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2011 Index of Economic Freedom

2011 Index of Economic Freedom

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Source: http://www.heritage.org/Index/
Source: http://www.heritage.org/Index/

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Published by: jdfogg on Apr 08, 2011
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World Rank: 143

Regional Rank: 41

Russia’s economic freedom score is 50.5, making its econo-
my the 143rd freest in the 2011 Index. Its score is 0.2 point
better than last year, reflecting minor improvements in four
of the 10 economic freedoms. Russia is ranked 41st out of 43
countries in the Europe region, and its overall score is below
the world and regional averages.

Economic freedom is severely challenged in Russia. While
strong returns from hydrocarbons have buoyed its econo-
my, prospects for sustained long-term diversification and
growth remain dim. An increasingly statist approach to
economic management adds to the cost of investment and
mutes private-sector dynamism. Pervasive corruption and
limited respect for property rights hinder the development
of economic activity that is free from government control or
influence. Macroeconomic instability is a drag on economic
growth.

Fiscal freedom is the one area in which Russia is at the fore-
front. Russia’s competitive flat income tax rate and low
corporate tax rates support innovation, although private
enterprises also must cope with “informal taxes” such as
bureaucratic hassling and corruption.

Background: The Russian Federation emerged following
the dissolution of the Soviet Union in 1991 and adopted a
new constitution following violent confrontations in 1993.
Russia’s increasingly centralized government has tightened
controls on civil society. Dmitry Medvedev was elected pres-
ident in March 2008, but former President Vladimir Putin
remains prime minister and leader of the ruling United
Russia party. Medvedev’s efforts to improve the rule of law
have stalled. The state has reasserted its role in the extrac-
tive industries and depends heavily on exports of natural
resources, especially hydrocarbons. The global financial cri-
sis, overregulation, pervasive corruption, and the war with
Georgia sparked capital flight in 2008, and GDP contracted
in 2009. Moscow has an agreement with Ukraine to extend
basing of the Black Sea Fleet in Crimea for an additional 25
years from 2017.

Quick Facts

Population: 141.4 million
gdP (PPP): $2.1 trillion
–7.9% growth in 2009
3.1% 5-year compound annual growth
$14,920 per capita
unemployment: 8.4%
Inflation (cPI): 11.7%
FdI Inflow: $38.7 billion

Economic Freedom Score

Country’s Score Over Time

Country Comparisons

Least Most
free free

50
25 75

0 100

50.5

1995 ’97 ’99 ’01 ’03 ’05 ’07 ’09 2011

30

40

50

60

70

0

20

40

60

80

100

50.5

Country

59.7

World
average

66.8

Regional
average

84.1

Free
economies

344

2011 Index of Economic Freedom

RUSSIA (continued)

THE TEN ECONOMIC FREEDOMS

Business Freedom

No. 142

Trade Freedom

No. 134

Fiscal Freedom

No. 59
Government Spending No. 101
Monetary Freedom

No. 165

Investment Freedom

No. 146

Financial Freedom

No. 106

Property Rights

No. 139
Freedom from Corruption No. 148
Labor Freedom

No. 81

COUNTRY’S WORLD RANKINGS

BUSINESS FREEDOM: 50.7

1.5

Burdensome regulations continue to hinder private-sector
development. The regulatory system suffers from corrup-
tion and a lack of transparency. Bureaucratic obstacles and
inconsistent enforcement of regulations inject considerable
uncertainty into entrepreneurial decision-making and are
a particular problem for small businesses.

TRADE FREEDOM: 68.2

0.2

Russia’s weighted average tariff rate was 5.9 percent in
2009. Prohibitive tariffs, services market barriers, import
and export restrictions, non-transparent regulations and
standards, discriminatory licensing, complex and non-
transparent customs valuation and administration, sub-
sidies, 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: 82.7

+ 0.4

Russia has relatively low taxes. The individual income tax
rate is a flat 13 percent, and the top corporate tax rate is 20
percent. Other taxes include a value-added tax (VAT) and
a regional property tax. In the most recent year, overall tax
revenue as a percentage of GDP was 34.1 percent.

GOVERNMENT SPENDING: 65.1

1.4

In the most recent year, total government expenditures,
including consumption and transfer payments, increased
slightly to 34.1 percent of GDP. The state maintains a strong
presence in such key sectors as energy and mining. Public
debt is at 11 percent of GDP.

MONETARY FREEDOM: 63.1

+ 0.5

Inflation has been high, averaging 12 percent between
2007 and 2009. Inflationary pressures dropped in 2010, but
higher food prices due to problems in the agricultural sector
remain a factor. 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 measures
that distort domestic prices.

INVESTMENT FREEDOM: 25

no change

Russian law provides national treatment for foreign inves-
tors, but there are several exceptions. In many industries,
the level of foreign ownership is capped or prohibited. In
2008, the government introduced a list of 42 “strategic” sec-
tors in which purchases of controlling interests by foreign
investors must be pre-approved by the government. Other
deterrents to investment include inconsistent and burden-
some government regulation, unreliable contract enforce-
ment, inadequate infrastructure and financial capacity, and
corruption. Residents and non-residents may hold foreign
exchange accounts, subject to restrictions. Capital pay-
ments and transfers are also subject to restrictions. Foreign

ownership of non-agricultural land that is not located near
international borders is permitted.

FINANCIAL FREEDOM: 40

no change

Russia’s small, undeveloped financial sector remains vul-
nerable to heavy government influence. State-owned banks
dominate the banking sector and account for over one-
third of total assets. Bank supervision and trans parency
are insufficient, although regulation was improved in 2006.
The more than 1,000 licensed and registered banks are
generally small and undercapitalized, but consolida tion is
underway. Capital markets are relatively small but grow-
ing and are dominated by energy companies. The global
financial turmoil provided an impetus for bank consolida-
tion. More than 60 banks were eliminated, but the govern-
ment prevented the closure of large lenders. Tighter capital
requirements were established in 2010. The government
has channeled large amounts of state funds to prop up fail-
ing financial institutions.

PROPERTY RIGHTS: 25

no change

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 Russia’s
integration into the West. Mortgage lending remains a nov-
elty. Violations of intellectual property rights continue to
be a serious problem.

FREEDOM FROM CORRUPTION: 22

+ 1.0

Corruption is perceived as pervasive. Russia ranks 146th
out of 180 countries in Transparency International’s Cor-
ruption Perceptions Index for 2009. Corruption is ram-
pant, both in the number of instances and in the size of
bribes sought. Neither President Medvedev’s Council for
the Fight Against Corruption, which was established in
the spring of 2008, nor the anti-corruption legislation of
December 2008 has been effective in reducing corruption.
In PricewaterhouseCoopers’ 2009 Global Economic Crime
Survey, Russia was in last place with 71 percent of respon-
dents having reported experiencing economic crime, of
which bribery and corruption were a major component.

LABOR FREEDOM: 62.9

+ 3.3

Russia’s complicated and outmoded labor code continues
to limit employment and productivity growth. The non-
salary cost of employing a worker is high, and dismiss-
ing an employee is difficult. Regulations on the number of
work hours are rigid.

345

How Do We Measure Economic Freedom?

See page 447 for an explanation of the methodology
or visit the Index Web site at heritage.org/index.

2009 data unless otherwise noted.
Data compiled as of September 2010.

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