RUSSIA
Rank: 120 Regional Rank: 39 of 41
ussia’s economy is 54 percent free, according to our 2007 assessment, which makes it the world’s 120th freest economy. Its overall score is 0.3 percentage point lower than last year, partially reflecting new methodological detail. Russia is ranked 39th out of 41 countries in the European region, and its overall score is much lower than the regional average.
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The economy is 54% free
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Russia enjoys high levels of fiscal freedom, labor freedom, and business freedom. The top income and corporate tax rates are 13 percent and 24 percent, respectively, although overall tax revenue is relatively high as a percentage of GDP. The labor system is only partially flexible; dismissing a redundant employee is simple, but regulation in other areas is rigid. Russia’s significant weaknesses lie in monetary freedom, investment freedom, financial freedom, property rights, and freedom from corruption. Foreign investment in virtually all sectors faces both official and unofficial hurdles, including bureaucratic inconsistency, corruption, and outright restrictions in lucrative sectors like energy. Corruption engenders a weak rule of law, which in turn reinforces the transience of property rights and arbitrary law enforcement. BACKGROUND: The 1991 collapse of the Soviet Union was a seminal event in Russian history. Russia seems to have moved to a “managed democracy”—a soft authoritarianism—under President Vladimir Putin. The economy continues to depend heavily on sales of natural resources, especially oil and natural gas. Russia has almost paid off its debts and is enjoying an impressive $200 billion hard currency reserve. Although Russia aspires to join the World Trade Organization, weak intellectual property rights and protectionism in the natural resources sector make accession difficult.
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40
Europe Average = 67.5 World Average = 60.6
20
0
1995
2007
QUICK FACTS
Population: 143.9 million GDP (PPP): $1.4 trillion 7.2% growth in 2004 6.9% 5-yr. comp. ann. growth $9,902 per capita Unemployment: 8.2% Inflation (CPI): 10.9% FDI (net inflow): $2.1 billion Official Development Assistance: Multilateral: $189 million Bilateral: $1.2 billion (64% from the U.S.) External Debt: $197.3 billion Exports: $203.7 billion Primarily petroleum, petroleum products, natural gas, wood, wood products, metals, chemicals, civilian and military manufactures Imports: $130.1 billion Primarily machinery and equipment, consumer goods, medicines, meat, sugar, semi-finished metal products
How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
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RUSSIA’S TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 66.6 62.6 86.3 71.6 62.8 30 40 30 24 66.2
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INVESTMENT FREEDOM — 30%
Official and unofficial barriers impede foreign investment in Russia. Officially, Russia restricts investments in aerospace, natural gas, insurance, electric power, defense, natural resources, Russian liquor concerns, and large-scale construction projects. Corruption is a serious unofficial barrier to foreign investment. In 2005, the government announced a decision barring foreign-controlled companies from bidding on its most lucrative natural resources. Residents and non-residents may hold foreign exchange accounts, subject to restrictions and government approval in some cases. Payments and transfers are subject to restrictions and surrender requirements. Transactions involving capital and money market instruments, derivatives, and credit operations are subject to central bank authorization in many cases.
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50 100
100 = most free,
= world average
BUSINESS FREEDOM — 66.6%
Starting a business takes an average of 28 days, compared to the world average of 48 days. Both obtaining a business license and closing a business are difficult. Regulations are inconsistent, causing unreliability of interpretation, and laws are implemented unevenly. Bureaucratic obstacles are a particular problem for small businesses. The overall freedom to start, operate, and close a business is somewhat protected by the national regulatory environment.
FINANCIAL FREEDOM — 40%
Russia’s financial system, which was strongly affected by a 1998 financial crisis, consists primarily of banking. Both supervision and transparency are insufficient. The 1,000 licensed and registered banks in Russia are generally small and undercapitalized. Patron relationships between industries and banks continue. The banking sector is dominated by two state-owned banks, which together account for a large minority of banking assets. Foreign banks may operate only as subsidiaries and must have a minimum number of Russian employees and board members. Foreign investment in the sector is capped at 12 percent of total banking capital. The state has a 25 percent stake in the largest insurer. Foreign insurers together may not control over 15 percent of the insurance market and are barred from the life insurance market. Capital markets are relatively small and are dominated by energy companies.
TRADE FREEDOM — 62.6%
Russia’s weighted average tariff rate was 8.7 percent in 2002. Prohibitive tariffs, quotas, discriminatory and prohibitive taxes, charges and fees, non-transparent regulations and standards, discriminatory licensing, registration, and certification rules, and weak enforcement of intellectual property rights add to the cost of trade. Consequently, an additional 20 percent is deducted from Russia’s trade freedom score to account for these non-tariff barriers.
FISCAL FREEDOM — 86.3%
Russia has a low income tax rate and a moderate corporate tax rate. The income tax rate is a flat 13 percent, and the top corporate tax rate is 24 percent. Other taxes include a value-added tax (VAT), a property tax, and a transport tax. In the most recent year, overall tax revenue as a percentage of GDP was 36.1 percent.
PROPERTY RIGHTS — 30%
Protection of private property in Russia is weak. The judicial system is unpredictable and corrupt, and contracts are difficult to enforce.
FREEDOM FROM CORRUPTION — 24% FREEDOM FROM GOVERNMENT — 71.6%
Total government expenditures in Russia, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 33.6 percent of GDP, and the government received 6.1 percent of its revenues from state-owned enterprises and government ownership of property. Privatization has been hasty and very chaotic. Corruption is perceived as widespread. Russia ranks 126th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.
LABOR FREEDOM — 66.2%
The labor market operates under somewhat flexible employment regulations that could be improved to enhance overall productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee can be easy. Characterized by limited and restricted labor mobility across regions, the labor market is still fragmented. Regulations on increasing or contracting the number of work hours are rigid.
MONETARY FREEDOM — 62.8%
Inflation in Russia is high, averaging 12.3 percent between 2003 and 2005. Relatively high and unstable prices explain most of the monetary freedom score. The government influences prices through regulation, extensive subsidies, and numerous state-owned enterprises and utilities. Consequently, an additional 15 percent is deducted from Russia’s monetary freedom score to account for these policies.
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2007 Index of Economic Freedom