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.
This is online draft of my book on Russia’s economic future. It is posted in the 6 book parts linked below. I will update it sometimes as events unfold.
Since February 2022 Russia has increasingly turned inward in political, social and economic terms. At the same time, Russia’s top leaders – and some important supporters – seem to think that Russians have some unique characteristics and talents that will allow an extreme focus on self to thrive in a complex economic and technological world; and also both influence and attract others. While this may appear to be so in the short-term because of Russia’s generally successful efforts at macroeconomic control, rich natural resources, internal propaganda and implicit threats to use nuclear weapons, this thinking is delusional. The ideological corruption of the education system will reinforce the misguided notion of technological sovereignty; and social and economic life will in the medium-long term move toward stagnation. Moreover, Russia is a country with a declining population which is increasingly ignorant of the wider world, a deteriorating culture, and no solid friends. Little will change while Putin and his thinking hold sway in Russia and present an antagonistic face to the world, and most Ukraine related foreign sanctions remain in place. Russia’s economic and political future is not particularly rosy, but neither is it anything like the 1990’s because of a generally competent bureaucracy and little prospect of regional separation.
Since February 2022 Russia has increasingly turned inward in political, social and economic terms. At the same time, Russia’s top leaders – and some important supporters – seem to think that Russians have some unique characteristics and talents that will allow an extreme focus on self to thrive in a complex economic and technological world; and also both influence and attract others. While this may appear to be so in the short-term because of Russia’s generally successful efforts at macroeconomic control, rich natural resources, internal propaganda and implicit threats to use nuclear weapons, this thinking is delusional. The ideological corruption of the education system will reinforce the misguided notion of technological sovereignty; and social and economic life will in the medium-long term move toward stagnation. Moreover, Russia is a country with a declining population which is increasingly ignorant of the wider world, a deteriorating culture, and no solid friends. Little will change while Putin and his thinking hold sway in Russia and present an antagonistic face to the world, and most Ukraine related foreign sanctions remain in place. Russia’s economic and political future is not particularly rosy, but neither is it anything like the 1990’s because of a generally competent bureaucracy and little prospect of regional separation.
While the main focus of this book is on the future medium to long-term performance of the Russian economy, the future is significantly dependent on unfolding political-security events in Ukraine. These are so important that I will firstly set out my views about how this situation is likely to proceed in the next few years so that I can then concentrate this text on economic issues. Having said that, in the text I do not shy away from offering a political and social perspectives. As well as basic facts, I often offer judgements on what is and what should be.
It is almost impossible to imagine Russia agreeing to return Crimea to Ukraine – irrespective of how the war proceeds and irrespective of who is in power in Moscow – because of his historical and strategic significance (particularly naval base in Sebastopol) and the wishes of the local population. It maybe in Ukraine’s interests to let Russia keep parts of Donetsk and Luhansk in order to avoid having a hostile Russian-orientated population within its borders. Anna Aruntunyan writes that “according to a poll conducted in April 2014 by the Kiev International Institute of Sociology, over 70% of respondents in the Donetsk and Luhansk oblasts of Ukraine – where support for Russia was far less consolidated than it was in Crimea – considered the government in Kiev illegitimate.”[1] There is little reason to believe that these numbers have since become more favorable for Ukraine.
As for the other annexed regions of Zaporozhye and Kherson, they are not vital to Russia’s interests, but they may be vital determinants of whether or not Putin stays in power. If Russia can retain these, Putin will be able to spin this as a victory for the security of Russia. If these regions are returned – in whatever way – to Ukraine, Putin is unlikely remain in power because these are the only tangible things that his very costly “special military operation” has achieved.
It is very unlikely that relations between Russia and “Western” countries can return to anything like pre-February 2022 conditions while Putin is in power (either as president or behind the scenes). The majority of foreign sanctions will not be lifted, and certainly not anything related to advanced technology.
Given – at the time of writing – the unlikelihood that the Ukraine offensive will take back the regions of Zaporozhye and Kherson, I have proceeded in this text to imagine that Putin remains in power and that the majority of foreign sanctions remain in place for a number of years.
But, there are also other factors that will have a very significant influence on Russia’s economic medium-longer term economic future – and these are the focus of this text!
