Russian Economic Reform

www.jeffschubert.com

called "Dictatorial CEOs &
their Lieutenants: Inside the Executive Suites of Napoleon, Stalin, Ataturk, Mussolini, Hitler and Mao."

1992 Article: “Russian Reformers and the IMF Get It Wrong.”

I first visited Russia in October 1991, after also visiting Hungary, Poland and Czechoslovakia. I again visited Poland and Russia in April/May 1992, and wrote the text below. In 1992 I met with Richard Layard, the British economist, who was then an adviser to the Russian Government. He told me how he and a fellow economist (who was Polish) boarded a Moscow-based plane in London with the idea that reform needed to be carried out gradually and with care. However, by the time they arrived in Moscow they had decided that it would be best to implement reform as quickly as possible, including the use of “shock therapy”. Layard told me that they thought there was a “less than 50% chance of this working, but it was worth a try”. Such—“worth a try”—was the low standard of economic advice being offered to Russia at that time.

Text of my May 1992 article:

“The economy of the Russian Federation will almost certainly deteriorate over 1992 and 1993. In particular, industrial production is likely to decline significantly in the state enterprise sector and both unemployment and underemployment will rise. Given the breakdown of much of the system of relationships that made the centrally planned economy, there is probably little that can be done to prevent this fall.

What economic policy makers can do, however, is influence the extent of the fall. Unfortunately, the Government’s pronounced economic policies (as outlined in the ‘Memorandum on the Economic Policy of the Russian Federation’ which was agreed with the IMF in March) are likely to exacerbate the difficulties. If implemented, they may even carry some risk of pushing the economy into an abyss.

The essential flaw in the stated economic policy is that it is one that is designed to appeal to the West in the pursuit of international financial help. Moreover, this appeal to the West is really to that side of Western opinion that believes that markets can solve all problems if only governments would get out of the way. Thankfully, for the West at least, not all Western opinion makers and governments have such an extreme view, let alone act on it.

The Russian Government’s program would be tough and ambitious even by Western standards. In particular, a program of the Government’s type might impede structural reform in a Western country by putting too much emphasis on fighting inflation and not enough on keeping the level of demand and production high enough to ensure that both existing and new enterprises have an incentive and an ability to invest to produce market goods and services.

This is precisely what happened in New Zealand in the late 1980s and the early 1990s. In the early 1980s New Zealand had a reputation as one of the most government controlled economies in the OECD. A comprehensive and effective program of privatization and micro-economic reform (eg by reduction of subsidies) was undertaken and there has been little criticism of this. Unfortunately the heavy emphasis on fighting inflation (which included the use of a very tight monetary policy) led production to stagnate and the level of employment in 1992 to be lower than in 1986.

Yet, for all of its government controls in the early 1980s, New Zealand was a long way from being a Russia. It already had a very large and experienced market sector. But even here, the lessons were clear. Structural reform takes a lot of time and effort and the macro-economic policies must be appropriate.

Closer to home, for Russia, is Poland. After much bravado about the success of its economic policies in 1990, the Polish economy has deteriorated significantly.

A number of experts on the Polish economy now point to three main lessons that should be learnt from the Polish experience. Firstly, too much emphasis should not be placed on reducing inflation and achieving currency convertibility. (The inflation issue lesson is the same as for New Zealand.) Secondly, a very great degree of focus needs to be given to basic issues such as the taxation system, banking system, legal system etc. which allow market economies to function effectively. Thirdly, there needs to be greater recognition that privatization is necessarily a slow and complex process.

If the Government’s ‘Memorandum on the Economic Policy of the Russian Federation’ is to be taken literally, Russia is to repeat many of the Polish (and New Zealand) mistakes.

Firstly, the ‘Memorandum’ says that it is intended to reduce the average monthly level of inflation to between 1% and 3 % in the last quarter of 1992. This is a fairly low and precise target and might be possible given the reversal of excessive price rises in the first part of 1992.

Evaluating the stance of monetary policy is difficult in any country. Monetary policy was not tight enough in 1991 and this is one of the factors contributing to very high inflation. However, there has been a significant risk that the tighter monetary policies in early 1992 in the pursuit of very low inflation would combine with attempts to tighten fiscal policy to crush the economy. This would impede the process of reform and recovery. Not only do existing enterprises need bank credits to restructure, and new enterprises need credits to begin, but budget deficit reduction inspired large decreases in government expenditure may launch a vicious circle of lower expenditure, weaker economic activity, lower tax revenue, increased budget deficit, lower expenditure etc.

There are some signs, however, that the ‘Memorandum’ will not be taken literally in this area. After a very tight monetary stance in the first two months of 1992, there has been as easing of monetary policy and an increase in central bank credits to commercial banks (and thus industry and agriculture). While this has probably increased the risks of higher inflation, it was probably necessary to avoid an almost complete industrial collapse in late 1992.

Secondly, while the ‘Memorandum’ discusses structural changes there is too little emphasis on the need for rapid and vital reforms in the accounting, banking and legal spheres, including anti-monopoly legislation. It is almost as if this very important component of an effective market economic system will rise by itself.

