Dispatches from Sochi: Conversation with a Senior Russian Economist

The vice president of Carnegie Corporation's International Program reports from the 13th meeting of the Valdai Discussion Club, Sochi, Russia.

Russia has transitioned from being a country with a poor economy to a country with an average economy. The current GDP is $3.5 trillion, and the purchasing power per person is $24,000.

Russia’s economic problems today are related to growth. Specifically, the underutilization of human capital and the relative lack of advanced technology present two of the major obstacles to economic growth.

Also, as 60% of exports are comprised of natural resources, another priority is to increase exports of non-natural resource goods.

Furthermore, an aging population and a decline in the working-age population present Russia with demographic difficulties. Until recently, these trends were compensated for by strong immigration to Russia, but immigration has been declining over the past two years. 

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These trends signal the need both to improve labor productivity and to expand the labor force.

Another challenge is the dominance of state-controlled or state-owned industries. The lack of competition faced by these industries limits their capacity for growth.

Currently, the state sector is being reformed through various methods, including privatization. The ultimate goal of these reforms is to substantially reduce the state's stake in the economy.

Less than 20% of industries in Russia can be considered innovative. This percentage point must be raised to over 25%, and—ideally—it should be closer to 30%.

The Russian state contributes more support to expanding innovation than do—per capita—Japan, Canada, and the United Kingdom, but in those countries the level of innovation is still much higher than it is in Russia. To reverse this trend, Russia must increase the involvement of the private sector in innovation. In order to realize this goal, many options are being considered by the Russian state, including education reforms, which would build on the investments already being made in major universities.

Russia has comparatively high ratings in many spheres of scientific education, but not in all. It lags in computer science, for example.

The stable and productive development of Russia’s economy requires a peaceful international environment.

Russia's entry into the World Trade Organization (WTO) was an important step in this direction, as it exposed Russia to—and educated it how to function within—the global economy.

The economic strategies which Russia is planning to adopt will expand Russia’s international engagement.

The European Union (EU) is still Russia’s primary trading partner. The expansion of trade eastward will help to balance trade, but it will take at least another ten years before Russia’s trade with the east matches its trade to the west.

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American and European sanctions are likely to stay, but there is a hope that they will not be expanded.

Russia's defense budget has increased. One reason is the need to modernize outdated Soviet weaponry. Basic modernization is required. The rate of growth in military expenditures has been a subject of discussion, but it is important to note that the international environment requires prioritizing military modernization.

Pension plan obligations remain significant, and investments in education are key and must grow. Some rebalancing of resource allocations will be needed, along with the expansion of sources of revenue. The privatization of industries will contribute to this goal.