Russia’s Turbulence Could Drive Sustainable Development

Falling oil prices and western sanctions have led to hard economic times for Russians. But lingering economic crisis can also allow a country new opportunity to regroup and reform, innovating and transforming the economy. Paradoxically, the long-running crisis could drive Russia to end its reliance on export of fossil fuels and embrace sustainability. “To do so, Russia must mobilize its strengths – including a well-educated public, sustainable development of rich natural resources, and economic reform,” writes Anastasia Okorochkova, a 2013-2014 Yale University Fox International Fellow who studies in Moscow. “Oil and gas represent about 50 percent of the Russian government’s budget. Sacrifices would be required in reducing dependence on these resources, striving for sustainability and shifting toward a service economy.” Economic growth and sustainable development can be achieved, Okorochkova notes, with strategic planning and diversifying the economy. Russians, practical and innovative, driven by economic crisis, could become leaders in sustainability. – YaleGlobal

Russia’s Turbulence Could Drive Sustainable Development

Hard times combined with falling oil prices could encourage Russia to lead in sustainability
Anastasia Okorochkova
Tuesday, April 14, 2015

Oil and sustainability: Russian President Vladimir Putin opens the Siberian crude oil pipeline to China (top); western sanctions threaten European food supply to Russian supermarkets

MOSCOW: The economic crisis confronting Russia paradoxically offers the country a chance to reform and try a sustainable path. External shocks such as economic sanctions and a drop in oil prices are pushing the Russian government to focus on domestic affairs pressing economic, social and ecological problems accumulated since the breakup of the Soviet Union. Difficult times could help Russians transform their society.

To do so, Russia must mobilize its strengths – including a well-educated public, sustainable development of rich natural resources, and economic reform.

Oil and gas represent about 50 percent of the Russian government’s budget. Sacrifices would be required in reducing dependence on these resources, striving for sustainability and shifting toward a service economy.

Russia has a great opportunity to switch to services and away from energy by developing, for example, the agricultural sector, mechanical engineering, software production. According to the decision of the Ministry of Economic Development of Russian Federation, there are several priority sectors for import substitution and further development of equipment for the food, heavy engineering, power engineering, electrochemical and cable, oil and gas engineering, machine-tool, shipbuilding, electronic industry, chemical and petrochemical, pharmaceutical and medical, conventional weapons, civil aircraft, engine and  transport engineering industries.

The government issued “The Economic Sustainable Development and Social Stability Plan for 2015” in January, to encourage structural economic changes and stabilizing functioning of institutions, particularly for key sectors. The goal: to promote growth and achieve macroeconomic stability by balancing the labor market and reducing inflation. The plan is vague, urging enhanced economic growth, support of economic sectors and social stability – easy to put on paper, but more challenging to achieve.

People are the priority, said First Deputy Prime Minister Igor Shuvalov, before the State Duma, the lower house of Russian Parliament, while presenting the plan: “We are not going to reduce budget expenditures at the expense of citizens.” The words sound beautiful, however words are not actions. Observers generally doubt that the government intends to convert a resources-based economy into a service-based system, socially and ecologically oriented. For the short term, large oil and gas reserves can easily be converted into money, and there is little will to risk changing priorities to invest in science, technology, education or health care.

Officials mention social risks and consequences of the lack of sustainability. But little thought or resources are devoted to promoting inclusive social development and environmental sustainability. Russia ranks 58 among 61 leading nations on the 2015 Climate Change Performance Index. The US and China, rank 44 and 45, respectively.

Generally the Ministry of Natural Recourses and Ecology devotes attention to environmental protection, to clean air, water, soil preservation, ecosystem and biodiversity protection. Green technologies and eco-efficiency are matters of a concern nowadays in Russia. Most of oil and gas companies develop environmental strategies and management systems, competing to become leaders on environmental safety. For example, Russia’s biggest natural gas and oil producer, Gazprom, has developed an online site on environmental protection and focused particular attention to environmental safety. There was scant mention of environmental protection in the “Economic Sustainable Development and Social Stability Plan for 2015.”