This criticism also applies to an aspect of macroeconomic policy. It would be acceptable to all but the most ideological anti-government Westerners that a larger than suggested Budget deficit (in the memorandum it is suggested that the deficit should be 1% of GDP in the first quarter of 1992, down from over 20% in 1991) would be acceptable if it could be financed by selling ruble denominated government securities into the domestic market. Even recognizing the difficulties, an insufficient amount of attention is being given to developing a market for such securities.

Thirdly, the mooted rapid pace of privatization in the ‘Memorandum’ is unachievable and dangerous. According to the memorandum, the ‘programme for 1992 envisages the privatization of 50 % of enterprises (organizations) in the building materials industry, wholesale trade and public catering, of 60 % of enterprises in the food industry, agriculture and retail trade, as well as 70% of enterprises in the light industry, construction, automobile transport and repair.

The pace of privatization is unachievable because of the lack of an existing market and institutional framework to support it. This pace is dangerous because of the massively disruptive effect that ownership changes and reorganization will have on the already mangled process of production in medium and large enterprises. Small enterprises and some service sectors, of course, may be privatized rapidly with less disruption. The other danger with rapid privatization of larger enterprises is that its lack of control may deliver many state assets into the hands of only a few groups who will then exercise monopoly powers and control over the economy. This appears to be a particular danger in Russia.

Having made these points, it should be emphasized that the Russian Government should not change its basics policy direction.

Rather than changing the direction of reform, the Government should slow the overall pace of policy change and re-orientate towards the building of mechanisms and institutions that will allow a market economy to function. This would reflect a recognition that one economic system (irrespective of how badly it is functioning) cannot be replaced by another “overnight”. In practical terms, this means that the Government would need to continue to play a significant role in determining both production and prices in parts of the economy. Some State plans would still be needed not only to ensure the continued production of many useful goods and services, but to ensure that as massive defense production is wound down the freed resources (both man and material) are put to some productive use. The market itself, will not be able to handle this huge task.

Finally, it is worth putting the view that Russia needs to find its own way of reforming. It may be that countries such as Hungary or those of East Asia provide more appropriate examples of what to do than the very “free-market” approach. It is more likely, however, that they will only provide bits and pieces. A very thoughtful and pragmatic approach is needed, for the risk remains that economic reform policies orientated excessively toward acquiring international financial help may end up doing more harm than good.

Past Articles on the work of each of the 21 Expert Groups can be accessed here:

New Eurasian Age: China’s Silk Road and the EAEU in SCO Space.

Both Russia and China have at various time spoken about coordinating the activities of the Shanghai Cooperation Organization (SCO), the Eurasian Economic Union (EAEU) and the Silk Road Economic Belt (SREB) part of One Belt, One Road (OBOR). What does this mean? And, what are the prospects and possible implications? Is there to be a new age of Eurasian economic – and power – primacy? Or, is it really simply “Noodles and Meatballs in a Breaking Bowl”? ©

This book was initially prepared for publication by RANEPA (Russian Academy of National Economy and Public Administration) when I was Head/Director of the “International Center for Eurasian Research”.  Instead, because it is at times very critical of many Russian policies, it is being published here on (on 14 August) as an open source book.

TABLE of CONTENTS

INTRODUCTION

At their 3-4 July 2017 meeting in Moscow, Vladimir Putin and Xi Jinping respectively spoke about the formation of a “broad Eurasian partnership” and “coordination of the Belt and Road initiative with the Eurasian Economic Union”.

Putin also referred to this issue several times at the 14-15 May 2017 Belt and Road Summit in Beijing. After a meeting with Xi, Putin said that “the integration” of the Eurasian Economic Union (EAEU) and the Silk Road (SREB) “actually implies a common economic space on the continent”, and in his formal speech at the Summit he said that “by adding together the potential of all the integration formats like the EAEU, the ‘One Belt, One Road’ (OBOR), the Shanghai Cooperation Organization (SCO) and the ASEAN, we can build the foundation for a larger Eurasian partnership”.

At the same summit, Kazakhstan’s president Nursultan Nazarbayev said “the idea of creating a single economic space of Greater Eurasia acquired a new meaning. The SREB can advantageously link the platforms of the SCO, the EAEU and the European Union into a single regional prosperity area”.

What does all this mean? And, what are the prospects and possible implications?

Is there to be a new age of Eurasian economic and power primacy? Or, is it really “Noodles and Meatballs in a Breaking Bowl”? ©

The Silk Road Economic Belt (SREB) part of the Chinese “One Belt, One Road” (OBOR) or “Belt and Road” initiative announced in 2013 has focused increased attention on central Eurasia.

The central Eurasian geographical area is not easy to define, but its importance to the world is immense. Central Eurasia undoubtedly includes the former USSR countries of Central Asia (Kazakhstan, Uzbekistan, Turkmenistan, Tajikistan and Kyrgyzstan) and Afghanistan, but more crucially it also includes parts of – or is of great importance to – their much bigger neighbors Russia, China, India and Pakistan. Central Eurasia is thus a mix of countries and parts of countries, ranging from very small to very large, whose relationships with each other do not always have a happy history.

