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When comparing modern Russia to other countries, we fail to take several things into account that make Russia an expensive place to do business (which is reflected in the fact that even domestic capital has been on the run abroad ever since the collapse of the USSR):

  1. Vast territory with unequally distributed natural resources (most natural resources are in Eastern territories while main consumption markets for them are in the Western territories, hence high transportation costs throughout the country);
  2. The direction of navigable waterways (which are the cheapest way of transportation) does not match the direction of the main flows of goods within the country (hence higher transportation costs again and the need for expensive transportation infrastructure (e.g. oil pipelines));
  3. Sever climate conditions with average temperatures lower than in countries like Finland and Sweden (hence low profitability of agriculture, higher capital investments requirements, higher construction costs, high heating costs);
  4. Ethnical diversity of the population with conflicting values and traditions, etc.

Besides in an economy with various social and economic structures functioning within a single society, modernization of some sectors occurs at the expense of others (Stalin’s industrialization “plundered” agriculture, the military-industrial complex later “plundered” the light industry and consumer sector).

In these conditions, the Russian economy’s profitability has always been low with the state acting as the main investor since private business reasonably leans towards more profitable and less capital-intensive sectors. In an attempt to boost profitability, businesses place some their burden on the shoulders of consumers or the government by reducing the quality of products, lowering customer service standards, evading taxes, etc. They are very reluctant to invest in long-term projects preferring a “hit-and-run” approach to conducting business. Large companies benefit from economies of scale, which monopolizes the economy and grants to the most privileged access to the most profitable sectors (e.g. oil and gas).

Boris Anisimov

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