Old Russia Hands' Poll — Where will Russia's Economy Be in 5 Years?

Correction appended.

Russia's economy arrives at this year's St. Petersburg International Economic Forum in a very different state than the year before.

Last May, economic growth far outshone a Europe and U.S. still only beginning to emerging from long periods of stagnation, and Russia-West economic integration seemed unstoppable. Now, in 2014, Russia stands on the brink of recession, and the fallout from its clash with the West over the crisis unfolding in Ukraine risks demolishing more than two decades of economic bridge-building. Caught between the slump and the West's cold shoulder, Russian officials have begun making noises about looking east to fast-growing Asian economies for new partners and sources of growth.

In the run-up to the forum, The Moscow Times asked a panel of business leaders with  experience in Russia to look through the mists and tell us how the Russian economy would fare over the next five years.

William Reichert

Moscow-based partner at U.S. law firm K&L Gates, specializing in helping foreign companies enter and work in Russia.

1. What will be the main driver of the Russian economy over the next five years?

It will almost certainly be what it has traditionally been — oil and gas, and other natural resources. There are significant developments in alternative energy sources — the shale gas movement in the U.S. and elsewhere in particular will likely shift the balance of power away from more traditional energy suppliers like Russia. But that will happen over a 10 to 20 year timeframe.

Over the next five years we will likely see more and more investment into technology, where there is a lot of interest in Russia in a variety of fields, but resources will remain the key growth-driver.

2. Where do you see Russia-Western economic cooperation in five years?

The political grandstanding over the crisis in Ukraine seems to be calming down for now — no one wants this crisis to escalate any further than it has. For better or for worse the whole world has become much more integrated. In some ways life was easier when you had the iron curtain and two factions, but now it is hard to isolate major countries. There are certain factions in the U.S. that would perhaps have no problem trying to isolate Russia, but I think Europe knows it cannot afford to do that. Russia is too big a potential market to ignore.

Over a period of two years, there might be the same, or a decreased amount of integration between Russia and the West, but in five years I expect there will be more cooperation than ever.

3. Where do you see Russia-Asian cooperation in five years?

This is tougher to predict, because there has not been as much integration with Asia. It will likely be linked to a certain degree to developments with the West — the more Russian-Western integration decreases, the more Russian-Asian cooperation will grow. But it is not a zero-sum game, and Russian integration with the West and Asia could both increase.

Bernard Sucher

Nonexecutive board member at Moscow-based investment bank Aton, banker and entrepreneur with more than 20 years experience in Russia.

1. What will be the main driver of the Russian economy over the next five years?

Like it or not, President Putin's political ambition will be the key factor influencing the development of Russia's society and its relationship with most of the rest of the world. This is no less true for the Russian economy. To answer any question, you will have to factor in your best guess as what Mr. Putin thinks.  

2. Where do you see Russia-Western economic cooperation in five years?

Most of the European and North American-based multinationals present today in Russia have built successful track records despite — or in some cases, thanks to — two decades of intense volatility in the country. These commitments are likely to endure even severe political trial. That said, for the foreseeable future, I would be surprised to see board rooms discussing anything more than investment sufficient to maintain their market positions.

Moreover, given how the conflict over Ukraine is playing out, you have to expect that Western technology and finance companies in particular will have a rough ride.

3. Where do you see Russia-Asian cooperation in five years?

It is hard to generalize about Asia, so let us do what the Foreign Ministry seems to do, and focus on China. Russian trade with China will continue to rise, but it is hard to imagine the character of that trade changing fundamentally. Russia will dig stuff out of the ground and find a way to deliver it to Chinese industry. China will send back value-added goods. Chinese banks and technology companies will probably grow market share in Russia, but this is not likely to be a top priority for them. Nor, given the unequal relationship that will always prevail between two countries, will the Kremlin permit the Chinese to go too far.  Russia does not want to be a vassal state to China.  

Daniel Klein

U.S. patent attorney, technology specialist and senior partner at Moscow's Podolsky & Klein law firm, an Alinga Group company that specializes in assisting foreign companies do business in Russia.

