Dr. Richard ConnollyCentre for Russian and East European Studies

University of BirminghamEmail: r.connolly@bham.ac.uk

Structure Part 1: - How did the GFEC affect Russia?- How does the Russian government

propose to deal with the effects of the crisis?

- Is the existing plan a feasible strategy for success?

Part 2: - What type of system exists in Russia

today?- How does this relate to other countries?- Will Russia’s place in the world change?

Outline

Russia was particularly badly hit by crisis. Russian elite has recognized the need for

modernization and diversification (i.e., structural transformation).

But this requires a sustained increase in the rate of investment.

What has held back investment in Russia? Identifying the binding constraint is the

best starting point for guiding policy action.

PART 1: Outline 1. Sources of Russia’s strong pre-crisis

economic performance. 2. But investment is relatively low,

notwithstanding increase 2005-8. 3. Brief overview of growth diagnostics

framework. 4. Application to Russia: what is the

binding constraint on investment? 5. Desirability of current policy and

prospects for success.

1. Pre-crisis economic performance

1999-2008: one of the fastest $ GDP expansions in the world (e.g., faster than China)

Why?

1. Rising commodity prices improve Russia’s terms of trade (rising incomes, corporate profits, etc).

2. Market reforms of 1990s

3. Post-1998 price competitiveness (devaluation)

4. Investment-light growth due to low capacity utilization

5. Low level of monetization, facilitating incoming currency flow absorption

6. Sensible macroeconomic policies (partial implementation of Gref program, but slows after 2005), although oil funds good

7. Favourable demographic tendencies help labour contribute to growth

1. Pre-crisis economic performance

1999-2008: episode of growth acceleration (Hausmann, Pritchett and Rodrik, 2005)

•But still Russia has made little progress from long-run perspective (i.e., relative to US per cap income)

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1. Pre-crisis economic performanceBut still a laundry list of problems (or why modernize?)...

1. Property rights (domestic and foreign) infringed in NR sectors (Yukos, TNK-BP, etc).2. Leads to slow expansion of state in ‘strategic industries’ – leads to dual economy (Sutela, 1999; Hanson, 2007)3. Rent distribution sustained non-productive firms (Gaddy and Ickes, 2010).4. Productivity still low (c.30 per cent of USA, McKinsey, 2009).5. Productivity growth lower in state-controlled firms (Guriev et al)6. Continued low ratings in corruption, ease of doing business, etc.7. Build up of external debt in private sector, although not excessive by international standards ; fast domestic credit growth in years prior to crisis8. Persistently low investment rate (even comparatively low as capacity utilization was stretched in later boom years) 9. And, crucially, dependence on favourable commodity prices – source of boom and bust;10. Russia overshadowed by nearly all emerging market economies in export of medium- and high-technology goods (Cooper, 2007; Connolly, 2008)

NEED FOR STRUCTURAL TRANSFORMATION RECOGNIZED BY ELITE

2. The effects of the GFEC on the Russian economy• EFFECTS ON RUSSIA:

• Swing from growth to recession was sharpest among G20 economies (nearly 15 per cent in rouble; c.25 per cent in $ terms); only BRIC economy to experience recession.

• During crisis (i.e., 2007-2009) Russia ranks 175 out 183 countries in degree of swing between pre-crisis and crisis output.

• Industrial production (down 10.8 per cent, 2009); investment (down 17 per cent); reserves fell by a third; rouble fell; CA surplus halved; domestic credit collapses.

• Domestic demand contracted sharply;

• state has swung from surplus (5.4 per cent in 2007) to deficit (5.9 per cent in 2009).

• Anti-crisis measures have mainly focused on businesses close to state (see rouble defence as well as direct transfers); measures for poorer more modest (see Yakovlev et al, 2009) – Putin fulfils his side of “protection racket” bargain.

• Why so severe? • 1.Commodity dependency

(expectations of oil price being primary driver of confidence).

