World Economic Forum in Davos: Prime Minister Medvedev will try to brighten up dark scenarios of Russia’s future

Today’s business daily Vedomosti.ru talks of the Russian Prime Minister’s difficult task to present his country’s economic future in a brighter light at the current World Economic Forum in Davos. In his attempt to do so, he will rely on large infrastructure projects, including the development of the Russian Far East, construction of the infrastructure for the winter Olympic Games in Sochi in 2014 and construction projects in cities expected to host the 2018 FIFA World Championship. According to the Deputy Prime Minister Arkadiy Dvorkovich, this year Russia sent the largest delegation ever to Davos.

A report on Russia’s economic future prepared by more than 350 managers, government officials and analysts before the Forum already casts a shadow of doubt over the presenter’s customary optimism. According to Vedomosti.ru, the report sees Russia as a passive player in the world economy: it will merely respond to changes or put up a line of feeble defense. The report proposes three alternative development models for Russia’s future, depending on the developments on the international energy markets, Russia’s institutional reforms and related social conditions in the country.   

The first scenario sees the central government comfortably enjoying the consequences of the international economic growth and corresponding growth of oil prices, postponing any meaningful institutional reforms. This will create problems for some local authorities in Russia, as they will remain dependent on the subsidies from the central budget. Some regions will manage to develop their own brand and attract investors by emphasizing their development potential based on human capital, but others will fail to do so, thus deepening economic disparity in the country.

The second scenario foresees a darker future should the oil prices drop; in attempting to preserve the current distribution of economic and political power in the country, the Russian Government could introduce a progressive income tax or other mechanisms for distribution of wealth in order to support the same level of social expenditures. The Government will intervene in the economy to prevent bankruptcies and loss of jobs, eventually creating a super-monopoly with a complete control over the country’s energy resources. Inefficiency will follow, causing the extraction to stagnate and the infrastructure to deteriorate.

The third scenario is not too bright, either: it sees Russia’s energy sector flourishing as a result of tax breaks and special treatment of foreign investors in the sector, while the rest of the society grows increasingly frustrated. Social inequalities will continue to rise and the citizens will continue to suffer from corruption, low quality of government services and lack of perspective. Even a part of the political and business elite will become dissatisfied with the continued domination of the oil and gas lobby. There will be increased pressure on the Government to implement institutional reforms.

All three scenarios are grim in their own way, but shouldn’t be taken too seriously. Russian municipalities and regions have already recognized the need to focus on developing their own resources rather than rely on Government subsidies, and many of them have already undertaken concrete steps to attract investors and create a more comfortable living environment. In addition, an expert from the Moscow’s Higher School of Economics reminds the readers that market forces should be taken into account – stakeholders will not watch any of the three scenarios develop with folded arms.

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