Part A of this book offers an explanation of the official political and administrative / institutional system of the Russian “federation”. The basics of the system – as laid out in the Russian constitution – will not easily be changed and thus provide some guidance on the likely future course of Russia, although I are very conscious that the system has increasingly been distorted and abused ever since it was first introduced following the collapse of the USSR. A basic tenet of the discussion is that bureaucratic systems are difficult to fundamentally change and that both the size and structure of Russia makes it doubly so. Even harder to change is the almost inevitable decline in Russia’s population. I also consider the Russian budgetary and financial systems and basic physical infrastructure.
In Part B of this book, I look at Putin’s economic policies when he first came to power – and when he was more open to ideas other than his own. These included commissioning research of an extensive “Strategy2020” report on Russia’s future in the economic and social spheres. Contrary to some commentary there is much more to Russia than oil and gas fields and corrupt oligarchs, and Putin was keen to develop a large service sector with a significant SME participation.
In Part C, I look at the latter Putin approach to the economy and related issues. For convenience, I call this the post-2014 invasion of Crimea period, although the transformation in Putin’s thinking and approach to issues began a number of years before this. There is now a very significant push to increase Russia’s “economic and technological sovereignty”. I judge that this push will remain in place for a number of years irrespective of the exact events in Ukraine and irrespective of who holds power at the upper levels of the Russian government; particularly as the technology competition between the USA and China – focused on computer chips – will provide some justification to Russian policy makers for their “sovereignty” aspirations. But, at some stage a large degree of failure will need to be admitted with a subsequent change in course. The nationalist ideological corruption of the education system will make such a change in course more difficult than it should be.
In Part D, I look at Russia’s international economic situation over which its economic policy makers have less control. I start with a geographic – ie country / region – focus because it is most conducive to identifying international political factors that may affect Russia’s economic future. I start by looking at the Eurasian Economic Union (EAEU) and Central Asia before moving on to consider the remainder of Eurasia — particularly China — and then some aspects of the wider world. At the end of this part of the book I attempt to look at Russia’s international economic situation from a product perspective with a particular focus on raw material, energy, agricultural exports and major existing technologies (nuclear power and weapons). Here I also consider issues associated with “climate change” and the Arctic.
Finally, I write a Conclusion.
Part A. Political and Administrative System
Population and Labor Force Issues
Russia does not have favorable demographic trends.[1] Its population has been falling since 2018 and there is little chance of a significant change. According to research by Moscow’s Higher School of Economics (HSE), Russia’s population was 146 million people at the start of 2023 [2][3][4], although this number did not take account of the effects of the war in Ukraine which has led to many deaths and an exodus of many younger people who wanted to avoid military service. HSE modelled several different population scenarios based on likely life expectancy, fertility, and migration rates.
The medium, and most realistic, scenario shows Russia’s population falling to 131 million by the mid-2070s with a slight increase to 137 million people by the end century.
According to the HSE low pessimistic scenario, the population will constantly decline and in 2100 will not exceed 84 million people — and depending on the level of migration could even fall to 67 million. The high optimistic scenario was that Russia’s population could be maintained at 146 million by 2100, but this scenario used the highest likely life expectancy, fertility, and migration rates.
Of the three scenarios, migration is the factor that could vary the most. From 1992-2019 inward migration was 9.6 million.
According to the UN’s latest projection, Russia’s population will be 112 million by 2100 under average circumstances.[5]
The generations born in the 1990s and 2000s, when Russia’s birth rate was at its lowest, are now entering the labor market. This will exacerbate the existing crisis due to a lack of young workers. Meanwhile, the post-war generations of the 1950s and 60s are aging and approaching retirement.
Other research by Finexpertiza[6] consulting firm indicates that “the number of young workers in Russia has dropped to one of its lowest levels in the country’s post-Soviet history”. “Working citizens under the age of 35 in the Russian labor market totalled 21.5 million in December 2022, accounting for 29.8% of the country’s workforce of 72 million. That marks the lowest share of young workers since the start of data collection in 2006.”
Constitution and “Federation” Issues
The Russian Federation is not a “federation” on the sense of countries such as the United States of America (USA) and the Australia Federation which were formed when individual regions agreed to come together and cede specified powers to a central authority. The powers ceded by the USA and Australian regions are specified in written constitutions, with the residual powers remaining with the regions. Instead, the Russian Constitution[7], and division of powers, was imposed on the regions in 1993 several years after the break-up of the USSR. It was, however, approved by a national referendum.