1. What will be the main driver of the Russian economy over the next five years?

Innovation and development of home-grown technologies. Russian engineers are among the finest in the world. Russian technology is used in areas such as software engineering, aerospace, oil & gas exploration and — perhaps unfortunately — in the military industry. As sanctions or other issues damage relationships with some Western companies, Russian companies and industries will have no choice but to have much more Russian-made content in everything from telecommunication systems to software, automobiles and the food industry.

Many Russians who left for great engineering opportunities abroad may suddenly find themselves offered very attractive salary packages. This will encourage a repatriation of many recent college graduates and others who have left in the 1990s — a sort of reverse brain drain.

2. Where do you see Russia-Western economic cooperation in five years?

Unfortunately, it appears that Russia-Western economic cooperation, which has been building up for almost a generation, may be greatly reduced. It all depends on the situation unfolding currently in the Ukraine.

3. Where do you see Russia-Asian cooperation in five years?

Cooperation will be much greater in five years time.

Philip Halperin

Independent director and financial risk advisor, former chief risk officer at Alfa Bank and advisor to the executive board at Gazprombank.

1. What will be the main driver of the Russian economy over the next five years?

Using the word "driver" to mean "major determinant," rather than "primary boon," the main driver of the Russian economy — aside from oil, gas and armaments — is concentration and lack of competition. What Russia has is not a capitalist system, but crony capitalism. Insiders are insulated from the slings and arrows of fortune, and margins are protected. We see, for example, insider agreements to get rid of food and electronics markets that undercut the prices offered by favored retailers, and the removal of exchange points in favor of banks. Competition is arranged away, and the consumer is not king. This has led to a sort of new "zastoi," or stagnation, reminiscent of the Brezhnev years of the Soviet Union.

This fact has become part of the second driver, or major determinant, of the Russian economy — disillusionment.

Business owners and managers milk profits rather than re-invest them, and the promise of the economy is becoming more a "was" than a "will be."

2. Where do you see Russia-Western economic cooperation in five years?

Russia is a seller of raw materials — which in five years will still be consumed by Western nations, each according to its perception of its own interests — and as a consumer of finished products. In other words, Russia is a sort of a colony of the West. This is an old pattern, dating back to the days of Veliky Novgorod and the Hanseatic League — Novgorod exported lumber and amber, and brought the products of Western mills.  The major advanced products of Russia — armaments and space technology — will be not purchased by the West for political reasons.

3. Where do you see Russia-Asian cooperation in five years?

Russia, with its noncompetitive industry and lack of technological drivers, can only sell in certain areas. Asian markets are much less troubled than the West by the concept of buying Russian munitions or aerospace, so Russia will sell more of these to Asia.

Dmitry Alimov

Founder and managing partner of Frontier Ventures, a venture/growth fund focused on equity financing for Internet companies in emerging and frontier markets and co-founder of video streaming service ivi.ru.

1. What will be the main driver of the Russian economy over the next five years?

The answer will depend greatly on the political environment. If Russia becomes economically isolated, we will see depressed growth as the expected benefits of international trade fail to materialize. If we can avoid economic isolation — including trade protectionism by Russia itself — we will see broad-based growth driven by consumer demand and private sector investment. The outlook is particularly attractive for the technology sector, including the Internet, where we should see continued double digit growth even if overall economic growth slows.

2. Where do you see Russia-Western economic cooperation in five years?

Russia's business relationship with the U.S. will likely continue to deteriorate given the current political environment. Fortunately, mutual trade and investment with the U.S. is small compared to the size of of Russia's economy. Russia's economic relationships with European countries will continue to grow, though the pace of that growth will also be influenced by politics.

3. Where do you see Russia-Asian cooperation in five years?

Russia has a unique opportunity to accelerate its economic ties with China, India, Japan and Southeast Asia. In addition to energy cooperation, we can rapidly grow cross border investment and trade relationships in other sectors. Asia will be the center of the global economic activity in decades to come and will generate most of the world's economic growth, so it is particularly important for Russia to focus its efforts on building business relationships with companies and governments in the region.

Christopher Van Riet

Managing director of Radius Group, a real estate infrastructure solutions company with over $1 billion in warehouse projects in Russia.

