Moscow, January 2013 valdaiclub.

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Russias Economy: after Transformation, before Modernization

Valdai Discussion Club Analytical Report

Russias Economy: after Transformation, before Modernization

Valdai Discussion Club Analytical Report

Moscow, January 2013 valdaiclub.com

Russias Economy: after Transformation, before Modernization

This report was prepared after discussions at the Valdai Discussion Club Summit held on October 2122, 2012. The authors express gratitude to all the participants in the Valdai Club Summit and the situational analysis discussions held on July 26, 2012, for contributing valuable ideas. Our special acknowledgements go to Pami Aalto, Director of the Jean Monnet Centre, University of Tampere; Pavel Andreev, Executive Director, RIA Novosti; Sergey Alexashenko, Director for Macroeconomic Research, National Research University Higher School of Economics; M.K. Bhadrakumar, former ambassador of India to Turkey and Uzbekistan; Evgeny Gavrilenkov, Managing Director and Chief Economist, Sberbank CIB; Sergei Glaziev, Advisor to the President of Russia; Charles Grant, Director, Centre for European Reform; Yuri Danilov, Director, Stock Market Development Center Foundation under the Federal Financial Markets Service of Russia; Mikhail Delyagin, Director, Institute of Globalization Problems; Sergey Dubinin, Chairman of the Supervisory Board, VTB-Bank; Piotr Dutkiewicz, Director, Center for Governance and Public Management, Carleton University, Ottawa; Natalya Zubarevich, Regional Program Director of the Independent Institute for Social Policy; Andrey Klepach, Deputy Minister of Economic Development of Russia; Yaroslav Lisovolik, Chief Economist and Head of the Analytical Department, Deutsche Bank Russia; Fyodor Lukyanov, Editor-in-Chief, Russia in Global Affairs journal; Jzef Oleksy, Dean of the International Relations Department, Academy of Finance (Warsaw); John Peet, Europe Editor, The Economist; Vladimir Popov, Interregional Advisor, UN Department of Economic and Social Affairs; Boris Porfiryev, Deputy Director, Institute for Economic Forecasting, Russian Academy of Sciences; Alexander Rahr, Advisor to the President, German-Russian Chamber of Commerce; Jean-Franois Rischard, ex-Vice President, World Bank; Jacques Sapir, Director of Studies, Paris School for Advanced Studies in the Social Sciences (EHESS); Kirill Rogov, Senior Research Fellow, Gaidar Institute for Economic Policy; Partha Sen, Professor of Economics, South Asia University; Boris Titov, Presidential Commissioner for Entrepreneurs Rights; Feng Shaolei, Dean of the Institute for Advanced International and Regional Studies, East China Normal University, Shanghai; Yu Hongjun, Director, Research Office, International Department of the Communist Party of China Central Committee; Igor Yurgens, Chairman of the Board of the Institute of Contemporary Development. The authors express their special thanks to Full Member of the Russian Academy of Sciences and President of the New Economic Association Victor Polterovich. In the course of the preparation of the report, the authors studied and summarized all major programs and proposals on the economic policy made in the last three years. The main author of the report is Professor Leonid Grigoriev, Head of the World Economy Department, World Economy and International Affairs Faculty, National Research University Higher School of Economics. Other key contributors to the report are: Evsei Gurvich, Head, Economic Expert Group; and Igor Makarov along with Ekaterina Makarova, post-graduate students of the National Research UniversityHigher School of Economics. The authors express sincere gratitude to Sergei Karaganov, Chairman of the Valdai Discussion Club, for his most valuable conceptual contribution and help in editing this paper. This report incorporates many of the conclusions on Russias political development contained in the 2011 Valdai report Russia Should Not Miss Its Chance: Development Scenarios (http://valdaiclub.com/publication/35120.html). Valdai Discussion Club wishes to express its gratitude to its partners from Strategic Foresight, World Economic Forum Kristel van der Elst, Director and Head; Stephan Mergenthaler, Associate Director; Andrew Bishop, Project Manager, for effective cooperation while working on this report and the report of World Economic Forum Scenarios for the Russian Federation.

Contents

4 7 11 14 20 30 38

1. Summary 2. Transformation Completed, Objectives not Achieved 3. Russia 2030 Setting Goals 4. The World in a Generation 5. Russias Resources 6. What Should Be Done? Appendix. Scenarios for Russian Economic Development until 2030 Quantitative Approach

Russias Economy: after Transformation, before Modernization

1. Summary

slumped by 43%), undergone painful transformations, dropped the meaningless and costly global confrontation, and avoided the risk of a civil war and the collapse of statehood. The GDP has just recently exceeded the level of the year 1989, but with a new quality its personal consumption component is greater than in 1989, while public (especially military) spending By the second half of the 2000s, Russia are lower. This is seen as relative by and large ended the post-Soviet period improvement of the condition of the society, which has manifestof its history, and started to develop. ed itself in at least a dual way But after a while the country marked time a decline in the rate of suicides again and heavy crime (murders), and the emergence of public protest against corruption and ineffective governance as well as other factors characteristic of civil society worthy forecasts are highly tentative. Easily predictof a European country. able are climate change, a growth in the shortage of fresh water and food, and demographic By the second half of the 2000s, Russia by changes. and large ended the post-Soviet period of its history, and started to develop. This is quite Russia has just emerged from the gravest an achievement in itself. But after a while transitional crisis of the 1990s (when the GDP Russias economic development up to 2030 and this is the time span covered in this report will embrace three presidential terms. The external factors (oil prices and world financial turmoil) are largely predictable for the next three to five years, while longer-term

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Russias Economy: after Transformation, before Modernization

the country marked time again, enjoying the redistribution of the oil rent and a level of consumption unheard of in the past hundred years. Signs of stagnation became increasingly visible. The elite developed new division lines. Our search for ways of the countrys advancing into the future uses as a point the desirable and possible visions of Russia in 2030 which have been developing by the authorities and by the civil society. The report also takes into

depend on the external oil rent. Alongside the influx of capital from outside and the reinvestment of huge national savings, which depend on the legal and social climate in the country, the rent determines the governments freedom of maneuver and the dynamics of this major budget source. We do not narrow the meaning of resources to that of rent, but further on often use the term rent as a synonym of access to resources. This report is by and large economic, as it focuses on economic policy assumptions. But its authors and most experts who contributed to the discussion arrived at the following unequivocal conclusion: Russia needs a new round of comprehensive reform. Economic measures, even super-reasonable ones, will be insufficient. Political reforms irrespective of whether they may be liberal or anti-liberal will be not enough, either. In preparing this report we used a multiscenario approach, briefly outlined in the following paragraph (also see Appendix). We do not focus on them in the main text not to confuse with Scenarios for the Russian Federation a parallel report by the World Economic Forum, which was produced in cooperation with the working group of the Valdai Club report. At the end of our report we offer a list of measures, which include both those proposed previously in various strategies, and also relatively new ones. We strongly believe that these measures are crucial for the countrys successful development as they can reverse the growing stagnation-

Russia needs a new round of comprehensive reform. Economic measures, will be insufficient
account the realities of the competition-ruled world, the countrys actual condition at the moment, and the available resources. This implies formulating and proposing for societys consideration a Concept of the Countrys Future 2030. For Russia to achieve the meaningful progress by 2030, it must have a meaningful goal, accepted and supported by society, and consistent efforts to translate it into life. The key reforms must be set in motion within several years. Russias resources human, material and financial are diversified and relatively large. In this report they are regarded as the basis for effective functioning of the economy and societys existence, which does not require a detailed description. We proceed from the understanding that the capabilities of many sectors of the economy and half of the budget

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Russias Economy: after Transformation, before Modernization

bound trend that may eventually bring it to degradation. In case of successful reforms combined with a high oil rent (the scenario that we termed sanguine), the Russian economy will outpace the world economy in terms of the average growth rate. An absence of both factors will hinder Russias economic growth considerably (the melancholic scenario). Successful reforms without a high rent (the phlegmatic

means. The political effects of such a scenario would entail, in the least, a loss of the great power status and part of the regained sovereignty and, in the worst case, a resumption of the trend towards the countrys breakup.

