Analysis

Davos Man on Russia

The fallout from the 2008 global financial crisis underlined Russia’s economic vulnerability, but Davos is still awash with talk about her potential, finds Maria Eugenia Filmanovic.

Dmitri Medvedev is listening. Image by World Economic Forum on flickr

After a severe GDP drop in 2009, the Russian economy has resumed growth of about 4%, a pattern the IMF expect to continue for several years, subject to the continued recovery of commodity prices and global markets. Nonethless, the the consensus at the Wold Economic Forum in Davos, Switzerland (23-27 January 2013), was that revitalising the Russian economy will be possible only if accompanied by institutional reform and attention to the effects of volatile energy prices on social cohesion. With a Gini coefficient of 0.42, Russia is a more unequal society than much of Eastern Europe or other high-income countries.

Accordingly, specialists have identified three scenarios for Russia’s future development.

1) In the case of a gradual decline in the energy prices, Russia will not be able to sustain fiscal surpluses of the sort that have filled its stabilisation funds and contributed to the development of high-tech industry at Skolkovo. Therefore, growth will have to be achieved by new leaders driving institutional reform at sub-federal level, in spite of stagnation in central institutions. If business environments improve in the well-run regions and cross-border infrastructure links and lower trade barriers with Russia’s Eastern and East Asian neighbours are enacted, Russia could see a growth in agricultural and manufacturing exports.

2) On the other hand, a sudden and sustained drop in energy prices would severely test the responsiveness of the Russian authorities. Although tax increases and a crackdown on evasion might temporarily protect reserves, the Central Bank could struggle to find sufficient foreign exchange reserves to support the exchange rate stability – heaping the harsh consequences of a financial default on the middle classes. As the 2008 financial crisis has shown, oil prices can go as low as $60 USD a barrel unexpectedly, meaning Russia ought to modify its fiscal structure to make it resilient in times of frequent global financial shocks. This could be achieved by pillaging state companies to pay for high priority social spending.

3) The third scenario involves a consistent increase in energy prices., lessening pressure on the fiscal position of the country. However, there is no guarantee that growing income disparities will not lead to mass discontent, especially if the state remains bureaucratic and public services inefficient. A split in the elitist lobby groups may eventually lead to a radical wave of institutional reforms.

Russia’s burgeoning consumer market now fuels growth in both domestic and international businesses. Nonetheless, both economy and society remain fragile and politics unstable. The biggest challenge for politicians will be to understand whether future global trends bring opportunities or challenges for Russia. Vladimir Putin’s “Russia 2020 ” strategy indicates awareness at an elite level of this role. Whether these reformist instincts will be implemented satisfactorily is crucial to Russia’s long-term growth and stability.

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