Russia and the World: Scenarios to 2025: Executive Summary

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For decades Russia, as the dominant constituent of the Soviet Union, was indisputably a superpower. The reality today is very different. With a population of 144 million, Russia has approximately as many inhabitants as Pakistan (which, like Russia, possesses nuclear weapons), and an economy about the size of the Netherlands (population 16 million). Russia has gone through major changes since the break up of the Soviet Union, with a 30% decrease in gross domestic product (GDP) from 1992 to 1998 and challenges to Moscow’s rule in some provinces. In addition to that, declining birth rates combined with emigration and disease have shrunk the working-age population. However, at the start of the 21st Century, the indications from Russia are more favourable, not least because it has experienced a strong real GDP growth in the past five years that has created large current account surpluses and reserves. The economic boom has been supported by high oil prices—but the benefits of this increased economic prosperity are shared only among the elite, while the income gap between regions and groups within society continues to grow. While the upturn in itself is not enough to ensure sustained economic development, it has provided President Vladimir Putin with a window of opportunity, which he has used to introduce a number of reforms, including a flat income tax, a new land and legal code, and legislation on currency liberalization. Indeed, his most significant achievement has been to balance the budget and dramatically reduce IMF borrowing. More recently, a number of issues have started to become more pressing, including inflation, ethnic tensions and some slowing in economic growth just to mention a few. It is thus appropriate to ask whether the combination of these different demographic, economic, social and political elements will eventually have a negative impact, or if Russia can successfully turn itself around.

Text of Russia and the World: Scenarios to 2025: Executive Summary

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Russia and the World: Scenarios to 2025 Executive Summary

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Executive Summary

Vozrozhdenie Long March

Oil's Curse

Russia and the World: Scenarios to 2025

Executive SummaryFor decades Russia, as the dominant constituent of the Soviet Union, was indisputably a superpower. The reality today is very different. With a population of 144 million, Russia has approximately as many inhabitants as Pakistan (which, like Russia, possesses nuclear weapons), and an economy about the size of the Netherlands (population 16 million). Russia has gone through major changes since the break up of the Soviet Union, with a 30% decrease in gross domestic product (GDP) from 1992 to 1998 and challenges to Moscows rule in some provinces. In addition to that, declining birth rates combined with emigration and disease have shrunk the working-age population. However, at the start of the 21st Century, the indications from Russia are more favourable, not least because it has experienced a strong real GDP growth in the past five years that has created large current account surpluses and reserves. The economic boom has been supported by high oil pricesbut the benefits of this increased economic prosperity are shared only among the elite, while the income gap between regions and groups within society continues to grow. While the upturn in itself is not enough to ensure sustained economic development, it has provided President Vladimir Putin with a window of opportunity, which he has used to introduce a number of reforms, including a flat income tax, a new land and legal code, and legislation on currency liberalization. Indeed, his most significant achievement has been to balance the budget and dramatically reduce IMF borrowing. Different scenario paths for Russia up to 2025 are represented in figure 1, in which the axes reflect different possible outcomes with respect to the key questions. A number of factors will influence Russias response to these questions : The Key Questions for the Scenarios Among the many challenges confronting Russia, two questions are key to how Russia will look in the next two decades : More recently, a number of issues have started to become more pressing, including inflation, ethnic tensions and some slowing in economic growth just to mention a few. It is thus appropriate to ask whether the combination of these different demographic, economic, social and political elements will eventually have a negative impact, or if Russia can successfully turn itself around.

Executive Summary

Will Russia be able to develop legitimate and effective governance, based on the rule of law ?

How effectively can Russia develop a broad-based economy given its extensive energy resources ?

The nature, openness and leadership qualities of the Russian elite, and its interest and ability to impose the rule of law ;

The choice of economic policy, and the extent of the freedom granted to private capital in the energy and non-energy sectors ;

The challenge of maintaining social cohesion given the countrys geographic spread and its serious demographic problems ; and,

Russias relations with the rest of the world.

