Russian Economy After Transformation_ENG

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Russias Economy:

after Transformation,

before ModernizationValdai Discussion Club

Analytical Report

Moscow, January 2013

valdaiclub.com


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Russias Economy:

after Transformation,before Modernization

Valdai Discussion Club

Analytical Report

Moscow, January 2013

valdaiclub.com


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Russias Economy: after Transformation, before Modernization

This report was prepared after discussions at the Valdai Discussion Club Summit held on Octo-

ber 2122, 2012.

The authors express gratitude to all the participants in the Valdai Club Summit and the situ-

ational 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 Tam-

pere; Pavel Andreev, Executive Director, RIA Novosti; Sergey Alexashenko, Director for Mac-

roeconomic Research, National Research University Higher School of Economics; M.K. Bhad-

rakumar, former ambassador of India to Turkey and Uzbekistan; Evgeny Gavrilenkov, Manag-

ing 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 Rus-

sia; Mikhail Delyagin, Director, Institute of Globalization Problems; Sergey Dubinin, Chair-

man 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 inGlobal Affairs journal; Jzef Oleksy, Dean of the International Relations Department, Acad-

emy of Finance (Warsaw); John Peet, Europe Editor, The Economist; Vladimir Popov, Inter-

regional 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 Contem-porary 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 stu-

dents 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, Asso-

ciate 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.


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Contents

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


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4 Moscow, JAnuAry 2013

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

forecasts are highly tentative. Easily predict-

able are climate change, a growth in the short-

age of fresh water and food, and demographic

changes.

Russia has just emerged from the gravest

transitional crisis of the 1990s (when the GDP

slumped by 43%), undergone painful transfor-

mations, dropped the meaningless and costly

global confrontation, and avoided the risk ofa 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 per-

sonal consumption component is

greater than in 1989, while pub-

lic (especially military) spending

are lower. This is seen as relative

improvement of the condition of

the society, which has manifest-

ed itself in at least a dual way

a decline in the rate of suicides

and heavy crime (murders), andthe emergence of public protest

against corruption and ineffec-

tive governance as well as oth-

er factors characteristic of civil society worthy

of a European country.

By the second half of the 2000s, Russia by

and large ended the post-Soviet period of its

history, and started to develop. This is quite

an achievement in itself. But after a while

1.Summary

By the second half of the 2000s, Russiaby and large ended the post-Soviet periodof its history, and started to develop.But after a while the country marked time

again


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5Valdai discussion clubanaly tic al report

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

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 soci-

etys consideration a Concept of the Countrys

Future 2030. For Russia to achieve the mean-

ingful progress by 2030, it must have a mean-

ingful goal, accepted and supported by society,

and consistent efforts to translate it into life.

The key reforms must be set in motion withinseveral 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

depend on the external oil rent. Alongside the

influx of capital from outside and the reinvest-

ment 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 mean-

ing 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 eco-

nomic, as it focuses on econom-

ic policy assumptions. But its

authors and most experts who

contributed to the discussion

arrived at the following unequiv-

ocal conclusion: Russia needsa new round of comprehensive

reform. Economic measures,

even super-reasonable ones, will be insuf-

ficient. Political reforms irrespective of

whether they may be liberal or anti-liberal

will be not enough, either.

In preparing this report we used a multi-

scenario 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 RussianFederation 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 cru-

cial for the countrys successful development

as they can reverse the growing stagnation-

Russia needs a new round ofcomprehensive reform. Economicmeasures, will be insufficient


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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 consider-

ably (the melancholic scenario). Successful

reforms without a high rent (the phlegmatic

option) will secure roughly similar economic

growth as in the case of a high rent without

reforms (the choleric option). The report

does not consider the possibility of an eco-

nomic crisis in the country following a slump

in oil prices (generally possible), say, to under

$80 per barrel.

A decline of high-tech industries, de-intellec-

tualization of life, degradation of the peoples

culture and public morals, massive capital

flight and emigration of talented young peo-

ple these are factors of the main catastrophic

option Russia should steer clear of by all

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 sover-

eignty 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 socio-

economic 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 (Discon-

tent 1) even in case of a high

rent, and also discontent among

the poor strata (Discontent 2),

which will manifest itself veryacutely if the rent slumps. The

maximum possible consent of

the elites and the development

of civil society are undoubtedly

essential for the modernization of the state

and the economy. But the present level of

the countrys development inevitably implies

reliance on certain elements of authoritar-

ian modernization not on authoritarianism

without modernization, though.

In this brief report we do not propose a detailedstrategy of Russias economic development up

to 2030 that is the business of the whole

of society, the elites and the authorities. But

we shall try to identify its critically important

aspects that are missing in the existing pro-

grams.

