Despite constant talk about plans to boost the nation’s economic growth, experts remain skeptical about any efforts to wean the Russian economy off its dependence on oil.

“Risks differ because they are possible to measure, while unpredictability is impossible to assess. And this bring about a sort of torpor among investors.” Photo: RIA Novosti

 As Russia’s top economic leaders prepare for the upcoming Russian Investment Forum in Sochi, scheduled on Feb. 27-28, there has been increased discussion among experts about what steps need to be taken this year to propel the Russian economy forward. For now, the focus seems to be on new investment projects for economic growth.

Yet, as Russian and foreign experts discussed at a Feb. 8 event at the Carnegie Moscow Center, it will take more than just new investment to jump-start the economy. As long as the Russian economy depends on oil and the “gray market” remains commonplace in the country, it will be challenging to carry out effective structural reforms, attract investors and boost economic growth.

This is the key message of the discussion that brought together the director of Stockholm Institute of Transition Economics Torbjorn Becker, the head of the Moscow-based Economic Expert Group Evsei Gurvich and Carnegie Moscow Center expert Andrei Movchan.

The oil curse as an obstacle for foreign investment

Gurvich argues that Russia’s key problem is the resource curse, which results from the cyclical nature of oil prices (with alternating cycles every 15 years or so). When prices rise, oil revenues also increase, which increases the rivalry among political elites for the control of the oil rent. In this situation, the authorities think not about the efficiency of the economy, but about grabbing a bigger slice of the pie. This is how the state assumes a greater control over the economy, in general.

“Russian economic dependence is very deep on the macroeconomic level,” Becker continues, adding that volatile changes in oil prices could have either negative or positive effects on Russia’s gross domestic product (GDP) and other economic indicators.

According to him, about 80-90 percent of forecast mistakes come from the fact the pundits and politicians cannot predict oil prices properly. For Russia’s policymakers, it means that they cannot control the economic situation in the country and this a big challenge for the authorities, said Becker.

Even though Russia’s sovereign wealth funds — the Reserve Fund and the National Welfare Fund — are good tools for rainy days, they primarily deal with short-term management of oil volatility. Thus, they cannot resolve the problem of unpredictability.   

As Andrei Yakovlev, the director of the Institute for Industrial and Market Studies at the Higher School of Economics, told Russia Direct in a 2016 interview, investing in an unpredictable environment “is highly difficult, because business is used to assessing risks.”

“Risks differ because they are possible to measure, while unpredictability is impossible to assess,” he clarified. “And this bring about a sort of torpor among investors.”

Moreover, the unpredictability that stems from the volatility of oil prices is narrowing the planning horizon among those at the helm, said Gurvich. Thus, the Kremlin relegates any strategic thinking to the secondary agenda and prefers to think even shorter term. This cannot help affecting the country’s economic growth; it does create favorable environment for the budget deficit.

Not only does the oil-dependent economy create a great deal of uncertainty and make the authorities helpless during abrupt changes in oil prices, but also it affects the structure of Russia’s trade with its European partners by making it one-sided.

To illustrate this trend, Becker gives an example of the trade between Russia and Sweden, with oil exports comprising about 80 percent of the products from Russia and Swedish exports being more diversified. Russia should be careful about “the danger of one-sided oil dependence.” After all, it could affect the country’s economic growth and efficiency, said Becker.

Political dimension of the resource curse

However, Movchan looks at the resource curse from a different angle. He prefers to focus on the advantages that the commodity-based economy creates for the authorities and the population. Even though he sees oil dependence as a challenge for Russia’s economic and political future, Movchan admits that those who work for the government – about 38 percent — get their salaries from the state budget that depends on oil revenues. In other words, the Russian population itself is “the key consumer of the resource curse,” because its income is determined to a larger extent by oil prices.

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Second, significant oil resources yield another advantage: very cheap energy. Movchan gives an example from day-to-day life: the average temperature in Russian houses is 23 degrees Celsius (73.4 degrees Fahrenheit), while American houses are heated to just 16-17 degrees Celsius (62 degrees Fahrenheit). In fact, the energy consumption (and economy) in Russia is adjusted to lower prices on hydrocarbons and it defines the key habit of Russians, which they are reluctant to change.

