Professor Arun Mohanty
After the decade of degradation and decline in 1990s under Yeltsin, Russia enjoyed a robust annual GDP growth of nearly seven per cent during eight years of Putin presidency. Thanks to this, the objective of doubling country’s Gross Domestic Product in ten years looked quite feasible. Russian economy became 7th largest in the world with a GDP worth US$ 2 trillion on the basis of public-private partnership. This is important in the backdrop of President Putin’s declaration in his millennium speech in 2000 that it would take 20 years for Russia to catch up with Portugal, Europe’s poorest country, if it develops at the then growth rate. Russia’s GDP during eight years of Putin’s presidency grew by 70 per cent, industrial production - 75 percent whileinvestment increased by 125 per cent. Russia’s GDP in 2007 reached the 1990 level, which means the country overcame the consequences of the economic crisis that devastated it in 1990s.
Rising from the debris
During the eight years of Putin’s leadership, accumulated foreign investment grew by seven times while foreign investment into Russian economy reached US$ 82.3 billion in 2007. Capitalisation of the stock market grew by 22 times compared to 1999. While capitalisation of Russian stock market was mere US$ 60 billion in 1999, it reached US$ 1 trillion 330 billion in 2007. Russia’s trade turnover with foreign countries grew by five times during this period. Russia’s foreign debt constituted three per cent of the GDP, which was one of the lowest in the world while foreign currency reserves touched more than US$ 500 billion in 2008. The real income of the population during the period grew by 2.5 times while people living below poverty line dropped to 13 per cent.
Long term development
While in the initial years of the 21st century some economists were stressing that the growth that Russia witnessed in the beginning of the century was merely recovery growth, Russia sprang a surprise by maintaining the high growth rate for the 9th year in succession. However, almost all economists were unanimous in their opinion that Russia will not be able to maintain this growth rate any more unless it diversifies its economy, highly dependant on energy and raw-material. One of the major achievements of President Vladimir Putin was that under his leadership Russia attained political as well as economic stability. Country’s leadership since then has been repeatedly emphasising that country’s next move is diversification from stability. In spite of repeated call for diversification from stability, little was achieved in practical terms. The country once again found itself in midst of an intense debate as to the strategy for achieving diversification of the economy and high economic growth.
Economists believe that there are only four possible economic development strategies before Russia: rent-driven strategy, mobilisation strategy, inertia-led strategy and modernisation strategy.
The essence of this strategy rests on the fact that source for development would be rent, collected from natural resources. Active support would be provided to poor people and poor regions under the strategy. The strong side of the strategy is a rise in the domestic demand and reduction of poverty while the weak side lies in dependence on unreliable, unpredictable and unsustainable source of financing.
Modernisation is not a priority under this strategy. In case of decline in energy and raw-material price, the risk of conflict stemming from redistribution is fairly high under this strategy.
This strategy is based on concentration of resources in State sector and its re-distribution for development of priority sectors like energy, infrastructure, etc. The coalition that supports the strategy includes bureaucrats and players of ‘breakthrough’ sectors. This strategy stipulates significant role for State budget, State companies and institutes of development and to some extent, coercive public-private partnership. The strong point of the strategy is that it facilitates accelerated modernisation of branches, known as ‘breakthrough sectors’ while the weak point is low effectiveness of the extremely large State sector and lack of sustainability of financing.
This strategy stipulates tactical manoeuvring between various groups of interests and solution of the problem as it gets acute. This strategy envisages consistent manoeuvring between populism with subsidy given by the State and partial mobilisation and also attempt to reform market institutions in order to satisfy interests of different groups while resolving most important tactical issues. This strategy does not provide opportunity for long term strategic success but helps in meeting the short term requirements of the coalition or repeals immediate threats. The elite end part of the population, satisfied with the status-quo lend support to this strategy. This strategy is convenient for the ruling elite.
This strategy envisages institutional modernisation of the society, State and business. In principle this strategy does not have opponents as such, but there are different versions of this strategy. Strong point of the strategy is substantial long term outcome in the sphere of socio-economic development while the weak point lies in excessive time required for bringing about the transformation and the necessity to form a broad coalition to support the strategy.
The strategy requires significant sacrifice from certain actors and would take a long time to produce desired result. So this strategy needs patience from the citizens and the ruling elite as well. Modernisation is not possible without some sort of consensus in the society and strengthening of civil society that supports the strategy. Since a whole generation has to wait for this strategy to produce results, there is a necessity for building a broad-based coalition that would function in course of long time. Emergence of such a coalition would form a reliable basis for modernisation.
Russia’s ruling elite in principle has made a conscious choice in favour of a modernisation strategy since 2008. The central element of the strategy is innovation-based development. In order to transfer the economy to the rails of innovation, the strategy sets the tasks for increasing the innovative and investment activeness. This strategy requires to raise the level of accumulation to 30 per cent of the GDP and achieve the levels of developed countries in the sphere of budget policy. This means the level of financing of education has to reach seven per cent of the GDP, healthcare - six per cent, science - three per cent. In other words, budget allocation for these sectors in Russia has to be doubled from the current level.
