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Strategy 2030

The most important news coming out of the Feb. 5 Group of Seven finance ministers’ meeting in the remote, far north Canadian city of Iqaluit was dog-sledding and caribou for dinner. This G7 meeting, possibly the last in this format, illustrated the global economic power shift that has accelerated as a result of the worst economic crisis in living memory.

So it’s out with the G7 and in with the “Emerging Seven,” or E7 — China, India, Brazil, Russia, Mexico, Indonesia and Turkey, whose combined gross domestic product may overtake that of the rich nations’ club this decade and open up a 30 percent lead by 2030, as PricewaterhouseCoopers forecasts.

China leads the E7 pack, while Russia’s 10 percent economic slump in the first half of last year cruelly exposed the economy’s overdependence on oil and foreign capital. But swift action to stabilize the banking sector and boost fiscal stimulus averted the worst. This wasn’t a rerun of 1998.

Clearly, some companies overreached during the oil boom and, fed with cheap credit, expanded their businesses on a virtual pyramid of debt. But they have learned hard lessons and are cleaning up their balance sheets. Contrary to conventional wisdom, many companies are working to improve transparency and corporate governance to win back the confidence of investors whom they will need to fund future expansion.

Russia’s own balance sheet — with a public sector debt of just 7 percent of gross domestic product — has enabled the state to stabilize strategic industries until they can stand on their own two feet. It will also help support consumption until growth once again becomes self-sustaining.

Banks, with combined assets smaller than those of Lehman Brothers when it failed in 2008, are still working through their bad loans but once they do they will have plenty of room to finance future growth. They are a very long way from being “too big to fail.”

President Dmitry Medvedev has lamented the challenge of “dragging a primitive, resource-based economy into the future,” and implementation of his modernization agenda has indeed been patchy. But to be fair, it’s not easy putting up a tent in a roaring gale.

But the strategic priorities are right — diversification, innovation, promoting small business, supporting families and strengthening the country’s financial system so that it can provide the investment capital that will enable business to grow and people to realize their potential.

Russia’s leaders are actively discussing how to restructure the country’s sprawling state corporations without putting at risk jobs in the Soviet-era single-industry towns or unduly exposed legitimately strategic assets.

Privatization needs to be accelerated, as Medvedev stated in a recent Cabinet meeting, but ultimately it’s a matter of price. When the stock market recovers toward pre-crisis levels, the state will be in a good position to reduce its strategic holdings in industry and banking.

One area that needs more resolute action is supporting small and medium-sized businesses. While legislation may be reducing petty corruption and official harassment, more needs to be done to encourage budding entrepreneurs. Russia could learn from the success of other emerging markets that have created an environment friendlier to business startups.

What will Russia look like in 2030? Gazing into the crystal ball is always risky, but under the right government policies, the next 20 years should be less turbulent than the last. A growing middle class will gain a vested interest in stability. As prosperity spreads to the regions, it is to be hoped that the ethnic tensions that blight the North Caucasus can be alleviated.

Russia needs to tackle the strategic priorities laid out above. It has every chance by 2030 of overtaking Germany to become the world’s sixth-largest economy. Russia will play a key role in the global economic power shift from G7 to E7.

Peter Gerendasi is managing partner of PricewaterhouseCoopers Russia.

See also:

MICEX Falls 5.5% to 2-Year Low

A Contagion of Bad Ideas

Manufacture Contracts in July Reversal

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