Friday, February 24, 2006

Russian Prospects - political and economic scenarios

by Kåre Stamer Andreasen & Jakob Kelstrup, Copenhagen Institute for Future Studies (CIFS)

Developments in Russia over the next 15 years could become of great importance to the World. There are many paths that Russia’s political and economic development may follow towards 2020. This members’ report evaluates the various possibilities and challenges that face tomorrow’s Russia.


Economic Scenarios
The economic scenario cross for Russia A.D. 2020 is based on two uncertainty axes. One concerns whether Russia evolves towards a market economy (free enterprise) or whether it evolves towards a planned economy. The other uncertainty axis concerns whether Russia’s economy becomes based on raw material production or whether it becomes a differentiated production and service economy. Below is a brief presentation of the trends that pull economic developments in Russia in different directions.

Based on Russia’s major developmental trends and on the selected uncertainties we’ve worked out four different economic scenarios. They are presented first in a point-by-point summary followed by a closer look at each economic scenario.

Two economic uncertainty axes
I. Market economy or planned economy?
Russia has experienced sweeping economic and political reforms, but they haven’t really become consolidated yet, and the shape of the future is still uncertain. In spring of 2004, Putin promised more economic reforms and new programs to encourage investments. Legislation and institutions are more or less in place, but there is still no detailed framework of laws and administrative rules to protect the rights of private investors. Most business legislation is already in place, and once the various institutions have been established, they will be able to enforce the law more efficiently than is presently the case. Russian membership of WTO will most likely consolidate and improve a market economy.

Looking back on Russia’s developments towards a market economy over the last 15 years, it seems unlikely that Russia would turn back to planned economy, the defunct system of the Soviet Union. But it is important to consider the governmental interference with the activities of private companies that has taken place in recent years and how the country’s business and economic life has become more subject to political attention as a result. Boris Yeltsin’s time in office during the 1990s was a time of mass privatization that may not always have been fairly carried out, but nevertheless the period was one of lessening political interference with the business world. Under Vladimir Putin this trend has reversed. The energy sector has been nationalized, and other attempts have been made at government interference with sectors that worked well enough without it (e.g. telecommunication). It is thus not unlikely that the next five to ten years (Putin’s remaining time in office and the next term under his successor) may lead to a more ‘take-charge’ government that feels entitled to decide when it is ‘sensible’ to impose restrictions and guidelines on the private sector. This may reduce foreign investments in Russia and cause a lack of confidence in the transparency of the Russian market.

II. Raw material based economy or differentiated production and service economy?
Russia possesses some of the World’s largest oil and gas deposits, and its economy is very sensitive to price fluctuations. Russia’s positive economic growth depends primarily on high oil prices on the global market. Unless Russia begins to diversify its production infrastructure further and to invest in other sectors, it may experience externally generated economic shocks from time to time. A prolonged sizable reduction in the price of oil would throw Russia into an economic recession that if worst came to the worst could result in a crisis of similar scope as that of 1998. In 1998 the value of the rouble plummeted as a result of a massive flight of capital brought about by a loss of confidence in the Russian market. Following that, international trade with and investments in Russia fell drastically, and Russia experienced a major economic decline in many sectors. Paradoxically, despite the country’s huge deposits, its dependence on oil and gas is one of the greatest uncertainties connected with future political and economic developments.

Decentralization and liberalization of foreign trade are of crucial importance to Russia’s future economic relations with the outside world. If they continue apace, Russia will in time become fully integrated with international division of labour and international trade. A lot depends on Russia’s ability to change its industry from being mostly based on raw materials to a more diversified industrial structure.

Also a trustworthy legal system needs to be implemented. Infrastructure and the service sector should constitute a greater part of the overall GDP structure in order to reduce Russia’s vulnerability to the price of oil on the global market and to increase Russia’s ability to compete on the global market. Russia would be able to attract more foreign investors if the country sent out unmistakable signals to the outside world about introducing a more transparent law of ownership and about constructing a more liberal and diversified financial sector. It is likely that over the next 15 years, the country will build a healthier and more flexible industrial sector on top of its current economic mainstay, the raw materials sector.

You can read the full report: click here