How Can Russia Develop Beyond Oil and Gas?

At the St Petersburg International Economic Forum (SPIEF), one of the main topics on the agenda is how Russia transforms the wealth gained from its substantial natural resources into a more rounded economy.

Many Russians have done extremely well out of the post-Communism boom. Average wages rose eightfold during Putin's eight years as president, from roughly $80 a month when he took office on December 31, 1999 to $640 in 2008, and gross domestic product went up sixfold.

However, some analysts are worried that the economy is over-reliant on revenues from oil, natural gas and other natural resources.

“The real problem is: how do you develop this economy so that it’s not dependent on only one sector," Dennis Nally, chairman of PricewaterhouseCoopers, told CNBC Friday. “Really driving the economy and making it more developed is all about innovation.”

Around 40 percent of the Russian government’s tax take comes from tax on oil and gas-related businesses, and this is set to rise with plans to remove tax breaks on several big new oil fields and raise taxes on natural gas.

“There’s a lot to be said for the sector which you can see is performing extremely strongly,” Denis Bugrov, Senior-Vice President of Russian bank Sberbank, told CNBC.

Russian President Dmitri Medvedev has announced plans to improve Moscow’s international reputation in an effort to turn the city into a greater financial centre, ahead of elections next year.

Increasing Transparency

The measures are designed to increase transparency, enforce international accounting standards and give minority shareholders greater power.

“A lot of what was being talked about for years is now becoming implemented. We see a good strategic move in the regulatory environment,” Bugrov said.

Russian businessmen, including Rusal CEO Oleg Deripaska, have spoken out in favor of the plans.

Eckhard Cordes, chief executive of Metro, told CNBC: “Of course, corruption is an issue, but they are wise to the issue and openly talking about it.”

One area where the Russian economy is diversifying is scientific research.


Thursday announced that it will build a new state-of-the-art research and development center in St Petersburg. This will bring its investment commitment in Russia to $1.2 billion over the next five years.

"We believe that the quality of the science that’s done in places like St Petersburg is high enough that we can get stuff done," David Brennan, chief executive of AstraZeneca, told CNBC. “We will probably bring in a couple of our people, but the center will mainly be staffed by locals.”

He said that AstraZeneca, which is also expanding its research in China as it scales down operations in the Western world, sees Russia and China as its biggest growth areas.

“Russia and China are both developing better healthcare,” he said. “In Russia, where the life expectancy is low, the government is investing in creating more access to healthcare.”

“The one thing that the financial crisis has demonstrated is how interlinked these economies really are,” Nally said.

“We are into a period of slow economic growth in the next few years. There are issues to work out with the US, Europe and parts of Asia. Having said that, levels of confidence in the CEO community are at an all-time high,” he added.

The relationship between China and Russia was also on the agenda.

“I don’t see any conflict between China and Russia,” Cordes said. “My perception is that Russia is leaning towards the West, although it also has to develop trade to China. It’s not a major conflict.”