Analysis

Does strong Russian leadership mean a weak economy?

5 Jun 2014
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Region: 
Russia & CIS

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The Russian economy, fuelled by high energy prices, boomed during the first decade of this century. But in recent years the limits of the current economic model have become clear as growth has slowed. Many among the Russian elite understand the need to modernise and diversify the economy. Even so, Russia is a serial under-reformer. More recently the Ukraine crisis has seen the economy stall, with capital flowing out, interest rates up and the rouble under pressure. Sanctions are partly to blame, but the bigger problem is political risk and uncertainty. The state has become harder to predict and appears indifferent to the economic consequences of its actions, while the agreements in May to establish a Eurasian Economic Union and export gas to China suggest Russia is pursuing a trade policy based more on geopolitics than commercial logic. Staccato progress on reform and the rise in political risk means the outlook for investors has deteriorated. Strong, centralised leadership, with an apparent insensitivity to the consequences of policy choices may turn out to be a source of weakness, if it continues to exacerbate Russia’s economic vulnerabilities.

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