The present level of the countrysdevelopment inevitably implies relianceon certain elements of authoritarianmodernization - not on authoritarianism

without modernization, though


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2.Transformation Completed,Objectives not Achieved

Over the 20 years of reforms Russia has not

achieved the desirable objective to become

a great power with a medium-developedeconomy 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

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 rela-

tively low cost.

Russia has created a very peculiar market

not the type everybody hoped for in the early

days of the reforms twenty years ago. Theelites, 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) dis-

content over the state of affairs

has come back but along far

stricter criteria.

The global economic crisis wasnegotiated 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, capi-

tal investment in the manufacturing industries

and in science remains far below the Soviet

level. During the recent crisis the structure of

The elites, civil society, the people ingeneral and external onlookers arerather unhappy with the condition ofthe countrys market economy, stategovernance and society


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production and export became increasingly

narrow.

Reliance on redistribution of the unstableexternal 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 promo-

tions 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 countryhas 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 edu-

cation. That is above the level of most devel-

oped countries, but it must be matched by

high-standard policies, state governance, andcivil society development. However, social

inequality has grown and social lifts have

weakened. The modernization of the economy

and development of innovations are not a nor-

mal, 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 bureaucratiza-

tion, the heavier the load on the countrys

leadership. Being forced to push the develop-

Uncertainty about the future breedsdisappointment, apathy and discontentin society. Moreover it causes the flight ofintellectuals and capital, while these arethe main assets in the 21st century


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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 overwhelm-

ing task.

The pace of socio-economic changes in the

country has slowed down, the adjustment of

the existing institutions is extremely tough-

going, 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

all, the rule of law, the protection of prop-

erty rights, and the reliability of the judicial

system, are the most important develop-

ment factor. Political scientists, economistsand businessmen are unanimous in that it is

the institutional obstructions that hinder the

modernization of the Russian economy. How-

ever, number one institutional problem

political and moral one is the illegitimacy of

large private property. The struggle for prop-

erty is possibly one of the main reasons why

Russia still lacks a long-term development

strategy. Also, it is an obstruction to steady

onward development.

The debate over whether the oil rent is good

or bad for development is fruitless. The rent in

combination with good institutions is a devel-

opment 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 manage-

rial functions in business began to be regu-

lated 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 produc-

ing an impression of active efforts to resolve

the countrys problems.

The time factor is a major prob-lem for the country. The educat-

ed generation of Soviet intellec-

tuals with their solid knowledge

and certain principles is about

to go, the Soviet-era bureaucrats

are quitting the stage. Many new

intellectuals are leaving the coun-

try or packing their suitcases.

Infrastructural problems and the wear of fixed

assets are aggravating (hence the growing

rate of accidents) and urgently require huge

investment for the overhaul of not only theinfrastructure, but of the extracting industries,

transport and urban utilities, too.

The country and society will be changing with

the change of generations in the elite and the

middle class. The minimum degree of wealth

and of freedom of information and travel (and

of the right to emigration) all gained since

1991, satisfied those who lived most of their

lives in the USSR, with its shopping lines

The rent in combination with goodinstitutions is a development resource.The rent without adequate institutionsis a risk of stagnation


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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 with-

out corruption (democracy), an independent

judicial system and personal safety; for busi-

nesses the possibility to invest without the

fear of losing property rights and protection

against racketeering; for the poor stability ofthe 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 ver-

sion of the well-known formula

the upper classes can no long-er live the old way and the low-

er classes no longer wish to live

the old way is applicable for

these days. The upper classes

are unable to ensure an inno-

vative way of economic devel-

opment without the freedom of

social innovations, protection

of property rights, personal

safety of innovative businesses

from racketeering and crimi-

nalization. The upper classesare unable to generate inten-

sive 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 long-

er afford to postpone modernization indefi-

nitely and depend on the unstable foreign

market of oil to finance most important state

programs. The educated classes have unam-

biguously expressed their discontent on the

streets and through massive frondeuring by

the middle class. Protest potential amongthe poorest strata has been growing against

injustice, which traditionally encompasses

everything in Russia from social inequality

to bad nobility.

The new norm is high-quality governance

without corruption (democracy), anindependent judicial system and personalsafety; the possibility to invest withoutthe fear of losing property rights andprotection against racketeering; stabilityof the real incomes and absence ofarbitrariness (justice); opportunitiesfor taking part in social processes and

vertical mobility in their own country,not elsewhere


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3.Russia 2030 Setting Goals

The goal of the countrys development up

to 2030 cannot be confined to guarantees

of well-being, pension insurance, and socio-political stability. The program must set posi-

tive objectives for the main sectors of society:

in fact, the issue of optimal combination of

objectives and ways to achieve them is irrel-

evant without account for the subject the

countrys citizens. And they all are very differ-

ent and tend to change their demands once the

previous objectives had been met.

