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Russia and the World: Scenarios to 2025

Executive Summary
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Executive Summary



Oil's Curse
Russia and the World: Scenarios to 2025

Executive Summary
Executive Summary

For decades Russia, as the dominant constituent More recently, a number of issues have started
of the Soviet Union, was indisputably a to become more pressing, including inflation,
superpower. The reality today is very different. ethnic tensions and some slowing in economic
With a population of 144 million, Russia has growth just to mention a few.
approximately as many inhabitants as Pakistan It is thus appropriate to ask whether the
(which, like Russia, possesses nuclear weapons), combination of these different demographic,
and an economy about the size of the economic, social and political elements will
Netherlands (population 16 million). eventually have a negative impact, or if Russia
Russia has gone through major changes can successfully turn itself around.
since the break up of the Soviet Union,
with a 30% decrease in gross domestic product The Key Questions for the Scenarios
(GDP) from 1992 to 1998 and challenges to Among the many challenges confronting Russia,
Moscow’s rule in some provinces. In addition two questions are key to how Russia will look
to that, declining birth rates combined with in the next two decades :
emigration and disease have shrunk the • Will Russia be able to develop
working-age population. However, at the start legitimate and effective governance,
of the 21st Century, the indications from Russia based on the rule of law ?
are more favourable, not least because it has • How effectively can Russia develop
experienced a strong real GDP growth in the a broad-based economy given its
past five years that has created large current extensive energy resources ?
account surpluses and reserves.
The economic boom has been supported A number of factors will influence Russia’s
by high oil prices—but the benefits of this response to these questions :
increased economic prosperity are shared only • The nature, openness and leadership
among the elite, while the income gap between qualities of the Russian elite, and its interest
regions and groups within society continues and ability to impose the rule of law ;
to grow. • The choice of economic policy, and the
While the upturn in itself is not enough to extent of the freedom granted to private
ensure sustained economic development, it capital in the energy and non-energy
has provided President Vladimir Putin with a sectors ;
window of opportunity, which he has used to • The challenge of maintaining social cohesion
introduce a number of reforms, including a flat given the country’s geographic spread and
income tax, a new land and legal code, and its serious demographic problems ; and,
legislation on currency liberalization. Indeed, his • Russia’s relations with the rest of the world.
most significant achievement has been to
balance the budget and dramatically reduce Different scenario paths for Russia up to 2025
IMF borrowing. are represented in figure 1, in which the axes
reflect different possible outcomes with respect
to the key questions.

Russia and the World: Scenarios to 2025
Executive Summary
Figure 1: Russia and the World: Scenarios to 2025



Oil's Curse

The Long March scenario covers a situation and a decline in the competitiveness of domestic
in which Russia continues to leverage its industries.
natural resources, to the detriment of the full A radical departure from the past is also
development of other sectors. A gradual possible, in which Russia would gradually
transition takes place to a system of governance achieve real economic and social progress.
based on the rule of law. In this scenario, Russia Vozrozhdenie (“Renaissance” in Russian)
is able to achieve relative prosperity, but a far foresees initially gradual but eventually wide-
less benign future is also possible. reaching governance reforms combined with
In Oil’s Curse, a political class bent on market reforms leading to strong GDP growth,
its own enrichment is in charge, resulting an increase in real income, and general
in slow growth, poor levels of investment in improvement in the quality of life for the
infrastructure, capital flight, increased corruption population at large.
Long March 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
Russia and the World: Scenarios to 2025

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 Quarterly—an investment journal—of a keynote
speech at its annual meeting in New York City in 2025.
Executive Summary

Oil’s Curse In Oil’s 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 Vozrozhdenie describes a Russia that implements a series of

(“Renaissance”) 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.

2006-2010: Following a period of economic upswing, inefficiency potential, because of limited access to financing and human capital
and declining productivity in the energy sector become increasingly and the absence of a free-market dynamic. Energy also shapes
apparent, as oil and gas production start to trend downward. foreign policy, drawing Russia closer to China and improving its
Inequality and corruption levels increase, while social spending relations with both the European Union and the United States.
on healthcare and education is underfunded. The 2008 elections
bring leadership changes and new vision to Russia. A model 2021-2025: Russia follows essentially the same path, maintaining