For a country with tremendous imbalances stemming from its history, geography and the nature of recent development, the socioeconomic issues are particularly important as a factor of economic development. Hence the report foresees the possibility of a surge of discontent among the educated middle class (DisconThe present level of the countrys tent 1) even in case of a high rent, and also discontent among development inevitably implies reliance the poor strata (Discontent 2), on certain elements of authoritarian which will manifest itself very modernization - not on authoritarianism acutely if the rent slumps. The without modernization, though maximum possible consent of the elites and the development of civil society are undoubtedly essential for the modernization of the state option) will secure roughly similar economic and the economy. But the present level of growth as in the case of a high rent without the countrys development inevitably implies reforms (the choleric option). The report reliance on certain elements of authoritardoes not consider the possibility of an ecoian modernization not on authoritarianism nomic crisis in the country following a slump without modernization, though. in oil prices (generally possible), say, to under $80 per barrel. In this brief report we do not propose a detailed strategy of Russias economic development up A decline of high-tech industries, de-intellecto 2030 that is the business of the whole tualization of life, degradation of the peoples of society, the elites and the authorities. But culture and public morals, massive capital we shall try to identify its critically important flight and emigration of talented young peoaspects that are missing in the existing prople these are factors of the main catastrophic grams. option Russia should steer clear of by all

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2. Transformation Completed,
Objectives not Achieved

Russia has created a very peculiar market not the type everybody hoped for in the early days of the reforms twenty years ago. The elites, civil society, the people in general and external onlookers are rather unhappy with the condition of the countrys market economy, state governance and society. After a certain level of well-being has been achieved (largely at the expense of the high oil rent) disThe elites, civil society, the people in content over the state of affairs general and external onlookers are has come back but along far stricter criteria. rather unhappy with the condition of Over the 20 years of reforms Russia has not achieved the desirable objective to become a great power with a medium-developed economy and European-type democracy. It has undergone three transformations: of the ideology and the political system of the state; of the economy; and of the countrys ethnic

the countrys market economy, state governance and society

and geographic composition. History shows that such transformations usually result in an utter collapse of the state. Russia and its elite may take pride in their unique success of preserving the core of the state at a relatively low cost.

The global economic crisis was negotiated without any major upheavals, and the 2012 GDP will be above the 2008 level, but only few points above the 1989 level. Personal consumption is way above the level of 1989, but the investment depression of the 1990s has not been overcome yet, capital investment in the manufacturing industries and in science remains far below the Soviet level. During the recent crisis the structure of

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Russias Economy: after Transformation, before Modernization

Uncertainty about the future breeds disappointment, apathy and discontent in society. Moreover it causes the flight of intellectuals and capital, while these are the main assets in the 21st century
production and export became increasingly narrow. Reliance on redistribution of the unstable external rent is harmful not only for the government but the country in general. It causes stagnation of sophisticated businesses, immobilizes initiative, and turns the state leaders into cowpunchers the people wait for instructions, subsidies and career promotions from the superiors. Uncertainty about the future breeds disappointment, apathy and discontent in society. Moreover, and that is still worse, it causes the flight of intellectuals and capital, while these are the main assets

in the 21st century. The country has got in the so-called Middle Income Trap. It badly needs to break away from the GDP level of $16,6 thousand per capita.

The level of education has grown over the past ten years: among 100 million Russians (aged over 15), 25% have higher education and over 60% have tertiary education. That is above the level of most developed countries, but it must be matched by high-standard policies, state governance, and civil society development. However, social inequality has grown and social lifts have weakened. The modernization of the economy and development of innovations are not a normal, self-sustaining process. It is not society and business that generate innovations in the country and self-modernize, it is the state that is spreading paternalism from pensioners to innovations. The greater the bureaucratization, the heavier the load on the countrys leadership. Being forced to push the develop-

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ment processes from above, the government has found itself in a difficult situation where it is just unable to cope with the overwhelming task. The pace of socio-economic changes in the country has slowed down, the adjustment of the existing institutions is extremely toughgoing, primarily due to the resistance from the existing interest groups. There is a great problem with transition from the market institutions that took shape amid the chaos of the transitional period of the 1990s to the rule of law. In principle, the latter is to be the indicator a successful completion of the transformation. Social institutions above

The debate over whether the oil rent is good or bad for development is fruitless. The rent in combination with good institutions is a development resource. The rent without adequate institutions is a risk of stagnation. The use of the rent without adequate market institutions in Russia clearly failed to give an impetus to modernization. Instead, a number of managerial functions in business began to be regulated by the state, and government companies started to grow and get bureaucratized. This policy addressed three tasks: meeting the interests (resource-oriented) of high-ranking officials; consolidating resources; and producing an impression of active efforts to resolve the countrys problems.

The time factor is a major problem for the country. The educatThe rent in combination with good ed generation of Soviet intellecinstitutions is a development resource. tuals with their solid knowledge The rent without adequate institutions and certain principles is about to go, the Soviet-era bureaucrats is a risk of stagnation are quitting the stage. Many new intellectuals are leaving the country or packing their suitcases. Infrastructural problems and the wear of fixed all, the rule of law, the protection of propassets are aggravating (hence the growing erty rights, and the reliability of the judicial rate of accidents) and urgently require huge system, are the most important developinvestment for the overhaul of not only the ment factor. Political scientists, economists infrastructure, but of the extracting industries, and businessmen are unanimous in that it is transport and urban utilities, too. the institutional obstructions that hinder the modernization of the Russian economy. HowThe country and society will be changing with ever, number one institutional problem the change of generations in the elite and the political and moral one is the illegitimacy of middle class. The minimum degree of wealth large private property. The struggle for propand of freedom of information and travel (and erty is possibly one of the main reasons why of the right to emigration) all gained since Russia still lacks a long-term development 1991, satisfied those who lived most of their strategy. Also, it is an obstruction to steady lives in the USSR, with its shopping lines onward development.

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Russias Economy: after Transformation, before Modernization

The new norm is high-quality governance without corruption (democracy), an independent judicial system and personal safety; the possibility to invest without the fear of losing property rights and protection against racketeering; stability of the real incomes and absence of arbitrariness (justice); opportunities for taking part in social processes and vertical mobility in their own country, not elsewhere
and no end of restrictions. The recent fast growth of bureaucracy and corruption cause sincere and quite patriotic annoyance of civil society however weak it may be. The new norm for the well-off and educated part of the society is high-quality governance without corruption (democracy), an independent judicial system and personal safety; for businesses the possibility to invest without the fear of losing property rights and protection against racketeering; for the poor stability of the real incomes and absence of arbitrariness (justice); for young people opportunities for taking part in social processes and vertical mobility in their own country, not elsewhere.

Apparently, only a milder version of the well-known formula the upper classes can no longer live the old way and the lower classes no longer wish to live the old way is applicable for these days. The upper classes are unable to ensure an innovative way of economic development without the freedom of social innovations, protection of property rights, personal safety of innovative businesses from racketeering and criminalization. The upper classes are unable to generate intensive development even through the obviously needed large-scale prestigious infrastructural projects. The development of the Transbaikal Region is clearly stalled. At the same time, the upper classes can no longer afford to postpone modernization indefinitely and depend on the unstable foreign market of oil to finance most important state programs. The educated classes have unambiguously expressed their discontent on the streets and through massive frondeuring by the middle class. Protest potential among the poorest strata has been growing against injustice, which traditionally encompasses everything in Russia from social inequality to bad nobility.