All these countries have both economic and security issue at stake in central Eurasian developments, and it is not always easy or even possible to disentangle these. This book mainly concentrates on the economic issues and does so by way of examining the most important international institutional arrangements and integration ideas impacting on the central Eurasian geographical space. These are presently dominated by Russia and China, but some changes are underway.

The main institutional arrangements are the Russian-led Eurasian Economic Union (EAEU) and the Shanghai Cooperation Organization (SCO). The main idea is China’s Silk Road Economic Belt (SREB).

The EAEU consists of Armenia, Belarus, Russia, Kazakhstan and Kyrgyzstan. The first two countries are not considered part of central Eurasia, and only make a brief appearance in this book. The present members of the SCO are China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, and (since June 2017) India and Pakistan.

But, exactly how should the SREB and the EAEU be “coordinated” to create a “Eurasian partnership”? Or, how should SREB, the EAEU and the SCO be “linked” to create “Greater Eurasia”?

In December 2015, Chinese Premier Li Keqiang and Russian Prime Minister Dmitry Medvedev signed a “Joint Communique on the results of the 20th regular meeting between the heads of the Russian and Chinese governments” that clearly states “the parties hold that the SCO is the most effective forum for aligning the construction of the SREB with the building of the EAEU”.

In November 2016, Li Xin of the Shanghai Institutes for International Studies (SIIS) wrote a report suggesting that “Chinese scholars” believe that “the SCO should play a central role as a platform for aligning the SREB and the EAEU”.

However, in reality there are many actual and potential issues that stand in the ways of a successful linking of the EAEU and the SREB – and particularly with the involvement of the SCO.

These include the actual uncertain futures of the EAEU and SCO themselves. While Russia would like to see the EAEU expand, particularly with the addition of Tajikistan, the EAEU is having trouble developing a positive internal integration strategy. New SCO members Pakistan and India will undoubtedly bring their own views about what the SCO should and should not be doing.

An Russian International Affairs Council (RIAC) report says thatRussia has not ruled out the possibility that the future of regional security in the area of the SCO’s responsibility could be determined by a strategic balance of the ‘division of roles’ between Russia and China within this organization, with Russia primarily being in charge of security and China being in charge of economic development, trade and mutual investment.”  

Such a division of labor would seem to ultimately put China at the mercy of Russian security interests, and so it would be less keen than Russia on such an allocation of roles. Moreover, not all other members of the EAEU or the SCO are likely to be enamored with such an arrangement.

Apart from the very Chinese Silk Road Fund (SRF), the nominally international Asian Infrastructure Investment Bank (AIIB) is relevant because of its Chinese foundations and focus on issues that will aim to facilitate successful implementation of SREB pronouncements.

This book starts by looking at the general Russia-China relationship because this will largely determine how all other events unfold. Secondly, Central Asia itself is considered with an emphasis on those internal issues which may ultimately impact on the EAEU, the SREB and the SCO. Thirdly, the relationship between Russia and the countries of Central Asia is examined, with a particular focus on the EAEU. Fourthly, the relationship between China and Central Asia is considered. Fifthly, the SCO is considered. The book then moves on to describe and consider the SREB, the SRF and the AIIB as they are ultimately Chinese creatures.

Finally, it considers the ways in which the EAEU, the SCO and the parts of the SREB associated with these countries can work together, and the actual prospects for this. It also concludes with a view about future developments in this part of the world.

Part A:   RUSSIA & CHINA

1.    Political Relationship

2.    Economic Relationship

3.    Influence of Domestic Policies on the Relationship

Part B:   CENTRAL ASIA

1.    Introduction

2.    Domestic and International Economic Data

3.    Relationship between Central Asian Countries

4.    Astana International Financial Center

Part C:  RUSSIA, CENTRAL ASIA & the EAEU

1.    Introduction

2.    Eurasian Economic Union (EAEU)

3.    Russia and Individual Countries of Central Asia

4.    The Way Forward?

Part D:   CHINA & CENTRAL ASIA

1.    Introduction and Security Issues

2.    Economic Issues

3.    Individual Countries

Part E:  SHANGHAI COOPERATION ORGANIZATION (SCO)

1.    What is the SCO?

2.    The Way Forward?

3.  The Effect of New Members (India and Pakistan)

Part F:  “BELT & ROAD” INITIATIVE.

1.    What is the Silk Road Economic Belt (SREB)?

(a)   Reasons for the “Initiative”

(b)   Official Chinese view of the “Initiative”

(c)    Role of Russia, EAEU, CA countries and SCO in official view

(d)   The special case of the China-Pakistan Economic Corridor (CPEC)

2.   Implementation of the SREB

(a)   Practical implementation of SREB

(b)  Financing the SREB (including Silk Road Fund)

3.    Belt and Road “Associates”

(a)   Asian Infrastructure Investment Bank (AIIB)

(a)   BRICS bank

Part G:  PULLING TOGETHER IN THE FUTURE?