Russia and the World: Scenarios to 2025

emerges, similar to Canada, where energy and natural resources a benign authoritarian regime and a strong involvement of the
are seen as a strategic asset that can be leveraged for both state in the economy, primarily focused on the energy sector.
economic development and geopolitical aims. Advances in the rule of law and a solid increase in real income
for the population in general encourage the development of a
2011-2020: The new President (2008-2016) and his successor middle class that, at this point, begins to resent the state’s
maintain Putin’s approach to a managed democracy and a stranglehold on all areas of public and economic life. Non-oil
managed economy, while committing to the redistribution of industries are growing, but over the years their competitiveness
revenues from the state-controlled energy sector to the population on the international scene is affected by the lack of exposure to
at large, improving their living standards through increased social a real market economy, the strengthening of the rouble, and the
spending. Despite the lack of serious structural reforms in the protectionist attitude of the state. This in turn sparkes pressure
economy and public governance, the government is relatively for market-friendly reforms. Furthermore, the regions, which
successful in fighting corruption and reforming the military, while have benefited from more efficient administration, are beginning

Executive Summary
its focus on the energy sector ensures much-needed investment to question the role of the state, while ethnic tensions are on the
and gradual improvement in efficiency and productivity in that increase. On the international scene, Russia is seen as a stable
sector. Other industries remain underdeveloped despite their and reliable oil provider.

2006-2010: The conservatives reinforce their power in the companies. As the state is unable to improve the economy,
Kremlin as despair and apathy spread among the population more and more industries are subject to government directives.
and high oil prices reduce the sense of urgency for the The private sector has only limited access to finance, human
need for substantial economic reforms. Efficiency and fiscal capital, fixed capital and management, whilst capital flight
discipline appear less important, given the revenues flowing soars. Eventually, a new wave of privatization creates a second
into the state’s vaults. However, the lack of reforms, as well as generation of oligarchs. Protectionist measures in favour of
uncertainty and instability, affect the economy, bringing about weaker domestic companies and dwindling oil production
a substantial decrease in productivity and efficiency in all contribute to the souring of international relations.
sectors—including energy, where insufficient investments
in exploration and extraction affect oil production growth. 2021-2025 : Alarmed by a potential collapse of the Russian
As corruption undermines the rule of law, elections do not economy, international financial institutions try to pump in
lead to any change in power or policy. Ethnic tensions funds—but these are mostly squandered without achieving
increase, and the international position becomes tenser any real effect. The state does not follow a long-term social
and more difficult. policy, and welfare expenditures are crisis-driven, unsustainable
and inadequate, while the number of those dependent on
2011-2020: The deteriorating economic situation spurs a the state for survival—pensioners, unemployed, the poor—
number of short term measures.The loosening of fiscal policy grows. Businesses continue to be hampered by loss of
as the government withdraws from the Stabilization Fund, competitiveness, low productivity, and an unfavourable market
without backing the withdrawals with the necessary structural environment. Internally, Russia experiences mounting centre-
reforms, actually worsens the situation by fuelling inflation periphery and ethnic tensions, which often erupt into violent
and inefficiency. The state reacts by reinforcing its industrial clashes. Externally, international relationships deteriorate as
policy and increasing its hold over the energy sector. Russia unsuccessfully attempts to recreate an imperialist
More companies are brought under state control, encouraging state, further alienating its neighbours, and eventually turns
an internal political struggle over the control of natural resource inwards, becoming more and more isolated.

2006-2010: Decreasing oil and gas production, low efficiency market and gradual withdrawal of the state from the economy ;
and productivity in all sectors, and a worsening of the business reduction of red tape and trade barriers ; encouragement of
environment cause a slowdown of the economy, after years of diversification to non-energy sectors), whilst also addressing the
relatively high GDP growth. Corruption and poor governance health and the education systems. Corruption is tackled, and
reach into virtually all areas of public and private life, and social confidence in state and business grows as the economy starts
services, such as health and education, are suffering from years to recover, with improvements in productivity across all sectors.
of insufficient budget allocations. After the 2008 elections, conflicts Internationally, Russia strengthens its ties with the EU and to some
flare inside the Kremlin between conservatives and market extent with the US, while its relationship with China is good in
reformers, and a new Prime Minister closer to the latter group the context of the supply of energy, but tenser elsewhere.
is chosen. He begins some much-needed reforms, but is
eventually ousted by conservatives. As the economy continues 2021-2025 : The succeeding Presidency builds upon the strong
to shift downwards, the “traditional” measures—state intervention, foundations created over the previous years, although with a
dirigisme, political pricing, etc.—prove unsuccessful. stronger emphasis on social aspects and regional development.
The diversification achieved ensures a solid and sustainable
2011-2020: Popular opposition following the slowing of the economic growth, despite the slowing in oil production, while
economy (and of income growth) and the scandals surrounding insulating the economy from energy shocks and increasing the
a failed anti-corruption campaign builds up ahead of the 2012 financial independence of the regions. The rise of a burgeoning
elections, and enables the ousted Prime Minister to obtain the middle class also ensures the emergence and development of
Presidency. Over the two terms of his mandate, he succeeds in a strong civil society. Abroad, Russia is positioning itself as the
implementing some radical reforms both in the public sector growth engine for the Eurasia and Central Asia region, and is
(progression towards greater democracy and division of powers; perceived as a major power, with the ability to counter-balance
civil service and army reform ; greater independence of regions both China and the US.
vis-à-vis the centre) and in business (establishment of the free
Russia and the World: Scenarios to 2025