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3. Russia 2030 Setting Goals

active citizens of the country, compatriots abroad, and sympathizing on-lookers. The wishes of university students or of the parents of university students are of major relevance here. So far according to opinion polls, about 68% of Russians with incomes above the national average would like to see their children study and work abroad, and 37% want their children to settle abroad permanently. Elderly people (75%) see the president Society needs a positive objective and solid as the father of the nation (only proof that the government is determined 20% are against this), and young to move towards its real implementation, people aged 1824 are split evenly: 48% share this approach and not just indulge in fine rhetoric and 48% are against it. These attitudes embody a direct way towards stagnation and eventual degradation. Society needs a positive objective evant without account for the subject the and solid proof that the government is detercountrys citizens. And they all are very differmined to move towards its real implementaent and tend to change their demands once the tion, and not just indulge in fine rhetoric. previous objectives had been met. The goal of the countrys development up to 2030 cannot be confined to guarantees of well-being, pension insurance, and sociopolitical stability. The program must set positive objectives for the main sectors of society: in fact, the issue of optimal combination of objectives and ways to achieve them is irrelThe vision of Russia in 2030 is sort of a pragmatic dream, an achievable goal for the most The countrys ruling and intellectual elites are facing the challenge of proving their ability for

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Russias Economy: after Transformation, before Modernization

compromise and staying united for the sake of the countrys development. There must be genuine (not simulated) dialogue among the elites, the authorities and the intellectuals over what sort of country they would like to have. The authorities feel insulted and alienate intellectuals, while a considerable part of the intellectuals have turned their backs on the authorities. Three presidencies up to 2030 will be able to feed the poor. But Russia has Argentinean

the resources of businesses and investment, but a problem of societys preparedness to work and sacrifice its efforts for the sake of the future? The priority economic sectors in state programs energy production, nuclear power engineering, aircraft-building, pharmacology and other capital-intense industries will be unable to substitute for the diversity of research-intensive consumer businesses and services, where business innovations must be the key factor in modernizing the country. If the industrial de-modernization trend persists, but no conditions for innovation are created, upgrading the national defense will be impossible.

Joining the group of advanced democratic market economies will require tremendous effort from Russia, both material and institutional
parameters of distribution of the (visible) deciles incomes, which in the context of high education and egalitarian traditions is a very inconvenient combination for maintaining socio-political stability. A drastic reduction in inequality is hardly possible. The world trends point to the opposite. But then the authorities must have at least the active part of society the new middle class and the intellectuals on its side. Otherwise, in case of any slump in the oil rent Discontent 1 and 2 may merge with great chances of a social explosion. What Russia will have besides raw materials, semi-finished product and assembly shops in 2030 is no longer a problem of just technocratic decisions as to where to channel

The most important questions are: Will people feel comfortable at home? Will young people return home after studying abroad? Will business be investing inside the country? Will judges be impartial? What shall be we proud of? What should the intellectuals and the upper middle class do in this country? Servicing (and discussing) the bureaucracy or pushing ahead with innovations? The democratic choice of the intellectuals and the middle class in Russia is by and large not to be doubted, but the success of modernization hinges on the balance of forces in society and the adaptation of the ruling elite. Joining the group of advanced democratic market economies will require tremendous effort from Russia, both material and institutional the modernization of society and the state, even though by authoritarian methods at first.

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A strategy of the countrys long-term development up to 2030 must become an attractive guideline for the society and not a list of check parameters for the agencies to meet
The country is longing for a real reduction of corruption and for control of the civil servants by the civil society and the mass media. In relation to the market economy the main institutional requirements look obvious by and large, but they are to be discussed with society and businesses: independent courts; respect for property rights; restrictions on state interference in the economy to a sensible level of correcting market failures; promotion of competition; societys (mass medias) control of the civil servants; promotion of diversified types of property (the problem of state capitalism); and creation of incen-

tives for the regions independent effective development.

A strategy of the countrys longterm development up to 2030 must become an attractive guideline for the society, for the people, and not a list of check parameters for the agencies to meet. The countrys future position incorporates the state of minds, an opportunity to rely not only on history, but also on the achievements of the coming decades. Russias new image of an advanced democracy, of a country of great culture and science, a country of educated people looking into the future, who have broken off with the grave legacy of the Communist past but take pride in the achievements of their compatriots of all times, and of a strong and independent great power will serve as a tremendous positive factor for drawing investments both internal and external.

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Russias Economy: after Transformation, before Modernization

4. The World in a Generation

Global rivalry for investment is increasing and becoming a major driving force of world processes. Russia will have to make huge efforts in Russia will have to make huge efforts in order to keep up with the world progress and, all the more so, order to keep up with the world progress to modernize itself and take the and, all the more so, to modernize itself lead over other countries. Russia and take the lead over other countries should be proactive in advancing towards the world whose contours are gradually showing up, rather than prepare for the previous (and their main priority tasks. They include: suslost) economic wars. taining growth while reducing unemployment and overcoming macroeconomic imbalances; Overall global growth rates in the foreseeable reducing huge budget deficits; and preventing future will apparently be lower than in the inflation. There is a threat that the recovery 2000s. The years 20122030 will be a transiphase may fail at the very start of the period tion period in the worlds development. In the under review and that the world may go over next few decades, advanced (yet already used from the Great Recession to the second Great globally) technologies will grow fast through Depression. The crisis has shaken the world economy, and there are neither simple meth-

The state of the external world also requires boosting development and overcoming the tendency towards stagnation. Along with challenges, there come opportunities. Currently, most governments see post-crisis efforts as

ods, nor an appropriate theory to explain the changes, nor handy recipes to achieve fast growth.

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Comparison of forecasts for economy of the leading countries

Average annual growth rates of real GDP in constant USD on PPP

- 20102035
Pessimistic

Oxford Economics 20102035

USDA

EIU

HSBC

IEA

EIA

CERA

20082035

20092035

20102040

20102030

20102030

Basic

USA China Japan India Germany Russia Great Britain Brazil World*

2,2 5,8 0,8 6,4 1,5 3,4 1,9 4,0 3,6

2,0 5,2 0,4 5,7 1,2 3,2 1,6 3,8 3,2

2,6 7,2 1,0 7,1 1,4 3,1 2,0 3,8 3,9

2,6 7,7 1,0 8,2 1,7 3,9 2,1 4,6 4,4

2,3 6,0 1,1 6,6 1,7 3,4 1,7 4,0 3,7

1,5 5,5 0,6 5,6 1,4 4,1 1,7 3,0 3,3

2,4 5,9 1,4 6,6 3,6 3,6 3,6

2,5 5,7 0,5 5,5 2,6 4,6 3,4

2,12,7 5,97,0 0,60,8 6,57,6 0,71,6 3,03,5 1,32,2 4,24,7 2,73,5

Note: We show evaluation figures of GDP for the world that are the result of using weights of the countries in the world GDP taken from REA-INEI forecasts related to countries forecasts by other organizations. Sources: Thomson Reuters Datastream, USDA, HSBC, EIA, IEA, CERA

new investment, replacing the old physical capital. World economic growth will most likely proceed in two different dimensions: the OECD countries, on the one hand, and China, India and part of the developing world, on the other. Other countries will address their problems in a tough competition with flows of cheap goods from fast-developing yet still poor countries, and sophisticated and expensive technologies from developed countries. The first prevents new industrialization of moderately developed countries, and the second stands in the way of

post-industrial development based on countries own production of sophisticated technologies and services. Both challenges apply to Russia and require unconventional economic specialization, rather than just a new industrialization or a post-industrial breakthrough. The mass of GDP, along with consumption, will continue to move from America and Europe to Asia. The share of the middle class in East Asian and Pacific countries in the global structure of society will markedly grow. According to OECD forecasts, the share of the global middle class in East Asia and the Pacific

20102030

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Russias Economy: after Transformation, before Modernization

GDP Growth Rate by Groups of Countries over the Given Period, %

19811990 World Developed economies: including EU including US Developing economies: including China Russia
Source: IMF

19912000 36,9 32,0 17,1 40,1 46,4 169,6 27,4

20012008 36,4 18,0 13,8 17,4 66,2 124,7 66,5

20092011 8,7 1,0 1,0 1,2 17,4 31,6 0,3

38,7 38,1 17,5 37,5 39,9 143,0

The global problems remain unresolved and will pose a potential threat to social and political stability for some countries and regions and in the long term the whole of mankind

steady growth of the demand for food and of food prices.