The vision of Russia in 2030 is sort of a prag-

matic dream, an achievable goal for the most

active citizens of the country, compatriots

abroad, and sympathizing on-lookers. The

wishes of university students or of the parentsof 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 chil-

dren study and work abroad, and

37% want their children to set-

tle abroad permanently. Elderly

people (75%) see the president

as the father of the nation (only

20% are against this), and young

people aged 1824 are split

evenly: 48% share this approachand 48% are against it. These

attitudes embody a direct way

towards stagnation and eventual

degradation. Society needs a positive objective

and solid proof that the government is deter-

mined to move towards its real implementa-

tion, and not just indulge in fine rhetoric.

The countrys ruling and intellectual elites are

facing the challenge of proving their ability for

Society needs a positive objective and solidproof that the government is determinedto move towards its real implementation,

and not just indulge in fine rhetoric


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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 alien-

ate 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

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 authoritiesmust 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 tech-

nocratic decisions as to where to channel

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 sec-

tors in state programs energy production,

nuclear power engineering, aircraft-build-

ing, pharmacology and other capital-intense

industries will be unable to substitute for

the diversity of research-intensive consum-

er businesses and services, where business

innovations must be the key factor in mod-

ernizing the country.

If the industrial de-moderniza-

tion trend persists, but no condi-

tions for innovation are created,

upgrading the national defensewill be impossible.

The most important questions

are: Will people feel comfort-

able at home? Will young peo-

ple 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? Servic-

ing (and discussing) the bureaucracy or push-

ing ahead with innovations? The democraticchoice 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 adap-

tation of the ruling elite. Joining the group of

advanced democratic market economies will

require tremendous effort from Russia, both

material and institutional the moderniza-

tion of society and the state, even though by

authoritarian methods at first.

Joining the group of advanced democratic

market economies will require tremendouseffort from Russia, both material andinstitutional


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The country is longing for a real reduction of

corruption and for control of the civil serv-

ants 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 withsociety and businesses: independent courts;

respect for property rights; restrictions on

state interference in the economy to a sensible

level of correcting market failures; promo-

tion 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 independ-

ent effective development.

A strategy of the countrys long-

term 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 incor-

porates the state of minds, an opportunity

to rely not only on history, but also on the

achievements of the coming decades. Rus-

sias 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 posi-

tive factor for drawing investments both

internal and external.

A strategy of the countrys long-term

development up to 2030 must become anattractive guideline for the society and nota list of check parametersfor the agencies to meet


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4.The World in a Generation

The state of the external world also requires

boosting development and overcoming the

tendency towards stagnation. Along with chal-lenges, there come opportunities. Currently,

most governments see post-crisis efforts as

their main priority tasks. They include: sus-

taining growth while reducing unemployment

and overcoming macroeconomic imbalances;

reducing huge budget deficits; and preventing

inflation. There is a threat that the recovery

phase may fail at the very start of the period

under review and that the world may go over

from the Great Recession to the second Great

Depression. The crisis has shaken the world

economy, and there are neither simple meth-

ods, nor an appropriate theory to explain the

changes, nor handy recipes to achieve fast

growth.

Global rivalry for investment is increasing

and becoming a major driving

force of world processes. Russia

will have to make huge efforts in

order to keep up with the world

progress and, all the more so,

to modernize itself and take the

lead over other countries. Russia

should be proactive in advancing

towards the world whose con-

tours are gradually showing up,rather than prepare for the previous (and

lost) economic wars.

Overall global growth rates in the foreseeable

future will apparently be lower than in the

2000s. The years 20122030 will be a transi-

tion period in the worlds development. In the

next few decades, advanced (yet already used

globally) technologies will grow fast through

Russia will have to make huge efforts inorder to keep up with the world progressand, all the more so, to modernize itselfand take the lead over other countries


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new investment, replacing the old physical

capital.