For the first time in the post-Soviet Russia, the State has decided to keep the strategic initiative under its control. So far this initiative was in the hands of international financial organisations, raw-material exporters, transnational corporations, natural monopolies etc. Each of these organisations imposed its own strategy over the country as a result of which the economy faced serious degradation. Country’s development in the recent past took place on the basis of inertia of these initiatives.
Russia for the first time in its post-Soviet history drafted in 2008 a long-term economic development strategy up to the year 2020. The long term development strategy was approved by the State Council after thorough discussion. The central thrust of the development strategy up to 2020 is to transfer the economy from the rails of raw-material export to innovation-driven development. The strategy has been approved by the Medvedev-Putin tandem.
The main problem with the Russian economy is that while it remains extremely dependent on energy exports, the global economy is becoming increasingly competitive, driven by a shifting balance of financial power in favour of developing countries, regional economic integration and technological innovation. Heavy dependence predominantly on revenues collected from energy and raw-material resources leaves Russia in an unstable and unenviable economic and financial situation. If Russia wants to be a global economic power, it must move towards innovation- based development. The strategy based on Russia’s current competitive advantage in energy, transport and agriculture aims at creation of a scientific and technological complex to promote specialisation in high- technology and diversification of the structure of the economy. It gives importance to creation of economic and social conditions that would facilitate development of best human capital and democracy in the country.
While the strategy assumes identical external economic conditions, it offers three alternative scenarios:
1) Inertia-based development,
2) energy and raw-material-based development through increasing investment in energy and raw-material sector and
3) innovation-based development.
The growth forecasts for the stipulated period up to 2020 differ from scenario to scenario. Though both energy and raw-material based strategy and innovation-based strategy ensure doubling of GDP during the stipulated period, the increase in case of innovation-based strategy is 21 per cent more than that in the energy-raw-material based strategy. Moreover, volume of investment in innovation-based scenario would be 59 per cent more than the energy-raw material-based scenario.
The authors of the development strategy up to 2020 have planned four-fold increase in investment during the stipulated period. This confirms the assessment that Russia is not fully utilising its investment potential as a result of 50 per cent decline in accumulation rate compared to savings rate and massive capital flight estimated to be US$ 1 trillion during the reform period. Along with massive investment, the strategy envisages sharp rise in innovative activities. The strategy stipulates that share of industrial enterprises executing technological innovation, would increase to 40-50 per cent compared to 9.3 per cent in 2005 and share of innovative products in total industrial production would rise up to 25-35 per cent from 2.5 per cent in 2005.
The ultimate goal of the strategy is to make Russia one of the top five economies of the world and along with this to establish Russia as a leader in technological innovation and global energy infrastructure as well as a major international financial centre. By establishing itself as a leading economic power, Russia plans to raise the living standards to the level of developed countries and safeguard its national security. The broad objectives of the strategy are to increase the country’s GDP to a level that would ensure US$ 21,000 per capita income by 2020 and to place 60-70 per cent of the population in the category of middle class and reduce the poverty level to that of developed countries.
Theoriginal long term development strategy was to be implemented in two stages and the first stage was to be completed in the year 2012. Russian GDP was to grow up by 37-38 per cent by the year 2012 compared to 2008 while labour productivity was to increase by 40-41 per cent during the period. The end of first phase of the strategy was to ensure reduction of energy-intensity of the GDP by 17-19 per cent. The strategy aimed at increasing the expenditure on education and healthcare to 5.6 per cent and 5.3 per cent respectively by 2012.
However, this strategy drafted under President Putin and subsequently accepted by his successor President Medvedev, faced its funeral before it could barely take off the ground as a result of the global financial crisis in 2008. Russia which believed that it would be a safe haven by insulating itself from global economic crisis soon found itself to be one of the most affected economies in the world by the crisis. Russian GDP shrank by 8 per cent and its industrial production declined by 12 per cent in the year 2009. It had to implement serious anti-crisis measures to save its economy and banking system instead of executing the long term development strategy.
The government had to bring substantial corrections in the indicators of the long term strategy though its broad parameters and objectives remain the same. According to GOSKOMSTAT, Russia’s National Statistical Committee, the GDP growth in 2010 is around four per cent while the growth for 2011 is forecast to be about 5 per cent. Russian GDP can reach the level of 2008 only in the year 2012 in the best case scenario.
Though indicators of the long term development strategy have been buried as a result of the global economic crisis, Russia as a whole has not abandoned the major directions and objectives of this strategy. Innovation-driven development remains the key objective of President Medvedev’s economic modernisation programme. However, he has shifted priorities to certain new areas, focusing attention on certain concrete directions of the modernisation programme .
Medvedev’s economic agenda was discovered first in his article titled “Go Russia”, in which he formulated the strategic objectives of his modernisation programme. He criticised Russia’s economic ‘backwardness‘, deploring its ‘humiliating’ dependency on energy and raw materials. Describing Russian society as ‘archaic’ and ‘paternalistic’ he said the country can no longer rely on the achievements of the past to secure a prosperous future and stressed that Russia should aim at building a modern, diversified economy based on high technology and innovation. His economic agenda includes making rouble an international reserve currency, turning Moscow into an international financial centre envisages further privatisation of Russian economy. While the hallmark of President Putin’s economic agenda was to bring strategic assets under State control through building of mega State corporations, President Medvedev plans to reduce their number by five times.
