VZCZCXYZ0000
RR RUEHWEB

DE RUEHMO #0918/01 0941315
ZNR UUUUU ZZH
R 031315Z APR 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 7471
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS MOSCOW 000918 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/RUS, EEB/IFD 
TREASURY FOR TORGERSON 
 
E.O. 12958: N/A 
TAGS: ECON RS
SUBJECT: Russia's Plan for Long-Term Socio-Economic Development 
through 2020 
 
------- 
Summary 
------- 
 
¶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 
sector.) 
 
--------------------------------------------- --- 
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 
phase. 
 
¶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 
recognition. 
 
¶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 
 
BURNS