Executive Summary

Oil's Curse

Comparing the Three Scenarios

This table provides a comparison of some of the most important aspects and developments of the
scenarios, with further analysis presented in the following Annex

Long March Oil’s Curse Vozrozhdenie

Economic performance • Strong investment in oil • Strong state regulation and • Push to diversify the
infrastructure, improvements protection of the economy economy away from energy,
in public infrastructure, from outside forces lead to leads to healthy and stable
limited growth elsewhere slow and fluctuating GDP balanced GDP growth

Social development • Higher but inefficient social • High social tensions due to • Social spending and
spending stabilizes income prevailing corruption and improved efficiency has
gap growing inequalities reduced inequality
• Civil society remains • Quality of life worsens and • Greater involvement of the
embryonic—but pressures social services close to population in political life
for ‘independence’ grow collapse

External relationships • Mildly benign attitude towards • Relationship with China • Russia becomes
the West, focus on China & thrives on the back of increasingly active on
India growing energy trade the world stage and in
• Russia has positioned itself • Closer relations with EU international organizations
as a crucial supplier of driven by security of energy • Greater readiness to
energy in a world where supply substantially align with EU
security of supply is major • US relationship grows distant and US views.

Leadership & governance • Power maintained by • Power maintained and • Full development of a more
increasingly moderate and concentrated by small elites effective and democratic
pragmatic conservatives at national and regional levels form of governance
• Successful war on corruption • Dissatisfaction with • Transparency, personal
legitimizes the central state ineffective governance rights and public
accountability are greatly

Russia and the World : Scenarios to 2025
Annexe : Comparing the

Annex: Comparing The Three Scenarios

Three Scenarios
The following section allows a side-by-side comparison Using the data
of the evolution of some key economic and social The main objective of the above data is to help develop
indicators as featured in each scenario. The underlying leading indicators to determine which of the three scenarios is
economic modelling and analysis has been developed, actually unfolding. Scenario users should keep in mind that
with contributions from several experts, in order to the scenarios and the related analysis are descriptions of
ensure that the storylines and the development of their only a set of possible outcomes, as seen from the current
different dimensions are both plausible and consistent perspective.
with each other. They should not be seen as predictions or forecasts.
The data provided therefore should only be seen as a guide,
and should be applied with careful judgement.

Key indicators considered :

1. World GDP growth
2. Russia GDP growth
3. Export growth (excluding oil)
4. Export composition
- Export breakdown by destination
- Export breakdown by industry
5. Oil exports
6. FDI inflows
7. Percentage of people living under
“subsistence level”

Russia and the World: Scenarios to 2025
Annex: Comparing The Three Scenarios

1. World GDP growth

Figure A.1 World GDP Growth

World real GDP % growth p.a. (moving 5-year averages)

Long March Oil’s Curse Vozrozhdenie

0 Actual Projected

2000 2005 2010 2015 2020 2025

Source: World Economic Forum

In Long March, global integration progresses worldwide and global growth peaks in 2008 ; however, in the long run, scepticism
and nationalism emerge, preventing the global economy from fully reaping the benefits of globalization and slowing down growth.
In Oil’s Curse, a difficult international environment, characterized by lack of trust and instability, undermines international cooperation
and integration, leading to a global recession in 2010-2014. In contrast, in Vozrozhdenie, the global economy benefits from increasing
globalization and a more harmonious external environment, reaching annual growth rates of up to 4 %.

2. Russia GDP growth

Figure A.2 Russia GDP Growth

Russia’s GDP growth p.a. (moving 5-year averages)

Long March Oil’s Curse Vozrozhdenie

0 Actual Projected

2000 2005 2010 2015 2020 2025

Source: Moody's

Following the 2002-2006 period of high growth, mostly driven by oil prices and consumer demand, Russia’s GDP growth
starts to slow. In Long March the maintained reliance on energy is backed by substantial investments and efficiency
improvements in the sector, while in the non-energy economy, small but efficient investments lead to moderate growth.
In Oil’s Curse, on the other hand, the dependence on energy is not sustained by the necessary investments; as decreasing
rule of law and negative business environment affect economic performance in all sectors, GDP growth is minimal.
In Vozrozhdenie, after an initial period of mediocre performance, the economy picks up thanks to encouraged diversification
8 and increased rule of law, attaining higher and sustainable growth levels.
Russia and the World : Scenarios to 2025
Annex: Comparing The Three Scenarios
3. Export growth (excluding oil)

