Russia’s economy: A great run but an uncertain future

Stephan Mergenthaler and Andrew D. Bishop on the hurdles Russia faces.

The Russian economy has had a great run over the past decade, as evidenced by its sevenfold increase in GDP per capita between 2000 and 2011. Yet despite this impressive growth story, the factors that underpinned Russia’s economic development over the past ten years are fraught with growing uncertainty. As the World Economic Forum’s Scenarios for the Russian Federation highlight, while Russia’s economy has grown substantially over the past years, it has also grown increasingly fragile.

Russia has missed an opportunity to use the large energy windfalls of the past decade to reform its institutional environment and make itself more resilient to future shocks. Corruption has surged despite a significant increase in GDP, and growing spending on an ever-larger government apparatus has failed to improve the delivery of public services in sectors ranging from health to infrastructure. In part because of this, popular discontent has been on the rise regardless of the increasing material comfort enjoyed by the country’s growing middle class.

Instead of building a more resilient economic model, energy revenues have served Russia to balance these shortcomings, an increasingly unviable option for the future.

There is growing evidence that energy abundance may become a global reality sooner rather than later, and not only in the United States whose shale gas revolution is already transforming global energy markets. This could lead to a substantial decline in oil prices, which would hurt the Russian economy in its current composition.

Yet even if energy prices remain high, Russia could fail to capitalize on its energy potential. The country critically needs to upgrade investments in its production capacities in order to move beyond ailing legacy fields and exploit untapped potential in less accessible areas including the Arctic. It also needs to adapt its business relationships and supply infrastructure in order to capitalize on new demand centres in the Far East and compete in the global LNG market.

Russia has, so far, failed to turn its wealth into a driver of resilience. As highlighted by the report’s Precarious Stability scenario, if Russia’s demanding reforms seem difficult to execute in today’s times of growth, they will be nearly impossible to implement in periods of downturn.

For instance, not only can it not be guaranteed that Russia’s energy sector will forever be able to support the country’s economy, but also its dominance could actually threaten Russia’s future economic vitality. This is one takeaway from the Beyond Complacency scenario, in which the proceeds from a booming oil and gas industry fail to improve the country’s institutions and lead to intractable popular discontent.

However, by no means is Russia doomed. In fact, sources of opportunity abound, both within the country and in the influences that surround it. As the report’s Regional Rebalancing scenario points out, Russia has not only the ability to benefit from a new global environment of food and water scarcity by further exploiting its natural resources beyond oil and gas, but also the country could unleash enormous potential by embracing the strengths of its diverse and increasingly active regional provinces.

There is no reason to assume that Russia will not be able to set itself on a new course of long-term, sustainable growth. Other energy economies have done it before, and just as the Russia of 1993 looked nothing like the Russia of 2013, tomorrow’s Russian Federation may surprise us all. Doing so, however, will require the country to better understand, accept and address the challenges it faces in order to create a brighter future for itself. That is one of the contributions the Forum’s Scenarios for the Russian Federation hopes to have achieved throughout the past year and at the Annual Meeting in Davos-Klosters by engaging the country’s most senior policy and business decision-makers.

Author: Stephan Mergenthaler is Deputy Head and Andrew D. Bishop is Project Manager with the Strategic Foresight practice at the World Economic Forum, which launches the Scenarios for the Russian Federation at the Annual Meeting on 22 January.

This article also appeared on the FT.

Image: The sun setting behind a crane in Russia REUTERS/REUTERS/Ilya Naymushin