will increase from 18% to 66% in the period from 2009 to 2030. China and India will account for more than 59% of all consumption by the global middle class. The share of developing countries in the world GDP growth rate will continue to increase, so the definition of a developed country may change. The structure of the world economy will gradually change towards the development and introduction of energy-saving technologies, economical housing and transport, the recycling of materials and waste, the introduction of more services and standards to meet the requirements of social justice in developed countries, and the growth of education and demand for new standards of living in developing countries. It would be safe to predict a

The global problems remain unresolved and will pose a potential threat to social and political stability for some countries and regions and in the long term the whole of mankind. Poverty, climate change and the environmental challenges, relative shortages of food and many kinds of raw materials, development disparities among countries and regions, the population explosion in some regions and the aging of the population in others, and limited resources (especially intellectual and financial ones) create an urgent need for more concerted and coordinated efforts by the international community. A mere listing of problems now facing the international community is enough to doubt mankinds ability to solve them within the coming years. The collision between development tasks, global problems and the decline of global governability will be in the center of the international agenda. Russia will have to look for a position of its own, which would link the

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Russia will have to look for a position of its own, which would link the interests of its development and promotion of the solution of a wide range of global problems
interests of its development and promotion of the solution of a wide range of global problems. Russia can contribute to their solution, but resource limitations are highly significant. This suggests a cautious approach and the integration of such goals into a national development strategy. At the same time, some global problems climate change, food insecurity, a sharp deterioration of the environmental

situation regarding, in particular, the quality and quantity of fresh water in Asia may create new competitive advantages for Russia.

Estimates of future Russian exports and revenues are based on the assumption that the physical volume of Russian hydrocarbons, metals and other products will be in demand, despite programs to reduce global energy intensity. But we do not know exactly what the oil price will be in the future in the conditions of revolutionary changes in the global energy sector, which have already begun. Rational behavior as regards budget projections would be to

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Military Expenditures: Years 1988, 2000, 2010

$bn year 2009 and % of GDP

$ bn 2010 1988 USA Great Britain France Germany Japan China India Brazil Russia Israel Saudi Arabia
Source: SIPRI * USSR

% GDP 2010 698 58 59 45 55 121 46 34 59 14 45 1988 5,7 4,1 3,6 2,9 1,0 2,5 3,6 2,1 15,8 15,6 15,2 2000 3,0 2,4 2,5 1,5 1,0 1,9 3,1 1,8 3,7 8,0 10,6 2010 4,8 2,6 2,3 1,4 1,0 2,1 2,7 1,6 3,9 6,5 10,1

2000 382 44 58 47 55 33 26 22 29 13 26

540 54 65 64 46 17 17 20 331* 13 20

In the 21st century there is no bloc confrontation but there still remain economic interests of countries and financial elites, lasting preferences of political elites, and historical phantom aches

very careful, as the oil price may fall to U.S. $80 per barrel.

abide by conservative estimates concerning oil prices. Energy efficiency, as a major vector of the development of the energy industry relying on new technological opportunities, is acquiring increasing importance. As the world approaches the 2020s, one should be

The decline in global defense spending from 1988 to 2000 (the peace dividend) has given way to its growth (above all, in developing countries). The world (except for Europe) is obviously rearming. Security areas now include ever more spheres of life, such as energy, information, cyber threats, etc. It has turned out that in the 21st century there is no bloc confrontation but there still remain economic interests of countries and financial elites, lasting preferences of political elites, and historical phantom aches. In addition, the world is facing terrorism and

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changes in the balance of power. The struggle for resources is coming back, along with the old geopolitics in a new appearance. After the post-Cold War unfreezing of conflicts (Yugoslavia, the Caucasus), there has begun the second unfreezing era marked by the rise of nation states, fast redistribution of power, and the decline of Western domination (hence the growth of tensions in East Asia, and conflicts in the Middle East). This era of conflicts is only unfolding. Military power is

returning into the center of world politics, which apparently requires an adequate military buildup from Russia. An analysis of links among economy, politics and defense spending is beyond the scope of this report. But we should warn here that Russia will inevitability face the challenge of choosing between increased defense spending and a lack of investment in human capital, and this will require serious internal discourse.

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5. Russias Resources

The countrys modernization in the context of such external challenges will be possible only if it taps tremendous intellectual and financial resources and effectively uses the available assets to address four tasks: ensure the well-being of the citizens; maintain and modernize the physical and social infrastructures; restore and realize the innovative development potential; and ensure an adequate defense capability. All these efforts will require a high degree of unity of the elites and society around a common national idea. The profound transitional crisis of the 1990s has been overcome only in some respects. The investment slump in the infrastructural industries and the emigration of intellectuals against a backdrop of axed spending on science and education have created ground for the countrys de-industrialization and pose a threat to innovative development. Shrinking population and the flight of financial and human capital require raising the effectiveness of the latter.

In the coming decades Russia will remain in a precarious position between two groups of countries both enjoying various competitive edges. The criteria of the success of Russian modernization programs will be not GDP growth rates, and not even the current consumption, but the effectiveness of capital investment, proper identification and use of competitive advantages, dynamic business and high-quality jobs for the graduates of Russian universities. The condition of Russias economy in 2012 is not a theme for debate by and large. Everybody seems to have got used to, if not reconciled oneself with an expected growth rate of 3%4%, or even less. Regrettably, the structure of production is fixed and frozen: the GDP and incomes from the export grow mainly with the production and prices of oil, gas, metals, chemistry products, timber and grain. The accumulation rate during the boom of 20002007 remained at a very low level of 20%. The export of savings (debt payments, the export of capital and the creation of

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The countrys modernization in the context of such external challenges will be possible only if it taps tremendous intellectual and financial resources and effectively uses the available assets to address four tasks: ensure the well-being of the citizens; maintain and modernize the physical and social infrastructures; restore and realize the innovative development potential; and ensure an adequate defense capability
reserves) stood at about 10% of the GDP most of the time. Russia saves as an exporter of oil, but keeps exporting capital (and people). The way the country invests can make one think there was no such thing as the slump of the 1990s. Russias savings rate is far above the

capital formation rate. This is a great paradox in economic history. There were countries that upgraded themselves with foreign capital. But no country has ever managed to modernize itself with a 20%-percent investment rate and the export of about one third of the national savings for a decade.

Some chances of success would be possible only in case of the absence of corruption and an incredibly high effectiveness of capital investment. The low accumulation rate in the 2000s indicated a very limited success of the transformational reforms in terms of development. At a deeper level it indicates that the bourgeois and a larger part of the countrys population do not believe in its development prospects.