1.  Introduction

2.   The Russian View

3.    The Chinese View

4.    Central Asian View

5.    Some Other Issues

(a)  The Thucydides Trap

(b)  EAEU and AIIB: “hard power” and “soft power”!

CONCLUSION

There have been, and will continue to be, various attempts to link the SREB, the EAEU, and the SCO. The analysis laid out in this book suggests that such attempts will have little success. There are a number of reasons.

The first is that the SREB, the EAEU, and the SCO are very different things in any institutional or organization sense. Moreover, the EAEU and the SCO are each close to the peak of their influence and relevance.

The joint report by analysts from the Chongyang Institute for Financial Studies, Valdai Discussion Club, and the Kazakhstan Council of International Relations released in early July 2017 might have been expected to result in a clearer understanding of many of the issues that have already been discussed in this text – but it does not!

Paradoxically, the failure of such a recent report with such multi-lateral input to finally bring some clarity to the SREB and related issues is the report’s strength because it highlights the confused nature of much of the intellectual debate and of many official policies. On the positive side, the report is not afraid to point the finger at some very specific problems and at those who are responsible for them.

The report contains a very forthright statement which indicates the probable reason that it is so weak on coherent analysis: “The current study was accompanied by a heated debate between Russian, Chinese, and Kazakhstani experts, which is reflected in the report.” As discussed throughout this text, the countries of Russia, China and Kazakhstan share little commonality in thinking on many important issues.

The report correctly says that “the ‘Belt and Road’ initiative in itself remains very abstract and subject to ambiguous interpretation: even Chinese experts often hold to opposite views on its essence.”

The report then goes on to say that the Silk Road Fund “is almost the only institutional embodiment of the initiative.” While partly true, this very statement in itself tells us something about the confused nature of discussion about the SREB because, as already discussed in this text, most of the activities of the Silk Road Fund have little to do with the professed “connectivity” objectives of the Belt and Road.

Despite various “philosophical” aspects in the minds of some people, this author regards the SREB as little more than an all-encompassing umbrella-type slogan to give credence and force to central Eurasian projects aimed at increasing China’s economic and political power and security.

Domestic aspects of this include boosting the economic prospects of Xinjiang and other western provinces of China and possibly contributing to reducing over-capacity in various heavy industry sectors. Externally, China wants a secure western rear to its eastern flank which borders on various international contested seas and exposed trade routes. The SREB, whether through Central Asian countries or Pakistan, gives China alternative routes for imports of energy and, to a lesser extent, exports of manufactured goods and industrial capacity.

China now prefers that the original “One Belt, One Road” terminology be replaced with “Belt and Road” because of its widening geographical and political ambitions. The SREB terminology may last longer because of the historical connections that it implies, but at some stage its individual projects will be seen simply as those that any country in China’s position would pursue. To put it another way, there is nothing particularly surprising about the SREB for a country in China’s geographical, economic and political position.

The EAEU is being held together by Russian will-power and may well survive in its present imperfect form for some time. Even if it can attract one or two new members (such as Tajikistan) during the next few years, it will eventually fade because of its own internal contradictions and because its Central Asian country members will increasingly see their future connected to closer relations with China.

The SCO at one stage could have possibly been the basis of greater economic cooperation in central Eurasia, but Russia has been against this – preferring to try to develop the EAEU as the main Eurasian supranational organization working as a “partner” with China. In the view of this author, the indications are that China’s growing confidence in its Belt and Road “initiative” is reducing its interest in the SCO as a vehicle for economic issues.

The succession of India and Pakistan to the SCO will greatly increase its diversity of thinking and interests and this means that it is likely to struggle to avoid becoming little more than a leader’s discussion club.

Given all of the above, it is extremely difficult to see a process in which the SREB and the EAEU are linked in any substantial way. Moreover – in the view of this author – it would be almost impossible for this to occur with the involvement of the SCO.

Yet, in another indication of confused thinking on such issues, the joint report of the Chongyang Institute for Financial Studies, Valdai Discussion Club, and the Kazakhstan Council of International Relations pushes the idea of an EAEU SCO free trade area!

In essence, the SREB and EAEU in the SCO geographical area appear similar to a breaking bowl (the SCO) containing noodles (the strung-out communication routes of the SREB) and a meatball (the flung-together countries of the EAEU which are not a solid mass). All this makes for a very messy meal!

But even a messy meal is a meal, and in the absence of anything else might be consumed if there is sufficient hunger to do so. Which brings us to the second reason why attempts to link the SREB, the EAEU, and the SCO will not be successful. There is simply no agreed appetite among the counties of central Eurasia to change the above trends.

Russia and China are the main players in the context of this book, and will remain so for many years because the other possible main player, India, has neither the Russian historical involvement nor the Chinese financial power to force any significant change in the outlook.

