted in the New Yorker’s recent piece “Kremlin Inc.”:

    “I have wondered a great deal about why I am so intolerant of Putin. Quite simply, I am a 45-year-old Muscovite who observed the Soviet Union at its most disgraceful in the 1970s and 1980s. Putin has, by chance, gotten his hands on enormous power and has used it to catastrophic effect. I dislike him because he does not like people. He despises us. He sees us a means to his ends, a means for the achievement and retention fo personal power, no more than that. Accordingly, he believes he can do anything he likes with us, play with us as he sees fit, destroy us as he sees fit. We are nobody, while he whom chance has enabled to clamber to the top of the pile is today Tsar and God. In Russia we have had leaders with this outlook before. It led to tragedy, to bloodshed on a vast scale, to civil wars. I want no more of that.”

    http://russophobe.blogspot.com/2007/01/kremlin-inc.html

  2. Max says:

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  3. jason says:

    On the bright side, the Baltics and former Warsaw Pact countries are doing fairly well. Although, I thought Poland would have be higher on the list than it was.

  4. ReluctantMuscovite says:

    Very amused. So what do we conclude from this? Not do business in Russia? I guess all the foreign companies doing business here must be idiots;) Message from established foreign company in Russia to those thinking about coming here: DON’T!It’s godawful… Brilliant:D

    RM

  5. ReluctantMuscovite says:

    Here’s another underreported detail: the Heritage Foundation’s report includes ‘perceived’ corruption, as measured by Transparency International.

    Go to this site, http://www.transparency.org/policy_research/surveys_indices/gcb/2006

    download English Global Corruption Barometer 2006 – Full Report

    and go to page 17…

    Annex I, Table 4 Experience of bribery: Question: “In the past 12 months, have you or anyone living in your household paid a bribe in any form?”

    Then look for the answers given by Russians:
    Yes: 8%
    No:92%

    Look at the other data, for other countries for comparison…

    Funny thing: we take the indices of ‘perceived corruption’, which means: people talking about how they think how corrupt their country is, but when you ask them about it, nobody seems to experience it. “Yeah, everybody pays bribes, except the people I know”….

    Go figure.

    Lived in Russia for much more than a year now, never paid a bribe. Never. Don’t know anybody who paid a bribe. Ever. Heard a lot of people complain about it. But, nobody who ever admits to having paid it. Funny.

    Can’t square that. Somebody help, please?

    RM

  6. Andy says:

    Yeah, I must confess, I never paid a bribe, nor felt in a position where I might possibly have to, during the time I spent in Russia either.

    From speaking to Russians, though, I know that many of them have paid out bribes (both in business and in personal life) or been offered bribes from time to time, although I couldn’t really judge how widespread it is.

    I suspect, in a sense, the statistic you quote above may also be partly due to terminology – nobody likes to think of themselves as paying bribes, but giving someone a gift to reward (future) good service, now that’s another matter…

  7. Andy: I suspect, in a sense, the statistic you quote above may also be partly due to terminology – nobody likes to think of themselves as paying bribes, but giving someone a gift to reward (future) good service, now that’s another matter…

    Exactly ! How far will you get in Germany without paying a “Trinkgeld” to e.g. the plumber ? Or a “pour boire” to his colleague in France ?

    Or how far will you get in Germany when your business receives a visit by the “Betriebsprüfer” (Tax Auditors) and the “snacks” you offer are not to their liking ? Is this bribing ? Hell “NO!!!” 😉

  8. ReluctantMuscovite says:

    But compare this to other countries, where people admit to considerable levels of corruption, having paid bribes, etc. Are we implying that Russian’s simply have no idea what it means to pay a bribe, or that they are suddenly lying about it after whining about wide-spread bribes to the researchers? There’s something weird going on here. Not saying that nobody in Russia is paying a bribe — just wondering how reliable the data is in general, and what to make of it.

    RM

  9. Andy says:

    Not that they’re not able to recognise what a bribe is, just that Russians have a different cultural approach and, thus, terminology to bribery.

    Had the question been phrased differently to take into account a different cultural approach, the results may well have proved different.

    (By the way – I’m not saying that bribery is everywhere in Russia, just that it is a major problem. And, whatever way you look at it, compared to more developed economies, Russia does lag behind in this area).

  10. Depends on how you look at it ….

    Examples:

    a) I travel in my car. A cop stops me and wants to “fine” me for a broken tail light. The tail light works perfectly well. He charges 100 (whatsoever), threatens me to break the tail light if I do not pay and to charge me more, or even to arrest me.

    Bribe or “Trinkgeld” ?

    b) I travel second class on a train. It’s crowded. The conductor suggests that I may use the empty first class in exchange for a “Trinkgeld”. He’s the one who “checks” the tickets, nobody else. The fist class ticket would be three times more than I payed for second class ticket + “Trinkgeld”.