World economic growth will most likely pro-

ceed 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 coun-

tries own production of sophisticated tech-

nologies and services. Both challenges apply toRussia and require unconventional economic

specialization, rather than just a new industri-

alization 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

Comparison of forecasts for economy of the leading countriesAverage annual growth rates of real GDP in constant USD on PPP

-Oxford

Eco-nomics

USDA EIU HSBC IEA EIA CERA

20102035

20102035

20102030

20102030

20102040

20092035

20082035

20102030

BasicPessi-mistic

USA 2,2 2,0 2,6 2,6 2,3 1,5 2,4 2,5 2,12,7

China 5,8 5,2 7,2 7,7 6,0 5,5 5,9 5,7 5,97,0

Japan 0,8 0,4 1,0 1,0 1,1 0,6 1,4 0,5 0,60,8

India 6,4 5,7 7,1 8,2 6,6 5,6 6,6 5,5 6,57,6

Germany 1,5 1,2 1,4 1,7 1,7 1,4 0,71,6

Russia 3,4 3,2 3,1 3,9 3,4 4,1 3,6 2,6 3,03,5

Great Britain 1,9 1,6 2,0 2,1 1,7 1,7 1,32,2

Brazil 4,0 3,8 3,8 4,6 4,0 3,0 3,6 4,6 4,24,7

World* 3,6 3,2 3,9 4,4 3,7 3,3 3,6 3,4 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


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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, sothe definition of a developed country may

change. The structure of the world economy

will gradually change towards the develop-

ment and introduction of energy-saving tech-

nologies, economical housing and transport,

the recycling of materials and waste, the intro-

duction 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 devel-

oping countries. It would be safe to predict a

steady growth of the demand for

food and of food prices.

The global problems remainunresolved and will pose a poten-

tial 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 environ-

mental challenges, relative short-

ages 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 oth-

ers, and limited resources (especially intellec-

tual and financial ones) create an urgent needfor more concerted and coordinated efforts by

the international community. A mere listing

of problems now facing the international com-

munity 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 inter-

national agenda. Russia will have to look for

a position of its own, which would link the

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

19811990 19912000 20012008 20092011

World 38,7 36,9 36,4 8,7

Developed economies: 38,1 32,0 18,0 1,0

including EU 17,5 17,1 13,8 1,0

including US 37,5 40,1 17,4 1,2

Developing economies: 39,9 46,4 66,2 17,4

including China 143,0 169,6 124,7 31,6

Russia 27,4 66,5 0,3

Source: IMF

The global problems remain unresolvedand will pose a potential threat to social

and political stability for some countriesand regions and in the long term the

whole of mankind


19/48



interests of its development and promotion

of the solution of a wide range of global prob-

lems. 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 devel-

opment strategy. At the same time, some glob-

al problems climate change, food insecurity,

a sharp deterioration of the environmental

situation regarding, in particu-

lar, the quality and quantity of

fresh water in Asia may cre-

ate new competitive advantages

for Russia.

Estimates of future Russianexports and revenues are

based on the assumption that

the physical volume of Rus-

sian hydrocarbons, metals and other prod-

ucts 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 revolu-

tionary changes in the global energy sector,

which have already begun. Rational behavior

as regards budget projections would be to

Russia will have to look for a positionof its own, which would link the interestsof its development and promotion ofthe solution of a wide range of global

problems


20/48



Military Expenditures: Years 1988, 2000, 2010$bn year 2009 and % of GDP

$ bn 2010 % GDP

1988 2000 2010 1988 2000 2010

USA 540 382 698 5,7 3,0 4,8

Great Britain 54 44 58 4,1 2,4 2,6

France 65 58 59 3,6 2,5 2,3

Germany 64 47 45 2,9 1,5 1,4

Japan 46 55 55 1,0 1,0 1,0

China 17 33 121 2,5 1,9 2,1

India 17 26 46 3,6 3,1 2,7

Brazil 20 22 34 2,1 1,8 1,6

Russia 331* 29 59 15,8 3,7 3,9

Israel 13 13 14 15,6 8,0 6,5

Saudi Arabia 20 26 45 15,2 10,6 10,1

Source: SIPRI

* USSR

abide by conservative estimates concerning

oil prices. Energy efficiency, as a major vec-

tor 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

very careful, as the oil price may

fall to U.S. $80 per barrel.

The decline in global defense

spending from 1988 to 2000

(the peace dividend) has given

way to its growth (above all, indeveloping 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 coun-

tries and financial elites, lasting preferences of

political elites, and historical phantom aches.

In addition, the world is facing terrorism and

In the 21st century there is no blocconfrontation but there still remaineconomic interests of countries and

financial elites, lasting preferences ofpolitical elites, and historical phantomaches


21/48



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 con-

flicts (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 mili-

tary 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 chal-

lenge of choosing between increased defense

spending and a lack of investment in human

capital, and this will require serious internal

discourse.


22/48



5.Russias Resources

The countrys modernization in the context

of such external challenges will be possible

only if it taps tremendous intellectual andfinancial 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 infra-

structures; restore and realize the innova-

tive 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 1990shas 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 sci-

ence and education have created ground for

the countrys de-industrialization and pose

a threat to innovative development. Shrink-

ing population and the flight of financial and

human capital require raising the effective-

ness of the latter.