• 2. Institutional weaknesses (previous confidence turned out to be fragile)

• 3. Private sector external debt burden amplified by ‘sudden stop’ (Calvo) and ex rate depreciation.

• Lessons drawn by elite:• Shakes confidence of elite in

NR rent-distribution model• Reinforces belief that Russian

economy needs a new model – diversification and modernization

• But how? Russia caught between high-tech Europe and low-cost Asia.

3. State-led development agenda2000-7: Putin (energy-led process – extract more value from resources, use to

develop other areas)

2008: Medvedev : ‘four Is’ – innovation, infrastructure, institutions, investment (driven by state)

2009: “Forward Russia” – Medvedev (Commission on the Modernization and Technical Development of the Russian Economy); InSoR report on Russia in 21st Century

2010: Putin’s Commission on High-Technologies and Innovation

Both reiterate same themes of modernization first outlined in Putin’s early speeches.

Both emphasize role of state in a top-down process.

Culminated in MER’s 2020 plan (2008): role of goskorporatsii ; limited FDI in strategic sectors; focus on innovation, raising R&D, reducing corruption, improving state administrative quality, etc.

Crisis reduced fiscal capacity of state – assumptions for plan excessively optimistic and unlikely to receive same degree of state backing

Also, reorganization of most goskorporatsii to JSCs

New ideas from InSoR (Gontmakher, Golts, Yurgens) – modernization conceived in broader political terms

Polarization of modernization agenda: liberal (InSoR, Medvedev?) v. conservative (Surkov, Shuvalov, United Russia, Medvedev?)

4. State-led development agenda Innovation goals of

2020 plan :

Increase in Russia’s role as a trading power, particularly in CIS

• General aims of 2020 Plan:

• Fifth largest economy in the world, biggest in Europe

• ‘Best place on earth for humans to live in’ (Putin, 2008)

• GDP, % 2007 = 226• Investment, % 2007 =

368• Population, 143 million• Life expectancy = 75• Share of middle class, =

% 50-70• Average pc income =

(2007 = 6000 USD) $30000

• Exports, % 2007 = 154• Energy intensity, %

2007 = 55-60

5. Growth diagnostics approach: identify binding constraints How to increase

private investment and entrepreneurship?

Identify ‘binding constraints’

Wholesale reform v. second best reform

Target largest distortions

Rodrik, Hausmann and Velasco (2006)

Appropriate for Russia Wholesale institutional

reform unrealistic (will informal behaviour match new formal rules?)

Government should focus on a limited number of key areas

State administrative capacity is a weakness

GD methodology 1. Any binding constraint should have a high actual or

shadow price. E.g., if human capital is binding, the returns to those that receive a good standard of education ought to be very high.

2. Movements on the presumptive binding constraint should be correlated with movements in the aggregate rate of investment or growth.

3. A constant cannot explain a variable (e.g., ‘Russianess’ not the problem).

4. Agents less intensive in the binding constraint should be more likely to survive and thrive, and vice versa.

5. When searching for binding constraints on private investment and growth it is useful to benchmark the performance of an economy against appropriate international comparators.

6. Investment in Russia

Investment is pretty low.

State accounts for c.20 per cent.

FDI, though increasing, accounts for a relatively small proportion.

Large firms account for much.

Regional concentration.

Poor quality?

Growth is extremely sensitive to investment growth, despite the relatively low level.

What accounts for recent growth and previous deficiency?

