Beyond Dutch Disease: When Deteriorating Rule of Law affects Russian Trade in High-Tech Goods and Services with Advanced Economies

How does Russia’s deterioration of its rule of law in recent years affect its ability to move away from an export pattern dominated by natural resources? We ask this question using three datasets for Russia’s bilateral trade relations for goods, services and investment at disaggregated level with its partner countries over the world. Our empirical analysis shows that the deterioration of the rule of law in Russia since 2004 has affected in the long run Russia’s trade performance, and in particular in sophisticated manufactured goods and in services with advanced economies. It is precisely this type of trade in high-tech and high value-added ICT services Russia has a comparative advantage according to the literature and that Russia should nurture to diversify away from hydrocarbons export dependence. We also show that inward investments suffer significantly due to Russia’s deteriorating rule of law. Moreover, our statistical analysis shows that Russia remains to a large extent an outlier within the multilateral trading system. It trades disproportionately more with partner countries that are or were previously not member of the WTO, many of which are in the former Soviet Union. Russia’s trade is negatively affected by the accession of these countries to the WTO. Russia acceded to the WTO in July 2012 and needs now to implement its commitments to ensure its institutional environment starts improving.