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Macroeconomic indicators for Russia for 20002011 years

2000 bn US$ GDP constant 2000 bn US$ Household final consumption expenditure bn US$ constant 2000 bn US$ bn US$ Gross capital formation constant 2000 bn US$ bn US$ Gross fixed capital formation constant 2000 bn US$ General government final consumption expenditure bn US$ constant 2000 bn US$ bn US$ Exports of goods and services constant 2000 bn US$ bn US$ Imports of goods and services constant 2000 bn US$ Unemployment rate CPI
Source: World Bank

2001 307 273 151 131 67 57 58 48 50 39 113 119 74 74 9 61

2002 345 286 177 142 69 55 62 50 62 40 122 132 84 85 7,9 70

260 260 120 120 49 49 44 44 39 39 114 114 62 62 10,6 50

% %

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2003 430 307 218 153 90 63 79 57 77 41 152 148 103 100 8,2 80

2004 591 329 298 171 124 71 109 64 100 42 203 166 131 123 7,8 89

2005 764 350 382 191 153 77 136 70 129 42 269 176 164 143 7,2 100

2006 990 378 483 214 210 91 183 83 172 43 334 189 208 174 7,2 110

2007 1300 411 634 245 314 111 273 100 225 44 392 201 280 219 6,1 120

2008 1661 432 812 270 424 123 370 111 296 46 520 202 367 252 6,3 136

2009 1223 398 668 257 231 73 269 95 257 46 343 193 251 175 8,4 152

2010 1488 415 768 265 338 93 324 101 288 47 445 207 321 220 7,5 163

2011 1858 433 908 344 457 101 430 106 315 40 514 211 396 264 6,1 176

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Russias savings rate is far above the capital formation rate. This is a great paradox in economic history
The mantra of dire need for foreign investment into Russia is basically correct, but it is rather related to governance, management and technologies over the ten years of high oil prices the country has failed to devise a way of how to put its own savings to use properly. Building infrastructures, housing and roads stayas the main problem. Investments into the manufacturing industries are small, and that into machine-building meager. The country grew increasingly dependent on foreign engineering over the transformation period. Generally speaking, this is not something very rare in the modern

world, but the depth and pace of de-industrialization over the past twenty years have been unprecedented. The level of upgrading industries whatever measuring method is employed is absolutely insufficient. Currently there are plans for innovations in the public companies, in the energy sector and in the defense industry. But the role of innovativeminded individuals is often overlooked. In the meantime, such people are not always ready to work as creative cogs in the machine for a company and need proper psychological and political conditions for self-realization in their home country. The 20132015 budget practically predetermines macroeconomic policies for the entire first presidential term. The siloviki will retain their share of the budget. Investment in the human capital is shrinking, which is

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Investment in the development in the next few years will be the matter of commercial companies (including staterun ones), which will be using their own or borrowed funds

extremely unfavorable, although not yet catastrophic from the standpoint of transition to innovative development. The economy-related ministries will lose a lot. The Finance Ministrys role grows to redistributing directly up to half of the budget. In practice, this budget draft means that any significant increase in investments domestically is possible only in the private sector. The state can merely establish tax discounts or improve the climate.

It follows that investment in the development in the next few years will be the matter of commercial companies (including state-run ones), which will be using their own or borrowed funds. In other words, the oil rent will be used only for addressing social problems and financing the defense. More new private investment is necessary as no tangible growth of state investment is anywhere in sight: according to the Economic Development Ministry, government investment in 20052008 in the entire budget system was within a range of 3.5%3.8% of the GDP, and in 20122015 it will be within a range of 3.4%3.5% of the GDP. The energy sector is left out of all reform programs to remain the elites sacred cow. We do not share the opinion, which has been pre-

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Russian budget projections for 2013 and the longer period extending over 20142015
2015 to 2011, % +29,7

2011 Spending (bn. rbls.) % Defense Ministry Interior Ministry Emergencies Ministry Security forces combined Ministry of Finance Education, science, healthcare, justice and culture Spending by other agencies on economic development GDP assessment, bn. rbls. Share of state expenditure in GDP, % 11,2 5,4 1,6 18,2 40,9 8,3 9352

2012 11108

2013 11612

2014 11697

2015 12128

11,8 9,6 1,5 23 39,9 7,7

11,7 9,4 1,4 22,5 42 7

8,9 8 1,4 18,3 48,5 6,2

8,7 7,7 1,3 17,8 50,5 5,8

+2,5 +2,3 0,3 0,4 +9,6 2,5

32,5

29,4

28,5

27

25,8

7,7

54369 17,2

59750 18,6

67360 17,2

74086 15,8

81761 14,8

+50,4 2,4

Source: The Ministry of Finance Source: RBC Daily, 24.09.2012, p. 3

vailing in the past six to twelve months, that the demand for and prices of Russias oil and gas are doomed to slump. However, it is highly probable that new technologies may cause problems on the world markets. Geopolitical destabilization of the Middle East may offset this factor only to a certain extent. Pinning development and well-being most entirely on the energy export will be a highly risky strategy already in the medium term. The financial sector remains weak by the existing standards even the largest banks are unable to finance truly significant projects. Russia is the sole large country which has an effective law on the blocking packet of shares.

A well-developed internal bond market is still absent, mostly due to the unstable legal environment. The weakness of the private financial sector drops out of sight now and then. As long as it is non-existent, financing an investment boom with national savings without carouselling them through foreign gubs will be problematic. Foreign direct investment will hardly exceed 1%2% of the GDP, that is, reach one-tenth of the overall annual investment in the country. Currently, Russia has a very unsound model of capital export and import. Direct capital is exported to return only partially and only as foreign one. Capital is largely pumped in

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Potentially needed boom of foreign investment in Russia would merely work as an amplifier, not as a substitute for own investment and for re-investment of domestic savings
through the banking sector and the exchange mechanisms as portfolio capital, where it is prone to conjectural waves. But even if direct capital is drawn into the country directly into some companies, it is important to understand that the potentially needed boom of foreign investment in Russia would merely work as an amplifier, not as a substitute for own investment and for re-investment of domestic savings. The population and labor resources, according to demographic forecasts, will be declining. Time is ripe to create conditions for wider

use of foreign workforce and for creating attractive conditions for those who are prepared to live and work in this country.

There is a vast source of national workforce in the spheres concerned with peoples personal safety, judiciary and law enforcement. According to the latest estimates, security firms employ more people (from 800,000 to 1.5 million men of able-bodied age) than there are on active service in the army. The countrys resources are rather limited by a number of key parameters: employment, available credit, management and technologies. Only foreign revenues from the export of crude (and other raw materials and semifinished products) are large. All economists adhere to one principal assumption: resources for development must be basically created by businesses and the population within the

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Foreign investment in Russia

billions of US dollars

1995 Total Including: Direct investment Portfolio investment Other investment

Source: Rosstat

2000 10958

2001 14258

2002 19780

2003 29699

2983

2020 39 924

4429 145 6384

3980 451 9827

4002 472 15306

6781 401 22517

framework of a competent government policy. In other words, the country needs not rent sharing, or rent redistribution through the budget, or reliance on future foreign investment (although the latter is important as a

The country needs not rent sharing, or rent redistribution through the budget, or reliance on future foreign investment, but opportunities for creating and using resources
criterion and as a resource), but opportunities for creating and using resources. And this depends on the quality of institutions. Bureaucratization, the creeping governmentalization of business and increased regulatory pressure by the state are now major topics discussed by the business community and expert society. Three simultaneous processes are underway immediate-action laws, which cannot be interpreted unambiguously, are being adopted; businesses are being artificially criminalized under controversial articles of the Criminal Code; lawmaking continues non-stop, newly issued or changing instructions put people and businesses in the guilty-by-ignorance position, thereby pushing up the transaction costs. This situation

and the systemic corruption which it breeds force businesses to transfer part of their assets outside of the country as a safety measure, narrow the horizon for planning and investment, and lower their readiness to take commercial risks in conditions of illegal takeover of businesses and bureaucratic risks. The sharp shift in the interests of young people over the past decade from business to civil service (possibly the sole such case in the developed countries) is a clear sign that the innovative processes in business and knowledge are slowing down to give way to bureaucratic innovations. The struggle for the rent inventing reasons for getting the rent, seizing the rent and keeping the rent obstructs development. It is characteristic of many levels of the government machinery, including the regional one. There will be hardly any dramatic change in the coming years related to Russias accession to the World Trade Organization, partly because the compromises achieved in concluding the agreement practically rule out shocks. A period of twenty five years, when the risk of the Communisms comeback played some role in elections and in decision-making is over.

