Cablegate: Russia's Plan for Long-Term Socio-Economic Development


DE RUEHMO #0918/01 0941315
R 031315Z APR 08





E.O. 12958: N/A
SUBJECT: Russia's Plan for Long-Term Socio-Economic Development
through 2020


1. (U) The Ministry of Economic Development and Trade (MEDT)
released its program for Russia's socio-economic development through
2020. The policy document, expected to be finalized in May,
outlines the GOR's plans for economic diversification away from
present levels of reliance on natural resources toward an innovation
economy. MEDT's program includes increased spending on education
and health care as key parts of Russia's ongoing economic
modernization. End Summary.

Plan Background

2. (U) On March 20, the Ministry of Economic Development and Trade
(MEDT) published its long-term socio economic development program
through 2020, which is expected to be a roadmap for President-elect
Dmitry Medvedev.

3. (U) Since July 2006, when MEDT was tasked at the State Council's
meeting to lead a task force responsible for drafting the program,
the draft has undergone significant revisions. MEDT's most recent
version of the program focuses on an "innovation economy scenario"
in line with Medvedev's February Kasnoyarsk speech on the four "I"s.
Senior government officials and leading Russian business
associations have discussed the draft development program
extensively. The Russian Union of Industrialists and Entrepreneurs
(RUIS) has sharply criticized the document for presenting only vague
objectives and no concrete steps to achieve stated development
goats.and is drafting a detailed critique. The policy document is
expected to be finalized in May.

Program Objectives

4. (U) The program's key objective is to transform Russia into a
global economic leader by: creating an innovation economy;
harnessing opportunities for Russia's existing industrial
capabilities; encouraging the formation of competitive high-tech
sectors; diversifying the overall economy away from natural resource
extraction; developing human capital and democratic institutions;
and decreasing regional economic disparities. MEDT's program will
involve the private sector in formulating policies, modernizing
industries and addressing social problems.

5. (U) Under the program's "innovation economy scenario," Russia
would become one of the five largest economies by 2015-2020. This
implies that GDP calculated in purchasing power parity (PPP) terms
would rise from the current level of USD 8,860 per capita to an
estimated USD 25,000 per capita in 2020.

6. (U) Under this scenario, more than half of Russia's population
will be part of the middle class by 2020 (from 20-30 percent
currently), and average monthly wages will surge from USD 526 in
2007 to USD 2,700 in 2020. The pension-to-wage ratio is expected to
increase from 25 percent in 2007 to 30 percent by 2020. The GOR
expects that life expectancy will rise to 75 years and that total
population will increase to 145 million from the current 142.2
million. Successful implementation of housing reform would
translate into 100 square meters (1,077 square feet) of living space
for every family of three.

7. (U) Government spending on education and health services would
catch up with industrialized countries. Spending on education would
increase from 4.6 percent of GDP in 2006 to 5.5-6 percent of GDP in
2020, and on health from 3.9 percent of GDP in 2006 to 6.5-7 percent
of GDP in 2020.

Human Capital Development

8. (U) Demographic Policy. Lower birth rates and higher death
rates have reduced Russia's population 0.5 percent annually, or
about 750,000 to 800,000 people per year during the late 1990s and
most of the this decade. The program warns that Russia's 2007
population of 142.2 million could fall below 133 million by 2030.
The program outlines several policy initiatives that would increase
the country's birth rate and life expectancy while reducing infant
mortality. As one measure to address population issues, the program
recommends providing economic incentives to qualified migrants from
other countries.

9. (U) Health Care Modernization. The program calls for a "new

health care system" that would be based on technological
innovations, improved efficiency in administration, and increased
professional standards. One key challenge is ensuring equal access
to quality health care, especially in the regions, at a reasonable
cost. The GOR envisions that by 2020, budget spending on health
care would reach 7 percent of GDP.

10. (U) Education Improvements. While lacking specifics, the
program acknowledges that reforming the country's current education
system to meet the needs of an innovation economy will require not
only hiring the best teachers and administrators but also ensuring
that schools, research institutes, and universities have access to
the resources to provide high-quality instruction.