However, the Russia-China relationship is not deep for a variety of reasons, and shows little sign of becoming so. Both countries have a natural inclination – despite a temporary mutual interest in “communism” in the middle of the last century – to look in opposite directions: Russia to the “West” in a westerly direction; China to the “West” in an easterly direction. Over the last two decades or so, the attractions and advantages of the English language and largely “Western” promoted international economic system have benefited both countries, although China has been much more adept than Russia at taking advantage of this.

This author has previously argued that a free trade agreement between China and Russia (or the EAEU) is fundamentally difficult to reach because Russia views any agreement in “quite narrow political and security terms, and its economic agenda is orientated toward new industrial development rather than trade development”. China, on the other hand, “at the current stage, is most interested in enhancing economic development and trade across the Central Asian and wider Eurasian regions”.

As for Greater Eurasia, the above mentioned joint report by the Chongyang Institute for Financial Studies, Valdai Discussion Club, and The Kazakhstan Council of International Relations, describes it as “nothing else than an attempt to grope for new sources of economic growth. Russia sees them in its potential entry to Asian markets and building up trade with EAEU nations, in luring investments in infrastructure projects in Siberia and Far East. China prefers large-scale investments in external infrastructure and gaining access to new natural resources.”

Once again this report is paradoxically useful because this statement is at least partly wrong!

It suggests that after so much discussion there is a broad limited understanding about the Greater Eurasia idea within Eurasia itself. In reality, Vladimir Putin and many influential Russian analysts mainly regard Greater Eurasia as a geo-political concept to reduce the power of the US and build a multi-polar world. The economic growth aspects are secondary.

Putting these trade, security and geo-political factors together allows us to see that the basic reasons for the EAEU and the Belt and Road are different. The EAEU is based on Russia’s conviction that globalization would gradually outlive its usefulness and the perceived opportunity for it to form a center of economic and political power in central Eurasia. China, however, launched its Belt and Road as a way of taking further advantage of globalization and in the process boosting its own security.

The 3-4 July 2017 meeting between Presidents Putin and Xi in Moscow seems to have resulted in little more than motherhood-type statements. Putin said: “We held an in-depth exchange of opinions on joining the activity of the EAEU with the Chinese initiative of the SREB. This is a highly promising direction, putting collective effort in line with our idea to form a broad Eurasian partnership.” Xi Jinping said: “We are developing our coordination of the One Belt, One Road initiative and the EAEU” and work to “promote development and prosperity on the Eurasian continent.”

The Russia-China relationship as it now exists is mainly the creature of the relationship between Presidents Vladimir Putin and Xi Jinping and whatever difficulties both countries are having in their external security environments.

Baring health issues, it would seem that Putin and Xi will remain the most powerful figures in their countries into the early 2020s. Both see themselves as historical figures leading the rejuvenation of their countries. Both want to use international economic relations to boost the power and prestige of their countries, although the way that they go about this is not the same.

For a variety of reasons Xi is likely to be more successful in the international arena than Putin. If nothing else, demographics and the catch-up aspect of economic development that benefits China make this almost inevitable. But, it is also clearly the case that China is showing a much defter hand on the international public relations (PR) front and acts to avoid unnecessary conflict, whereas Russia seems to bask in such conflict.

While domestic policies have been little more than touched upon in this book, it is not clear that either Xi or Putin will ultimately put economic effectiveness ahead of domestic political goals. This will spill-over into international relations and will slow the development of closer economic ties between Russia and China because non-political business decision makers will much prefer to deal with countries where business is less political.

While much of the future of the central Eurasian area will be determined by the relationship between Putin and Xi, there is also ultimately a third player, in the form of the child-like Donald Trump and the self-important policies of the USA. If Putin and Xi are attracted to each other, it is the US that has pushed them into their embrace.

While Crimea and the South China Sea remain significant issues for US policy makers, Putin and Xi will find solace in each other. If the US removed such pressure, the present leader-centric Russia-China relationship would quickly show sign of fatigue due to the absence of support from more fundamental deep ties between the two countries and due to their competition in the central Eurasian region. The so-called “Thucydides Trap” might then show prominence as Russia clings to the idea that it should be the main security provider in the region and China begins to get nervous about this.

In the meantime, China seems in no hurry to change present circumstances and trends in central Eurasia because it has the upper hand, and will continue to pay lip-service to ideas of greater cooperation with Russia in order to prevent it playing a SREB spoiling role. Russia will continue to try to figure out what it can do to hold its position in central Eurasia and – unrealistically – engage in EAEU and Greater Eurasia dreams about how it can enhance it!

In the view of this author, significant cooperation between the EAEU, the SREB and the SCO – or even between any two of these – is highly unlikely. The idea of Greater Eurasia is a fantasy!

READ THE WHOLE BOOK HERE:

http://russianeconomicreform.ru/wp-content/uploads/2017/08/New-Eurasian-Age-with-Chinese-Silk-Road-and-EAEU-in-SCO-Space-Update.pdf

Published on April 05 2017

National Technology Initiative – “Waiting for High-Tech Tooth-Fairy” !
5

Overview (of full paper)

This paper argues that Russia’s National Technology Initiative (NTI), which aims to boost the country’s future high-tech production and exports, is likely to achieve little and should be severely modified or even abolished. The NTI concept of focusing on selected “new markets” that are expected to exist in 2035 is misguided. Its execution process, particularly the use of the Rapid Foresight methodology, results in recommendations that are banal or vague.

