On the surface, newly inaugurated Russian President Dmitry Medvedev is inheriting one of the world's strongest economies. Surging prices for Russian energy exports and a near-decade-long economic boom mean that confidence in the country's future is running strong. Two prominent Russian businessmen, however, caution that Russia's energy reliance hurts its economy as much as it helps.
The high price of oil (currently at just under $125 per barrel) has allowed Russian politicians to avoid making hard choices required to restructure the economy for long-term growth, argued Alfa Bank President Petr Aven at a May 8 seminar at the Peterson Institute for International Economics in Washington, DC.
"The country is just spending its money" rather than making desperately needed investments, said Aven, who served as Russia's Minister of Foreign Economic Relations from 1991-92. "The growth paradigm should shift from consumption to investment" if Russia does not want to fall behind Brazil, China and India (fellow members of the so-called BRIC group of developing economies), all of which invest higher shares of their national product.
This lack of investment has meant that, in non-energy sectors, the international competitiveness of Russian manufacturing has "stayed more or less on the same level as in the Soviet Union," according to the former minister.
Other features of the Soviet period have also lingered on. The growing role of the state in the economy has limited economic efficiency, argued Aven and fellow speaker Mikhail Fridman, chairman of the Alpha Group Consortium Supervisory Board. According to Aven, "the share of state bureaucrats in the population is bigger than in the Soviet Union now."
Heavy government regulation has limited competition and encouraged inflationary trends, the pair contend. Aven predicts that inflation in 2008 will exceed 12 percent "whatever they do." The current "consumption boom," he says, has led to "very high expectations. When you live 10 percent better every year for eight years, you expect that you will live 10 percent [better] for years to come."
Nowhere do expectations run stronger than in the Russian energy sector, which accounts for the bulk of the country's economic expansion. Yet long-neglected structural upgrades are hindering output capacity here, as well.
Both Aven and Fridman see a strong need for investment in the sector's production and transportation infrastructure. Current production primarily involves the exploitation of oil fields discovered during the Soviet period. Slight emphasis is put on development of new fields or enhancing the efficiency of existing ones, the pair argued.
If such capacity were in place, Moscow, given its huge reserves, could bring much more oil to world markets, the two said. To stimulate the flow, Fridman argued for reduced taxes on oil production. Under the current system, he said, the government swallows most of any company profits above $25 per barrel. That means that high oil prices become a nearly irrelevant stimulus for industry improvements, he added.
Both billionaire businessmen, Aven and Fridman, however, do not speak as disinterested analysts. Alfa Bank, which Aven heads, is one of Russia's largest private retail and investment banks, with clients throughout the energy sector. The bank's parent company, Alpha Group Consortium, which Fridman represented at the seminar, also has interests in the telecommunications and oil industries.
Representatives of other companies with stakes in Russian energy development, though, have likewise cited high taxes as well as the escalating costs of maintaining old fields and developing new ones as major reasons for stagnating oil production.
Outside pressures could force a change in that situation, according to Aven and Fridman. Gazprom's recent decision to pay market prices for natural gas from Kazakhstan, Turkmenistan and Uzbekistan as of 2009 could prompt the energy giant to focus more on Russian production. That move could, in turn, lead to necessary infrastructure improvements, Aven believes.
One Central Asia expert, Martha Brill Olcott of the Carnegie Endowment for International Peace, however, notes that the government opted to raise taxes for Russian gas consumers and reduce domestic subsidies for precisely the opposite reason: to limit internal demand sufficiently to sustain heavy gas exports to higher-paying European customers.
Despite the trouble spots, though, both men concede that indisputable successes -- ranging from high economic growth to enormous financial reserves -- have occurred. The most notable transformation -- a 140 percent average rise in real disposable income since 2000 -- goes far toward explaining ex-President Vladimir Putin's popularity, according to Aven.
Yet that popularity, in itself, can prove a stumbling block for far-reaching changes. According to Aven, President Medvedev has all the resources to solve Russia's economic problems by introducing reforms in the country's fiscal, tax, pension, and banking sectors. The question is whether or not he has the political will to do so.
Richard Weitz is a senior fellow at the Hudson Institute in Washington, DC.