In the coming decades Russia will remain

in a precarious position between two groups

of countries both enjoying various compet-itive 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 capi-

tal investment, proper identification and use

of competitive advantages, dynamic business

and high-quality jobs for the graduates of Rus-

sian universities.

The condition of Russias economy in 2012

is not a theme for debate by and large. Eve-

rybody seems to have got used to, if notreconciled 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 pay-

ments, the export of capital and the creation of


23/48



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 his-

tory. There were countries that

upgraded themselves with for-

eign 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 wouldbe 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.

The countrys modernization in thecontext of such external challenges will

be possible only if it taps tremendousintellectual and financial resources andeffectively uses the available assets toaddress four tasks: ensure the well-beingof the citizens; maintain and modernizethe physical and social infrastructures;

restore and realize the innovativedevelopment potential; and ensurean adequate defense capability


24/48


25/48



2003 2004 2005 2006 2007 2008 2009 2010 2011

430 591 764 990 1300 1661 1223 1488 1858

307 329 350 378 411 432 398 415 433

218 298 382 483 634 812 668 768 908

153 171 191 214 245 270 257 265 344

90 124 153 210 314 424 231 338 457

63 71 77 91 111 123 73 93 101

79 109 136 183 273 370 269 324 430

57 64 70 83 100 111 95 101 106

77 100 129 172 225 296 257 288 315

41 42 42 43 44 46 46 47 40

152 203 269 334 392 520 343 445 514

148 166 176 189 201 202 193 207 211

103 131 164 208 280 367 251 321 396

100 123 143 174 219 252 175 220 264

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

80 89 100 110 120 136 152 163 176


26/48



The mantra of dire need for foreign invest-

ment into Russia is basically correct, but it

is rather related to governance, management

and technologies over the ten years of highoil 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 indus-

tries are small, and that into machine-build-

ing 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 unprec-

edented. The level of upgrading

industries whatever measuring

method is employed is abso-

lutely insufficient. Currently

there are plans for innovations in the public

companies, in the energy sector and in the

defense industry. But the role of innovative-

minded individuals is often overlooked. In themeantime, 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 predeter-

mines 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

Russias savings rate is far above thecapital formation rate. This is a greatparadox in economic history


27/48



extremely unfavorable, although not yet cata-strophic from the standpoint of transition to

innovative development. The economy-related

ministries will lose a lot. The Finance Minis-

trys role grows to redistributing directly up to

half of the budget.

In practice, this budget draft means that any

significant increase in investments domesti-

cally 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 (includ-

ing 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 tangi-ble growth of state investment is anywhere

in sight: according to the Economic Devel-

opment 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 pro-

grams to remain the elites sacred cow. We

do not share the opinion, which has been pre-

Investment in the development in thenext few years will be the matter ofcommercial companies (including state-run ones), which will be using their ownor borrowed funds


28/48



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. Geopoliticaldestabilization 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 strat-

egy 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, financingan 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

Russian budget projections for 2013 and the longer periodextending over 20142015

2011 2012 2013 2014 20152015

to 2011,

%

Spending (bn. rbls.) 9352 11108 11612 11697 12128 +29,7

%

Defense Ministry 11,2 11,8 11,7 8,9 8,7 +2,5

Interior Ministry 5,4 9,6 9,4 8 7,7 +2,3

Emergencies Ministry 1,6 1,5 1,4 1,4 1,3 0,3

Security forces

combined18,2 23 22,5 18,3 17,8 0,4

Ministry of Finance 40,9 39,9 42 48,5 50,5 +9,6

Education, science,

healthcare, justice

and culture

8,3 7,7 7 6,2 5,8 2,5

Spending by other

agencies on economic

development

32,5 29,4 28,5 27 25,8 7,7

GDP assessment,bn. rbls.

54369 59750 67360 74086 81761 +50,4

Share of state

expenditure in GDP, %17,2 18,6 17,2 15,8 14,8 2,4

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


29/48



through the banking sector and the exchange

mechanisms as portfolio capital, where it is

prone to conjectural waves. But even if directcapital is drawn into the country directly

into some companies, it is important to under-

stand that the potentially needed boom of for-

eign 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 con-

cerned with peoples personal

safety, judiciary and law enforce-

ment. According to the latest estimates, secu-

rity firms employ more people (from 800,000

to 1.5 million men of able-bodied age) thanthere are on active service in the army.

The countrys resources are rather limited by

a number of key parameters: employment,

available credit, management and technolo-

gies. Only foreign revenues from the export

of crude (and other raw materials and semi-

finished products) are large. All economists

adhere to one principal assumption: resources

for development must be basically created

by businesses and the population within the

Potentially needed boom of foreigninvestment in Russia would merely workas an amplifier, not as a substitute forown investment and for re-investment ofdomestic savings


30/48



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 invest-

ment (although the latter is important as a

criterion and as a resource), but opportuni-

ties for creating and using resources. And this

depends on the quality of institutions.