If Russia wants to make serious advances in future high-tech “production”, it needs a technology policy that puts more emphasis on promoting Russian “usage” of presently available technologies. Much technological progress actually flows from the initiatives of “users” of present technologies and the feed-back they give to “producers”.

The threats to Russia from increased multi-country economic/trading blocs/alliances and inaccessible “global value added chains”, used to provide justification for the NTI, are overstated.

Apart from education – which is the only redeeming feature of the NTI – one of the best ways for the Russian government to improve Russia as a high-tech “producer” is to push structural economic reform because increasing competitive pressures encourage organizations to become better “users” of high-tech.

If Russia does not become a better “user” of high-tech, there is a risk that other countries will get greater benefits than Russia from any Russian developed high-tech products. If such Russian high-tech products were actually to be developed using government budgetary funds under the NTI (or any other government program), this would also mean that Russian tax-payers were subsidizing high-tech “users” in other countries.

Irrespective of government policy actions (including the NTI), the rapid pace of technology change and falling technology prices (relative to other prices) means that, at the country level, “users” can easily receive greater economic benefits than “producers” because of improvements in their “terms of trade”.

Reasons for this paper

This paper had its genesis during the author’s participation in the 2016 “Foresight Fleet” (four boats) journey down the Volga River in May. Jointly organized by the “Agency for Strategic Initiatives” (ASI) and the “Russian Venture Company” (RVC), it aimed to consider various aspects of the “National Technology Initiative” (NTI) which is billed as “a program for creation of fundamentally new markets and the creation of conditions for global technological leadership of Russia by 2035”. I found it to be (at least on my boat, the “Global Markets / World”) an intellectually stifling event. The discussion groups on pre-designated topics supposedly produced considered group recommendations. But, they in fact, operated to produce forced recommendations as the generation of output quantity was prioritized over output quality. Talking to the few other foreigners (and quite a few Russians) on my boat, I found considerable agreement with my views. On 21 July, I attended a NTI forum at VDNH.

Conclusion (of full paper)

While the NTI might at first seem an attractive idea, it quickly losses its luster when it is considered in detail. The suggested measures to allow Russia to escape the “resources curse” and diversify its output of goods and services basically come down to using a dubious forecasting methodology to identify future “new technology order” or high-tech “national champions” despite the lack of evidence of advantages, and despite the risks of failure in an era of rapid technological change.

Import-substitution (even if limited to “part of key technologies”) may boost some industries for a time, but the great risk is that lack of ongoing competitive pressure will impede broader “digitization” in the economy and the use of high-tech.

The Rapid Foresight methodology being used to identify trends and new markets is a very simplified version of more “classical” foresight methods – based on the Delphi approach — which themselves are of dubious utility in that they tend toward exposing the obvious. Even if a form of foresight methodology is to be used, the Foresight Fleet would seem to be an unnecessary expense that produces banality, repetitiveness and vagueness.

The “national security” justification for the NTI cannot and should not be easily dismissed. In the view of this author, there is little doubt that proposed groupings such as the Trans-Pacific Partnership (TPP) and the Transatlantic Investment Partnership (TIIP) are motivated by a combination of economic and political aims.US Secretary of State, John Kerry, makes no secret of this: “I have worked from day one to emphasize that foreign policy is economic policy and economic policy is foreign policy. Without a doubt, these trade agreements are at the center of defending our strategic interests, deepening our diplomatic relationships, strengthening our national security, and reinforcing our leadership across the globe. And the importance, my friends, cannot be overstated.” “Even as we seek to complete TTIP and strengthen our bonds across one ocean, we know that our future prosperity and security will also rest on America’s role as a Pacific power. Central to that effort is the adoption of TPP.” (Kerry even related the TPP to events in the South China Sea.) While the TIIP and the TPP may not proceed given the election of Donald Trump as the next US president, the basic motivations described by Kerry will not go away.

However, the election of Trump and the recent Brexit vote in the UK occurred against the great majority of domestic and international corporate opinion, and suggest that some of the NTI arguments about economic/political blocs/alliances with closed “global chains creating additional value” are significantly overstated. Moreover, there is little evidence that China has a particular wish to form or participate in such closed blocs/alliances. China’s “One Belt One Road” (OBOR) initiative is virtually the anti-thesis of this.

The one redeeming feature of the NTI is the newfound emphasis on education. This should assist Russia to become a better “user” of existing and future technologies. This would also help achieve some of the NTI “new technology order” aims by allowing Russian producers to more readily take advantage of the feedback that “users” give to “producers. Better “usage” would also allow greater advantage to be taken of existing possible network effects.

Apart from education, one of the best ways for the Russian government to improve Russia as a high-tech “producer” is to push structural economic reform – because rising competitive pressures encourage organizations to become better “users” of existing technology. The “resources curse” is not always such a bad thing, as Australia has demonstrated by becoming a good high-tech “user” rather than a “producer”.

