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February 9, 2016 No.
6297

Leading Economists At Russia's Sixth Gaidar Forum: The Oil Age Is Over; Russia Needs Internal Reforms To Overcome Recession

The sixth Gaidar Economic Forum, held in Moscow on January 13-15, 2016, addressed the economic situation in Russia and the country's economic difficulties. Held annually since 2010 and named after leading Russian economist Yegor Gaidar, architect of Russia's free-market transition in the early 1990s, the Forum is Russia's major international economic conference and is often referred to as 'Russia's Davos Forum.'

This year the Forum hosted government officials, heads of leading Russian and foreign companies, and various experts, who discussed Russia's development in light of the current crisis, the technological revolution of the last decades, and recent political changes. Addressing the forum, Russian Prime Minister Dmitry Medvedev said the Russian government needs to prepare for "the worst-case scenario."[1] This, in light of the deep difficulties the country is experiencing: The drop in oil prices, which have fallen by almost 70% in the last 18 months, has crippled the Russian economy, due to loss of income from energy exports as well as from taxes on oil and gas, which generate about half of the Russian government's revenue. The grim economic situation is worsened by Western sanctions that deny international credit to Russian banks. The crisis is reflected in the value of the ruble, which has plummeted from a high of 30 to the dollar to around 75.

Two other prominent speakers at the forum were Herman Gref, CEO of Sberbank, Russia's largest bank, who was economy minister during Vladimir Putin's two terms as president, and Alexey Kudrin, a former finance minister and the architect of Russia's financial system. Known as the "St Petersburg economists," Kudrin and Gref are considered the leading liberal reformers in Putin's administration in the early and mid-2000s, and the main figures responsible for crafting the economic policies of the Putin and Medvedev presidencies. At the conference both called for deep internal reforms to avoid further descent into recession.

The following are excerpts from statements made at the Gaidar Forum and concerning the issues discussed in it.

Sberbank CEO Herman Gref:  We Must Reform All Government Systems, As Well As Education System

Addressing the forum, Sberbank CEO Herman Gref noted that the oil age is over, because there have been radical changes in consumption: "The era of hydrocarbons is in the past. Just like the Stone Age ended, and not because they ran out of stones, the oil age is also over."[2]

According to the Moscow Times, Gref complained that Russia has failed to adapt to economic and technological change and has "fallen into the ranks of 'downshifter' countries that will catastrophically lag behind their more advanced rivals. He added that Russia "must honestly admit" that has "lost to competitors." Warning of "technological subjugation," he added that, in the new technology-driven world, the difference between leaders and losers would be "larger than during the industrial revolution."

Gref's warning came after the decline in oil prices has thrown Russia into its longest recession since the 1990s, demonstrating the country's reliance on energy exports.[3] As a solution, Gref called for radical reforms of state governance, reduced regulations, stricter measures by law enforcement agencies and by the courts, and a more extensive diversification into non-oil sectors.[4] "Reforms are badly needed, or we will end up far behind other countries," Gref stated.[5]

Gref elaborated that Russia should not only "change all government systems" but also reform the education system, to enable its citizens to join the "technological revolution." He stressed that "primarily education, from kindergartens to universities" should be reformed by "scrapping of the old Soviet educational system." "Welcome to the future!" Gref said.[6]

PM Dmitry Medvedev echoed Gref's demand for internal reforms. "Even though reforms are always painful, we need them today, during this period of crisis. [ÔǪ] Stagnation is the hot issue in the world. We can't afford to let ourselves be trapped in economic decline, as it will lead directly to recession."[7]   

Ex-Finance Minister Alexey Kudrin: Syria Operation Not A Large Expense For Russia; Activities In Crimea, Ukraine Are Far More Costly

Alexey Kudrin likewise suggested reforms to save Russia from recession. According to the Russian news Agency TASS, he spoke of the need to reduce Russia's budget in two or three years' time. "Cutting defense expenditure cannot be avoided," he said. Explaining his position to the Russian News Service radio station, he said: "Many argue that, in the current geopolitical situation, such cuts will be hard to make I do not see any problem in this respect. I don't think that the defense budget is a sacred cow that cannot be touched under any circumstances."

Referring to Russia's military operation in Syria, Kudrin assured that its cost was not very high: "In the medium term, Syria is not a very heavy [financial] burden." He added that other factors are far more costly for Russia and have a far greater effect on the investment climate and on the investors. For example, the measures taken to incorporate Crimea, and humanitarian support for the East Ukraine, have cost the Russian treasury far more than the operation in Syria.[8]

Concerning institutional reforms, in an interview with the RBC news agency, Kudrin said the government, including President Putin, does not have an adequate plan for reform and merely hopes that the situation will go back to normal.[9]

Kudrin elaborated on the issue of reforms at the Davos Economic Forum, held on January 20-23, 2016. He stressed that the Russian government had to define an economic strategy within months, and added: "As for possible signs that we are emerging from this economic crisis, we have to carefully monitor the economy this year, and have in place a plan in case there are no such signs." According to Kudrin, the current crisis is affected primarily by market trends, and Russia can expect zero growth through 2017. "A much deeper question is: assuming we can begin reforms and end our economic stagnation, will we be able to develop competitively and provide investment security?[10] "Russia has never abandoned the development of a market economy, democracy, integration with the global economy. Right now we have a geopolitical crisis, which will pass; it is nothing like the Cold War of Soviet times. Today we do not have differing ideological aims, our systems are not confrontational."[11]

 

Endnotes:

[1] Themoscowtimes.com, January 13, 2016.

[2] Vestnikkavkaza.net, January 15, 2016.

[3] Themoscowtimes.com,  January 15, 2016.

[4] Aa.com.tr, January 25, 2016

[5] E-xecutive.ru, January 19, 2016.

[6] Vestnikkavkaza.net, January 15, 2016; E-xecutive.ru, January 19, 2016.

[7] E-xecutive.ru, January 19, 2016.

[8] Tass.ru, January 13, 2016.

[9] Themoscowtimes.com, January 13, 2016.

[10] Vedomosti.ru, January 22, 2016.

[11] Rbth.com, January 22, 2016.