This top-down approach to “federation” in some ways makes it easier for the central government in Moscow to exert influence over the country. However, historical factors have left Russia as a country with 83 regions (excluding Crimea), which is a very large number for central government to have necessary relationships with[8]. These regions have various designations – republics, krays, oblasts, cities of federal significance, an autonomous oblast and autonomous okrugs – and according to the constitution all have equal rights as part of the federation. These regions vary tremendously in geographical size and natural wealth. The smallest region has around 200,000 people while the largest has around 13 million. Moscow’s control efforts must also cope with the fact that the Russian landmass is very large and covers eleven time zones.
Some commentary has suggested that Russian “defeat” in Ukraine may lead it to fall apart in a similar way to the USSR, possibly partially on ethnic lines. Sociologist Alexey Gusev[9] doubts this and has pointed out that while “the borders of Russia’s regions and republics are essentially abstract, having been repeatedly redrawn between the 1920s and the 1940s”, they “can give the false impression of large national autonomies”. He has written that: “Sociologically, most of Russia’s regions share the same basic values and attitudes. In 2018 and 2020, Moscow State University researchers discovered that predominantly Russophone provinces did not have statistically significant differences when it came to how they felt about power distance (the extent to which people are accepting of formal hierarchy and inequality), uncertainty avoidance, individualism versus collectivism, and long-term versus short-term normative orientation. Neither geography nor socioeconomic development made a difference.”
Budgetary and Financial Systems
As a former professional macroeconomist – Australian central bank (RBA) and chief economist of the Australian subsidiary of a large international bank (HSBC) – I am relatively relaxed about the way budgetary and monetary policy issues are handled in Russia. However, I well recognise how shorter-term macroeconomic events can have a major effect on longer-term developments.[1]
Budgetary
The Russian Tax Code has two parts (introduced in 1999 and 2001).
Corporate profits tax rate of 20% with 85% of this going to the regions and the reminder to the federal budget (several tax payments may need to be made when a company has separate subdivisions in more than one Russian region.); VAT rate of 20% (food and medical products at 10%) goes entirely to federal budget; personal income tax rates of 13% and 15%, of which 85% goes to regions and remainder to local government. Revenue from other federal taxes (such as excise) goes to federal budget. There is also a quite complex tax on mineral resources extraction, and various special tax regimes various business sizes and areas of activity[2] – as is often the case in other countries!
Unlike in a true “federal” system where certain defined powers have been voluntarily ceded to a central government with the regions retaining the balance, the Russian regions can only change taxes within limits set by the overall Russian Tax Code. The same situation applies to local (municipal) taxes. The main regional taxes are corporate property tax; transport tax and gambling tax. The main local taxes are land tax, individual property tax and sales duty.
A 2021 IMF report said that “compared to other large countries with federal systems of government, Russia stands out with its high reliance on direct taxes as a revenue source for its regions.”[3] There may thus be scope for some change in the distribution of corporate and/or personal income tax receipts. In addition, there would appear to be scope for raising the low personal income tax rates.
Having said that, the huge variety of Russian regions generates significant problems, according to a number of reports on the situation before the February 2022 invasion of Ukraine. A GIS report said that only 13 of Russia’s 85 regions “fully meet their budget needs from their own resources”. “These include the highly developed and wealthy Moscow and St. Petersburg cities, the industrial regions of Kaluga, Leningrad, Samara and Sverdlovsk, the Tatarstan Republic, and rich oil- and gas-producing regions such as the Sakhalin and Tyumen, along with the Nenets, Khanty-Mansi and Yamalo-Nenets autonomous districts. All other regional governments can only make ends meet with help from the federal budget.”[4] There are 22 regions in Russia, whose financial self-sufficiency is below 50%.[5]
The 2021 IMF report said that “World Bank (2018) estimates Russia’s richest region to be 17 times richer than its poorest one, and explains this finding with the Soviet legacy and the unique geography of a continent-sized, sparsely populated country with pockets of abundant natural resources.”[6]
There is also a mandatory payroll based “insurance contribution” which is paid to pension funds at a rate of 22% and further payments to social and medical insurance funds which take the total additional cost of employing people to 30%, which may be considered high in international comparative terms.[7]
The GIS report says that in various years the Finance Ministry has estimated that oil and gas related taxes in the total federal budget have ranged from 36% to 51%. The changing nature of the Russian economy because of both Ukraine-related sanctions and energy markets may prompt changes in the distribution of taxing powers.