    Bribe or “Trinkgeld” ?

    People are angry about the “Trinkgeld” in a) as they do not profit from it. They rarely complain about the “Trinkgeld” in b).

    Note: a) and b), both happend to me. Both didn’t happen in Russia.

  11. ReluctantMuscovite says:

    Andy — important point about ‘Had the question been phrased differently to take into account a different cultural approach, the results may well have proved different.’

    Was the box of chocolates I gave to the nice ladies in the registration office AFTER they let me bypass the line a bribe or simply a gesture of appreciation?

    I think it was the latter. I am sure that if I had not given it to them, they would be just as nice next time, because all I did to get this done was be my most charming self [takes a lot of work, but I can be charming if I absolutely have to].

    I have sweet-talked my way out of fines in Germany and North America. All I do is make clear that I understand the situation of the person I am dealing with, I don’t demand, I ask very nicely and make them feel very good about themselves. Goes very far with almost all officials who are not completely brain-dead and automated. I charmed my way out of a fine here in Russia at least once — I pretended to be utterly incapable of the language and played dumb and nice at the same time. Saved me a thousand ruble fine.
    Is being nice to get your way a bribe? Is a smile and a joke that lightens up the day of the official a bribe if it speeds up the process/saves you a fine a bribe?
    Where does bribe start, where does plain civilized conduct end?

    Is a small bottle of cognac a bribe? Is a bunch of flowers a bribe? Is a box of nice chocolates a bribe?

    RM

  12. Andy says:

    It’s a very fine line, isn’t it, particularly when the gift is given after the event?

    Obviously, there are some cases where it is crystal clear that a bribe is being demanded or paid, but there are other times when the situation is far less clear.

    There often comes a point when gifts are ‘expected’, either explicitly or tacitly, and that’s where I’d argue we move into bribery territory. But, to make things even more difficult, that point will vary from culture to culture – the same action in Russia could be viewed in a completely different way in England, for example. And, it gets even more difficult, when you consider that what, on the face of it, seems like the same action carried out in two different contexts, even within the same culture, can have different implications depending on the many other factors behind the decision.

    How do you judge what is and what isn’t bribery in circumstances so close to the line? Difficult to say. Context, experience, gut feeling?

  13. ReluctantMuscovite says:

    Very much so. Which is why I have some problems with the TI report. I just feel the findings don’t match up — particularly when it involves Western businessmen and Westerners in general giving their two cents to the story as well.

    I’m currently doing a lot of reading on the scientific research into this, including the problems of conceptualizing corruption. It’s a real bag of worms.

    RM

  14. Can bribing be seen in the context of “protection rackets, monetary or non-monetary ? I am asking this just to be clear on the definition of “bribing”.

  15. ReluctantMuscovite says:

    No, corrupiton can only involve the “use of public office for personal gain”.

    Everything else is either just lousy business practice or plain-old crime. If it doesn’t involve government employees or institutions at least at some level, it can’t be corruption.

    RM

  16. RM: No, corrupiton can only involve the “use of public office for personal gain”.

    Well, thank you. I somehow gained the impression that e.g. the guy working in the purchasing department of some private company, taking / requesting money for giving an order to a particular side and not someone else, would be considered “bribing” as well.

    What I initially had in mind was “blackmailing”, like someone telling me “Let me do this or that or I will do something to you. I got mixed up there, sorry.

  17. Andy says:

    I think “use of public office for personal gain” is more of a legal definition, with respect to corruption (and bribery).

    Personally, I don’t really see much of a distinction in practice between a government official who takes a back-hander, in return for a ‘favour’ and a private employee who does the same.

  18. ReluctantMuscovite says:

    Ah, but in the context of THIS particular discussion, we are (hopefully) not talking about shoddy business practices. There IS a difference between the two, namely that the former makes it into the TI reports, while the latter doesn’t, unless I have been missing something.

    RM

  19. Andy says:

    The TI report seems to cover both public and business corruption, although it acknowledges that most people think public corruption is more frequent than business corruption.

  20. RM – Unfortunately there do not seem to be the differences in the English language like in German. Here we speak of “Vorteilsnahme” and “Voteilsgabe” on the private sector, of “Bestechung” und “Bestechlichkeit” on the public sector. In English the term “bribing” seems to be used for both sectors. At least this is what I understood.

    In some aspects of the language we Germans are obviously inspired by the Inuit, who have some 250 words for snow. 😉

  21. ReluctantMuscovite says:

    if the TI report includes business corruption as well, we’re having an even bigger problem to deal with (in regards to the report, I mean)

    RM

  22. Tim Newman says:

    Lived in Russia for much more than a year now, never paid a bribe. Never. Don’t know anybody who paid a bribe. Ever. Heard a lot of people complain about it. But, nobody who ever admits to having paid it. Funny.