Bureaucratization, the creeping governmen-

talization of business and increased regula-

tory pressure by the state are now major top-ics discussed by the business community and

expert society. Three simultaneous process-

es are underway immediate-action laws,

which cannot be interpreted unambiguously,

are being adopted; businesses are being arti-

ficially 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 push-

ing 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 meas-

ure, 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 interestsof 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 innova-

tive 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 acces-

sion to the World Trade Organization, partly

because the compromises achieved in con-

cluding 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.

The country needs not rent sharing,

or rent redistribution through the budget,or reliance on future foreign investment,but opportunities for creating and usingresources

Foreign investment in Russiabillions of US dollars

1995 2000 2001 2002 2003

Total 2983 10958 14258 19780 29699

Including:

Direct investment 2020 4429 3980 4002 6781

Portfolio investment 39 145 451 472 401

Other investment 924 6384 9827 15306 22517

Source: Rosstat


31/48



2004 2005 2006 2007 2008 2009 2010 2011

40509 53651 55109 120941 103769 81927 114746 190643

9420 13072 13678 27797 27027 15906 13810 18415

333 453 3182 4194 1415 882 1076 805

30756 40126 38249 88950 75327 65139 99860 171423

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.

Social discontent has different origins, social

strata, causes and duration. Discontent 1 (the

middle class and the intellectuals) largely stems

from the fact that they are not represented in

the bodies of power and are aware that the

development is in a stalemate. Discontent 2

(the poor) has different causes and requires

different methods of settlement. Eliminating itwill be far more costly (if there is no economic

growth) there will have to be tremendous

social transfers. At this point the ruling elite

has not yet established relations with a con-

siderable 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

the government and supported by

a majority of society. In this situa-tion Discontent 1 andDiscontent

2 will entail particularly acute

and painful consequences, posing

ever more hurdles in the way of

the countrys stable development.

The two types of possible discontent may

influence the authorities decisions concern-

ing distribution and investment, depending

on which development scenario the country

will follow. Rest and tranquility can hardly

be expected society has overcome the tran-

sitional shock and is now making demandsthat are quite normal in a medium-developed

market democracy.

Society has overcome the transitional

shock and is now making demands thatare quite normal in a becoming medium-developed market democracy


32/48



6.What Should Be Done?

Domestic legal and economic institutions are

crucial for an efficient economy, the position of

the country, its clout and ability to influence theenvironment in order to achieve better condi-

tions for its transition to innovative develop-

ment. Of special importance to Russia is the use

of its human capital and business potential to

give up, as soon as possible, its reliance on the

natural resource rent, which will become ever

more risky in the long term.

This reform implies accelerated innovative

development of Russia itself with a view to mak-

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 econom-

ic 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 devel-

opment of mankind. But this goal

requires much more attention to

(and investment in) education,

culture, and the infrastructure of

maintaining traditions. The global

competition has covered this area,too: a country with a huge crea-

tive potential and ability to create

works of science, art and literature

of universal significance increases its capitaliza-

tion, creates respective jobs, and receives a rent

from its culture.

Success in Russias innovative modernization

depends on the countrys actual starting basis

Accelerated innovative development ofRussia itself with a view to making itmore than just a market for its neighborsproducts and more than just an energy

exporter


33/48



and implies its steady movement towards a

higher civilizational and cultural level. It is, in

fact, the movement to the model of developeddemocracies (which are close to Russia in cul-

ture and values), while maintaining the coun-

trys independence and identity and developing

Russian culture.

Naturally, the adoption of many advanced,

mostly Western, institutions will not mean

following Western foreign policies (which

have obviously lost their bearings), or giv-

ing up the forced and already belated pro-

gram for entering the rising Asian markets

through new development of the Transbaikal

Region.

Emphasis on institutions presupposes unity

and stability within the political and finan-

cial elites, and concentration of their efforts

on public goals, rather than settlement of

internal conflicts and distribution of material

benefits typical of the early stages of soci-

ety formation. A delay in choosing the type,

direction and tools of modernization would

mean a loss of time and a failure to reach

an important goal for the elites (at least, the

intellectual elite) and society: achieving the

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.

An overhaul of society and market institu-

tions implies maximum unity of

the elites and a transition from

the short-term horizon to long-

term coordinated actions. Elites

usually rally together in the face

of a common danger, especially

when it is close and obvious. It

is much harder to rally in orderto 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

threat to themselves not slow growth but the

countrys de-intellectualization (brain drain,

decrease in the sophisticated products out-

put, bureaucratization, etc.) and primitiviza-

tion of the economy. A compromise among

the elites for the next 15 years would give a

chance for them and the nation to ensure the

countrys progress and stability of its posi-tions.