Sustainable development must meet present needs without compromising the ability of future generations to meet their needs, suggests the 1987 Brundtland Report from the UN World Commission on Environment and Development. Sustainable development requires strategic economic planning, flexible to changing needs, as well as reliance on state-of-the-art IT technologies, private-public partnerships that emphasize corporate social responsibility. Instruments of monetary policy – taxation, redistribution of income and inconsistent changes of interest rates by the central bank – are not enough to overcome challenges. The government must also strengthen social-welfare and environmental-protection systems.

It is necessary to develop a sustainable model of strategic economic planning, based on dynamic input-output model developed by economist and Nobel laureate Wassily Leontief, which examines the evolution of an economy toward equilibrium via industrial interrelationships and inter-independencies of the economic system. Attention to the model with government investments could ensure sustainable consumption and production patterns. Russia needs such structural economic changes to shift from oil and gas extraction and export to petrochemical, agricultural, pharmaceutical and other goods production and export.

Moreover, public-private partnerships and corporate social responsibility – the inclusion of businesses and NGOs into the process of sustainable development – could help Russia achieve economic growth and full and productive employment. When business and government work as partners, opportunities abound to prevent deforestation, biodiversity loss, environmental degradation while fostering innovation and access to affordable, reliable and modern energy.

Such strategic economic planning could revive Russian confidence.

People of all ages and income brackets worry about their future with many in a hurry to buy consumer products before the prices rise. “Sales” and “value for money” are priorities for customers in Russia today.  

Consumer demand is falling rapidly and with government financing shrinking – in part because of sanctions but in large part because of falling oil prices – there are worries over education, health and culture. Corporations have cut thousands of jobs and investors withdraw assets from Russia.

Some are relieved by the downturn, hoping that Russia will be forced to confront its problems, that the country could fix everything at the last moment when the system seems most cracked. Many anticipate a turnaround, a new political agenda and new values among the young.

The government’s economic plan faces political challenges. Representatives of several political parties that normally support the government do not agree on the proposals. The deputy chairman of the Fair Russia faction, Mikhail Emelyanov, said to the Kommersant newspaper, “This is a set of measures to help private individual industries and categories of the population that strategically change nothing." The deputy chairman of the Communist Party of the Russian Federation, Sergei Reshulsky, said that support of the plan showed a lack of self-respect. The Liberal Democratic Party is more amenable: “It is impossible not to support the government in such an acute situation, but we do not absolve the government of responsibility for the crisis,” said Igor Lebedev, vice-speaker of the State Duma.

Prime Minister Dmitry Medvedev is trying to consolidate the many political forces. He proposed renewing the mechanism of interaction between the president, the government and the State Duma, which would allow consolidating of political positions, as was done during the financial crisis of 2008. 

Some people say that the 2015 plan is workable, reviving measures taken during the 2008 crisis, but not creative or bold enough. Former Finance Minister Alexei Kudrin suggests the plan “only partially ‘relieves pain,’ it doesn’t heal." 

Russia must wean its economy away from energy, its single source of revenue, and the country must consider ways to conserve natural resources while developing new methods of production, consumption and distribution. For example, during the 1973 oil crisis, when oil hit new records, the developed economies that depended on imported oil stepped up research on alternative energy sources and focused on efficiency through regulations. Research and development of solar, wind and biomass energy sources have gained momentum, along with new technologies for exploiting shale oil.

The current crisis offers Russian President Vladimir Putin a chance to reevaluate his priorities, understand the goals of sustainable development and change the political agenda according to the principles of inclusiveness, efficiency and effectiveness.

Macroeconomic indexes and statistics do not reveal the real state of affairs inside Russia, the lack of confidence and anxiety. Russians wait for reforms and an improved quality of life.

Anastasia Okorochkova is a Fox International Fellow (2013-2014) at Yale University and she is a PhD candidate in economics at Lomonosov Moscow State University. Her research focuses on public policy in the field of corporate social responsibility and economic development.
Copyright © 2015 YaleGlobal and the MacMillan Center at Yale University

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