    I can only assume that you don’t run a business, where to get any kind of license or certificate involves a mysterious “facilitation fee”, which doesn’t appear in any regulation or notice and for which you cannot get a receipt. I’m a general manager of a company here, I deal with this stuff on a daily basis. I don’t complain, it’s part of doing business, same as the sponsorship fees in the Middle East. But it’s bribery, pure and simple.

    I’ve only been in Russia 6 months and I have seen a fair bit of bribery. I handed over a couple of hundred roubles to avoid a speeding fine, my wife bunged the passport office a couple of hundred dollars to get a passport in a week rather than 6 months, at least three Russians I know very well bribed somebody to stay out of military service. In most cases, I prefer to enter into a financial arrangement with an official in Russia rather than being faced with some jobsworth in the UK who whines “But the system says….” and invites you to write a letter of complaint.

    Bribery is rife in Russia, but from what I’ve seen of the world there are only about 3 countries where bribery isn’t rife.

  23. GER O'BRIEN says:

    I used to criticise bribery all the time, acting like I was above it all -until it saved my arse one time.
    I overstayed a visa(I actually got drunk and never bothered going to the airport)and woke up not only to a hangover but also to the fact I was illegally in the country.
    I paid 250 dollars at the airport to, ahem, rectify the problem. If I hadnt, i’d have been officially fined and banned for five years. Paying 250 bucks is a lot better than having a big dirty ‘deported’ stamp on your passport.
    What is upsetting though is the necessity of bribes to get into university and get official documents quickly, etc. This is really damaging the country.

  24. ReluctantMuscovite says:

    Tim,

    are you in Moscow? Second question: do you think that bribery you experience makes business easier or more difficult?

    RM

  25. Tim Newman says:

    Hi RM,

    No, I’m in Yuzhno-Sakhalinsk, in the Russian Far East. Not having any experience of running a business in Moscow, I am quite ready to accept that things are different there.

    The second question is more difficult to answer. The bribery exists because the bureaucracy exists; the bribes become necessary to navigate the bureaucracy; and the ones taking the bribes are the ones managing the bureacracy. Therefore, the bribes are a consequence not a cause. So the answer to your question must surely be yes, as the bribes are often essential for certain requirements of the business, such as obtaining a sanitary certificate, for example. But the cause of the bribes, the bureaucracy, makes business infinitely more difficult.

  26. ReluctantMuscovite says:

    Tim,

    in your professional opinion then: do you believe that ‘corruption’ in Russia is discouraging businesses from doing business in Russia? Or do most businesses make a cost-benefit analysis and decide that after all, it’s still worthwhile to be in Russia?

  27. Tim Newman says:

    RM,

    Yes, the corruption in Russia does discourage businesses from setting up shop in Russia, as the payment of bribes costs money. However, some companies may decide the benefits of doing business in Russia outweigh the drawbacks of the corruption, and go ahead anyway. Others won’t. The day I am asked to pay a bribe to a major client to win a contract on Sakhalin is the day I close the business with the blessing of my boss. But so far, things aren’t that bad.

    The decision for a company going into business in a corrupt country is often decided by the level at which the corruption occurs. In the Middle East, generally you can pay one influential figure a handsome sum and from that point forward everything goes relatively smoothly. In Nigeria, you have to pay practically everybody at every level to get something done. The former case doesn’t present too much of a problem for businesses, they simply factor in the cost and charge the clients. In the latter case, the business struggles like hell and in most cases is unworkable.

    Russia is somewhere between the two, probably close to the latter rather than the former, but it really does depend on what you are trying to do and what type of business you are in.

  28. ReluctantMuscovite says:

    Thanks. As I said, I am currently researching this issue, so the opinions of business people do matter to me. I have one lawyer who has been active in Russia for more than a decade tell me bluntly that there is no need to pay a bribe in Russia, and that he advises people that when they are asked to pay a bribe to a) not do it and b) look for another business(partner).

    RM

  29. Tim Newman says:

    I suppose in theory there is no need to pay a bribe in Russia. You can always wait months for various official documents to be issued, or pay enormous fines for breach of a regulation you knew nothing about, instead of paying a bribe to get things done much faster. I’m sure there are a lot of companies that do this too (none of them French, I’ll wager :))

    Your lawyer friend might be refering to the practice of bribing contract holders into awarding contracts, which should be avoided at all costs unless it is the norm across the board in that country. This is a very different sort of bribery to paying officials to hurry the bureaucratic wheels along a bit faster.

  30. ReluctantMuscovite says:

    I’ll get back to him on this.

    Thanks for your take on all this.

    RM

  31. Thanks for your take on all this.

    I would also like to thank Tim for this great info. I really apprechiate it.