Elucidation of policy
Medvedev’s modernisation agenda finds further elaboration in his annual addresses to the nation in the year 2009 and 2010. His modernisation programme emphasises five key directions that include:
■ Energy efficiency and new fuels
■ Medical technologies and pharmaceuticals
■ Nuclear power engineering
■ Information technologies
■ Space and telecommunications
Russia controls 30 per cent global gas and 15 per cent of global oil reserves. At present energy intensity of Russian economy is 2.5 times more than the global average. Under the modernisation strategy government has set a goal to reduce energy intensity of the economy by 40 per cent by 2020. It has been identified that the main potential to achieve this goal lies within the housing sector and budget organisations.
Medical and pharma tech
Notwithstanding certain achievements to its credit, Russia lags behind world leaders in medical technology and pharma production. Russia meets almost 80 per cent of its domestic requirements in medicine through imports. President Medvedev has set a goal to revamp country’s pharma industry through joint ventures and substantially reduce imports from the current 80 per cent to 50 per cent in the foreseeable future. Though no concrete major projects have been identified, the government aims at augmenting production of the most-required medical equipment and pharmaceuticals.
Soviet Union was the first country to develop civilian nuclear power and to construct world’s first nuclear plant. Russia has a strong industrial and scientific base in the area of nuclear technology. However, much needs to be done in order to make full use of technological potential that had been built during Soviet era. Russian government plans to allocate US$ 5.5 billion through a federal programme aimed at development of next generation nuclear energy technology. Nearly US$ 43 billion is earmarked for development of nuclear power and industry development by 2015. The programme seeks to establish secure, cheap and long term nuclear energy supply in Russia as well as increase in Russian exports of nuclear energy and technology abroad.
Russia is a leading nation in software development and the country has a large pool of IT talent. Russian youth dominate international technology competitions like the ACM International Collegiate Programming Contest. Despite this Russia faces a shortage of IT specialists due to high demand. In 2009, Russian companies employed more than one million IT specialists, making up 1.34 per cent of country’s total work force, which is much lower than in other major economies.
The government is making serious efforts to create an information society in Russia for which it has initiated several large projects.
Space and telecom
Russia that launched the first satellite and sent the first cosmonaut to the orbit remains a leading nation in space technology. Currently, Russia is the largest satellite launcher and the only provider of transport for space tourism services. However, much of the potential developed in the sphere needs wide commercialisation. This can be achieved through combination of space technology and telecommunications. Massive projects aimed at space-based navigation, space-based monitoring and search, space-based targeting systems, space-based telecommunications in the broadband access systems, etc. would help achieving the goals set in this sphere and provide tremendous impetus to socio-economic progress.
Super innovation cities
President Medvedev plans to implement his modernisation programme not only through the promotion of scientific research in existing centres but by creating exceptionally world class new mega research centres in the country. Major concrete thrust of his modernisation programme lies in creation of first world class innovation city at Skolkovo, situated in the Moscow suburb. Skolkovo innovation city, for which US$ 4 billion has been earmarked for building its infrastructure alone, is President Medvedev’s dream project. This is planned to be Russia’s silicon valley, which would enjoy a special status with huge tax concessions for 10 years. Special laws are being passed by State Duma in order to ensure its special status and attract foreign specialists as well as investors to the centre. Top class foreign specialists including several Nobel laureates are to be invited to the innovation city. An elite business school where internationally famed specialists would impart training has been set up at the upcoming city. The executive council of the centre consists of global leaders in science and business, representatives of high tech companies from Silicon Valley. Many famous foreign as well as eminent Russian scientists would work here.
Skolkovo’s experience would be used to build innovation centres elsewhere in Russia. Moscow is planning to build 20 such innovation centres across the country. In spite of degradation, Russia’s fundamental science still is one of the best, if not the best in the world. Stalin had built special cities called ‘Sharaskas’ and Brezhnev had built new cities called ‘Naukagrads’ for development of science in the former Soviet Union. Medvedev’s attempt to create these innovation cities now nicknamed as ‘innocities’ looks like a pattern of Soviet science cities. There are economists who are skeptical about President Medvedev’s modernisation programme in Russia. They say this is nothing but repetition of Soviet experience to create special research centres and can hardly be successful in an atmosphere that is completely different from the Soviet one.
By establishing itself as a leading economic power, Russia plans to raise the living standards to the level of developed countries and safeguard its national security. The broad objectives of the strategy are to increase country’s GDP to a level that would ensure US$ 21,000 per capita income by 2020 and to place 60-70 per cent of the population in the category of middle class and reduce the poverty level to that of developed countries. Source: RIA Novosti / Reuters
Prof. Arun Mohanty teaches at School of International Studies, Jawaharlal Nehru University, New Delhi, India. He is the editor-in-chief of the research journal Eurasian Report. He has published 7 books. He specialists in Russian foreign and security policy, Russian economy, Indo-Russian bilateral relations.
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