This simple fact pinpoints a very intuitive explanation for the slowdown: Russia is no longer attractive for investors, neither foreign nor Russian. This explanation is also consistent with the fact that Russia experienced a net capital outflow of 3 percent of its GDP in 2012 and 2013. Also, Russian stocks were traded at about a 50 percent discount to other emerging markets even before Crimea.
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The investors are leaving Russia for a very simple reason: Russia’s investment climate (the rule of law and protection of investors’ rights) is very poor—at least relative to competing capital destinations. For a high-income, urbanized, and educated country, Russia is unusually corrupt.
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Rule of law and fighting corruption constrain the elite’s ability to extract rents from the economy and, thus, to hold on to power. Although these reforms are likely to result in faster GDP growth and prosperity for the whole country, they will reduce the incumbent elite’s ability to enjoy this prosperity.
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This problem is the key explanation of the Russian elite’s pref- erence for the status quo. The elite chooses to avoid institutional reforms that may raise the probability of political transition. More- over, high oil prices, and therefore substantial resource rents, further increase aversion to reforms by making incentives for staying in con- trol even higher.
The situation is therefore very close to the Brezhnevist zastoi (lit- erally, “stagnation”), the last period of Soviet history when high oil prices resulted in a lack of economic dynamism in the Soviet Union. Important economic reforms were delayed, economic growth dis- appeared, and once oil prices went down in the mid-1980s—the Soviet Union went bankrupt and disintegrated.
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The Crimean adventure has shown the world that Russia’s eco- nomic development and its integration into the global economy are a second-order priority for the Russian elite and can certainly be sac- rificed if the regime feels threatened. In the long run, this will under- mine investor confidence and remove the plausibility of restoring economic growth in Russia. Russian economic performance may still temporarily improve—for example, in the form of another oil price surge. However, long-term economic growth is unlikely to return, at least until a political transition takes place.
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