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Russian President, Economists Offer Gloomy Forecasts

Russia's President Dmitri Medvedev recently offered a gloomy assessment of Russia's economy and said the country can no longer afford to continue doing business as usual. Some Russian observers, however, are skeptical the country will take the steps necessary to sustain economic growth.

President Medvedev says Russia's economy has been hit particularly hard by the global downturn because it remains overly dependent on the exporting natural resources.

He recently painted a bleak picture of the economy's current state and future prospects.

Mr. Medvedev says the economy needs "forward movement" but is instead "going around in circles." This has been demonstrated most graphically, he says, by the global economic crisis, which has sent Russia into a downward spiral steeper than in other countries.

He says relying on commodity exports is a "dead end," and says the Russian economy has no future unless it is changed structurally.

When the global economic crisis hit, demand for Russian oil, gas, timber and other resources dropped, as did prices.

Mr. Medvedev made the comments last week at meeting of senior political party leaders in the resort city of Sochi.

Recent data bear out that assessment of an economy that once was among the world's fast growing. Russia's state statistical agency says the economy contracted by almost 11 percent in the second quarter of this year compared with a year earlier, its biggest annual drop on record.

Russia has one of the highest rates of inflation and lowest levels of industrial output among the countries of the former Soviet Union. Its economic performance trails that of such developing countries as Brazil, India and China.

Russia's reserve fund, consisting of surplus revenue from oil exports, fell to about $88 billion in July after reaching a high of $137 billion in March.

The fund is expected to sink to around $50 billion by the end of the year, despite the recent rise in world oil prices. Indeed, the Finance Ministry warns that the reserve fund will be "practically exhausted" by the end of 2010.

But restructuring may not come soon.

Economist Mikhail Delyagin says he doubts that Mr. Medvedev, who has been president for more than a year, has had a sudden revelation about the economy's shortcomings.

Delyagin says the president's comments were probably connected to jockeying for power with Mr. Medvedev's predecessor, Vladimir Putin, who is now prime minister and has responsibility for the economy.

Politics aside, economists say there are no quick fixes for the economy's structural problems.

Natalia Orlova, chief economist at Alfa Bank, Russia's biggest privately owned lender, says there are relatively few examples in history of major energy exporters successfully diversifying their economies.

Orlova says diversifying Russia's economy will take many years and require a change in strategy.

Economists say other profound changes are needed if Russia is to achieve long-term economic growth.

Oleg Zamulin, a professor at Moscow's New Economic School, says that while Russia has done much in the past decade to create a private financial and trade infrastructure, little has been done to create what he calls public goods.

These public goods, says Zamulin, include the rule of law and a judicial system that protects large private investment. He says Russia's political system is not conducive to the development of effective law enforcement and judicial systems. So it is unlikely, he says, the country will see the kind of investment it needs to return to economic growth.

Zamulin predicts that over the next few years, the economy will stagnate - it will no longer be in a tailspin but will be unable to deliver the kind of rapid growth it achieved earlier this decade.