Table 1. Gross capital formation, 1990-2008 (per cent of GDP)

Figure 2. Investment and growth in Russia, 1994-2008

1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008Average

(1990-2008)Brazil 20.7 18.3 16.8 17.0 16.4 15.3 16.1 15.9 16.4 17.5 19.0 17.5China 25.9 34.4 34.1 34.4 36.3 39.4 40.7 42.2 42.5 41.0 42.0 35.8India 23.0 24.4 22.7 23.6 23.8 24.9 28.4 31.0 32.5 34.0 34.8 25.5Indonesia 28.3 28.4 19.9 19.7 19.4 19.5 22.4 23.6 24.1 25.0 27.6 24.6Mexico 17.9 16.1 21.4 20.0 19.2 18.9 19.7 20.0 20.7 20.8 22.1 19.6Poland 21.0 17.7 23.7 20.7 18.7 18.2 18.1 18.2 19.7 21.6 22.0 20.0Russia 28.7 21.1 16.9 18.9 17.9 18.4 18.4 17.7 18.5 21.1 22.0 19.9Ukraine 23.0 23.3 19.7 19.7 19.2 20.6 22.5 22.0 24.6 27.1 25.6 22.2Vietnam .. 25.4 27.6 29.2 31.1 33.4 33.3 32.9 33.4 38.3 36.0 30.0

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7. Working down the decision tree 1. Is the problem a high cost of finance? High savings suggest that the problem isn’t liquidity constraint

7. Working down the decision tree 1. Is the problem a high cost of finance? Interest rate spreads are narrowing.... … with investment sensitive to this narrowing (r = 0.72)

7. Working down the decision tree 1. Is the problem a high cost of finance? And yet firms see finance as becoming an increasing problem, particularly after

crisis.

7. Working down the decision tree 1. Is the problem a high cost of finance? Doesn’t compare favourably with sample comparators on

index of financial sophistication (ranked out of 133 countries, WEF).

2004 2005 2006 2007 2008 2009 2010

Brazil 19 26 28 31 64 51 50

China 72 77 93 91 109 81 57

India 37 32 32 33 34 16 17

Indonesia 63 40 83 50 57 61 62

Mexico 32 35 38 67 66 73 96

Poland 57 59 56 64 68 44 32

Russia 87 72 84 109 112 119 125

Ukraine 93 81 81 85 85 106 119

Vietnam 82 90 90 97 80 82 65

7. Working down the decision tree 1. Is the problem a high cost of finance? Russia has a small and poorly performing financial sector Why? 1. State controlled - now around 55 per cent (Vernikov,

2010). - Low competition and negative real interest rates lead to

credit rationing.

2. Large number of banks; regional concentration (at least half around Moscow); regions and SMEs poorly served.

- A dual financial system.

3. Bank-centric: few alternative sources of finance. - Underdeveloped equity and bond markets; limited pension

fund development.

4. Limited role for foreign organizations. - 8 per cent of total assets in 2002 to 20 per cent in 2008.

Plus, regional and social concentration tends to follow domestic banks.

7. Working down the decision tree 1. Is the problem a high cost of finance? And yet, as credit supply loosened 2005-8, investment took off.

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7. Working down the decision tree 1. Is the problem a high cost of finance?

Overall: 1. Investment moves in line with changes in credit

supply, suggesting supply, not demand, is the problem. When this eases, investment takes off, growth follows.

This suggests investment demand is significant. 2. Agents constrained in factor are not large companies

with either close links to state or access to foreign capital (these avoid credit rationing).

Conversely, those that perform poorest (SMEs, remote regions) are precisely those most sensitive to changes in the credit supply.

In short, poor availability of finance because of supply-side weaknesses appears to be a strong contender for biding constraint.

7. Working down the decision tree 2. Is the problem low social returns?

A. Infrastructure? Not bad by international standards. Not widely cited by survey evidence.Table 6. Global Competitiveness Index Rankings: Quality of Infrastructure, 2004-2010

2004 2005 2006 2007 2008 2009 2010

Brazil 47 59 79 78 78 74 62

China 55 62 65 52 47 46 50

India 70 63 69 67 72 76 86

Indonesia 51 44 96 91 86 84 82

Mexico 52 61 60 61 68 69 75

Poland 73 86 72 80 96 103 72

Russia 60 64 85 65 59 71 47

Ukraine 59 65 70 77 79 78 68

Vietnam 76 92 91 89 93 94 83 Source: World Economic Forum (2004-10)

