It's all change in the Russian economy

With Vladimir Putin back in the Kremlin as president, 'diversification' is now the buzzword in the country's political circles, says Mary Dejevsky

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The Independent Online

Asked to comment on last month's deal between Rosneft and BP, which will create the world's biggest oil company, Vladimir Putin gave an answer that was not quite as expected. Instead of repeating the public blessing he had given before either side signed on the dotted line, he said that he had mixed feelings.

On balance, he said, there were more pluses than minuses, but the minuses were not negligible. Not only did the buyout risk reinforcing the impression of Russia as an old-fashioned energy supplier, but the creation of this majority state-owned oil giant ran counter to the trend for the state to scale back on its involvement in Russian business.

Now these arguments could be dismissed as so much sophistry. Perhaps Mr Putin was simply giving a group of foreign visitors – from the Valdai discussion group of Russia specialists – an answer he thought they would like to hear.

But, following meetings in St Petersburg and Moscow last month, as part of this group, as well as the two-hour question and answer session with Mr Putin, that is not the impression I came away with. After at least 10 years of rejecting Western advice to diversify its economy away from its reliance on oil and gas, Russia appears to be countenancing precisely this.

In the four years that Dmitry Medvedev was Russia's president, and Mr Putin was prime minister, the buzzword in political and economic circles was "modernisation".

Mr Medvedev, who is a bit of a techie and a one-time software entrepreneur, patronised the creation of a Russian "Silicon Valley" at Skolkovo outside Moscow, designed to use state and business money to attract start-ups. Nano-technology was also favoured.

But the development of these two strands coexisted with a still-defensive attitude towards the primacy of raw materials exports. When asked why Russia was not diversifying, the routine answer from officials, including Mr Putin, was that, with world energy prices so high, Russia would be foolish not to carry on drilling and bank the money while the boom lasted.

Russian politicians also suspected an ulterior motive. Westerners, they believed, regarded Russia's oil and gas revenue as a cushion that allowed the Kremlin to raise living standards while avoiding necessary political reform.

With Mr Putin now back in the Kremlin and Mr Medvedev replacing him as prime minister, modernisation – as a slogan, if not in fact – appears to be taking a back seat. Skolkovo is supposed to be progressing well, but you have to ask about it now; it is no longer the presentational flagship for Russia's future it was a year ago. Today's buzzword – let the trumpets sound – is "diversification". At last, Russia appears to be interested in weaning itself off natural resources as the be-all and end-all of its economic fortunes.

And the change of tune comes less because of the urging of outsiders – benevolent or otherwise – but chiefly because of pessimistic projections, from Russia's own central bank, among others. According to these, the country's economy, which has maintained a healthy surplus for the best part of 10 years and withstood the 2008 global financial crisis better than many others, could fall into deficit as soon as 2015. The twin culprits would be falling oil export revenue and rising imports.

It may be, of course, that oil prices hold up better than forecast – a deficit is predicated on the oil price falling below $104 a barrel. But pressure from rising imports, needed to satisfy a new generation of Russian consumers, is likely to be inexorable.

There are other factors at work, too. One is that Russia has now, after years of dithering, finally joined the World Trade Organisation, and although there is a long transition period, Russia will have to reduce, or eliminate, import tariffs and pare back domestic subsidies. Another is that, while Russia still has plentiful oil and gas reserves, extraction is becoming more difficult. High prices justify the outlay at present, but the economics are changing fast, and Russia well knows that it will need advanced, mostly imported, technology.

Changes in the international gas market have only complicated Russia's position. With EU regulators taking a more aggressive approach to the pricing system of the vast, state-controlled conglomerate, Gazprom, and the US nearing self-sufficiency thanks to shale gas, the economics of the sector are shifting. Early evidence of the impact on Russia was Gazprom's recent decision to abandon the Shtokman field in the Arctic which it had been trying to develop for 20 years.

At the Valdai group's meeting with President Putin last month, he made clear that he was confident the current account would be in surplus to the end of 2014 – the exchequer was actively planning for a time when the indicators were much less favourable than they currently are. A key part of that planning is for the economy to be managed as though income from oil and gas – which accounts for around half of Russian state spending – were already lower, with the "excess" funnelled to other areas, such as transport infrastructure, education and other projects unrelated to energy – in other words, "diversification".

Such planning is not foolproof. There is the risk that Russia's timetable lags behind changes in global markets, or that efforts to improve the climate for foreign investors – another priority for Mr Putin's new term – prove insufficient to attract anything like the funds the country needs.

But even as the state at last moves to reduce its dependence on oil and gas, it is only fair to note the extent to which the Russian economy has, in fact, diversified over the last 10 years. This is partly because what is happening in the domestic economy, including at municipal and even street level, tends to be obscured by the focus on external trade.

Russian city streets have changed out of all recognition in recent years, change exemplified for me by the appearance of a new supermarket – upmarket of Waitrose – opposite the diplomatic compound where I lived as a correspondent between 1988 and 1992. Even a few years ago, the space was occupied by a poorly-stocked children's store and a Soviet-era stationery shop. Obliquely opposite is a branch of the Russian lingerie chain, Dikaya orkhideya (Wild Orchid). Both this and the supermarket have appeared in the past year.

While this part of Moscow is now regarded as for the elite, with property prices to match, the supermarket concerned, Azbuka vkusa (Alphabet of taste), has branches all over the Moscow region, including in less-favoured districts. The proliferation of new grocery stores is rarely cited by analysts, though it arguably marks the biggest improvement in quality of life for Russia's urban population.

Only a short walk from the new supermarket you can glimpse Russian shopping as it used to be. The Dorogomilovsky market is just hanging on, hemmed in by building sites on two sides. The range of produce is surprisingly similar to that at Azbuka vkusa, as are the prices – though the goods at the supermarket are hygienically packed and there is no bargaining. Most striking, though, is how the market has become the haunt of elderly Muscovites, visitors up from the countryside for the day, and mostly male migrant workers.

There will be a role for markets in the new Russia. But what used to be safety valves which helped offset the defects of central planning are no longer needed. The same market forces that have transformed the consumer sector may, belatedly, be about to sweep aside an economy where old-style, natural resources ruled.