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2004 40509

2005 53651

2006 55109

2007 120941

2008 103769

2009 81927

2010 114746

2011 190643

9420 333 30756

13072 453 40126

13678 3182 38249

27797 4194 88950

27027 1415 75327

15906 882 65139

13810 1076 99860

18415 805 171423

social transfers. At this point the ruling elite has not yet established relations with a considerable part of the new middle class and the intellectuals, although the latter do not demand such transfers. Yet it is still more important that neither the ruling elite, nor the intellectuals, nor public at large have a goal set by Society has overcome the transitional the government and supported by a majority of society. In this situashock and is now making demands that tion Discontent 1 and Discontent are quite normal in a becoming medium2 will entail particularly acute developed market democracy and painful consequences, posing ever more hurdles in the way of the countrys stable development. Social discontent has different origins, social The two types of possible discontent may strata, causes and duration. Discontent 1 (the influence the authorities decisions concernmiddle class and the intellectuals) largely stems ing distribution and investment, depending from the fact that they are not represented in on which development scenario the country the bodies of power and are aware that the will follow. Rest and tranquility can hardly development is in a stalemate. Discontent 2 be expected society has overcome the tran(the poor) has different causes and requires sitional shock and is now making demands different methods of settlement. Eliminating it that are quite normal in a medium-developed will be far more costly (if there is no economic market democracy. growth) there will have to be tremendous Now everything will have to be proven anew: democracy and prosperity as they are and in comparison, but not with the arguments like these days there is slightly more of both than under the old regime.

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6. What Should Be Done?

ing it more than just a market for its neighbors products and more than just an energy exporter. Russia should offer cooperation in engineering, space for development, the traditional Russian cultural openness, and stable legal and economic institutions. Another important strategic goal is to save and strengthen the Russian world as a great civilization, which has made a huge contribution to the development of mankind. But this goal Accelerated innovative development of requires much more attention to Russia itself with a view to making it (and investment in) education, culture, and the infrastructure of more than just a market for its neighbors maintaining traditions. The global products and more than just an energy competition has covered this area, exporter too: a country with a huge creative potential and ability to create works of science, art and literature of universal significance increases its capitalizagive up, as soon as possible, its reliance on the tion, creates respective jobs, and receives a rent natural resource rent, which will become ever from its culture. more risky in the long term. Domestic legal and economic institutions are crucial for an efficient economy, the position of the country, its clout and ability to influence the environment in order to achieve better conditions for its transition to innovative development. Of special importance to Russia is the use of its human capital and business potential to This reform implies accelerated innovative development of Russia itself with a view to makSuccess in Russias innovative modernization depends on the countrys actual starting basis

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An overhaul of society and market institutions implies maximum unity of the elites and a transition from the short-term horizon to longA delay in choosing the type, direction and term coordinated actions. Elites usually rally together in the face tools of modernization would mean a loss of a common danger, especially of time and a failure to reach an important when it is close and obvious. It goal for the elites and society becoming is much harder to rally in order a modern Great Russia to maximize long-term benefits for the broader constituency and on terms that part of the clans may take as a concession or a loss. It is important that the elites realize as a Naturally, the adoption of many advanced, threat to themselves not slow growth but the mostly Western, institutions will not mean countrys de-intellectualization (brain drain, following Western foreign policies (which decrease in the sophisticated products outhave obviously lost their bearings), or givput, bureaucratization, etc.) and primitivizaing up the forced and already belated protion of the economy. A compromise among gram for entering the rising Asian markets the elites for the next 15 years would give a through new development of the Transbaikal chance for them and the nation to ensure the Region. countrys progress and stability of its positions. Emphasis on institutions presupposes unity and stability within the political and finanThe creation of institutions will require cial elites, and concentration of their efforts extraordinary initiative from the countrys on public goals, rather than settlement of top leaders. At first, this policy will have to internal conflicts and distribution of material be implemented largely in a manual mode, so benefits typical of the early stages of socitraditional for Russia. ety formation. A delay in choosing the type, direction and tools of modernization would The change of interests of social strata and mean a loss of time and a failure to reach groups along with their development and an important goal for the elites (at least, the the growth of their identity is an inevitable intellectual elite) and society: achieving the

and implies its steady movement towards a higher civilizational and cultural level. It is, in fact, the movement to the model of developed democracies (which are close to Russia in culture and values), while maintaining the countrys independence and identity and developing Russian culture.

status of a great scientific, cultural, political (and military) power with a developed civil society and a high level of personal freedom in other words, becoming a modern Great Russia.

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Of course, fundamental issues concerning macroeconomics and budget spending, including a choice between investment in human capital and the defense-industrial complex, imply a huge institutional load. Strategy 2020 devotes much attention to the pension system, the quality of public services and e-government. We cannot enter into a detailed discussion of ministries decisions and are not discussing concrete recommendations for specific industries, areas of peoples activities, businesses or public administration. Given below is a list of problems, whose solution is vital, in our opinion, for creating an efficient economy, the foundation of the might It is important that the elites realize and well-being of the country as a threat to themselves not slow growth and the people. The more efficient and more comprehensive but the countrys de-intellectualization the reform of institutions, the and primitivization of the economy more chances there will be able to launch mechanisms of development, innovation and investment, which are now blocked by cumbersome bureaucratic governance sysAgain: a conscious choice of a preferred tems. economic development scenario is possible only when there is a long-term and maxiRussia also needs a new image, formulated mum agreed goal. The first thing that catches by its leadership in a dialogue with society the eye in Russias official and semi-official and constantly adjusted: the Vision of Ruseconomic programs for 20112012 is the sia-2030 Great Russia, which the majority abundance of applied problems and techniof society is ready to seek. At the same time, cal details, parameters and indicators. With it should be declared what the country should all due respect for their authors, they are not relinquish in order not to fail. Discussing ways programs for the countrys economic transto form this image is beyond the scope of this formation or the creation of efficient market report. Yet it is already obvious that in order democracy institutions and foundations to to become prosperous, free and strong, Russupport and develop the status of a modern sia, its elites and people should set themselves great power, but a collection of immediate the following economic and social goals: ministerial plans. process. The only question is about forms of manifestation. Street protests in 20112012 have improved somewhat the investment climate in Russia, as they showed its normalcy from the standpoint of the European tradition of expressing dissent. Citizens readiness for social innovations, their resolve to protect their rights, and their demand for compliance with the law is a natural prerequisite for the countrys transition to the next development stage. This is an important condition for modernizing the country and strengthening its statehood.

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Radically separating public administration and business, in particular, on the regional and municipal levels. Reducing state interference in the economy, curbing the bureaucratization of economic life, and modernizing the state apparatus, which should not be confined to e-government only. Preventing corruption from becoming a norm of life at all levels, not as a one-time campaign but as a national task for the authorities and the civil society. Anti-corruption struggle must become the national idea for Russia also needs a new image, the years to come. uman resources policy based H formulated by its leadership in a dialogue on the principles of meritocwith society and constantly adjusted: racy, competence and decency, the Vision of Russia-2030 Great Russia, rather than servility or clanwhich the majority of society is ready nishness. strong but compact and proA to seek fessional army.

A. Institutional Issues: Transformation of society in the spheres of values and morals; the adoption of publicgood attitudes as a norm. Formation of national identity, fundamentally, based on the key role of Russian culture and the preservation and development of the Russian language, on the one hand, and proud and successful history of the struggle for independence and sovereignty, on the other.

Shaping public attitudes in favor of innovations, entrepreneurship instead of reliance on the resource rent. The Rule of Law is the key point of the new identity. The key institutional reform the judicial reform must ensure independence of courts and give citizens, Russian and foreign investors confidence that the administration of justice will be fair for all. Improving laws and law enforcement practices, in particular, changing economic clauses in the Criminal Code in order to rid businesses of the threat of artificial criminalization.

B. Social Issues: Setting a goal of preserving and developing the nation and safeguarding peoples rights. Taking care of the main factors in creating human capital families and teachers. Setting a goal of building up the middle class for social stability. The post-transition (Latin America-style) inequality should be gradually overcome not through redistribution but by releasing market forces, developing entrepreneurship, and supporting mechanisms of vertical mobility in the society. Introducing social innovations and developing civil society as a vehicle of progress.

