Russia’s Future: Energy, Elites, Emigration?

Russia has three major problems, according to a new report issued by the World Economic Forum in Davos: the future of energy prices and their impact on the Russian economy, a weak political institutional environment, and a profound lack of social cohesion.

The country’s ability to deal with these major problems will depend, according to the report, on which of the following trends gain more support:

  1. Energy:
    • new energy sources/supplies, improved efficiencies and reduced demand, or
    • growing populations, high-demand economies, and low energy supplies (or shocks)
  2. Institutions:
    • corruption, growth of state enterprise/fascism and inconsistent/capricious application of regulation, or
    • transparent/efficient public services, protection of property rights and consistent application of regulations
  3. Society:
    • income disparity, reduced social entitlements, and limited political power, or
    • income growth, infrastructure improvements, and national pride/cohesion

Fortunately, Russia remains within reach of the BICS (Brazil, India, China, South Africa) in terms of competitiveness:

Source: Scenarios for the Russian Federation, World Economic Forum, January 2013

This suggests that well-positioned small and medium-sized enterprises will be able to compete globally and generate attractive returns.

We remain hopeful that Russia will deliver on its macroeconomic promise. To that end we are actively seeking opportunities to invest human and financial capital in areas that support growth of populations and personal incomes rather than increases in state economic involvement or income disparities.

A key element of the discussion for us is that with small and medium-sized businesses, not tied to the state or government personalities for their success or profitability, one can invest alongside capable managers who can seriously benefit from the inputs of a competent investment team. But if the status quo of corruption and selective application of regulations does not improve drastically, we are concerned that the better managers and owners/founders of the high growth SMEs we’re looking for might just find their lives improved by relocating to other markets.