Roots of Russia's Economic Dilemmas: Liberal Economics and Illiberal Geography

Abstract

ONE OF THE STRIKING ASPECTS of Russia’s economic course in the 1990s is the dearth of capital investment, both foreign and domestic. Investment is an essential requirement if Russia is to experience a sustained economic recovery from the shocks of Soviet disintegration and the often incoherent economic policies pursued in the early post-Soviet years. By any standard—for example the levels of foreign direct investment going into the East Central European countries or the capital requirements of reversing the general obsolescence of Russia’s transport, communications and even mining infrastructures—the Russian economy is starving for direct capital investment. Why has this been the case? A widespread view has it that uncertainties about political stability and legal and administrative reliability have scared off investors from a risky Russian market and caused them to look elsewhere. While we are far from wishing to contest this interpretation, it may not go far enough in explaining the hesitancy of investors to commit to substantial, long-term projects in the Russian Federation. Even were Russia to establish effective and impartial public institutions, there would remain for many investors signie cant hurdles in the form of the unusually high costs of production in Russia, especially for large-scale infrastructure projects and the development of distant Siberian regions. This article advances the thesis that there are specie cally Russian aspects of economic geography, in the form of severity of climate, distance (including the dislocation of population as compared to natural resources) and the preponderance of costly land transport over cheap sea transport, that tend to make the costs of production in Russia a multiple of what they are almost everywhere else in the world. Under these circumstances, the Russian state must play a central role in economic development if Russia is to develop as a civilisation, as distinct from certain raw materials enclaves. The article examines the infrastructure crisis facing the Russian economy after a decade of cumulative capital depreciation, the scale of investment requirements over the next decade, and the ways in which geographical factors impinge upon the costs of production and the decision to invest. In the conclusion, an essentially Keynesian approach will be applied to the problem of Russian economic development in an increasingly liberal international political economy.