Figure A.3 Export Growth Excluding Oil

Export excluding oil (nominal, moving 5-year averages)

Long March Oil’s Curse Vozrozhdenie
Billion US$

0 Actual Projected

2000 2005 2010 2015 2020 2025

Source: Moody's

In all scenarios, export growth slows down significantly in the period 2006-2011, to stabilize at
lower levels as of 2012. In Long March, growth remains the same throughout the rest of the period,
as domestic companies remain less competitive than their international counterparts. In Oil’s Curse,
not only does growth not pick up, but it remains, comparatively, at the lowest level. In Vozrozhdenie,
the level at which growth stabilizes is relatively higher than in the other scenarios; moreover, growth
picks up again in 2019 thanks to increasing diversification of the economy.

4. Export composition
Export breakdown by destination

Figure A.4 Export Breakdown by Destination 2005 and 2025

CIS Europe China Asia ex China Americas, Australia and Oceania Middle East & Africa

In 2005 Percentages

Russia in 2005 17 54 6 15 5 4

In 2025 Percentages

Long March 18 54 8 14 4 2

Oil’s Curse 20 47 13 10 5 5

Vozrozhdenie 12 40 10 20 15 3

Source: World Economic Forum

In Long March, the importance of the countries of the European Union as trading partners
is maintained, driven by energy exports. The breakdown of export destinations in Oil’s Curse
shows a slight reduction in the amount of exports towards the EU, mostly absorbed by Asia.
Vozrozhdenie offers a more balanced profile of export destinations, as differentiation and
globalization encourage Russia’s integration in international trade.
Russia and the World: Scenarios to 2025
Annex: Comparing The Three Scenarios

5. Export breakdown by industry

Figure A.5 Export Breakdown by Industry 2005 and 2025

Mined and Mineral Products Machinery, Equipment, and Transportation Related Goods
Forest and Paper Products Consumer and Other Goods
Metals, Precious Gems, and Their Products Services
Chemical and Rubber Manufacturing

In 2005 Percentages

Russia in 2005 54 3 18 5 7 3 9

In 2025 Percentages

Long March 36 3 23 11 12 3 13

Oil’s Curse 42 4 27 7 8 3 9

Vozrozhdenie 21 3 18 14 18 7 20

Source: Moody's

Long March and Oil’s Curse both depict an ongoing reliance on natural resources for their
external trade. In Vozrozhdenie, differentiation and higher competitiveness of Russian businesses
are reflected by a more varied export composition.

5. Oil exports

Figure A.6 Oil Exports

Crude oil export p.a. (volumes)

Long March Oil’s Curse Vozrozhdenie
Million Bpd

4 Actual Projected

2000 2005 2010 2015 2020 2025

Source: Moody's

The quantity of oil exports is higher in the Long March scenario. In Oil’s Curse, it is lower,
due to insufficient investments and inefficiencies. In Vozrozhdenie, a greater proportion of the oil
produced fuels the growing economy.

Russia and the World : Scenarios to 2025
Annex: Comparing The Three Scenarios
6. FDI inflows

Figure A.7 FDI Inflows

Long March Oil’s Curse Vozrozhdenie

Billion US$

Actual Projected





1996-2000 2001-2005 2006-2010 2011-2015 2016-2020 2021-2025

Source: World Economic Forum

In Long March, Russia attracts a higher level of FDI in the period 2006-2010—directed predominantly
towards the energy sector—than in any of the other scenarios. In the period 2011-2025, however,
the greater differentiation and the market economy in Vozrozhdenie see a greater inflow of FDI.
The negative business environment and poor rule of law discourage the majority of potential
investors in Oil’s Curse.

7. Percentage of people living under “subsistence level”

Figure A.8 People Living Under “Subsistence Level”

Share of people
Long March Oil’s Curse Vozrozhdenie

0 Actual Projected

1995 2000 2005 2010 2015 2020 2025

Source: World Economic Forum

Both Long March and Vozrozhdenie see a decrease in poverty. While in Long March this is
due to the state, which ensures a redistribution of wealth through social policies and spending,
in Vozrozhdenie, it is the market mechanism that guarantees a greater participation of the people
in the improvement of the economy. In Oil’s Curse, poor economic performance, coupled with
the absence of proper redistribution mechanisms and minimal rule of law, causes many to remain
trapped below subsistence levels.

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