7. Working down the decision tree 2. Is the problem low social returns?

B. Human capital? Again, comparatively good. Not cited as particularly important in aggregate survey data.

Table 7. Global Competitiveness Index Rankings: Quality of Education, 2004-2010 2004 2005 2006 2007 2008 2009 2010

Brazil 72 85 114 120 91 94 103

China 50 65 87 73 41 37 53

India 36 39 25 31 31 33 39

Indonesia 49 35 23 29 48 49 40

Mexico 74 77 82 92 92 97 120

Poland 44 56 34 49 40 39 62

Russia 39 49 54 46 45 57 78

Ukraine 40 47 47 47 55 61 56

Vietnam 62 89 100 112 88 69 61 Source: World Economic Forum (2004-10)

7. Working down the decision tree 3. Is the problem low appropriability of

private returns? A. Taxation? Not great by

international standards.

Ranks high in survey evidence.

But, a constant cannot explain a variable: taxation has always been cited as a problem, yet investment grows despite this. It doesn’t move with the dependent variable.

A constraint, but is it binding?

Table 8. Global Competitiveness Index Rankings: Extent and Effect of Taxation, 2004-2010 2004* 2005 2006 2007 2008 2009 2010

Brazil 101 103 125 131 134 133 139

China 29 30 46 47 36 32 29

India 59 19 21 29 28 29 36

Indonesia 36 27 11 8 16 22 17

Mexico 90 71 74 80 89 91 113

Poland 87 99 64 101 128 110 107

Russia 96 73 94 97 94 99 97

Ukraine 98 102 101 123 127 128 136

Vietnam 61 55 54 60 53 48 58

Source: World Economic Forum (WEF), Global Competiveness Reports (2008-10)

7. Working down the decision tree 2. Is the problem low appropriability of private returns?

B. Institutions? Among the worst in the world. Ranks top problem in survey data. But investment tends to grow even as

perceptions of corruption and poor institutional quality increase!

Again, a constant cannot explain a variable.

Can this be the binding constraint?

Summary Russia performed badly during global recession. Russia needs an investment boom to modernize

and diversify. But investment is relatively low in Russia. Binding constraint appears to be poor financial

intermediation: demand is there; supply isn’t. Supply of finance is the only variable that moves

with investment (and growth); other variables are constraints, but not binding.

Existing state policies do not address the binding constraint; therefore, they are unlikely to result in greater investment, leading to continued structural stagnation.

Russia appears to be entering the inertia scenario (see MER, 2008).

PART 2: Outline What type of system prevails in Russia

today?

How does this help Russia fit in with the external environment?

Will the emerging multi-polar world order reflect domestic structures?

Exercise in scenario mapping to assess what types of risk exist today in Russia, and what may emerge in the future.

State of the art: Existing contributions focus on either: 1. Domestic structures or interests: e.g., Tsygankov

(2009), Wood (2009), Timofiev and Melville (2008) 2. International distribution of capabilities:

Freidman (2009), Goldman Sachs (2005) However, need to incorporate both if we are to

have any chance of exploring what the future might look like.

Domestic forces likely to be shaped by events on international stage, and Russia’s international role likely to be shaped by domestic considerations.

Traditional realist accounts of IR: Kissinger, Gilpin, EH Carr, all see world politics as ‘two-level game’ (Putnam)

Methodology:• Not an exercise in forecasting. • Projections are based on relatively simple

assumptions and are used to generate alternative scenarios for future development of both Russia and world.

• Scenario approach used by business (Shell), government (RAND), military (NIC),and scholars (Gustafson and Yergin, 1995)

• Purpose here is to set out alternative scenarios to facilitate identification of key variables that will likely shape Russia’s future trajectory, whatever the scenario.

• As such, can help focus attention on policy priorities to prepare for future.