The creation of institutions will require

extraordinary initiative from the countrys

top leaders. At first, this policy will have to

be implemented largely in a manual mode, so

traditional for Russia.

The change of interests of social strata and

groups along with their development and

the growth of their identity is an inevitable

A delay in choosing the type, direction andtools of modernization would mean a lossof time and a failure to reach an importantgoal for the elites and society becominga modern Great Russia


34/48



process. The only question is about forms of

manifestation. Street protests in 20112012

have improved somewhat the investment cli-mate in Russia, as they showed its normalcy

from the standpoint of the European tradi-

tion 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.

Again: a conscious choice of a preferred

economic development scenario is possible

only when there is a long-term and maxi-

mum agreed goal. The first thing that catchesthe eye in Russias official and semi-official

economic programs for 20112012 is the

abundance of applied problems and techni-

cal details, parameters and indicators. With

all due respect for their authors, they are not

programs for the countrys economic trans-

formation or the creation of efficient market

democracy institutions and foundations to

support and develop the status of a modern

great power, but a collection of immediate

ministerial plans.

Of course, fundamental issues concern-

ing macroeconomics and budget spending,

including a choice between investment inhuman 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 deci-

sions and are not discussing concrete rec-

ommendations for specific industries, areas

of peoples activities, businesses or public

administration. Given below is a list of prob-

lems, whose solution is vital, in our opinion,

for creating an efficient econo-my, the foundation of the might

and well-being of the country

and the people. The more effi-

cient and more comprehensive

the reform of institutions, the

more chances there will be able

to launch mechanisms of devel-

opment, innovation and invest-

ment, which are now blocked by

cumbersome bureaucratic governance sys-

tems.

Russia also needs a new image, formulatedby its leadership in a dialogue with society

and constantly adjusted: the Vision of Rus-

sia-2030 Great Russia, which the majority

of society is ready to seek. At the same time,

it should be declared what the country should

relinquish in order not to fail. Discussing ways

to form this image is beyond the scope of this

report. Yet it is already obvious that in order

to become prosperous, free and strong, Rus-

sia, its elites and people should set themselves

the following economic and social goals:

It is important that the elites realizeas a threat to themselves not slow growth

but the countrys de-intellectualizationand primitivization of the economy


35/48



A. Institutional Issues:

Transformation of society in the spheres of

values and morals; the adoption of public-good attitudes as a norm.

Formation of national identity, fundamen-

tally, based on the key role of Russian cul-

ture 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 innova-

tions, entrepreneurship instead of reliance

on the resource rent.

The Rule of Law is the key point of the newidentity.

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 prac-

tices, in particular, changing economic

clauses in the Criminal Code in order to rid

businesses of the threat of artificial crimi-

nalization.

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-govern-

ment 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

the years to come.Human resources policy based

on the principles of meritoc-

racy, competence and decency,

rather than servility or clan-

nishness.

Astrongbutcompactandpro-

fessional army.

B. Social Issues:

Setting a goal of preserving and developing

the nation and safeguarding peoples rights.

Taking care of the main factors in creatinghuman 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 redis-

tribution but by releasing market forces,

developing entrepreneurship, and support-

ing mechanisms of vertical mobility in the

society.

Introducing social innovations and devel-

oping civil society as a vehicle of progress.

Russia also needs a new image,formulated by its leadership in a dialogue

with society and constantly adjusted:the Vision of Russia-2030 Great Russia,

which the majority of society is readyto seek


36/48



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 politi-

cal class should demonstrate their respon-

sible 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

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 preserva-

tion of natural diversity, and participation

in international cooperation in addressing

global problems (climate change, food andwater 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 insti-

tutions and who help shape national iden-

tity, 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 edu-

cated young people.

Migration policy ensuring a normal life-

style for immigrants; normalizing their legal

status; and creating conditions for their

adaptation, naturalization and effective work.

Russia should not avoid (in

conditions of peaceful devel-

opment)the realistic step of

increasing the retirement ageto 6365 years both for men

and women, and the sooner,

the better. This necessary and

inevitable social shock should be compen-

sated for by sharply raising pensions which

are now at a humiliating level for the major-

ity of pensioners, barely dependent on peo-

ples contributions to pension funds, and

which in essence currently bare characteris-

tics 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.

The Rule of Law is the key point of thenew identity


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Creating a large class of owners (in the mid-

dle 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 owner-

ship. Combating bureaucratization which is

evolving into managerial nationalization.

