Summary of JIIA Forum Presentation
February 7, 2011
Venue: Japan Institute of International Affairs

Evgeny Shlemovich GONTMAKHERManagement Board Member, Institute of Contemporary Development, and Vice President,
Institute of World Economy and International Relations (IMEMO), Russian Academy ofSciences, Moscow“Contradictions of Russian Modernization”

When examining current conditions in Russia, there are far more questions than answers.
First, what is modernization?

In my view, modernization is not a goal but rather a transition

process from one state to another.

Let me describe the background necessitating thistransition. Russia’s GDP grew last year at a not-insignificant 4%, but it will take too long tocatch up to the developed countries at this rate. Consequently, Russia needs an economic
base that will serve as a driving force for economic development apart from such resources
as petroleum and gas. Russia has an aging society and low levels of medical care andeducation, making reform an urgent matter in order to secure human resources.

However, Russia’s poor investment environment, serious corruption, and problems in its
judicial and public security systems have become hindrances to achieving reform.

Inaddition, the national government directly or indirectly controls an excessive 60% of theRussian economy.

Genuine competition and private-sector initiative are needed to bringabout reform, and the state’s role both politically and economically must be re-examined.

Itis problematic that policy decision makers think that modernization is possible by making
additional investments without making fundamental reforms.

There has also been from theoutset a problem in the pace of change; just as Gorbachev’s perestroika led to the collapseof the Soviet Union, there is the risk that overly rapid political reform could led to chaos.

The elites have not been sufficiently supportive of the historic reforms that Russia needs atpresent.

Russia’s business interests, in particular the petroleum and gas industries, havegenerated enormous profits from the export of resources.

Resource prices are unstable,

though, and worldwide efforts to establish green economies mean that surrealistically highprices are not likely in future.

The general populace faces a paradox.

Russia’s poor account for about 15% of thepopulation by official statistics and about 40% by European standards, but people areuneasy about reform due to memories of the economic chaos caused by the reforms of the1990s.

Rising petroleum prices boosted incomes and improved living standards between

2000 and the financial crisis, and the Russian government adopted measures to increase
pensions even during the financial crisis, so the general public does not desire a change inthe status quo. Taking the issue of employment as an example, Russia has retained manyof the old inefficient companies of the Soviet era, and it is now necessary to close these andin turn increase new companies in the private sector; however, neither politicians noraverage citizens are willing to support corporate restructuring for fear of increased
unemployment.

With regard to social security, Russia has been unable to maintain thefinancial soundness of its pension systems despite the country’s short average lifespan, andsocial insurance contributions are to be raised starting this year.

The age of eligibility forpension benefits in Russia is 55 for women and 60 for men, but in actuality 30% of pension
recipients are younger beneficiaries who have taken early retirement.

As a result, 40million pension beneficiaries are being supported by 70 million workers, with this support
being borne entirely by companies. Consequently, public understanding must be sought
and social insurance system reforms implemented while economic conditions are still
favorable.

Finally, with insufficient political support available at present, the matter of how to begin
modernization depends greatly on who becomes the next president.

Russia is not a truly

democratic country but has rather a “soft” authoritarian system of governance. Practicallyspeaking there will be only two candidates in the next presidential election.

Although acomeback is legally possible for Putin, he would likely not seek to change the status quo.
Russia’s future requires a new direction.

There have been no major course changes madein the three years since Medvedev took office as president, and he has only paid lip service
to modernization and democracy.

Nevertheless, changes might be possible if Medvedev

has enough authority to implement his own policies.

There is the risk that reform efforts

would meet with resistance from the petroleum and gas industries and opposition from thepublic, but I think reforms could be successfully made if he can gain the support of 10-15%
of the active population.

The next president’s six-year term offers a last chance to makechanges, and we support Medvedev.