OREANDA-NEWS. April 23, 2010. While natural resources extraction was responsible for a decade of relative prosperity in Russia, it is destructive in the long term for the economy, environment and public health, the United Nations said.

In a 170-page report [http://www.undp.ru/documents/NHDR_2009_English.pdf] on Russia's energy sector, the UN Development Program called the situation an "energy and environmental malaise" and recommended that the government diversify and decentralize the economy.

The government's "innovative scenario" for development up to 2020 — which dominates its long-term development concept approved in 2008 — is not realistic, the report said, since it will be years before the economy fully recovers fr om the recent economic crisis.

Instead, Russia should immediately focus on innovation in the energy sector to lay the groundwork for further modernizing after 2020. Keeping the industry's current development strategy will worsen symptoms of so-called Dutch disease, such as the loss of competitiveness in all nonresource-based sectors, difficulty reallocating resources and social tension.

At current rates of extraction, Russian oil and gas will run out in 21.9 years and 9.4 years, respectively, making the transition urgent, the report said, citing figures fr om oil giant BP.

In the long run, the country has significant room to increase its renewable energy sources, while the oil sector should "take into account global trends toward energy efficiency" and increase refining depth so as to export more expensive products.

Russia's "exceptionally high" energy intensity, currently more than double that of developed countries with the same climate, and the efficiency gap "cannot be overcome by piecemeal measures," the report said.

The comment indicates that the government's high-profile campaign to phase out incandescent light bulbs may be misguided, since "most energy wastage is beyond the control of households," which consume less power per capita than in developed countries, despite not having power-saving technologies.

The government also must decentralize the economy, since "the existing relationship between the center and the regions lacks stability and does not stimulate institutional modernization of more developed regions." Centralization leaves those regions with the greatest opportunity for human development short on funds and "without authority to act."

Moscow alone accounts for 23 percent of Russian GDP because of corporate offices located in the capital, the report said. "Corporate reporting [creates] special advantages for the Moscow city budget," which derives 49 percent of its revenue from profit tax.

Regional budgets' stability depends on corporate policies, the report said.

Billionaire Mikhail Prokhorov's decision to change his permanent private address last summer from Moscow to Eruda, in the Krasnoyarsk region, led to a reallocation of about 16 billion rubles (USD550 million) to the Siberian region's budget, practically covering its deficit, Kommersant reported at the time.

The domination of natural resources industries in certain regions helped them during the recession in the 1990s, but it "did not become the driving force for fast and sustained economic development in the 2000s."

Instead, it widened Russia's income gap, which is higher than the national average in resource-producing regions. But the national income gap leader is Moscow, wh ere the richest 10 percent of residents are 44 times wealthier than the poorest 10 percent.

Ninety percent of Russia's energy is still derived from coal, oil and gas, and its policies on global warming leave much to be desired, the report said.

"The 15 percent lim it on reductions as compared with 1990 leaves Russia room to maneuver and even allows it to return in the post-crisis period to a power-intensive development path," the report said. While the national energy strategy says that up to 20 percent of power will come from renewable resources by 2020, the figure includes generation by giant hydroelectric plants whose "health risks … have been little studied."

Public health is suffering from pollution from the energy sector, but Russia's system for measuring its levels is "archaic" and does not meet World Health Organization recommendations.

UNDP estimates that "air pollution contributes up to 3 percent of mortality among the urban population, of which 15 to 20 percent is contributed by the fuel and energy sector."

The situation is especially bad in cities powered by coal plants, it said. While Russia continues to export gas, consumption of coal is set to increase to 20 percent, from 19 percent now, by 2020, according to Russia's energy strategy.