The rapid pace of technology change and falling technology prices means that “users” can easily receive greater economic benefits than “producers” because of improvements in their “terms of trade”. This is a particular possibility when the “producers” are a very small part of the economy in one country, but the “users” are a very large segment of an economy in another country.

If Russian high-tech products were actually to be developed using government budgetary funds under the NTI (or any other government program), this would also mean that Russian tax-payers were subsidizing high-tech “users” in other countries.

Russia should radically change the NTI or abandon it. At the very least, it should not proceed with any future Foresight Fleets and abandon Rapid Foresight as a policy tool.


English language pdf version of full document can be accessed here: http://russianeconomicreform.ru/wp-content/uploads/2017/01/NTI-ENGLISH-VERSION.pdf

Russian language pdf version of full document can be accessed here: http://russianeconomicreform.ru/wp-content/uploads/2017/01/NTI-RUSSIAN-VERSION.pdf

Published on June 30 2016

John Besemeres’ reckless ignorance of Russia

John Besemeres’ article “Ukraine conflict exposes Western weakness on Russia” published on the Lowy Institute for International Policy” internet site (10 April) shows a fundamental and reckless ignorance about Russia.

See: http://www.lowyinterpreter.org

Besemeres writes that Russia “claims to be afraid of being encircled by hostile states, and to have been humiliated by the West’s supposedly triumphalist expansion into its backyard (its ‘sphere of privileged interests’). This is largely a propaganda myth; the Western expansion was a bit reluctant and apologetic, caused above all by the desperation of former Soviet vassals for protection from any Russian recidivism. Russia’s volatile opinion polls suggest, however, that after years of intense propaganda most of Putin’s subjects have come to believe the hostile encirclement narrative. Some who spend a lot of time talking to Russian officials and propagandists start to repeat these claims of encirclement and humiliation, and present them as their own superior insight into the Russian mind. They would do better to reflect on them more critically.”

Besemeres is right that “propaganda” has played a role in the “hostile encirclement narrative”, however that does not mean that there is not some basis for it nor that the “some” that he mentions have no insight into “the Russian mind”.

During the 7 years or so that I have spent in Russia since I first visited Moscow in 1991, I have often been reminded by quite ordinary people (not “Russian officials and propagandists”) about the Nazi invasion and, even occasionally about Napoleon.

The “Russian mind” clearly has this feeling of “never again” etched into it.

For example, on 25 February 2008, I wrote that that about 6 months earlier I was in a park in Pushkin on the outskirts of St. Petersburg when a 10-year old girl pointed out to me that “this is where the Germans were beaten”. Several days later, in the evening, I hailed down a private car to take me to Pushkin. The driver, a lawyer looking for a little extra money by acting as a taxi for me, volunteered the same point about the Germans.

See: http://www.jeffschubert.com/index.php?id=55

I also covered some such issues in a 5 March 2001 (ie 14 years ago, Besemeres should note!) presentation to the Australian Institute of International Affairs (Sydney Branch) on the subject of “Missile Defence”.

See: http://www.jeffschubert.com/index.php?id=57

It should be remembered that as a real event which affected a nation, the Nazi invasion is much more significant than Gallipoli in 1915 or the 9/11 attacks in the US; but look at how the ANZAC story has come to have meaning in Australia and the US has responded around the world to the terrorist attacks. The mind is not always totally logical and devoid of feelings.

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Published on April 12 2015

Boris Nemtsov, the Russian economy, and “Western” hypocrisy

Today, I will attended (as an observer because as a foreigner, who does not have to live in this country, I feel that I can comment on Russia but I must let Russians run their own affairs) the mourning procession for Boris Nemtsov in Moscow. In some ways the murder of Nemtsov is the most significant event in Moscow since Boris Yeltsin used tanks to blast the White House in October 1993 (I was also in Moscow at that time).

Of course, the murder of one man (even a man of Nemstov’s stature) does not compare to the hundreds of people killed in 1993.

What makes the Nemtsov murder so significant is that it has occurred against the present back-ground of the events in the Ukraine and strong anti-Putin sentiment in most “Western” countries, and is the latest in a series of such killings of Putin critics — including Anna Politkovskaya (an investigative journalist, was shot dead outside her Moscow apartment on Putin’s birthday in 2006) and Alexander Litvinenko (by radiation poisoning in London, also in 2006).

Putin has already totally lost the trust of “Western” political leaders. The additional negative feelings resulting from the Nemtsov murder will mean that even if the situation in the Ukraine improves it will be very difficult for “Western” sanctions to be eased. Positive sentiment toward Russia will be zero; indeed, any sentiment will be negative!

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Published on March 01 2015

Litvinenko, Borodin and Pugachev in London, and the Yukos $US50bn

In the week beginning 1 February, I emailed a survey to 1,750 of my Russian connections on LinkedIn (about 1,500 are “finance executives”). It should be borne-in-mind that these people will be much more “Western”-orientated than the general Russian population – a fact attested to by the extensive use of English in their profiles. You can see the profiles of the 1,750 here:

https://www.linkedin.com/profile/view?id=330346389

I also emailed the same survey to about 200 academics and journalists living outside Russia, but whom I knew had an interest in Russian issues.