A number of factors since the February 2022 invasion of Ukraine have made understanding the Russian budgetary situation more difficult. These include taxation policy changes and “secret” data. According to the Stockholm Peace Research Institute, Russian defence spending increased to 9% of GDP in 2022 from 4% the previous year. Along with construction spending in the occupied regions of Ukraine this has increased the budget expenditure and may result in increases in taxation.
Janus Klluge gives a good summary of the budgetary situation as of April 2023[8] and of the various factors that can affect it.
Financial System
The Russian approach to Central Banking and managing its financial system is generally quite conventional; and I will not elaborate much here because the focus of this report is on Russia’s medium to longer term economic performance.
However, on 14 August an article by Maxim Oreshkin, economic aide to Putin, was published in Tass.[9] He argued that “the economy is successfully changing its structure, faster than anyone predicted.” He spoke of visits “to dozens of enterprises in more than 20 regions”. He wrote: “There are positive trends everywhere. The main change of the last year is the increase in enterprises’ investments in the creation of new technological solutions, scientific groundwork and personnel training. These trends are actively supported by the government and regional authorities.”[10]
Oreshkin complained that Central Bank monetary policy was too loose and pushing up inflation and leading to a weakening ruble exchange rate. He said that “weak ruble complicates the restructuring of the economy”.[11]
If the Russian economy was showing weak GDP growth, a conventional approach might be to accept a weaker ruble to boost exports and slow imports – while accepting some increase in inflation. But the economy is presently showing good GDP growth and has excessive inflation. Oreshkin seems to think that a weak ruble reduces pressure on Russian enterprises to restructure as Russia pursues a policy of “economic and technological sovereignty”.[12]
I accept that in some cases a stronger domestic currency policy can be used push business to become more efficient and productive, and it will happen in quite a few Russian organizations. However, later in the text I will argue that Russia’s very extensive “technological sovereignty” policy aims are unrealistic. Oreshkin is deluding himself when he claims that “in the coming years, this will have a significant positive systemic effect on the economy”.[13]
Like a number of other countries, Russia is considering introducing a central bank digital currency (CBDC) – possibly by 2025[14] — although the exact approach varies between countries. The Russian central bank says that the digital ruble will operate primarily as a means of payments and transfers. “CBDCs are not cryptocurrencies, but they use crypto’s underlying distributed ledger technology.”[15] There is nothing unusual in the Central Bank proposals.
Infrastructure
I have travelled widely in Russia and lived and worked for extended periods in Moscow, Irkutsk and Vladivostok (respectively in the European part of Russia, Siberia, and the Far East). While the privately built shopping malls are much the same in most large cities, the quality of publicly financed infrastructure can vary considerably. The Moscow metro system is extremely high quality (both the stations and the operation of the system) and an excessive amount of money has been spent on many streets near the center (and clearly some corruptly so), while regional city infrastructure can be quite dangerous for pedestrians and vehicles.
A May 2023 article by Ekaterina Zolotova looked at some of Russia’s infrastructure problems.[1] She says that “aside from pipelines, road and rail are the only way to move goods across Russia. Of the two, rail is self-evidently more important; a massive territory, a lack of access to maritime trade routes and a harsh climate necessitated as much.”[2]
Zolotova says “regional infrastructural disparities are explained by geography. The south and east developed much slower than the rest of Russia because the terrain and climate are difficult and harsh and because the low-density populations lived so far away from the main consumption centers.”[3] “Transport routes were thus concentrated in the European part of Russia, where a significant part of the population with higher incomes lives. Here, there is a much larger market for goods, a closer proximity to European markets and fewer geographic barriers.”[4] “Almost all the most important roads fan out radially from Moscow and St. Petersburg. Europe has therefore always been Russia’s biggest and most important trading partner, even if the specific beneficiary of trade changed throughout the years.”[5]
She says that even as Russia’s international trade with non-European countries increased in recent years, “it never really translated into infrastructural improvement. Moscow continued to rely on the existing road and rail networks and on the Suez Canal and the Black Sea port of Novorossiysk. The current state of eastern and southern transport systems is therefore comparatively poor.”[6]
The war in Ukraine and its fall-out have changed the “structure and direction of cargo flows. Instead of going through Black Sea ports or railways to the West, Russian goods flow south and east, through mainland Russia. The volume of direct rail transportation through land border crossings with China, Kazakhstan and Mongolia has also significantly increased. Border facilities and domestic Russian infrastructure were ill-equipped to metabolize increased trade with the rest of Asia. Far East ports, which account for the bulk of current imports and exports, are already operating at 100 percent capacity. Trucks are not enough to circumvent the bottlenecks; traffic jams increased, as did the time it takes for goods to reach China. Similar problems cropped up in the Caucasus.”[7]
Zolotova says that, “although rail and road are more expensive, inland water transport is untenable because of short navigational periods and a general absence of west-east rivers.”[8] Paul Goble writes that use of rivers and canals for transport has been adversely affected by lowering of water levels and an aging fleet of river ships and barges.[9] “Given the shortage of railways and highways throughout much of the country, rivers and canals carry as much as 80 percent of the nation’s cargo that the other branches do combined during the navigation season, a time that is limited by falling water levels and the absence of a sufficient number of river-based icebreakers to allow ships to pass for longer periods.”[10]
Goble notes that during the “special military operation” in Ukraine, Russia has only been able to use the Volga-Don Canal river system to shift smallest type naval vessels from the Caspian Sea to the Sea of Azov (next to Ukraine). Dredging the entire length of Russia’s numerous rivers, something that has not been done for many years, would be extremely costly. And Moscow’s problems with shipbuilding and Putin’s desire to build up the blue-water navy make it unlikely that Russian shipyards will produce the new riverine ships he is talking about.”[11] I briefly address Russian ship-building issues later in this text.
