In recent years, data localisation requirements have become one of the main threats to the open trading system. As cross-border data flows are integral to a modern economy, restricting the movement of data does not only affect social networks and e-commerce, but almost every aspect of the economy, directly or indirectly.
A year ago, we at ECIPE made an attempt to quantify the economic impact of various data localisation laws that were either enforced or being proposed in a wide group of countries, including Brazil, India, Indonesia, China, Korea and Vietnam. The results of our first study were widely quoted, and we have also invited other researchers to build and improve on our methodology.
Since then, at least Brazil and India have put their legislative proposals on hold or under further review. However, Russia heading towards the opposite direction than the BRIC group, and recently enacted an amendment to its privacy legislation (the “OPD Law”) that includes a clear data localisation requirement. Article 18 §5 of the law requires data operators to ensure that any collection or use of personal data of Russian citizens is made using databases located inside Russia, starting from September this year
Our forthcoming policy brief on the new Russian amendment estimates the losses from this amendment to -0.27% of GDP, equivalent to a loss of 286 billion roubles (US$ 5.7 billion). Russia’s economy is already in severe recession, and the Russian economy is likely to contract by 2-3% this year. Investments in the Russian economy would drop by -1.4% or 187 billion roubles, with considerable effects on employment. The manufacturing sectors are hardest hit, as they must also absorb cost increases from their suppliers in the service industry.
It is unlikely that losses of such scale could be compensated and offset by a few jobs created in data processing thanks to the data localisation requirement. Nor could it be offset by government interventions, such as subsidies and other incentives. Yet the numerical results of this analysis do not fully capture the longer term adverse effects of regulations of data flows on technological progress, competitive behaviour and Russian firms’ innovative capacities. Since these factors are the main drivers of long-run economic output growth, our results are likely to significantly underestimate the economic losses arising from data localisation requirements.