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Achieving clarity as regards the lifestyle of the majority of people, and understanding as to what a family can hope to achieve over its lifetime without emigrating to another country. Achieving mutual understanding and unity of the elites as regards the goals of the countrys development and methods of problem-solving. The elites and the political class should demonstrate their responsible behavior towards the state, property and family. The elites should be ready to cooperate among themselves, as well as with foreign elites and civil society. The

The Rule of Law is the key point of new identity

change of the generation in the elites in the future should reflect the need for a steady, sustainable approach to government the transitional period of illegal takeovers must become a thing of the past. The environmental policy, the preservation of natural diversity, and participation in international cooperation in addressing global problems (climate change, food and water shortages, poverty) should take center stage, as in the rest of the world. The demographic and employment policies should be aimed at improving the quality of life in cities and creating conditions for enlarging families. Mortality from unnatural causes should be reduced. Support should be given to educated mothers who hand down knowledge to their children at home

much more efficiently than pre-school institutions and who help shape national identity, culture and worker morale in families. Ensuring personal safety of citizens and property. Reducing superfluous personnel in security companies. Combating poverty in cities and poor regions searching for models to ensure employment. Creating jobs for highly educated young people. Migration policy ensuring a normal lifestyle for immigrants; normalizing their legal status; and creating conditions for their adaptation, naturalization and effective work. ussia should not avoid (in R conditions of peaceful development)the realistic step of the increasing the retirement age to 6365 years both for men and women, and the sooner, the better. This necessary and inevitable social shock should be compensated for by sharply raising pensions which are now at a humiliating level for the majority of pensioners, barely dependent on peoples contributions to pension funds, and which in essence currently bare characteristics of a kind of social aid.

C. Property Issues: Supporting diverse forms of ownership. Resolutely combating illegal takeovers of businesses and vestiges of communism. Any property, except that whose criminal origin has been proved, should be declared sacred. Protecting property rights, in particular by courts, including in conflicts of businesses or citizens with government agencies.

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Introducing more programs to support small and medium businesses (reducing red tape and taxes for science-intensive businesses, and providing such businesses with premises and loans). Working out and implementing a set of measures to bring the economy out of the offshore shadows, specifically by concluding agreements with offshore companies on tax information exchanges. t is worth returning to limI ited borrowing in international financial markets. One must The post-transition inequality should account for such borrowing it be gradually overcome not through is more efficient than budget investment. redistribution but by releasing market Creating a large class of owners (in the middle class) of stocks, houses and businesses is an important but recently forgotten problem of the transformation. Privatization should be aimed at not so much to increase budget revenues as to ensure efficient management. Ensuring real, not formal, completion of the separation of management and ownership. Combating bureaucratization which is evolving into managerial nationalization.

forces, developing entrepreneurship, and supporting mechanisms of vertical mobility in the society

D. Finance and Investment: Creating conditions for transforming domestic savings into investments to re-invest domestic savings without dealing through foreign financial centers. Developing an industrial bond market, without which adequate funding of large domestic projects is impossible. Repealing the blocking stake law. Increasing the capitalization and competition of banks there are too few big banks for such an economy. The mega-regulator problem: its creation is now being considered. This issue should be addressed in cooperation with market players.

E. Industries and Regions: he launch of several large ecoT nomic projects in industries and regions will require not only funds of major (state-owned) companies but also organizational and fiscal stimulation of small and medium businesses. It is necessary to stimulate regions initiative and a municipal reform. Federal efforts to redistribute funds should cause regions to move away from parasitic attitudes and start developing. The development of South Russia and, especially, the Russian Far East and the Transbaikal Region requires consistent and efficient investment by the state. The idea to increase the countrys economic clout and acquire new development resources through opening into Asia is critically important. Meanwhile, activity in the Rus-

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F. Energy and Security: Updating the countrys energy strategy, taking account of new tendencies in the world and the need to increase energy efficiency. Existing programs should be brought out of their mutual isolation to link domestic demand for energy, competition among various types of fuel, growth in energy efficiency, and export needs. areful analysis of the prosC pects of the industry, which Any property, except that whose criminal accounts for 4.5% of GDP for capital formation and half of origin has been proved, should be declared national budget revenues, is sacred needed.. Russia produces 10% and exports about 5% of global (primary) energy, which is a huge contribution to world energy secuers of economic growth, but this requires rity. This factor requires fulfilling imporhuge managerial and institutional efforts. tant tasks, among them increasing energy The defense, nuclear and space industries efficiency and mitigating climate change could help solve technological problems in the country (especially in permafrost faced by the Russian economy. The most areas). promising technologies (nano-, bio-, and Integrating the factors of energy efficiency, green energy) need massive targeted, small-scale energy and the use of renewabove all fiscal, support. But a total new able fuels into regional strategies in order to industrialization is an impractical, if not avoid inefficient investments in infrastrucharmful, myth. ture. The transport strategy should become one In the CIS and, especially in the Eurasian of the main development drivers by bringing Union, emphasis should be made on energy the periphery nearer to the center, developcooperation, in particular to produce higher ing links among the provinces, and relievvalue added products. ing the center of the transportation load.

sian Far East has sharply decreased after the APEC Forum. The Corporation for Siberia and the Far East, whatever its organizational form, does not exist. The situation is serious transport barriers and continued migration to the West pose serious obstacles to economic development and geopolitical problems. A program is needed to revive Central Russia and the historical Muscovy center, where the bulk of the countrys population lives. One needs to understand changes in the sectoral policy under the WTO conditions. Agriculture could become one of the main driv-

It should also be linked to the national recreation system, another development resource. Task number one is eliminating bottlenecks in the Transbaikal Region, which can block any growth.

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It is necessary to stimulate regions initiative and a municipal reform. Federal efforts to redistribute funds should cause regions to move away from parasitic attitudes and start developing

P.S. Theoretically, there are options of a mobilization breakthrough based on the use of state indicative planning. These variants were discussed by the Valdai Club and were also presented by some members. Our preferred or optimal scenario (section What Should Be Done?) has included some elements of these proposals. At the same time, like the overwhelming *** majority of participants in the discussions, A picture of the countrys future in 2030 prowe believe that Russia still has a chance vides a good opportunity for dialogue with for fast and quality development through citizens and business. One should take into creating systems of modern economic and account the different motivations of the main social institutions, strengthening the legitigroups of interests in the long term, create such macy of ownership, and improving the qualmotivations and determine the limits of posity of human capital. Creating a subject for sible growth in well-being and freedom in order the mobilization variant of enhanced planto avoid excessive expectations. This is a task for ning is even more difficult than for the institutional-innovative scenario. The state apparatus is A picture of the countrys future in 2030 too corrupt and enjoys too little provides a good opportunity for dialogue trust among the active part of society for that. with citizens and business However, it may happen that the mobilization scenarios will have to be implemented if continued degradation tendencies are coupled with a sharp and lasting fall in energy prices, which may put the country in a difficult situation of a financial shock.

five years of presidency, which must be solved to ensure the countrys sustainable development, achieve and maintain the status of a modern great power, and increase its political, cultural, economic and defense competitiveness.

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Appendix.

