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Ease of doing business: Russia and post-Soviet area

(Based on the Reports prepared by the World Bank and the World Economic Forum).

As of December 2011 exactly 20 years had passed since the fall of the Soviet Union and the formation of 15 new independent states on the post-Soviet landscape and map. 20 years — is that a lot or little? How have these new states been developing and what have they achieved?

Firstly, it is worth noting that all these countries vary greatly in terms of their territory size, availability of natural resources, economic potential and population. The political and economic relations between these former ‘tight-knit republics’ have evolved in a rather complex manner over the years. Some states have distanced themselves, while others are striving towards integration. Ten countries are a part of the Commonwealth of Independent States (CSI), which was created to regulate economic affairs between former Soviet countries; while the three Baltic countries are currently members of the European Union.

However, no unexpected turns in development have happened over the last 20 years: one can trace certain historical tendencies that have been commonplace over the past few decades when these countries lived side-by-side.

According to The Global Competitiveness Report 2011-2012 (prepared by the World Economic Forum), countries on the post-Soviet landscape are at different levels of development:

  1. Russia and the Baltic countries (Estonia, Latvia, Lithuania) are transitioning from the 2nd to the 3rd stage of development (efficiency driven to innovation driven)
  2. Armenia, Azerbaijan, Georgia, Kazakhstan, Ukraine are transitioning from the 1st to 2nd stage of development (factor driven to efficiency driven)
  3. Kyrgyzstan, Moldova, Tadzhikistan are on the 1st stage of development (factor driven)

Ranking 11th in the world in GDP, Russia undoubtedly far outdistances other Soviet countries (Russia’s GDP is 10.5 times greater than Kazakhstan’s, Ukraine’s, 40 times greater than the most highly developed Baltic country, Lithuania, and 318.5 times greater than Kyrgyzstan’s GDP (pic. 1). The total fraction of the listed countries amounts for 1.04% of the world economy, which is three times less than Russia’s fraction of GDP as a share of world GDP. (One should not forget that based on this statistic Russia is ranked 6th in the world, squeezing in between Germany and Brazil).

Ranking of Gross domestic product
Pic. 1. Ranking of Gross domestic product

Russia has the largest population in the group considered, therefore in GDP per capita it is only 4th in this group (pic. 2), lagging behind the Baltic States.

Ranking of GDP per capita
Pic. 2. Ranking of GDP per capita

Even so, in the Global Competitiveness Index Russia does not exactly come out on top (pic. 3): its competitive performance level is evaluated as being lower than the Baltic countries and Azerbaijan. Relative to the 2010-2011 ranking Russia has slipped three spots. The Report notes that “the drop reflects the fact that an improvement in macroeconomic stability was outweighed by deterioration in other areas, notably the quality of institutions, labour market efficiency, business sophistication, and innovation.” Institutional framework is an area 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 area.”

The Global Competitiveness Index 2011-2012 ranking
Pic. 3. The Global Competitiveness Index 2011-2012 ranking

“You are so heavy, the cap of Monomakh! (Note – A Russian popular saying which means it is so hard to be the ruler).

It is evident that doing business in Russia is not exactly a piece of cake! In this sense Russia is at the bottom of the list, it is more difficult to do business only in Tadzhikistan, Ukraine and Uzbekistan (pic. 4).

World Bank Ranking of Ease of doing business
Pic. 4. World Bank Ranking of Ease of doing business

Dealing with construction permits is a main stumbling block for the majority of post-Soviet countries. Ukraine is the worst for this (182nd) despite the fact that the number of formalities is two times less than in Russia and the amount of time required to receive all necessary documents is dramatically less. However, the cost (% of income per capita) is the highest in the group –1.462%. Georgia is the easiest and fastest country for receiving building permits (4th position).

Georgia leads the group in the category of ‘starting a business’ (7th place in the ranking): there are only two formalities that take two days and cost 0.2% of income per capita and minimal capital is 0.0% of income per capita. It is relatively easy to start a business in Belarus (9th) and Armenia (10th). Russia is 111th in this category. Ukraine is right behind in 112th.

However, starting a business is only half the battle, the other is maintaining it. The third factor, paying taxes, is a sore spot for the mentioned countries. On the post-Soviet landscape the lowest total tax rate (% of profit) is in Kazakhstan (28.6% and 13th in the world ranking), but the highest rates are in Tadzhikistan (84.5%) and Uzbekistan (97.5%)! It is worth pointing out that the total tax rate (% of profit) is 46.9% in Russia.

According to the Report, Ukraine has the most complex taxation system (181st out of 183 countries): the amount of required payments throughout the year—135 and on average 657 hours are spent a year on preparing all these declarations and tax forms. The total tax rate is 57.1% of profit.

Besides the three aforementioned factors, the ranking also evaluated factors like: getting electricity, registering property, obtaining credit, protecting investors, trading across borders, enforcing contracts, resolving insolvency.

The most problematic issue for Russia is getting electricity, i.e. all procedures required for a business to obtain a permanent electricity connection and supply for a standardised warehouse, including applications and contracts with electricity utilities, all necessary inspections and clearances from the utility and other agencies. Russia is dead last in this category! This is mostly due to high connection costs (one of the highest in the group at 1.852% of income per capita) and the number of formalities necessary (10) for receiving the necessary services.

Russia is at the top of both post-Soviet and BRICS countries in the category enforcing contracts, i.e. the indicator measures the efficiency of the judicial system in resolving a commercial dispute. The lowest efficiency of the judicial system in resolving a commercial dispute is in Armenia (91st on the list).

Registering property in Russia is not too arduous. It is easiest of all to do this in Georgia where there is one formality that takes up to two days costing 0.1% of the property value. It is most difficult to register property in Ukraine (166th position).

Latvians can obtain credit the easiest (4th spot) and Tajiks find it most difficult (177th spot). Russia is ranked 98th in this category.

Investors are most well-protected in Kazakhstan (10th spot). Investors in Uzbekistan are worst off (133rd position) and Russia is also near the bottom of the barrel in 111th with Ukraine and Moldova.

Corruption is one of the most problematic factors for doing business for all countries excluding Estonia and Georgia. The lowest average figure for this factor is in Latvia and Lithuania (11.8 and 12.2 respectively). Russia and Kyrgyzstan have the highest at 22.8 and 20.4 respectively.