• Identify four basic drivers of politics: (1) demographic; (2) economic; (3) military; (4) political

Overview: 1. State Russia’s position on the four

drivers at the current time. 2. Outline three scenarios for future

Russian development. 3. Describe main contours of world today. 4. Two alternative scenarios for

development of world along four variables.

5. How do domestic scenarios interact with international scenarios?

6. Key issues for Russia’s future development.

Russia today: demographic trends

Causes: health crisis; low male life expectancy; declining fertility rates.

Russia today: demographic trends

End of its final decline in dependency ratio. Implications: lower savings rate, higher state expenditure, labour squeeze.

Russia today: economic trends

One of the world’s fastest dollar increases in GDP between 1999-2008.

Correlated with rise in commodity prices, but other causes...

Russia today: key economic features Growth caused by: Move to market

incentives

Final demographic dividend

Increased employment Capital utilization

Higher productivity Rising commodity

prices Appreciation of rouble

Current problems: Dual economy (state

capitalism) Rising dependency ratio Tighter labour market Low investment (FDI

and domestic) Slowing TFP

productivity NR dependency Dutch disease Need for diversification Rule of law/corruption

Russia today: the military

Main features today:

Structure skewed towards officers, conscripts

Force structure geared towards old threats (large conventional conflict with NATO) – flawed military doctrine?

Low readiness and low effectiveness

Low morale (dedovshchina, pay for kontraktniki)

Largely obsolete weaponry Mixed quality of modern

weaponry Not network-centric Defence industry sustained by

exports Defence industry inefficient and

dispersed

Future challenges:

Professionalization (permanent corps of NCOs, less senior staff, contract soldiers)

Lighter, more mobile forces to deal with more imminent threats

More responsive and effective Improve morale Modernization of weapons Improved communication and

information systems New export customers Clear domestic demand profile Consolidation and re-

organization of defence industry

Russia today: key political features

Russia today: key political features Main features

today: Limited-access order (North

et al, 2009) – those in power use rent disbursements to sustain existing power structures

Link with economic structure; state control of key sources of rent

Patrimonial state uses resources to capture federal and regional politics

Low level of demand for provision of rule of law

Weak civil society, weak political parties, weak business interests

Future challenges:

Increased economic competition through diversification of economy

Reduction of state control of economy

Generate demand from below for rule-based government

More and stronger organizations independent of state

Move to universally applicable rules as basis for state rule

Three scenarios for future

Scenario 1: Optimistic-Demographic trends remain same, but higher female participation rate, better education, etc

-Economic growth model based on: higher investment (diversification), productivity gains (not innovation), reduction in state ownership, sensible fiscal policies, etc.

-5 per cent average

-Military: smaller, professional armed forces (1 mil); budget of 3 per cent of GDP; smaller, more efficient defence industry; focus on fewer, but better equipment

-Political: not a Western democracy, but more open-access (i.e. more universal application of rules), more representation of organizations that emerge with economic growth and diversification

Scenario 2: Muddling through-Demographic trends remain same, but no changes in female participation rate, education, etc

-Economic growth model based on: state ownership of strategic sectors, stagnant investment , modest productivity gains, sensible fiscal policies, continued dependence on NR revenues, etc.

-4 per cent average

-Military: smaller, conscript-based armed forces (1 mil); budget of 3 per cent of GDP; similar inefficient defence industry; equipment quality declining as Soviet investment recedes and exports dry up

-Political: Persistence of patrimonial Putinist model

Scenario 3: Recentralization

- Demographic trends remain same, but no changes in female participation rate, education, etc

- Economic growth model based on: state ownership of strategic sectors and some non-strategic, higher investment , lower consumption, lower productivity, populist fiscal policies, continued dependence on NR revenues, etc.