The questions covered the Alexander Litvinenko murder Inquiry, the situations of ex-Russian bankers Andrei Borodin and Sergei Pugachev, and the Hague-based Permanent Court of Arbitration award of $US50bn to former Yukos shareholders.

Most of the questions asked could be answered within a “yes”, “no” or “don’t know” format. Not surprisingly, given the politically-charged nature of the issues, both Russians and those living outside Russia gave a hefty dose of “don’t know” to many of the questions. So, I will focus first on those questions where there were the fewest of such answers – and, I will provide some of my own views!

I asked whether former Russian bankers Andrei Borodin (formerly Bank of Moscow) and Sergei Pugachev (formerly of Mezhprombank), who now live in the UK, were criminals guilty of fraud. In Borodin’s case, 46% of Russian respondents said he was guilty, 11% said no, and 37% answered “don’t know”. In Pugachev’s case the corresponding numbers were 46%, 8% and 38%.

I do not claim to know a great deal about the Pugachev case, but in my view Borodin in clearly a crook – so, I was surprised that the “yes” vote was not much higher. But then, to my additional surprise, not one of the non-Russian respondent answered “yes”!

I drew two conclusions from the Borodin results. Firstly, financially savvy Russians themselves often do not know whom to believe – thus the high proportion of “don’t know” answers – because of a considerable distrust of the government, and that this can more generally distort good thinking. Secondly, many non-Russians either know very little about Russian financial issues, or they have a bias against the Russian authorities – indeed, how else could I explain the fact that Borodin has been granted political asylum in the UK!!

Ever since I first visited Russia in 1991, I have felt that the British (including most of its mass media) are generally quite unsophisticated when considering Russian issues – and the same goes for British economists (see left hand column entitled 1992 Article: “Russian Reformers and the IMF Get It Wrong.”).

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Published on February 08 2015

Moscow as an International Financial Center (IFC)
10

This article initially appeared in the December 2014 issue of “Baltic Rim Economies” published by Pan-European Institute.

In 2010 the Russian government launched the Moscow International Financial Centre (MIFC) project and sought international assistance, including from TheCityUK (the self-described “representative voice of Financial Services in the UK”). A Memorandum of Understanding between the MIFC Taskforce, TheCityUK and Vnesheconombank was signed in Moscow in 2011 in the presence of President Dmitri Medvedev and Prime Minister David Cameron.

Subsequently a number of reports were produced, mainly by TheCityUK and the IBRD.

Right from the beginning there were fundamental delusions. An early 2011 survey of “260 participants from leading Russian and foreign entities active in the Russian financial market” reported such views as Moscow as a “regional financial centre for CIS”, and “Moscow is where East meets West. It is a blend of different cultures and nationalities. It will be easy for everyone to come to do business”.

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Published on December 25 2014

Ukraine’s Poroshenko is going to Australia: WHY?
21

Ukraine President Petro Poroshenko will speak in Sydney on 12 December at a Lowy Institute function:

http://www.lowyinstitute.org/events/event-address-his-excellency-mr-petro-poroshenko-president-ukraine

Why is he doing this?  And why it is a bad idea!

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Published on December 09 2014

What do Chinese trade/investment people think about Russia (and vice-versa)?
20

During the first few weeks of November, I conducted two surveys regarding the attitudes of Chinese and Russians to closer economic and financial relations between their two countries. The surveys were conducted in Shanghai and Moscow, and showed an overwhelming desire — over 90% of respondents in both cases – for closer relations between China and Russia.

The Moscow and Shanghai responses to other questions in the surveys showed more divergence, and in particular seemed to point to the effect of the events in the Ukraine and of US led sanctions on Moscow attitudes.

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Published on November 25 2014

Moscow, London and Shanghai “money” !
10

In the first week of November I conducted an emailed survey of Russian (mainly Moscow) “educated middle class” attitudes to (mainly) financial issues in Russia and attitudes to Russia’s financial relations with China, the US, Europe, and the UK. Most of the over 1,000 people to whom I sent the survey were my LinkedIn “connections”. (I cast the net quite wide even though I suspected that many of my “connections” would have little interest in such financial matters.)

I wanted to get “financial expert” Russian feedback so, for the purposes of this article,  I subsequently pruned the data to remove all non-Russian respondents and also remove any who did not indicate that “about 50% or more” of their work time involved “thinking about financial issues”.

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Published on November 09 2014

Russia and China: what sort of “relationship”?
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In June I spent some time in Moscow talking to Russian banks about financial developments in China,  where I am conducting research on “Opportunities and challenges in developing an international financial centre (IFC): Learnings relevant to Shanghai” for the Shanghai Institute of International Financial Centre (SIIFC), Shanghai University of Finance and Economics.

I decided to go to Moscow for several reasons.

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Published on September 06 2014