Global Shift to the East and Challenges for Russia

February 3, 2011


The combined efforts of the world’s leading powers prevented a global economic recession, although the crisis has drastically changed the balance of forces. Asian countries have strengthened their role as the drivers of economic growth, although they already face the risk of economic overheating and the creation of “bubbles.” Will the new “locomotives” learn from the examples of the U.S. and Europe and stay among the leaders for the long-term, and does Russia have a shot at joining this group? Are the plans for a world financial center in Moscow realistic, and what changes are needed to reach this ambitious goal? The first day of The Russia Forum 2011 sought to provide answers to these and many other important questions, as well as to discuss the problems currently facing Russia and other leading economies.

Over the past twenty years Russia has made an enormous leap forward – this fact was acknowledged by many of the session panelists. While delivering the opening remarks at The Russia Forum 2011, Ruben Vardanian, Chairman of the Board of Directors at Troika Dialog, said, “However, we are faced with plenty of challenges: to learn to see the ‘long’ horizon ahead and to plan for the long-term, to be diligent and successful in reaching our stated goals, to correctly set priorities, as well as, no less importantly, to build effective partnerships between government and business.”

Russia’s GDP in 2010 grew by 4%, slightly above the forecasts. Alexei Kudrin, Deputy Prime Minister, Minister of Finance of the Russian Federation, pledged that in coming years the Russian investment climate will improve thanks to lower administrative barriers, preservation of competitive advantages provided by the tax rate, reducing the government’s hand in the economy (future privatization), programs aimed at raising the efficiency of fiscal spending and other measures. “Russia is built to be competitive by business conditions, but we need to do something more. I’m sure we will do this,” Mr Kudrin said.

On the first day of the Forum two sessions were fully devoted to the situation in Russia – “How to Spur Growth in Russia” and “Is Russia the Best or Worst in BRIC?” Joseph Stiglitz, recipient of the Nobel Prize for Economics and Columbia University Professor, opined that Russia, as a commodities-based economy, is still experiencing “Dutch disease,” fraught with risks of higher exchange rates of the national currency, economic dependence upon volatile swings in prices on fossil fuels, as well as problems of government management. Discussion participants converged in the opinion that the key tasks for Russia are to improve the investment climate and to reduce the government’s hand in the economy. Until this happens, Russia cannot vie for leadership in BRIC.

According to Michael Milken, Chairman of the Milken Institute, over the past ten years the Russian equity market became one of the most efficient in the world. However, this is insufficient for turning Moscow into a global financial center – aside from economic reforms and further liberalization it is necessary to invest in human capital. Moreover, each sector of the Russian economy faces a number of priority tasks which, if properly solved, could strengthen Russia’s competitive advantages in BRIC. The latest industry trends were discussed in-depth at the sessions “Oil and Gas Exports to Asia: Deciphering the Message in a Fortune Cookie,” “Consumer and Retail: Rise of the Russian Middle Class” and “Commodities: Pendulum Swings.”

Discussions of the world economic paradigm met with broad resonance. In his keynote speech, Harvard University Professor Lawrence Summers remarked that the main event of our time, the subject future historians will write about, has to do with the birth and rapid growth of emerging market economies, especially in Asia. Mr Summers is sanguine on the future of the U.S. economy, believing that America should focus on supporting domestic and foreign demand and export growth. Regarding the outlook for Western European governments, Professor Summers was less unequivocal: “It’s hard to believe that the European financial drama has ended – this is just an intermission. Europe has to take several important steps to definitively solve the problems. Germany was quite successful in supporting its economy, yet this was largely thanks to its neighbors in the EU,” Professor Summers said.

A discussion with Moscow Mayor Sergey Sobyanin and President of the Republic of Tatarstan Rustam Minnikhanov wrapped up the first day of The Russia Forum 2011. According to Sergey Sobyanin, until recently the Russian capital grew spontaneously, causing serious infrastructure (primarily transport and energy) limitations. Moscow ranks among the world’s ten-largest business-friendly mega-cities. “There’s no way to speak about Moscow as a future world financial center without developing infrastructure and creating comfortable living conditions for all the city’s residents. It is necessary to develop infrastructure, to determine clear rules of the game and to reduce corruption levels – then we’ll achieve everything,” the Mayor summarized.