Moreover, the Russian army depends on low energy prices in the country and nobody even cares about the amount of money to maintain the country’s military forces. Given the fact that Russians sees these forces as a guarantor of political stability, territorial integrity and geopolitical influence, oil in this regard mobilizes people around the leader and creates a sort of stability, even if illusionary and ephemeral. 

However, it doesn’t necessary mean that oil is good for the nation per se. According to Movchan, the oil dependence is a curse, an evil for the long-term development of the country, but it is necessary to understand the short-term oil benefits for the Kremlin and the population to avoid many pitfalls on the path to structural reforms. It is also essential not to turn into another oil-dependent Venezuela, which is now on the verge of political collapse because of ill-thought-out economic initiatives.

Today, the Russian authorities are looking for political and economic stability. And if one looks at the situation from their perspective, they naturally shy away from any reforms, which could endanger their positions and this is a normal behavior, says Movchan. In order to foster the sweeping changes, they should stop being policymakers and turn into reformers who are ready to destroy the old system and build the new one. Obviously, this is not what the current Russian political elites are looking for now.

That’s why any forecast about higher oil prices is music to the ears of those in the Kremlin. After all, high oil prices (which translate into economic prosperity) boosted the approval ratings of Russian President Vladimir Putin as well as Soviet leader Leonid Brezhnev during their tenures. Meanwhile low prices on hydrocarbons (which led to economic woes) ruined the reputations of Soviet President Mikhail Gorbachev and his successor Boris Yeltsin, in part, because their presidencies coincided with a period of low oil prices. Gurvich pointed out the correlation between their popularity and the oil cycles during his speech.

The expert believe that Russia will become a magnet for investors only when the oil dependence era will end, when oil revenues won’t be relevant for the authorities anymore, when oil prices will drastically plummet. If it happens Russia will be forced to produce the goods that it imports now.

Thus, the Russian political elites will be ready to conduct the sweeping structural reforms, only if they will be faced with the existential threat for their stability and well being, Gurvich concluded.

Russia’s infatuation with economic forums

The only problem is that when the Russian authorities have to deal with economic challenges, they aren’t ready to take the difficult next steps. Instead, they have a penchant for organizing lavishly funded economic forums that bring together top economists, politicians and diplomats from Russia and abroad.

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There are at least five major economic forums that take place in Russia each year — the St. Petersburg International Economic Forum, the Eastern Economic Forum in Vladivostok, the Gaidar Economic Forum, the Yalta International Economic Forum, and the Russian Investment Forum in Sochi. In a nutshell, their major goal is to create an intellectual and business platform for boosting the country’s economic growth and raising Russia’s global profile.

There is no unanimity about the efficiency and viability of such forums among experts and independent economists. While some see them as an opportunity to attract foreign investors and discuss the most urgent challenges while cutting important deals, others describe such forums as a convenient photo-op, a sort of “party” or “talk show” for pundits and politicians. Such platforms may be splashy, but are often inefficient. In short, they may promise more than they actually deliver.

For example, Oleg Buklemishev, an associate professor of Economics at Lomonosov Moscow State University, is skeptical about the impact of investment forums.

“Do these many economic gatherings pay off? I’m not sure,” he told Russia Direct. “But inertia and the benefits for organizers and the local communities in general outweigh the costs, which are usually spread between many — and some of them can’t vocally speak out (for example, the taxpayers).”

At the same time, Buklemishev admits that these investment forums “do perform some useful functions” no matter how “strange it may seem.”

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“First, there are very few places where politicians have to address businesses and their everyday needs, explain their position, speculate about intentions and even logically justify them. Sometimes this is the easiest way to access the views of top government leaders and themselves personally,” he clarified.

“Second, these are platforms for communication between business leaders, to share news and challenges, forge practical contacts and relationships and get a feel for the atmosphere of the marketplace,” he notes.

“Third, this is a mechanism for the general audience to know something about the authorities’ views and economic perspective,” Buklemishev concluded. “Fourth, sometimes the discussions put forward some helpful ideas, which experts share with the bureaucrats and the business community. Fifth, this is a powerful way to support local hospitality industries – hotels, restaurants, transportation and entertainment.”