Russia is not only a political dictatorship – it’s an economic one too
Over the last few days, Russia has threatened to nationalise the assets of foreign companies. This underscores the fact that Russia is not only a political dictatorship, it is also economically unfree. The Heritage Foundation has been publishing the Index of Economic Freedom – a 472-page analysis of the state of economic freedom in 177 countries, also known as the “capitalism scale” – since 1995. Russia is ranked 43rd out of 45 countries in Europe.
Globally, Russia ranks only 113th in the most recently published index for 2022 and is placed in the “mostly unfree” category. Russia scores particularly poorly in the categories “Property Rights,” “Judicial Effectiveness,” and “Government Integrity,” as well as in “Investment Freedom” and “Financial Freedom.” Russia scores its lowest rating in the “Government Integrity” category, where even Cuba does better.
On the subject of the financial sector, the analysis states: “The financial sector is dominated by state-controlled banks.” And under the heading “Investment Freedom,” the report’s authors comment: “Private-sector trade and investment activities are undercut by structural and institutional constraints caused by state interference in the marketplace.”
The most important aspect of the analysis is that Russia would be in a much worse position in the ranking if it did not have above-average ratings in the areas of “Tax Burden” and “Fiscal Health,” where it scores 93.1 and 99.3 points out of 100. This is due to the country’s low tax rates and very low level of public debt. If the overall analysis were to exclude just the “Fiscal Health” rating, Russia would only score 52.1 points and would thus be ranked 140th out of 177 countries – directly behind Angola and only just ahead of Sierra Leone and Mozambique.
Russia’s low public debt is now of little benefit, as the major rating agencies recently downgraded Russia. Moody’s cut Russia’s credit rating to Ca, the second-lowest rung of its ladder, citing central bank capital controls that are likely to restrict payments on the country’s foreign debt and lead to default. Moody’s said its decision to cut Russia’s rating was “driven by severe concerns around Russia’s willingness and ability to pay its debt obligations.”
Although there are formal private property rights in Russia, these rights have been eroded in practice because the state exerts almost total control over the economy. Politically inconvenient entrepreneurs live in fear of prison or labor camps – as happened to Mikhail Borisovich Khodorkovsky, formerly Russia’s richest man, who spent ten years in prison and now lives in exile in London. Russia scored only 36.8 out of a possible 100 points in the Index of Economic Freedom’s “Property Rights” category, putting it on a par with Togo. China score of 43.7 is seven points better than Russia’s in this category.
Grigory Yavlinsky is one of the Russian economic reformers who wanted to transform the country toward capitalism in the 1990s. As early as 2015, he explained in an interview why this attempt had failed completely: “Small businesses are dependent on small bureaucrats, big businesses on big bureaucrats. No one can escape the influence of the state in Russia. And everyone lives in fear that their property will be taken from them if they resist. Business and state power are so interdependent in Russia to an extent that almost no one in the West can really imagine.”
As a result, Russia is one of the least capitalist countries in the world. In the wake of the collapse of the socialist order, a handful of oligarchs hijacked the country’s economy and established a kleptocracy. They are rentiers and largely live from the oil and gas business. The consequence is a highly inefficient economic system. Russia’s GDP in 2020 was just $1.5 trillion – even lower than Italy’s $1.9 trillion. Yet Italy has a population of just under 60 million, compared to Russia’s 144 million.
Unlike in Poland, where most people are positive about capitalism and say that the economic situation in their country today is better than it was under communism, the majority of Russians reject the system that is inaccurately called a market economy.
In a survey conducted from May to August 2019 in 17 countries by Pew Research Center, citizens in former socialist countries were asked whether they approve of the change to a market economy. In Poland, 85 per cent of respondents support the shift to capitalism and only 8 per cent disapprove. In Russia, by contrast, only 38 per cent welcome the system, which falsely calls itself a market economy, and 51 per cent disapprove.