How strong is Russia’s economic foundation? By Pekka Sutela ★ The global economic crisis has hit Russia particularly hard, with a combination of collapsing oil prices, reversing capital flows and falling global demand ending a 10-year growth spurt. Even a sustained rally in international oil prices would not guarantee a return to sustainable growth for Russia. ★ The government’s medium-term economic policy plan – the Russia 2020 programme – foresees a shift from an oil dependent economy to one powered by innovation. The programme’s basic assumptions are doubtful, its prospects for implementation dubious and the underlying economic thinking flawed. ★ The true source of Russian growth since the collapse of the Soviet Union has been the shift of resources from inefficient heavy industries to modern services sectors. For this catch-up growth to continue, Russia does not need to innovate but to imitate: it can import technology, know-how and institutions from richer countries. However, successful catch-up growth requires a sound business environment, the rule of law, open markets and good infrastructure. The Russian authorities should focus on these things rather than top-down attempts to encourage innovation. The economic crisis of 2008-09 hit Russia after a long period of rapid expansion during which annual GDP growth rates averaged 7 per cent. Very few major economies have enjoyed such protracted periods of exceptional growth. This performance encouraged the Russian leadership in late 2008 to adopt the official goal of becoming the fifth largest national economy in the world by 2020, after the US, China, Japan and India. This target – always of dubious credibility, given Russia’s underlying economic weaknesses – has been reduced to irrelevance by the economic crisis, which has affected Russia’s economy more than most. President Dimitri Medvedev seems to concur. In August 2009, he stated that current economic trends could lead Russia into a “dead end” – unless Russia embraced reform and diversified its economy away from hydrocarbons. In an open letter published in September 2009, he repeated his dire diagnosis. He wrote that the Russian economy was ineffective and suffering from too much state involvement and an overdependence on oil revenues. Medvedev was in fact echoing the criticisms that Vladimir Putin, now the prime minister, had made when he first became president almost ten years ago.
Centre for European Reform 14 Great College Street London SW1P 3RX UK
Problems that are left unattended tend to get worse over time, so Russia’s economic weaknesses will be a major challenge for the country’s leadership. The economy is the decisive factor in determining Russia’s future path. At stake are both the welfare of the Russian people and the international position of the country – and therefore the sustainability of the current regime headed by Putin and Medvedev. To shed light on the economic basis of Russian power, this policy brief will address four questions: Why has Russia been hit so hard by the economic crisis? Why did Russia grow so strongly until 2008, and can it do so again? Do the authorities have a realistic view of what should and could be done to avoid the dead end that Medvedev fears? And what kind of economic policies are the Russian authorities likely to pursue in the future?
Russia’s economy in crisis Russia has been hit particularly hard by the 2008-09 global economic crisis because it was affected by several negative shocks at the same time: a collapse in
T: 00 44 20 7233 1199 F: 00 44 20 7233 1117 info@cer.org.uk / www.cer.org.uk