Analysis

Fine words, but little action on Russia’s economy

A speech by Vladimir Putin at the St Petersburg Economic Forum in June 2013 alluded to the economic challenges Russia must tackle in order to boost its economic performance in the years to come. Maria Filmanovic cuts through the optimism.

A disappointing 1.9% percentage growth in the first quarter of 2013 is the most important evidence yet that  institutional pragmatism should be considered by the political elite in Moscow.

On the international front, Putin has made it clear that the country is slowly moving its oil and gas supply away from stagnating European demand. Indeed, Putin told the Forum that “conditions of high growth in prices of Russia’s primary exports no longer seem to offer a sustainable growth model for our [this] country”. This statement, comes only a few weeks after Russia signed a strategic agreement with the Chinese authorities to assure Russia’s supply of oil and gas over a 25 years plan. Two major energy companies signed deals with China. Russia’s main oil producer, Rosneft, promised to deliver 360m tonnes of oil, while Novatek, an independent gas producer, was permitted to gain a stake in China’s CNPC $20bn LNG plant on the Yamal peninsula in northern Russia.

At the Forum, the Russian president stressed the need for pivotal investments in China. A $13.5bn investment approved by the Russian government aims at making the Trans-Siberian railway “the artery linking Europe to Asia Pacific” – a plan that sees the reserves of the national wealth fund invested in infrastructure, communications and technology.

But Russia’s challenges ahead are certainly not only limited to the world’s energy market dynamics. Of the BRICs, Russia is unique in displaying signs of an economic deceleration following the 2009 financial crisis.

Putin seems aware that Russia’s unsustainable resource-driven growth model is engendering. To tackle decelerating growth, it is a priority to focus all efforts in order to unveil Russia’s internal growth potential. As an emerging market economy, the country sees itself exposed to favourable trends, such as the growing consumer demand for goods and services, alongside increasing real wages. Over the years, these trends led to a growing middle-class group that constituted a consolidated and representative opposition force in the protests against the Putin’s regained political leadership in the May election last year.

Russia’s future plans also consist of a massive privatization campaign that will be concluded in 2017. Yet, returns on the sale of state-owned assets may be disappointing.

Putin never forgets to pay lip service to the need for improvements in the private business climate and for clearly delineated property and competition laws in order to rekindle stale investment growth. Despite encouraging words, disappointment still exists about economic performance. Bureaucratic bottlenecks and stagnating leadership are the main factors hampering growth over the longer term. Structural economic reforms aimed at unveiling internal growth potential need to be supported by political credibility. For Russia to emerge as an influential country within the BRICs club, leveraging on oil and gas diplomacy remains an insufficient strategy for economic progress.

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