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Russia and the World: Scenarios to 2025 Executive Summary

Figure 1: Russia and the World: Scenarios to 2025

Vozrozhdenie Long March

Oil's Curse

The Long March scenario covers a situation in which Russia continues to leverage its natural resources, to the detriment of the full development of other sectors. A gradual transition takes place to a system of governance based on the rule of law. In this scenario, Russia is able to achieve relative prosperity, but a far less benign future is also possible. In Oils Curse, a political class bent on its own enrichment is in charge, resulting in slow growth, poor levels of investment in infrastructure, capital flight, increased corruption

and a decline in the competitiveness of domestic industries. A radical departure from the past is also possible, in which Russia would gradually achieve real economic and social progress. Vozrozhdenie (Renaissance in Russian) foresees initially gradual but eventually widereaching governance reforms combined with market reforms leading to strong GDP growth, an increase in real income, and general improvement in the quality of life for the population at large.

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Long MarchRussia and the World: Scenarios to 2025 Executive Summary

Long March describes a Russia that is still highly dependent on natural resources. Increasingly moderate and pragmatic conservatives make investments in oil infrastructure so as to fully leverage the advantages Russia derives from its natural resources while struggling to enforce a greater rule of law. In other sectors of the economy, international competitiveness remains limited. This scenario is set out in the notional form of a transcript in the Dupree Quarterlyan investment journalof a keynote speech at its annual meeting in New York City in 2025.

Oils Curse

In Oils Curse Russia continues to rely heavily on natural resources. With high oil prices worldwide and strong demand for energy, the implementation of far-reaching institutional reforms and investment in oil and public infrastructure are neglected, in part due to ineffective leadership. The scenario is told as an article (by Russian sceptics) in The Online Newsletter of the Russian Development Group, aimed at potential investors.

Vozrozhdenie(Renaissance)

Vozrozhdenie describes a Russia that implements a series of bold reforms under the leadership of a democratically elected President. These reforms lead to the economic, political and social rebirth of Russia. The scenario is narrated in the Online Encyclopaedia of the World (OEW) and provides a factual account of what Russia has achieved over a 20-year period.

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2006-2010: Following a period of economic upswing, inefficiency and declining productivity in the energy sector become increasingly apparent, as oil and gas production start to trend downward. Inequality and corruption levels increase, while social spending on healthcare and education is underfunded. The 2008 elections bring leadership changes and new vision to Russia. A model emerges, similar to Canada, where energy and natural resources are seen as a strategic asset that can be leveraged for both economic development and geopolitical aims. 2011-2020: The new President (2008-2016) and his successor maintain Putins approach to a managed democracy and a managed economy, while committing to the redistribution of revenues from the state-controlled energy sector to the population at large, improving their living standards through increased social spending. Despite the lack of serious structural reforms in the economy and public governance, the government is relatively successful in fighting corruption and reforming the military, while its focus on the energy sector ensures much-needed investment and gradual improvement in efficiency and productivity in that sector. Other industries remain underdeveloped despite their

potential, because of limited access to financing and human capital and the absence of a free-market dynamic. Energy also shapes foreign policy, drawing Russia closer to China and improving its relations with both the European Union and the United States. 2021-2025: Russia follows essentially the same path, maintaining a benign authoritarian regime and a strong involvement of the state in the economy, primarily focused on the energy sector. Advances in the rule of law and a solid increase in real income for the population in general encourage the development of a middle class that, at this point, begins to resent the states stranglehold on all areas of public and economic life. Non-oil industries are growing, but over the years their competitiveness on the international scene is affected by the lack of exposure to a real market economy, the strengthening of the rouble, and the protectionist attitude of the state. This in turn sparkes pressure for market-friendly reforms. Furthermore, the regions, which have benefited from more efficient administration, are beginning to question the role of the state, while ethnic tensions are on the increase. On the international scene, Russia is seen as a stable and reliable oil provider.Russia and the World: Scenarios to 2025 Executive Summary

2006-2010: The conservatives reinforce their power in the Kremlin as despair and apathy spread among the population and high oil prices reduce the sense of urgency for the need for substantial economic reforms. Efficiency and fiscal discipline appear less important, given the revenues flowing into the states vaults. However, the lack of reforms, as well as uncertainty and instability, affect the economy, bringing about a substantial decrease in productivity and efficiency in all sectorsincluding energy, where insufficient investments in exploration and extraction affect oil production growth. As corruption undermines the rule of law, elections do not lead to any change in power or policy. Ethnic tensions increase, and the international position becomes tenser and more difficult. 2011-2020: The deteriorating economic situation spurs a number of short term measures.The loosening of fiscal policy as the government wi