2009 Index of Economic Freedom

Quick Facts

Population:

• 142.5 million

GDP (PPP):

• $1.9 trillion
• 7.4% growth
• 6.6% 5-year compound annual growth
• $13116 per capita

Unemployment:

• 6.2%

Inflation (CPI):

• 9.0%

FDI Inflow:

• $28.7 billion

Russia's economic freedom score is 50.8, making its economy the 146th freest in the 2009 Index. Its score is 1 point higher than last year, reflecting improved scores in four of the 10 economic freedoms, especially trade freedom. Russia is ranked 41st out of 43 countries in the Europe region, and its overall score is below the world average.

Russia scores above the world average only in fiscal freedom and government size, partly because of earlier taxation and budgetary management reforms. The oil and gas sector has driven strong economic growth, but overdependence on the energy sector increases volatility and the risk of a sudden loss of competitiveness.

State involvement in economic activity remains considerable, and institutional constraints on economic freedom are severe. Non-tariff barriers add significantly to the cost of trade. Inflation is high, and prices are heavily controlled and influenced by the government. Virtually all foreign investment faces official and unofficial hurdles, including bureaucratic inconsistency, corruption, and outright restrictions in lucrative sectors like energy. Corruption weakens the rule of law and increases the fragility of property rights and the arbitrariness of law enforcement.

Background Back to the top

The Russian Federation was formed in 1992 after the dissolution of the Union of Soviet Socialist Republics. President Boris Yeltsin’s erratic rule (1991–1999) was replaced by a more authoritarian “sovereign democracy” under President Vladimir Putin (2000–2008). Dmitry Medvedev, Putin’s protégé, was elected president in March 2008, but Putin remains as prime minister. After chaotic privatization in the 1990s, the state has reasserted its role in extractive industries and some other sectors and depends heavily on sales of natural resources, especially oil and natural gas. A growing consumer economy is bolstered by an emerging middle class. Russia, in partnership with China, is a founding member of the Shanghai Cooperation Organization. Ac-cession to the World Trade Organization has stalled.

Business Freedom 54.0 Back to the top

The overall freedom to conduct a business is limited by Russia's regulatory environment. Bureaucratic obstacles are a particular problem for small businesses. Obtaining a business license takes much more than the world average of 18 procedures and 225 days. Bankruptcy proceedings can be lengthy and difficult.

Trade Freedom 60.8 Back to the top

Russia's weighted average tariff rate was 9.6 percent in 2005. Prohibitive tariffs, quotas, and services market access barriers; import and export restrictions; discriminatory import and export taxes, charges, and fees; non-transparent regulations and standards; discriminatory licensing, registration, and certification; complex and non-transparent customs valuation; customs fees; inefficient and arbitrary customs administration; subsidies; corruption; and weak enforcement of intellectual property rights add to the cost of trade. Twenty points were deducted from Russia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 78.9 Back to the top

Russia has a low income tax rate and a moderate corporate tax rate. The individual 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) and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 36.9 percent.

Government Size 70.6 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 31.3 percent of GDP. The state maintains a strong presence in such key sectors as energy and mining. The reform agenda includes a new framework for saving and distributing oil revenues, as well as measures to address anticipated spending increases for public welfare and social projects.

Monetary Freedom65.5 Back to the top

Inflation is high, averaging 9.5 percent between 2005 and 2007. The government influences prices through regulation, extensive subsidies, and numerous state-owned enterprises and utilities. Fifteen points were deducted from Russia's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom30.0 Back to the top

Foreign and domestic investments are treated equally under the law, although the government tends to prefer joint ventures with foreign companies as a minority shareholder, especially in strategic sectors. Investment is restricted in many areas. Government approval is required for all investments over 50 million rubles (about $2 million), investment ventures in which the foreign share exceeds 50 percent, or investments in housing and construction projects. Inconsistent and burdensome government regulation, unreliable contract enforcement, inadequate infrastructure, and corruption deter investment. Residents and non-residents may hold foreign exchange accounts, subject to restrictions. Capital payments and transfers are also subject to restrictions. Foreign ownership of non-agricultural land that is not located near international borders is permitted.

Financial Freedom40.0 Back to the top

Russia's financial sector is not fully developed and is subject to government influence. Supervision and transparency are insufficient, although regulation improved in 2006. The more than 1,000 licensed and registered banks are generally small and undercapitalized, but consolidation is underway. The Central Bank of Russia regulates the banking sector, which is dominated by two state-owned banks. Foreign banks may establish subsidiaries, but the government has not permitted foreign banks to set up branches in Russia. As of 2007, there were 857 insurance companies, 27 of which are foreign-controlled. Capital markets are relatively small but growing and are dominated by energy companies.

Property Rights25.0 Back to the top

Protection of private property is weak. The judicial system is unpredictable, corrupt, and unable to handle technically sophisticated cases. Contracts are difficult to enforce, and an ancient antipathy to them continues to impede Russian integration into the West. Mortgage lending is in its initial stages. Violations of intellectual property rights continue to be a serious problem.

Freedom From Corruption23.0 Back to the top

Corruption is perceived as pervasive. Russia ranks 143rd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption remains all-encompassing, both in the number of instances and in the size of bribes sought. Manifestations include misuse of budgetary resources, theft of government property, kickbacks in the procurement process, extortion, and official collusion in criminal acts. Customs officials are extremely inconsistent in their application of the law.

Labor Freedom60.0 Back to the top

Russia's relatively rigid labor regulations discourage overall employment and productivity growth. The non-salary cost of employing a worker is high, and the difficulty of firing a worker creates a disincentive for additional hiring. Regulations related to the number of work hours are rigid.