1. What will be the main driver of the Russian economy over the next five years?

Russia's $2 trillion economy is underpinned by the natural resources, and growth is driven by consumer-related sectors. Over the next one to two years, foreign direct investment volumes will fall, creating head-winds for domestic investment. In three to five years, development of shale gas will impact the natural resource industries, putting pressure on growth in the sector and energy prices. This means the drivers of the Russian economy over the next five years will be consumer-related sectors that remain under-penetrated from a supply perspective and under-resourced from an efficiency perspective. Increased government infrastructure spending should also contribute to economic growth.

2. Where do you see Russia-Western economic cooperation in five years?

The economies of Western Europe, Eastern Europe and Russia are interconnected, and further convergence is likely. The political situation around Ukraine will cause a slowdown in Russia-Western integration for a year more, but longer term, pragmatism will prevail over political hyperbole on both sides — Russian-Western cooperation will be substantially more meaningful in five years than it is today.

3. Where do you see Russia-Asian cooperation in five years?

The negative rhetoric flowing from the current political situation triggers negative emotions on both sides of the Russia-West divide and concerns about future "reliability." As a result, the Russian government and business elite will invest time, effort and resources in diversifying their interests to more fully embrace Asian cooperation. The U.S. announced its "pivot" to Asia, and Russia will likely do a similar pivot to welcome Asian interests.

Tony Watkins

General director of video game publisher Electronic Arts Russia.

1. What will be the main driver of the Russian economy over the next five years?

Even before the events of the past two months, numerous economic performance indicators were trending negatively. It does not look like the stable and relatively high oil price is helping as much as it did before — beyond perhaps subduing the speed of the negative dynamic. With these trends, and foreign capital investment likely to fall in the short term, it is hard to predict anything other than a recession. While Russia has responded well to previous recessions, if there is a negative investment climate from U.S. and Europe then this one will likely be longer. Oil will remain the most important factor limiting its impact.     

2. Where do you see Russia-Western economic cooperation in five years?

I expect it to get worse in the short term, but it is in the interests of both parties to re-establish closer business and political ties. This will happen within five years, though it may require a major incident or reality check for the two sides to realize how important they are to each other.

3. Where do you see Russia-Asian cooperation in five years?

This will certainly improve in the short term, but it is little less easy to predict how that cooperation will pan out over five years.

Andrey Dzubandovski

General manager and head of the Moscow branch of SunGard Capital Markets.

1. What will be the main driver of the Russian economy over the next five years?

In short to mid-term the driver could be increasing cooperation with the BRICS countries — Brazil, India, China and South Africa. Long term, infrastructure projects inside Russia and government support for small- medium-sized businesses will power economic growth.

 2. Where do you see Russia-Western economic cooperation in five years?

We have to split "the West" into the U.S. and Europe. I doubt that cooperation between the U.S. and Russia will significantly increase during next five years, though it won't decrease either. Russian-Europe economic cooperation, on the other hand, will of course increase.

3. Where do you see Russia-Asian cooperation in five years?

Russia-Asian cooperation will become deeper and deeper, but we should keep in mind that Asian countries have their own political interests. Really, if the Russian government wants to build a strong economy, it must build cooperation with all countries worldwide.

Sergey Skaterschikov

Head of investment fund Skate Capital, board member of real estate developer LSR Group and Munich-based satellite maker Dauria Aerospace.

1. What will be the main driver of the Russian economy over the next five years?

Continuing isolation from the international economy and gravitation towards increased trade with non-Western states

2. Where do you see Russia-Western economic cooperation in five years?

Over the period there will be a steady decline, lack of long term commitment from both sides and a lack of significant new initiatives.  

3. Where do you see Russian-Asian cooperation in five years?

Russia will put a lot of effort into promoting more trade with the Asia-Pacific region, but beyond substituting increased Asian supplies for Western imports, there will be limited progress. The volume of foreign direct investment from Asia will likely pick up, but this increased flow is unlikely to be able to compensate for the loss of investment from Western economies.

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Correction: An earlier version of this article said Daniel Klein was a partner at U.S. law firm K&L. In fact, he is a U.S. patent attorney, technology specialist and senior partner at Moscow's Podolsky & Klein, an Alinga Group company that specializes in assisting foreign companies do business in Russia.