- 3 per cent average

- Military: larger, conscript-based armed forces (1.5 mil); budget of 5 per cent of GDP; similar inefficient defence industry; equipment quality declining as Soviet investment recedes and exports dry up

- Political: No semblance of democracy, arbitrary

-

The world today: demographic trends Rank Country 2010

1 China 13542 India 12143 USA 3184 Indonesia 2335 Brazil 1956 Pakistan 1857 Nigeria 1588 Russia 1409 Japan 12710 Mexico 11111 Germany 8212 Turkey 7613 Iran 7514 Thailand 6815 France 6316 UK 6217 South Africa 5018 Korea 4919 Argentina 4120 Chile 17

Rank Country 20301 India 14852 China 14623 USA 3704 Indonesia 2715 Pakistan 2666 Nigeria 2277 Brazil 2178 Russia 1299 Mexico 12610 Japan 11711 Turkey 9012 Iran 9013 Germany 7814 Thailand 7315 UK 6816 France 6617 South Africa 5518 Korea 4919 Argentina 4720 Chile 20

Rank Country 20501 India 16142 China 14173 USA 4044 Pakistan 3355 Nigeria 2896 Indonesia 2887 Brazil 2198 Mexico 1299 Russia 11610 Japan 10211 Turkey 9712 Iran 9713 Thailand 7314 UK 7215 Germany 7116 France 6817 South Africa 5718 Argentina 5119 Korea 4420 Chile 21

The world today: demographic trends

One of the lowest in sample

One of the highest in sample

Russia

The world today: GDP (current $US)Rank Country 2000 % of Group

1 United States 9951 40.9%2 Japan 4667 19.2%3 Germany 1906 7.8%4 United Kingdom 1481 6.1%5 France 1333 5.5%6 China 1198 4.9%7 Brazil 644 2.6%8 Mexico 629 2.6%9 Korea 533 2.2%10 India 462 1.9%11 Argentina 284 1.2%12 Turkey 266 1.1%13 Russia 260 1.1%14 Indonesia 166 0.7%15 South Africa 133 0.5%16 Thailand 123 0.5%17 Iran 96 0.4%18 Chile 75 0.3%19 Pakistan 74 0.3%20 Nigeria 46 0.2%

Rank Country 2010 % of Group1 United States 14704 34.4%2 China 5263 12.3%3 Japan 5187 12.1%4 Germany 3326 7.8%5 France 2745 6.4%6 United Kingdom 2353 5.5%7 Brazil 1724 4.0%8 Russia 1364 3.2%9 India 1339 3.1%10 Mexico 953 2.2%11 Korea 855 2.0%12 Turkey 591 1.4%13 Indonesia 569 1.3%14 Iran 359 0.8%15 Argentina 296 0.7%16 South Africa 286 0.7%17 Thailand 282 0.7%18 Nigeria 186 0.4%19 Pakistan 179 0.4%20 Chile 160 0.4%

The world today: military trends

Full spectrum dominance of US military Even regional powers relatively weak

vis-à-vis US Reinforced by strong alliances Low prevalence of war between

countries that can be considered as ‘powers’, usually large v. small

The world today: political tendencies Dominance of democratic, market

economies in international institutions Dominance of same countries in share

of world population and economic output

World order reflects this distribution of power

Same countries also the most technologically advanced

The world in the future: two scenarios The fast rise of the

rest: USA aside, demographic tendencies

suggest rising powers will have more favourable demographic characteristics

Sensible economic policies are carried out; orderly shift to greater consumption, less investment

Emerging economies take place of US as global consumer

No economic or political crises Current leading economic powers

suffer from less favourable demographic features, slowing productivity growth, and slower growth associated with being closer to EEF.

Military spending stays at existing levels (as % of GDP)

No change in political systems In short, Goldman Sachs

projections with stable political development

The slow rise of the rest:

Rising dependency ratios in EEs slow savings, investment, consumption growth, etc.

Policies not always conducive to consistent growth.

US remains global ‘consumer of last resort’

Next two decades punctuated by periodic economic and political crises

Current leading economic powers suffer from less favourable demographic features, slowing productivity growth, and slower growth associated with being closer to EEF.

