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The Russian economy looks doomed

The Russian economy looks OK from the outside, but look deeper and it is doomed by corruption and demographics.

LET’S play a game of I spy with my little eye. I spy an economy which has one of the lowest public debt to GDP ratios in the world, at just 12 per cent, having fallen from 92 per cent at the turn of the century.
It has a flat rate of personal income tax of just 13 per cent and one of the lowest effective corporate tax rates in the world, according to a 2017 study by the US Congressional Budget Office.
I spy an economy, which has introduced a fiscal rule to constrain the government from spending too much money in the good years. And I spy an economy, which has run a significant current account surplus for most of the past 20 years.
That’s a pretty impressive resume for any economy, except it’s not.
The economy in question is Russia, and its long-term outlook is very poor indeed.
Despite these misleading figures, Russia is poor and likely to remain so. According to IMF estimates for 2017, Russia ranks 64th in the world for per capita GDP at $10,250. World Bank and UN estimates for 2016 ranked Russia at 61st and 70th in the world respectively.
The Russian economy grew strongly in the decade prior to the financial crisis, averaging seven per cent per annum GDP growth. But then the lights went out. Subsequent growth has averaged a mere 0.4 per cent.
Unsurprisingly, the collapses in the oil price in 2008-09 and 2015-16, were associated with sharp contractions in GDP. But the problem is as much structural as cyclical. Russia is an energy dependent economy in a world trying to reduce its dependence on fossil fuels.
Russia faces two enormous structural challenges, which it shows no sign of overcoming. The first is corruption, and very much here and now. The second is the declining working population in the future.
Transparency International’s latest Corruption Perception Index, which ranks countries from best to worst in terms of corruption, ranks Russia 131st out of 176 countries, tied with Kazakhstan.
The index also shows no sign of improvement in recent years. (For reference, Denmark ranked first, North Korea last).
The first time I went to the then Soviet Union was in 1989. At a private party, I met a KGB Colonel who proposed a vodka toast to “the Soviet Union, the worst run country on earth”. Since then, Russia has ditched communism, but not corruption. Another KGB colonel, Vladimir Putin, has become one of the richest men in the world.
Russia will experience a population implosion over the coming decades, with its working-age population projected to fall by 20 per cent between now and 2050.
This presents an enormous challenge. We’ve already seen that fluctuations in the oil price can swing the economy from recession to recovery and back again. If oil prices remain at current levels, economic growth is likely to stay at current rates as well – around 1.5 per cent last year. Throw in future working-age population decline, and the Russian economy could struggle to grow at all.
The former Soviet Union was a wounded beast, dragged down by the consequences of communism. Contemporary Russia is also a wounded beast, dragged down by corruption and demographics.