Even as the Kremlin redoubled efforts to improve Russia’s investment climate, yet another report from a reputable global institution showed the country losing its competitive advantage, as the government continues to exert a stranglehold over the economy. Russia’s largely resource-based economy continued to fare poorly compared to the economies of other emerging markets, according to the World Economic Forum's latest Global Competitiveness Report. Russia dropped three places from last year’s ranking to 66th, a notch below Vietnam, said the report, which was published on Wednesday.

“The drop reflects the fact that an improvement in macroeconomic stability was outweighed by deterioration in other areas, notably the quality of institutions, labor market efficiency, business sophistication, and innovation,” said the authors of the report.

The biggest worry about Russia, however, is the growing weakness of its financial institutions. Despite the ongoing efforts to boost the investment climate and restructure the country’s financial sector, Russia received its lowest grade – 129th – in WEF’s assessment of its financial institutions. Russian President Dmitry Medvedev has been spearheading efforts to transform Moscow into an international financial center able to compete with other regional financial hubs. But factors such as poor financial infrastructure and the limited size of the financial market have forced many Russian companies to seek to raise long-term capital on international exchanges, said Peter Necarsulmer, whose PBN Company advises investors on initial public offerings (IPOs).

A relatively weak institutional framework and the low efficiency of its goods market were also cited among the challenges facing Russia, together with a loss in confidence and trust in the judicial system. “The lack of progress with respect to the institutional framework is of particular concern, as this area is likely to be among the most significant constraints to Russia’s competitiveness. Strengthening the rule of law and the protection of property rights, improving the functioning of the judiciary, and raising security levels across the country would greatly benefit the economy and would provide for spillover effects into other areas,” the report said.

Russia still benefits from its high innovation potential, its large and growing market size, and its solid performance in higher education and training. But that was not enough to offset the cumulative challenges in other areas, especially the weakness of banks and lack of ease of access to various forms of capital, the report said. “Taken together, these challenges reduce the country’s ability to take advantage of some of its strengths. Competition, both domestic as well as foreign, is stifled by market structures dominated by a few large firms, inefficient anti-monopoly policies, and restrictions on trade and foreign ownership,” the authors said.

The latest report also indicates that the state of the Russia's economy is much worse than in some of the countries in the Middle East, as well as among the so-called the BRICS countries (Brazil, Russia, India, China, and South Africa). Among the BRICS, India ranked 56th, on a par with South Africa at 50th and Brazil at 53rd. However, China, which ranked 26th, continued to lead the way among large developing economies and its BRICS peers, improving by one more place and solidifying its position among the top 30, the report said.

However, Russia outperformed some of its ex-Soviet peers, including Kazakhstan and Ukraine, according to the report. After falling 16 places over the last two years, Ukraine reversed the trend and moved up seven positions this year. Like Russia, the country continues to demonstrate a number of competitive strengths, such as a well-educated population, flexible and efficient labor markets, and a large market size.

The WEF’s report, first published in 1979, aims to rank the soundness of an economy and a country's ability to provide sustainable prosperity. The research combines public data, like debt levels and inflation rates, with an opinion poll of over 14,000 business leaders in a record 142 economies. The results shows that while competitiveness in advanced economies has stagnated over the past seven years, in many emerging markets it has improved, placing their growth on a more stable footing and mirroring the shift in economic activity from advanced to emerging economies.

Switzerland topped this year’s overall rankings, with Singapore overtaking Sweden for second position. Northern and western European countries dominated the top ten, with Sweden coming third, Finland fourth, Germany sixth, the Netherlands seventh, Denmark eighths and the United Kingdom tenth. Japan remained the second-ranked Asian economy at ninth place, despite falling three places since last year. The United States continued its decline for the third year in a row, falling one more place to fifth position. In addition to the macroeconomic vulnerabilities that continue to build, some aspects of the United States’ institutional environment continue to raise concern among business leaders, particularly related to low public trust in politicians and concerns about government inefficiency.

Russia Profile