No. 67, 2004 - Russian Economic Growth and Development: Some New and Old Dilemmas

This paper aims to contribute to recent discussion, both in Russia and internationally, about Russian strategies of economic development. The debate is focused on the dangers associated with present resource-oriented (practically: oil- and gas-oriented) development, and the need for, as well as, constraints of, a change to priority development of nonresource, mainly high-tech sectors in manufacturing and services. The controversies are linked, among others, to diverse interpretations of the content and the likely economic consequences of the protracted conflict between the Russian state (the President) and the private oil industry (the “oligarchs”).
The problems with Russian oil and gas industries are approached here in historical perspective. Hydrocarbons production and, especially, exports were of overwhelming importance for the Soviet and, later, the Russian economy. However, priority development of the oil sector has become a clearly discernible fact following the financial crisis of 1998 only. During most of the previous century, growth was concentrated on that of the machinery industry (within machinery, in the first instance, the military industry, as well as the branches serving it). Development of oil and gas, as well as of other mineral resources was considered a necessary evil and a constraint to economic and military development. When nowadays contrasting Russia’s resource-based and non-resource sectors, it should be born in mind that military industry is among the few sectors that could effectively (however, to a limited extent only) contribute to the country’s incomes from exports in case proceeds from oil and gas decline for any reason. As modernisation of army is now on the political agenda, defence sector is an important candidate to benefit from state-managed industrial restructuring. The tragedy in Beslan in September 2004 has strengthened the position of those in Russia who consider the terrorist assault not as the most terrible act of an internal armed conflict, but as a “war”, “diversion” supported by the West (the United States) and aiming at “undermining the Russian state” (“подрыв Российского государства”), and, for that reason, press for the multiplication of the country’s military budget (Leontyev 2004).
However, as far as economy is concerned, under present circumstances there is no alternative to parallel development of resource-based and non-resource sectors of the Russian economy with a view of maintaining and widening the scope of the dynamic sectors and branches. In the foreseeable future, exports growth will obviously be based on oil and gas (and some metals) as well as military industry products. The biggest challenge for the Russian economy, however, is to increase production of up-to-date goods and services both for production and consumption uses – from food and textiles to information technology – that can compete with foreign firms on domestic and international markets. Success or failure in those fields (whether related to growth in oil and gas sectors, and/or defence, or not) will realistically indicate, how deep and progressive structural changes in the Russian economy are.

The paper is available here.