Will Russia ever reduce dependence on oil and gas exports?

Russian President Dmitry Medvedev visits Lytkarino Optical Glass Factory Dmitry Medvedev made the modernisation of the economy one of the key themes of his presidency

Rising oil prices can bring nothing but benefits to an energy-dependent economy, one might suggest - and be incorrect.

Take Russia: during the boom years of the 2000s, when the country's budget was flooded with oil and gas export revenues, the government avoided taking many unpopular but necessary steps to diversify the economy.

Then, two unrelated things happened: Dmitry Medvedev became Russia's president and soon afterwards the global financial crisis started.

Left with little choice, the young president launched a programme of modernisation, aimed at turning Russia into a technologically-advanced country.

Its flagship project - creating a Russian version of Silicon Valley in Skolkovo, near Moscow - was officially started last spring.

But a year on, there have been no sound results, apart from a number of memorandums of understanding signed between the Skolkovo Fund and foreign companies, including Microsoft.

"We are talking a lot about this [modernisation], both the president and the prime minister are talking about it, but frankly speaking there are not many things happening in this direction," Andrey Kostin, head of Russian state bank VTB, told the BBC's Russia Business Report.

Understanding the business

But Skolkovo Fund President Viktor Vekselberg pointed out that while the fund was legally set up in May 2011, the Russian parliament only approved the law regulating its activities in September.

He said the seven months elapsed since September was virtually nothing for such a project.

VTB head Andrey Kostin talks about the modernisation of the Russian economy

Sergey Aleksashenko, director of macroeconomic research at the Higher School of Economics in Moscow, agrees: "It would be a little bit naive to expect some definite results within one year."

One of the reasons, he says, is that many of those who became responsible for implementing the project had no experience in the high-tech business.

"They needed time to understand it, to get to know their counterparts," says Mr Aleksashenko.

But there is another important reason, believes Vadim Malkin, managing partner at Transitional Markets Consultancy LLP.

Those who devised the project did not pay enough attention to why investors would choose Russia over other countries, such as Portugal, with equally attractive tax breaks, or India, with a much cheaper cost of labour, he told the Russian business daily Vedomosti.

New ecosystem

Mr Vekselberg told the BBC that while Russian researchers are still more than capable of generating new ideas, there are almost no means, or even clear understanding, of how to transfer them to the real economy.

That, according to the billionaire, is the task for the Skolkovo project: to create an ecosystem with rules, regulations and laws which will make the transfer possible.

The government pledged 85bn roubles ($3bn, £1.9bn) over four years for the project, Mr Vekselberg said.

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In turn, VTB's Kostin pointed out that while the government sees no alternative to Russia being an open economy, he added: "How much we will benefit from this very much depends on whether we will manage to modernise our economy."

But the recent hike in oil prices could again make the government less willing to follow the modernisation agenda, especially as 2011 is a pre-election year in Russia.

Oil and gas account for about two-thirds of Russia's exports.

Finance Minister Alexei Kudrin has already suggested that the country's budget deficit could be eliminated next year - three years earlier than initially hoped - if the price of Urals, Russia's export oil brand, averages $120 per barrel.

Urals' crude average price exceeded $100 in the January-March period, and has recently climbed to $120 a barrel.

"Rising oil prices help [the government] postpone making difficult decisions," says Sergei Guriev, rector of the New Economic School in Moscow.

Oil quality

But even if oil prices remain high, it would be impossible for Russia to enjoy high oil revenues without investing heavily into new technologies.

The Russian Ministry of Natural Resources said in its report earlier this week that the quality of the country's remaining oil reserves was declining.

According to the ministry, heavy and viscous oil, which is difficult to extract, now accounts for 70% of the country's oil reserves, while lighter oil - which is of a higher quality - accounts for 70% of all extracted crude oil.

It means that even the oil and gas industry will suffer if the economy is not modernised.

"The question of modernisation is the question of turning Russia into a 21st Century country," says Mr Aleksashenko.

"Otherwise, Russia will continue being stuck somewhere between the 19th and 20th Centuries."

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