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The Secret Recipe for Developing Russia's Economy

To successfully develop, Russia needs a national economic strategy that will free it from the disadvantages of the liberal model imposed on the country in the 90's

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This post first appeared on Russia Insider

In an introduction to this article Russian politician and leader of The “Great Motherland Party (Velikoe Otechestvo) NIkolai Starikov,  writes:

My party is running in this year’s elections for the State Duma with a fully developed economic program. Gennady Zakimatov, the party activist and expert from St. Petersburg outlines in layman’s terms the basic steps to lead Russia’s economy out of the deadlock that resulted from the liberal policies of Dmitri Medvedev’s government”.

Let us consider the minimum requirements that economic strategies for Russia should meet, which result from the unique environmental conditions of our country.

– First, there are large reserves of  raw materials resources, whose production is very profitable. In a market economy the export of raw materials is more profitable than that of manufactured products. There is a so-called "Dutch disease" (“or Russian commodity curse"), pushing the economy into raw materials specialization in the international division of labour and into dangerous dependence on countries exporting high value added products. This situation inhibits the development of Russia’s own manufacturing industries and agriculture; 

– Secondly, the climate in Russia is one of the coldest in the world, while transport distances are the greatest, increasing production costs compared with other countries. The share of transport costs in production is 15-20% compared to 7-8% in other industrialized countries, and the energy intensity of Russia's GDP is 2.5 - 3.5 times higher.

The low mobility and high cost of labour contribute to the lower cost-effectiveness of finished agricultural products than in countries with a more favorable climate. Construction in Russia is more expensive and the need to ensure security and defense over a large area raise the tax burden per inhabitant.

In order to neutralize the negative environmental factors, Russia needs to:

Maintain low domestic prices for raw materials and part-processed products - our only competitive advantage that can really attract investors. This requires the strict regulation of the export and regulation of domestic prices in order to saturate the domestic market.

Import substitution makes it possible to substantially change the commodity cycle from external to internal consumption and develop domestic production, increasing the domestic incomes as well as the budget, providing military and economic security while increasing the Russian economy’s resistance to global economic crises.

A centrally directed  investment process, which allows the state to counter market forces by directing the economy towards manufacturing industries, while not degrading Russia’s raw materials trove.

Mobilizing resources for investment development. The current level of investment does not solve the essential problems of the country (demography, economic modernization, defense, etc.). They constitute only 18% of GDP, compared to 25-30% in developed countries and more than 40% in China.  

A policy of reasonable protectionism helps protect the domestic market from excessive foreign competition in unequal competitive conditions. The share of products manufactured within the country should be at least 80%.

Analysis shows that a market economy cannot solve this problem. In particular, it does not have the ability to mobilize resources to significantly increase  investment and the rate of economic growth. The Russian-style market economy cannot suppress inflation in order to make businesses and consumer loans affordable, increasing investments and the demand for finished products. This is related to the fact that the Central Bank of Russia and the government are forced to maintain an undervalued RUR exchange rate.This increases the price of imported products and reduces the price of our exports, protecting the domestic producer who is in unequal competitive conditions in comparison to a foreign one. It is almost impossible to reverse this policy because a higher exchange rate would cause a catastrophic decline in manufacturing and agricultural output, followed by  mass unemployment and social protests.\

In conclusion, the main reason for the economic failure of the last two decades and current economic stagnation is the liberal market economy’s poor fit with Russian climate conditions and the resulting mentality. That is why existing strategies have failed.

This is the key to solving the problems of social and economic development of the country. The current liberal economic model is only functions in favorable economic conditions, when business invests to make bigger profits. Under adverse conditions, these decline, as in Russia. 

To successfully develop, Russia needs its own economic model, a national economic strategy that will free it from the disadvantages of the liberal model imposed on the country in the 90's. In addition to market mechanisms, the national economic model should enable direct state management of enterprises in order to counter market forces, ensuring the efficiency of the economy as a whole. There needs to be a two-tier system, that would harmoniously combine the principles of planned and market economies. 

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