Three scenarios for Russia’s economy

In 2012, the World Economic Forum engaged over 350 Russian and international business leaders, government officials and academics to put together a set of Scenarios for the Russian Federation in 2030. The team produced three scenarios – “Regional Rebalancing”, “Precarious Stability”, and “Beyond Complacency” – which were presented at the WEF 2013 Annual Meeting in Davos. Given the events that took place in 2014, this might be a good time to reflect and assess: how well have these scenarios fared so far?

The project team naturally did not predict the recent geopolitical developments. However, all the main elements of the three scenarios turned out to be essential for understanding what has happened to date and how Russia will develop in the future.

All three scenarios were pessimistic on the ability of the central government to improve Russia’s economic institutions, to create a competitive business environment and to fight corruption. In this respect, the Report proved to be right on target. Not surprisingly, already in 2013 and in the beginning of 2014 (even before the Crimean crisis!) investors turned disillusioned in the government’s promises to reform – and did vote with their feet. Russian stocks were now trading at about 50% discount to the comparable emerging market counterparts, capital outflow intensified, investments declined, the economy started to stagnate. Even though in the beginning of 2013, the International Monetary Fund forecasted a 3.5% growth in 2013, the eventual outcome was only 1.3%. The current consensus forecast is 0.2% growth for 2014 and below 1% for 2015.

The Report’s pessimism regarding the pro-business reforms implied a major conundrum. Without reforms, the Russian economy could not grow, and without growth the extant social contract between the government and the society just could not continue to function. This is why neither scenario felt like an entirely reassuring trajectory towards 2030; in each scenario, there would have to be a major political or economic change.

The Report also argued that the developments in the global energy market were likely to result in lower oil prices (thus leading to the Precarious Stability scenario). Today, the oil prices are 25% below their early 2013 levels and keep falling – due to the very factors that were outlined in the Report.

In the Precarious Stability scenario, the government would respond to lower oil revenues with a strengthened hold of the state on the economy. This is exactly what is happening in Russia today – with the expansion of state companies and the removal of privatization from the policy agenda. The Report also argued that Russia’s oil revenues may be hit further by its inability to develop new fields without access to Western technology. Unfortunately, this is almost certain to happen due to the US and Europe’s sanctions.

The first, the most optimistic, Regional Rebalancing scenario is also recognizable however in today’s Russia. Certain regions have managed to reform and improve their business climate. A year after the countrywide study, the World Economic Forum followed up with an analysis of the four success factors of the four most advanced regions (“Russia’s Regions Drivers of Growth: 4X4”). These – and several other – regions continue to reform and grow even in the presence of sanctions.

Finally, the Report also emphasized the importance of social cohesion. Ironically – and contrary to the Report’s recommendations to do so – the government decided not to reach out to the pro-modernization middle class. Vice versa, it used the annexation of Crimea to draft a new social contract. Instead of reforms promoting economic growth and better governance, Russia is now building a social consensus around territorial expansion. In this sense, the government did find an unexpected solution to the conundrum identified in the Report. In the new political equilibrium, social cohesion is not based on growth or better public goods – it is built on Russian nationalism and anti-Western sentiment.

What conclusions can we draw now that two years have passed? First, social demand for modernization, openness and growth cannot be taken for granted. Second, the central government seems increasingly unlikely to carry out pro-business reforms. Third, external factors, especially those in the global energy market, are likely to further undermine Russian growth. These factors all point in the same direction: the Russian economy is going to stagnate or even experience recession. The Scenarios Report hit the nail on the head: one can’t predict the details of exactly how Russia will change by 2030, but one can be confident that the country will undergo substantial change in coming years, as the status quo is unlikely to be sustainable.

Author: Sergei Guriev is Professor of Economics at SciencesPo. in Paris. He was a participant in the World Economic Forum’s Scenarios for the Russian Federation process in 2012.

Image: A man walks across Red Square near the GUM state department store (L) and St Basil’s Cathedral on a rainy day in Moscow, November 26, 2007. REUTERS/Oksana Yushko