Russia in the G20: ‘Bearly’ Fitting In?

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G20 Membership Criteria

In A Modest Approach for Effective Multilateral Institutions, Alex Brill proposes a set of mission-based, quantitative criteria for G20 membership that could increase the organization’s legitimacy and effectiveness. He argues that a country should be selected for membership based on three factors: (1) its economic size, (2) its adherence to the rule of law, and (3) its “financial interconnectedness,” or the size of its financial services sector and the magnitude of its cross–border banking transactions. Based on these criteria, Brill says that the Russian Federation would become ineligible for G20 membership, albeit by a small margin. In this Of Note, I examine Russia’s performance in relation to the three aforementioned factors. I find that Russia’s economic performance is favorable but highly sensitive to oil prices, and that urgent reforms are needed to strengthen its rule of law and financial interconnectedness.

Russia’s Economic Performance

Russia is the world’s ninth largest economy, with a current growth rate of about 4% a year. The latest World Bank economic report on Russia says that “ . . . while output growth is slowing . . . in line with weaker growth in Europe and elsewhere, Russia’s latest economy performance has been solid, though aided by favorable oil prices.” Indeed, when compared to the economic performance of the G7 countries, Russia’s growth story has been impressive (See Figure 1).

Figure 1.

Russia’s Economic Growth In Comparison With The G7

Source: Mark Adomanis, Russia’s Economic Growth In Comparison With The G7, Forbes.com, July 26, 2012, http://www.forbes.com/sites/markadomanis/2012/07/26/russias-economic-growth-in-comparison-with-the-g7/

The validity of these statistics is questioned by those who claim that an economy whose GDP is smaller than G7 countries ought to grow at a higher rate. This criticism is fair. But as Mark Adomanis points out, “Russia has been growing much more rapidly than the other G7 countries ever since its economy bottomed out in 1998 and has also recovered much more rapidly from the global financial crisis . . . if you focus on actual results, as opposed to what should happen based on various kinds of economic theories, Russia has had a pretty good run over the past 14 years, a period of time during which the G7’s performance has been distinctly underwhelming. This reality is something to keep in mind the next time someone berates [President] Putin for his ham-handed and unsuccessful economic management.” But all that glitters is not gold. Some economists believe Russia’s growth is not sustainable because it is driven by external factors, particularly high oil prices, rather than the institutional change that former President and current Prime Minister Dmitri Medvedev promised in his 2008 modernization program. The Russian economy’s dependence on oil revenues can be seen easily; once oil proceeds are removed, the current account and fiscal surpluses turn into alarming deficits. In 2011, Russia’s non-oil current account deficit stood at a record high of 13% of GDP, while the non-oil fiscal deficit was close to 10% of GDP. The Rule of Law in Russia Corruption is rampant in Russia. The Kremlin recognized this problem—in name, if not in practice—when Medvedev announced his “fight against corruption.” But even he admitted that results have been “modest.” This lack-luster progress is perhaps best reflected in Russia’s ranking in Transparency International’s Corruption Perceptions Index, where it has seen a rise from 154^th place in 2010 to 143^rd in 2011. This improvement, however, does not give a sense of the magnitude of the problem.

Research shows that the size of a country’s shadow economy—defined as “all market-based legal production of goods and services that are deliberately concealed from public authorities”—can be used as a proxy measure for the...