Behind the BRICs: Russia

Lucy Mair finds out about life in Russia and the challenges ahead for the world's leading oil producer

The road for Russia has been rocky over the past few decades. Following the collapse of the Soviet Union in 1991, the new Russian Federation had to find its feet politically while grappling with economic collapse, hyperinflation, wars and crime. The country picked itself up and managed a small step forwards, before being thrown back by the Russian financial crisis in 1998.

But that didn't stop Goldman Sachs economist Jim O'Neill from predicting, just three years later, that Russia could become one of the world's largest economies by 2050 with a GDP of $7 to $10 trillion (£4.4 to £6.3 trillion). Along with Brazil, India and China - together, the BRICs - Jim forecast that Russia would be an important engine of economic growth. And, to many people's surprise, in the early 2000s it seemed he was right.

Growing fast

President Vladimir Putin has overseen Russia during a period of near-continuous oil price rises, which has accelerated the country's growth. The Russian economy grew ten-fold between 1998 and 2008, and GDP per capita increased by about 5 per cent each year, leading to newfound prosperity for many Russians. Rural poverty fell and significant advances in employment, housing, education, healthcare and policing transformed the country.

Still, in The Growth Map: Economic opportunity in the BRICs and beyond, published a decade after Jim coined his famous acronym, he admits that Russia "is the one country many think should be dropped from the BRICs". And the impact of the global financial crisis in Russia certainly brought its economic stability into question. In 2008, Russian GDP contracted by 8 per cent and the value of its stock market plummeted by 70 per cent due to the dive in oil prices.

"Russia was one of the worst performers [out of the BRIC economies] during the financial crisis, then it didn't manage to rebound as fast as other countries," explains Anna Stupnytska, an executive director and macroeconomist at Goldman Sachs. "Investors became disappointed and we've seen a huge capital outflow from Russia in the years since then." The country is rich in natural resources and has one of the world's best-educated populations on its side, but it's also got some serious challenges to contend with if the Russian economy is to fulfil its potential.

Elixir of life?

At the annual meeting of the World Economic Forum (WEF) in Davos in January 2013, Russian and foreign experts discussed an issue that's been troubling economists and onlookers for some time: Russia's dependency on oil.

In November 2012 Russia overtook Saudi Arabia to become the world's leading oil producer, and its rapid growth until 2008 - and subsequent recovery - has relied on unsustainable increases in oil prices. At Davos, it was argued an economic model heavily dependent on commodity exports has made the Russian state increasingly vulnerable. It was also suggested that a sudden and sustained drop in the price of oil could seriously threaten the economy and prompt a public revolt and political instability.

Russian prime minister Dmitry Medvedev addressed the audience at Davos and dismissed this possibility as unrealistic. But shale gas exploitation is already beginning to transform the global energy landscape, with the US emerging as a major player in natural gas production, meaning that the days of high oil prices - and Russia's position as a leader in the energy market - may well be numbered.

Anna admits it's a "fair concern" that Russia is too reliant on natural resources. But, she says, the Russian government is already taking steps to diversify its economy. "A sector that has been growing relatively fast in Russia is the consumer sector, and it's now outstripping oil and gas as the main driver of growth. Russia is already one of the largest markets for consumer products in Europe, and I think it's something that will continue growing," she says.

The Kremlin has also invested in IT and innovation by developing the Skolkovo Institute of Science and Technology near Moscow, with hopes of fostering a Silicon Valley-style culture, and finance and entrepreneurship are also growing in Russia.

Dmitry and Alexander are members of the Russian Business Society at UCL. Originally from Moscow, they've noticed these changes in their home city. "The middle class is growing in Russia, and the entrepreneurial mentality of the Russian people, which has been suppressed over 80 years by the Communist regime, is now reviving," says Dmitry. "I also have to point out the enormous progress made in the capital markets. Russia has increased the size and liquidity of the financial markets and upgraded its infrastructure to the highest international standards. It's looking to establish itself as a major financial centre," adds Alexander.

Soviet hangover

Rebalancing the Russian economy will improve its long-term prospects and help to safeguard the country against future crises. But a number of other problems, left over from the Soviet era, are discouraging investment in Russia and limiting the potential of its economy. "Investors are worried about the political situation in Russia," says Anna. "Corruption is very high and rule of law is very weak."

In the WEF's latest Global Competitiveness Index, Russia's institutional environment is ranked 133 out of 144 countries, and it concludes that most international assessments consider Russia one of the most corrupt economies in the world. As a result, the cost of doing business and the risk of falling victim to illegal practices are very high and act as a barrier to investment.

Russia has ambitious goals to increase investment from 20 to 25 per cent of its GDP by 2020, but the perception of Russia overseas detracts foreign investors from getting involved. Most recently, Putin caused outrage by banning the adoption of Russian orphans by American citizens - in response to the US blacklisting a number of Russian officials accused of rights abuses - and last year, the arrest of three members of Russian punk collective Pussy Riot for staging a political protest brought condemnation from around the world.

Anna says: "Some investors don't want to invest in Russia because the weak political conditions create unnecessary risk." But she also points out that all of the BRICs are, in a way, in the same boat. China is still less democratic than Russia, and both Brazil and India have similarly poor business environments.

Looking ahead

These are not the only challenges Russia has to overcome. To increase its productivity and compete with the developed economies, and the other BRICs, Russia must also improve its infrastructure and tackle high mortality rate to nurture a healthy, growing workforce to keep up with the demands of its economy.

But the mood is overwhelmingly optimistic. After 18 years of negotiations, Russia became a member of the World Trade Organisation in 2012, which will enhance competition in the domestic market and create a better environment for foreign companies. And, based on conservative assumptions, Goldman Sachs predicts that Russia can at least triple its GDP from $2.4 trillion today, to $7 trillion by 2050. "The BRIC story is about a powerful shift in economic weight. It's about these countries being the engines of economic growth from a longer-term perspective. Even including the troubles we've had so far, we still think Russia - along with the other three countries - can potentially be in the top five economies," says Anna.

Like Brazil, Russia will hold an Olympic Games - the Winter Olympics in 2014 - and the FIFA World Cup in 2018, which will shine the international spotlight on the country and test its recent progress. In the economy, as in sport, Russia's biggest challenge won't be scoring a goal, but making sure it doesn't drop the ball.