D. Finance and Investment:

Creating conditions for transforming domes-

tic savings into investments to re-invest

domestic savings without dealing through

foreign financial centers. Developing an

industrial bond market, without which ade-

quate funding of large domestic projects isimpossible.

Repealing the blocking stake law.

Increasing the capitalization and competi-

tion 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.

Introducing more programs to support

small and medium businesses (reducing red

tape and taxes for science-intensive busi-

nesses, 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.

It is worth returning to lim-

ited borrowing in international

financial markets. One must

account for such borrowing it

is more efficient than budget

investment.

E. Industries and Regions:

Thelaunchofseverallargeeco-

nomic projects in industries and

regions will require not only

funds of major (state-owned)

companies but also organizational and fis-

cal stimulation of small and medium busi-

nesses.

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 startdeveloping.

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-

The post-transition inequality shouldbe gradually overcome not throughredistribution but by releasing market

forces, developing entrepreneurship,and supporting mechanisms of verticalmobility in the society


38/48



sian Far East has sharply decreased after the

APEC Forum. The Corporation for Siberia

and the Far East, whatever its organiza-

tional 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 sec-

toral policy under the WTO conditions. Agri-

culture could become one of the main driv-

ers of economic growth, but this requires

huge managerial and institutional efforts.

The defense, nuclear and space industries

could help solve technological problems

faced by the Russian economy. The most

promising technologies (nano-, bio-, andgreen energy) need massive targeted,

above all fiscal, support. But a total new

industrialization is an impractical, if not

harmful, myth.

The transport strategy should become one

of the main development drivers by bringing

the periphery nearer to the center, develop-

ing links among the provinces, and reliev-

ing the center of the transportation load.

It should also be linked to the national

recreation system, another development

resource. Task number one is eliminat-

ing bottlenecks in the Transbaikal Region,

which can block any growth.

F. Energy and Security:

Updating the countrys energy strategy, tak-

ing 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 domes-

tic demand for energy, competition among

various types of fuel, growth in energy effi-

ciency, and export needs.

Careful analysis of the pros-

pects of the industry, whichaccounts for 4.5% of GDP for

capital formation and half of

national budget revenues, is

needed.. Russia produces 10%

and exports about 5% of global

(primary) energy, which is

a huge contribution to world energy secu-

rity. This factor requires fulfilling impor-

tant tasks, among them increasing energy

efficiency and mitigating climate change

in the country (especially in permafrost

areas). Integrating the factors of energy efficiency,

small-scale energy and the use of renew-

able fuels into regional strategies in order to

avoid inefficient investments in infrastruc-

ture.

In the CIS and, especially in the Eurasian

Union, emphasis should be made on energy

cooperation, in particular to produce higher

value added products.

Any property, except that whose criminalorigin has been proved, should be declaredsacred


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* * *

A picture of the countrys future in 2030 pro-

vides a good opportunity for dialogue with

citizens and business. One should take into

account the different motivations of the maingroups of interests in the long term, create such

motivations and determine the limits of pos-

sible growth in well-being and freedom in order

to avoid excessive expectations. This is a task for

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.

P.S. Theoretically, there are

options of a mobilization break-

through based on the use of stateindicative planning. These vari-

ants 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 propos-

als. At the same time, like the overwhelming

majority of participants in the discussions,

we believe that Russia still has a chance

for fast and quality development through

creating systems of modern economic andsocial institutions, strengthening the legiti-

macy of ownership, and improving the qual-

ity of human capital. Creating a subject for

the mobilization variant of enhanced plan-

ning is even more difficult than

for the institutional-innovative

scenario. The state apparatus is

too corrupt and enjoys too little

trust among the active part of

society for that.

However, it may happen that the

mobilization scenarios will haveto be implemented if continued degradation

tendencies are coupled with a sharp and last-

ing fall in energy prices, which may put the

country in a difficult situation of a financial

shock.

It is necessary to stimulate regions

initiative and a municipal reform. Federalefforts to redistribute funds should causeregions to move away from parasiticattitudes and start developing

A picture of the countrys future in 2030provides a good opportunity for dialogue

with citizens and business


40/48



Appendix.

Scenarios for Russian EconomicDevelopment until 2030 Quantitative Approach

By Evsei T. Gurvich

Possible scenarios for the Russian economys

long-term development can well be visual-ized 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 dol-

lars.

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 qual-

ity of state institutions. The optimal variant

describes a hypothetical situation where busi-

ness 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 oth-

er. 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 ofthe 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 aver-

age 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 conditionscan 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 cur-

rent 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 cur-

rent development levels of the aforementioned

countries. Given that the average growth rate

of the world economy over the period underreview 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

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