Scenarios for Russian Economic Development until 2030 Quantitative Approach

By Evsei T. Gurvich Possible scenarios for the Russian economys long-term development can well be visualized from macroeconomic forecasts made for four variants differing in external conditions (world economic growth rates and oil prices), on the one hand, and in the degree of progress in improving the business climate, on the other. Under the baseline scenario, oil prices reach U.S. $145 per barrel in constant dollars by 2030 (as in the baseline scenario of the U.S. Energy Information Administration). Under the pessimistic scenario, these prices fall to $80/bbl in 20132014 and then slowly grow but remain within $100/bbl in constant dollars. In terms of business conditions, the inertial variant suggests that in the period until 2030 some changes will take place, but there will be no breakthrough towards a better quality of state institutions. The optimal variant describes a hypothetical situation where business conditions dramatically improve during the next 10 years. The basic forecast data is presented in Tables 14. The data shows that favorable external and internal conditions can offset each other. In the variant with high oil prices and unchanged business conditions and in the variant with unchanged oil prices but an improving business environment, average growth rates of GDP and per capita income are approximately the same by the end of the period. The development results are best seen in per capita GDP measured in PPP and expressed in 2011 dollars. As shown in Table Estimated Per Capita GDP, in both variants, by 2030 Russia can reach the average level of Western Europe countries (as of 2011) in terms of economic development, or the upper limit of income in the group of countries called emerging markets. These income levels are represented by France and South Korea, respectively. A combination of favorable external and internal conditions can boost income to the level of the most developed countries in Western Europe (such as Switzerland). Finally, if both oil prices and business conditions remain in their current state, by 2030 Russia will only reach the development level of the most successful of transition economies (such as the Czech Republic). Again, these comparisons relate to the current development levels of the aforementioned countries. Given that the average growth rate of the world economy over the period under review will be 3.7%, Russias positions in the world will strengthen only if growing oil prices are combined with a major improvement in the business environment. Otherwise, Russias share in the world economy will decrease both in the absolute value of GDP and in per capita income.

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Appendix

Estimated Average GDP Growth Rates for 20122030

Business Conditions Qualitative Improvement Oil Price Scenario Baseline Pessimistic 4,4% 3,0% Status Quo

3,1% 2,1%

Estimated Per Capita GDP (PPP) by 2030

(per capita at PPP against countries with the 2011 GDP; Russia in 2011 USD 16,600)

Business Conditions Qualitative Improvement 43,2 Baseline Oil Price Scenario Pessimistic Level of Switzerland today (sanguine) 32,4 Level of South Korea today (phlegmatic) Status Quo

34,1 Level of France today (choleric)

26,6 Level of Czech Republic today (melancholic)

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Scenarios for Russian Economic Development until 2030 Quantitative Approach

Table 1. Basic Development Indicators Baseline Inertial Variant

2012 2015 Average Urals oil price over the period (in 2010 dollars/bbl) Physical volume of GDP by the end of the period (2011=100%) Average growth rate of GDP over the period Real per capita income (GDP) by the end of the period (2011=100%) Average growth rate of real per capita income (GDP) over the period Per capita GDP (PPP) by the end of the period (in 2011 dollars) Investment in fixed assets by the end of the period (2011=100%) Average growth rate of investment in fixed assets over the period Retail trade by the end of the period (2011=100%) Average growth rate of retail trade over the period Gross domestic savings (% of GDP) Gross accumulation (% of GDP) Net capital inflow into the private sector on average over the period, U.S.$bn 2016 2020 2021 2025 2026 2030 TOTAL 2012 2030 129

115

125

133

140

116,9%

136,8%

155,6%

180,0%

4,0%

3,2%

2,6%

3,0%

3,1%

120,9%

146,3%

171,6%

204,0%

4,9%

3,9%

3,2%

3,5%

3,8%

20228

24490

28719

34140

121,2%

146,8%

171,5%

200,7%

4,9%

3,9%

3,2%

3,2%

3,7%

128,1%

160,7%

188,9%

230,3%

6,4%

4,6%

3,3%

4,0%

4,5%

28,8% 25,1%

28,4% 25,4%

28,6% 25,9%

28,7% 26,2%

28,6% 25,7%

34,6

27,8

27,2

22,1

27,6

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Moscow, JAnuAry 2013

Appendix

Table 2. Basic Development Indicators Baseline Variant with Improved Investment Climate
2012 2015 Average Urals oil price over the period (in 2010 dollars/bbl) Physical volume of GDP by the end of the period (2011=100%) Average growth rate of GDP over the period Real per capita income (GDP) by the end of the period (2011=100%) Average growth rate of real per capita income (GDP) over the period Per capita GDP (PPP) by the end of the period (in 2011 dollars) Investment in fixed assets by the end of the period (2011=100%) Average growth rate of investment in fixed assets over the period Retail trade by the end of the period (2011=100%) Average growth rate of retail trade over the period Gross domestic savings (% of GDP) Gross accumulation (% of GDP) Net capital inflow into the private sector on average over the period, U.S.$bn 2016 2020 2021 2025 2026 2030 TOTAL 2012 2030 129

115

125

133

140

118,5%

148,7%

183,6%

226,6%

4,3%

4,6%

4,3%

4,3%

4,4%

122,5%

159,3%

203,3%

258,1%

5,2%

5,4%

5,0%

4,9%

5,1%

20501

26656

34028

43201

122,5%

156,2%

193,7%

237,5%

5,2%

5,0%

4,4%

4,2%

4,7%

131,9%

193,1%

273,2%

385,2%

7,2%

7,9%

7,2%

7,1%

7,4%

28,4% 25,4%

27,3% 26,4%

27,7% 27,6%

27,9% 28,4%

27,8% 27,0%

23,7

21,0

48,9

70,6

32,0

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Scenarios for Russian Economic Development until 2030 Quantitative Approach

Table 3. Basic Development Indicators Pessimistic Inertial Variant

2012 2015 Average Urals oil price over the period (in 2010 dollars/bbl) Physical volume of GDP by the end of the period (2011=100%) Average growth rate of GDP over the period Real per capita income (GDP) by the end of the period (2011=100%) Average growth rate of real per capita income (GDP) over the period Per capita GDP (PPP) by the end of the period (in 2011 dollars) Investment in fixed assets by the end of the period (2011=100%) Average growth rate of investment in fixed assets over the period Retail trade by the end of the period (2011=100%) Average growth rate of retail trade over the period Gross domestic savings (% of GDP) Gross accumulation (% of GDP) Net capital inflow into the private sector on average over the period, U.S.$bn 2016 2020 2021 2025 2026 2030 TOTAL 2012 2030 90

88

87

91

94

103,7%

114,0%

126,6%

147,8%

0,9%

1,9%

2,1%

3,1%

2,1%

104,8%

117,6%

133,3%

159,0%

1,2%

2,3%

2,5%

3,6%

2,5%

17543

19674

22310

26610

110,8%

128,8%

148,6%

175,1%

2,6%

3,1%

2,9%

3,3%

3,0%

98,5%

107,0%

119,0%

147,7%

0,4%

1,7%

2,1%

4,4%

2,1%

29,7% 24,5%

27,6% 23,6%

26,4% 22,4%

25,6% 21,5%

27,2% 22,9%

51,4

28,3

25,2

15,0

28,8

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Appendix

Table 4. Basic Development Indicators Pessimistic Variant with Improved Investment Climate
2012 2015 Average Urals oil price over the period (in 2010 dollars/bbl) Physical volume of GDP by the end of the period (2011=100%) 2016 2020 2021 2025 2026 2030 TOTAL 2012 2030 90

88

87

91

94

104,5%

121,4%

143,6%

175,7%

Average growth rate of GDP over the period Real per capita income (GDP) by the end of the period (2011=100%) Average growth rate of real per capita income (GDP) over the period Per capita GDP (PPP) by the end of the period (in 2011 dollars) Investment in fixed assets by the end of the period (2011=100%) Average growth rate of investment in fixed assets over the period Retail trade by the end of the period (2011=100%) Average growth rate of retail trade over the period Gross domestic savings (% of GDP) Gross accumulation (% of GDP) Net capital inflow into the private sector on average over the period, U.S.$bn

1,1%

3,0%

3,4%

4,1%

3,0%

105,7%

126,3%

154,0%

193,9%

1,4%

3,6%

4,0%

4,7%

3,5%

17688

21142

25774

32445

111,4%

134,6%

162,0%

197,2%

2,7%

3,9%

3,8%

4,0%

3,6%

100,1%

122,9%

157,5%

217,6%

0,0%

4,2%

5,1%

6,7%

4,2%

29,6% 24,9%

27,5% 25,5%

27,1% 25,7%

27,0% 25,9%

27,7% 25,5%

46,3

5,1

28,3

55,6

13,7

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