Russia's opportunity to diversify economy

Crises are not new to Russia. The world knows the situations it went through in the early 1990s, 2008, and especially 1998. When Russia faced a major economic crisis in 1998 by defaulting on its bonds, which caused the ruble to plunge sharply, I was helping Stockholm School of Economics to start a subsidiary in Russia.

Early during the crisis our organisation as well as Vimplecom, one of Russia’s largest mobile-phone operators, were rapidly losing customers and were depressed. But Vimplecom’s chief operating officer said that while the crisis had created many problems, it also had presented opportunities to modernise the company’s management practices, which would be difficult to do if all was going well. Indeed the crisis ended up helping improve Vimplecom’s organisational effectiveness.

The 1998 crisis in Russia taught me one of the most important lessons of leadership – that along with dangers, crisis also presents opportunities, and good leaders of businesses and governments alike show their employees/citizens the opportunities, so that they stay motivated to try to create a brighter future for the company/country.

There is major lesson for Russia here. One of Russia’s biggest problems is over-reliance on exports of natural resources, especially oil. Russia needs to diversify its industry. That said, it is very difficult for any country to succeed in such diversification program when so much easy money can be made from exporting natural resources.

Russia’s current crisis, prompted also by the 30 per cent fall in oil prices, could also provide an opportunity for it to push forward policies to diversify the economy away from its dependence on exporting natural resources.

Russia could push for industries that use its natural resources, and add more value to products before exporting them, or leverage Russia’s traditional strengths in technology that sadly has been eroding over the past 20 years.

Many do not understand how dependent Russia is on oil today. Taxes from the oil industry account for about half of the Russian government’s budget. So, a decrease in the price of a barrel of oil by $1 results in a yearly loss of $2.1 billion in revenue for Russia. Luckily, Russians are good at dealing with crisis, and therefore Russia will fare better in the crisis than one might expect. It will rebound but experience plenty of pain before that.

Russia has taken some steps in recent years to diversify away from oil but it has to do much more. Russia’s universities, among the best in the world in Soviet times, now lag behind those in other parts of the world. Policies need to be adopted to favour innovation over trade to make quick money. And better tax incentives and more investment in research and development, among other things, are needed to bolster the Russian economy.

Hopefully, Russia will take advantage of the opportunities the crisis has presented, by encouraging industrial diversification away from oil, to minimise the risk of future dangers.

 

The author is dean of Nottingham University Business School China.