Military spending stays at existing levels (as a % of GDP)

No change in political systems In short, lower GDP projections

for Rising Powers, but same GS for developed economies

The world in the future: economic (fast rise)Rank Country 2030

1 China 299132 United States 250353 India 68634 Japan 68135 Brazil 51016 France 42047 Germany 39998 United Kingdom 37789 Russia (opt) 348210 Mexico 286911 Russia (muddle) 284812 Russia (central) 232513 Indonesia 212914 Korea 192515 Turkey 169516 Iran 123817 Thailand 87818 South Africa 81719 Nigeria 78320 Argentina 77721 Pakistan 55522 Chile 420

Rank Country 20201 United States 197322 China 147943 Japan 62794 Germany 37415 France 34746 United Kingdom 32607 India 30648 Brazil 29949 Russia (Opt) 213810 Russia (Muddle) 192411 Mexico 176912 Russia (Central) 173013 Korea 149314 Indonesia 112715 Turkey 100716 Iran 66817 Thailand 52618 South Africa 47919 Argentina 47120 Nigeria 37821 Pakistan 30222 Chile 259

The world in the future: economic (slow rise)Rank Country 2020

1 United States 197322 China 97643 Japan 62794 Germany 37415 France 34746 United Kingdom 32607 Russia (Opt) 21388 India 20229 Brazil 197610 Russia (Muddle) 192411 Russia (Central) 173012 Mexico 116813 Korea 98514 Indonesia 74415 Turkey 66516 Iran 44117 Thailand 34718 South Africa 31619 Argentina 31120 Nigeria 25021 Pakistan 19922 Chile 171

Rank Country 20301 United States 250352 China 197423 Japan 68134 India 45295 France 42046 Germany 39997 United Kingdom 37788 Russia (opt) 34829 Brazil 336610 Russia (muddle) 284811 Russia (central) 232512 Mexico 189413 Indonesia 140514 Korea 127015 Turkey 111916 Iran 81717 Thailand 57918 South Africa 53919 Nigeria 51720 Argentina 51321 Pakistan 36722 Chile 277

The world in the future: military The fast rise of the rest: US still primary power, but full

spectrum dominance compromised by rise of China and other regional powers.

Move towards regional alliances; less emphasis on US alliances.

Russian armed forces overshadowed by all large powers in all but optimistic scenario – increased dependence on nuclear deterrence.

Dominant in ex-Soviet sphere Less emphasis on conventional

forces make Russia more vulnerable to low-intensity conflict (primarily on southern border)

The slow rise of the rest:

US remains primary power, greatest power projection capabilities

Only China, and perhaps India, can challenge on a regional level

Move towards regional alliances, but US remains the decisive actor (e.g., Indo-US alliance?)

Same as fast rise: Russia with no relative power projection capacity outside ex-Soviet sphere.

Only optimistic scenario provides capacity to provide security against low-intensity conflict

The world in the future: political In either scenario, the distribution of economic

activity and population is strongly in favour of more democratic systems, assuming no change in political organization of states.

Slower the rise of the rest, the longer existing practices persist.

Only significant difference will be greater relative power of large but poor (per capita) economies – implications for free trade, welfare, etc.

For Russia, optimistic scenario provides more scope for alliances based on values, internal structures (because there are more potential allies).

However, presence of larger but poorer nations in top group provides room for alliances based on interests rather than values.

Conclusion: Best scenario for Russia is slower rise of rest

alongside optimistic domestic scenario. However, in all but worst scenario, Russia will

remain a significant actor. Like now, no power to decisively alter trajectory

of world politics, but power to cause problems and to act as swing actor in a more fluid environment.

However, optimistic scenario will provide other ‘goods’: human freedom, economic prosperity, security from lower intensity warfare, more shared values, etc.

In no scenario can Russia improve on its position of relative power that it has now.