After the Crisis

the theme of this year’s World Economic Forum in Davos was “Shaping the Post-Crisis World.” Since Russia has been among the hardest hit by the crisis so far, it is a subject to which it should be giving some urgent thought.

The Russian government – along with most oil market analysts – is certain that oil will eventually return to its “right” price. Not $140 per barrel perhaps, and surely not the $200 those same analysts predicted only a few months ago, but at least to $70-80.

When this happens – ushering in, at least for Russia, the wonderful post-crisis world – many people believe that Russia should try to avoid the errors of the past, when it exported energy, metals and other commodities, while importing consumer goods and food. The government should be building up domestic manufacturing, which would make Russia less reliant on foreign producers and therefore more stable.

The communist economy produced at home pretty much everything it consumed, but nobody wants to go back to the Soviet model, of course. However, even under a state capitalist model favored by the Russian government, it would be difficult to develop world-class domestic industry.

The natural way to do so would be to improve the investment climate and encourage direct foreign investment. But, just as in the past five years, if oil prices recover, the ruble will once more come under upward pressure. With the currency trading at last summer’s 23.5 rubles per dollar, importing finished products from China, Turkey and even Germany became considerably cheaper than making the same products in Russia.

Another way would be to set up national champions and create some form of state-oligarch partnership. To be fair, such steps were already taken in recent years, for instance to modernize Russian automakers. That experience has shown that, without foreign technological and managerial know-how, domestic producers will be at a disadvantage. Moreover, it requires massive investments, which will have to be borrowed abroad. Domestic producers will then end up with hard currency debts and ruble sales – a typical recipe for financial disaster.

And, if the government curbs imports to protect domestic producers, high prices and poor quality will inevitably result.

But even if Russia does become more self-sufficient, it won’t be safe from a global crisis. China, the major industrial success of the past two decades, is now on the brink of an economic debacle. Its massive manufacturing capacity has suddenly become a liability in a climate of a drastic – and probably lengthy – fall in global demand.

But although self-sufficiency is a false goal, there is certainly a way to prepare Russia better for the post-crisis world – and for future crises. It requires assessing economic conditions soberly and playing to the country’s traditional economic strengths.

First of all, the return of high oil prices is by no means assured. Commodity prices won’t increase until global demand recovers. This primarily means U.S. demand, due to the enormous weight of the U.S. economy in the global system. Of the ideas mooted by President Barack Obama, the most promising for stimulating the U.S. economy have been those involving investment in energy efficiency and alternative energy sources. When the post-crisis world finally dawns, it is likely to be far less reliant on fossil fuels.

This is the reality Russia should be preparing for. To become an energy superpower, it will have to be the cheapest, cleanest and most reliable producer. It will need to invest heavily in exploration, production, transportation and refining. It will need to attract foreign investment as well as cutting-edge managerial and technological expertise, requiring a root-and-branch change in the investment climate.

Russia is generously endowed with all kinds of resources, which it tends to use unwisely. Over the past century, it has destroyed one of its main assets: its human capital. Once considered boundless, its population has shrunk in relative terms and is diminishing further.

Russia’s wasteful attitude to its resources endures. In six months since the start of the crisis, it frittered away more than a third of its reserves, or over $200 billion. Unless it makes wise decisions now, it may end up squandering its natural wealth as well.