11. (U) Labor Market. MEDT expects that in the 2007 - 2020 period,
Russia's labor force will shrink by 10 percent. As a
countermeasure, the program describes policy initiatives to
stimulate inter-regional labor mobility, to increase labor
productivity (by 6.7 percent annually in 2011-2015 and by 7.5
percent annually in 2016-2020) and to encourage new immigration
while increasing the upper limit for migrant groups currently
authorized by law.

12. Housing Affordability. The government has pledged to increase
Russia's housing stock to about 28 square meters (300 square feet)
on average per person by 2015 and about 35 square meters (380 square
feet) per person by 2020. The government has also pledged to
replace all of Russia's dilapidated housing stock during this
period. To achieve this goal, the GOR will use a combination of
incentives and public-private partnerships to increase housing
construction from the current activity level of 50 million square
meters (540 million square feet) per year to 170 million square
meters (1.8 billion square feet) per year in 2020.

13. Social Security Development. MEDT's program recommends a
revised welfare approach to assist the country's most vulnerable
segments of the population: elderly pensioners, veterans, infants
and children, expectant mothers, families with more than one child,
invalids, and people with disabilities.

14. (U) Pension System. According to the program, the
pension-to-wage ratio, a ratio of a person's pension to his former
wage, will reach 30 percent, from the current 25 percent, by 2020.
(N.B. The pension system is to be supported by the National Welfare
Fund, an SWF created this year out of the Stabilization Fund, which
will be primarily supported by revenue from the oil and gas

--------------------------------------------- ---
Institutional Development and Economic Stability
--------------------------------------------- ---

15. (U) Russia's long-term monetary and fiscal policy goals are
aimed at sustaining annual GDP growth of 6-7 percent through 2020
and reducing the annual inflation to 4.5 percent by 2015 and to 3
percent by 2020. At the same time, the program notes that the
budget will play an increasingly important role in financing
"strategically important social and economic programs and
eliminating infrastructure bottlenecks." Budget deficits, however,
should not exceed 1 percent of GDP. Loosening fiscal policy would
put additional pressure on the government's ability to meet its
inflation targets.

16. (U) The GOR expects the country's trade balance to continue to
fall, reaching deficit by 2010. An expected decline in the price of
oil, in conjunction with already-stagnating production and a
reduction in Russia's exportable surplus, and growing imports would
lead to a trade deficit of USD 110 billion in 2018-2020, or 2
percent of GDP. In turn, the trade deficit will keep the ruble's
real effective exchange rate stable in 2011-2015. MEDT forecasts
the ruble will resume its appreciation after 2015, as a result of
the expected trade deficit and Russia's GDP catching up to other
developed economies.

17. (U) The program emphasizes the development of Russia's
financial sector as a principal driver of economic growth and
outlines key target indicators:
--Corporate lending to increase from current 30 percent of GDP to 75
percent of GDP in 2015 and 85 percent of GDP in 2020;
--Share of commercial bank financing to increase from 11 percent in
2006 to 25 percent in 2020 (state-owned banks would contribute most
to this growth);
--Capitalization of Russian companies to double from today's level
of USD 1.4 trillion (more than 100 percent of GDP) to 200 percent of
GDP by 2020;
--Assets of pension funds to increase from 2.5 percent of GDP in
2006 to 20 percent of GDP in 2020.

Increasing National Competitiveness

18. (U) Russia's economic growth will be modeled on an "innovative
industrial policy" in which the State will play a leading role. A
combination of state programs encouraging competition and
entrepreneurship, state support of targeted projects, and
public-private partnerships will be pursued. Protection of
intellectual property rights, information technology parks, special
economic zones, and business incubators are key pillars in the MEDT
program to improve the competitiveness of Russian businesses.

19. (U) Currently, Russia's information technology sector lags
behind other BRIC countries, according to a July 2007 Economist
Intelligence Unit ranking on competitive IT environments. Sergei
Chemezov, chairman of the state-controlled Russian Technologies
Corporation, said earlier this year "if Russia doesn't bridge the
gap by 2015, then in the near future, our foreign competitors may
not only push Russia out of the global high-tech market but also the
domestic market."

International Trade Policy

20. (U) MEDT's trade outlook is based upon the long-term goal of
making Russia a leading producer of high-tech goods. The program
targets Russia's share of global GDP (on a purchasing-power parity
basis) to grow from the current 3.1 to 3.8 percent by 2015 and 4.3
percent by 2020. Russia's annual exports would rise from USD 304
billion in 2007 to USD 700 billion in 2020.

21. (U) The GOR would actively protect the interests of domestic
firms and encourage their expansion internationally, through export
promotion and government assistance in investing abroad. It also
commits to providing transparent and clear rules for foreign
investments in Russia's strategic sectors.

22. (U) MEDT's trade program underscores the importance of a
cooperative working relationship with the U.S. on trade issues.
Business-to-business cooperation and open dialogue between the two
governments are identified as ways to import technology and
experience needed to forge an innovation economy. The MEDT
highlights cooperation in energy, aerospace, and high-technology as
areas for increased interaction, dialogue, and exchanges.

Regional Development

23. (U) Russia's new regional economic policy will focus on
decreasing disparities and creating new centers of regional economic
growth by taking advantage of each region's competitive advantages.

Reform Phases

24. (U) The plan envisions three phases of reforms to create an
innovation economy: 2008-2012 will be the "preparation" phase;
2013-2017 will be the "breakthrough" phase; and 2018 and beyond the
"growth" phase.

25. (U) Phase I Preparation (2008 - 2012). During the first five
years, the government will focus on enhancing existing competitive
advantages and creating institutional capacity for the breakthrough

26. (U) During this phase, the GOR would begin to invest heavily in
medical education and to increase funding for health care services
nationwide. New education standards take effect. Junior and
technical colleges begin undergraduate degree training for new
students. Construction of fifteen university campuses begins and
Russia's education curricula begin garnering international

27. (U) Phase I Key Indicators (cumulative):
--GDP Growth: 36 percent
--Labor Productivity Growth: 37-39 percent
--GDP's Decreased Energy Reliance: 16-17 percent
--Real Disposable Income Growth: 48-50 percent
--Capital Investment Growth: 67-70 percent
--Research and Development Spending: 2 percent of GDP
--Education Spending: 5-5.2 percent of GDP
--Health Care Spending: 5-5.3 percent of GDP

28. (U) Phase II, Breakthrough (2013 - 2017). During 2013-2017,

the economy begins to develop new technologies, creates a number of
new industries and transforms traditional ones.

29. (U) As an example, in the health care system, outpatient
clinics and hospitals start to compete for patients, and prevention
becomes the standard of care. The mortality rate decreases 30-50
percent and high-tech medical treatment becomes more widely
available. Doctors and teachers salaries begin to match those in
the commercial sector.

30. (U) Phase II Key Indicators (cumulative):
--GDP Growth: 37-39 percent
--Labor Productivity Growth: 42-44 percent
--GDP's Decreased Energy Reliance: 18-20 percent
--Real Disposable Income Growth: 37-40 percent
--Capital Investment Growth: 65-68 percent
--Research and Development Spending: 3.3 percent of GDP
--Education Spending: 5.3-5.7 percent of GDP
--Health Care Spending: 5.8-6 percent of GDP

31. (U) Phase III: Innovation Economy (2018 and beyond). The
program envisions that after 2018, the key goal will be to maintain
Russia's place in the world economy and continue its
innovation-driven economic growth.

32. (U) Phase III Key Indicators (cumulative):
--GDP Growth: 19-22 percent
--Labor Productivity Growth: 21-24 percent
--GDP's Decreased Energy Reliance: 9-12 percent
--Real Disposable Income Growth: 20-23 percent
--Capital Investment Growth: 30-33 percent
--Research and Development Spending: 4 percent of GDP
--Education Spending: 5.5-6 percent of GDP
--Health Care Spending: 6.7-7 percent of GDP


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