Power Realities
The breakup of the USSR allowed a considerable number of people to obtain control and/or ownership of many assets that previously were “state” property. Some of these people – commonly known as “Oligarchs” – played a very significant role in Russian politics prior to Putin becoming president in 2000 following the resignation of Boris Yeltsin. Putin worked to decrease the political power of these Oligarchs while building a system in which he had ultimate say on significant economic and political issues with the assistance of a generally competent team of economic technocrats and security orientated people (the later often dubbed “siloviki”).
I wrote an article in 1992, after my second visit to Russia, foreshadowing some to the economic problems that Russia was to subsequently suffer.[12] Mark Galeotti has produced an excellent (former Twitter, now X) podcast on the 1990’s in Russia, Yeltsin and the Oligarchs etc. and the influence on present-day Russia.[13]
As in 2008 the Russian constitution limited any individual to two successive presidential four-year terms, Putin arranged for Prime Minister Dmitry Medvedev to become president for a term before he returned to the presidency in 2012.[14] Not unexpectedly, Medvedev liked his new situation and there were clear signs that he wished to have a second term; but Putin had chosen his man well and Medvedev did not have the psychological strength to state publicly that he wished a second term and yielded to the wishes of Putin.
By early 2022 – at the time of the so-called “special military operation” in Ukraine – Putin had been the ultimate Russian leader for over 20 years. It would have been quite unusual if during this period his had not become to regard himself as indispensable to the future of his country.
His thinking also seems to have been significantly affected by his selected reading of Russian history and what he regards as some historical rights for Russia to dominate its near neighbors and play a crucial role in world affairs. In 2011 Dmitry Peskov, Putin’s press secretary, said that Putin “reads all the time, mostly about the history of Russia. He reads memoirs, the memoirs of Russian historical state figures.” In response, I wrote at that time: “Reading history is an excellent way of understanding the nature of people and their actions and reactions, but that understanding then has to be applied in a contemporary context with an eye to the future – and not used to justify existing notions. Putin would be well advised to read more widely; he has already read enough Russian history!”[15]
Various actions by other countries, including – importantly in my view – the actual and expected expansion of NATO, contributed to Putin’s views; and, indeed, those of many Russians. The Ukraine was particularly significant because its inclusion within NATO would have meant that Russia’s Black Sea Fleet would have been based in a NATO member country – ie in the Crimean city of Sebastopol.
Under the presidency of Putin the autonomy of Russian regions has been reduced by a series of steps which have replaced most elected regional leaders (and city mayors at sub-regional level) with Moscow appointed officials. Some regions have been more troublesome than others, most notably Chechnya in the Caucasus geographical area of southern Russia. The war in Ukraine has resulted in more responsibilities for regional authorities as Putin has focused on his military adventure and efforts to woo the so-called Global South to his side.
Less energy being exported to Europe and more to other markets means that some energy producing regions closer to Europe are likely to decline relative to other newly exporting regions. Having said this, the production of military equipment for the fighting in Ukraine has been boosted in some regions. Sociologist Alexey Gusev says that the invasion of Ukraine has not led to any form of regional separatism in Russia. He argues that it has more “closed the values gap between Russia’s provinces than widened it, boding ill for those with separatist aspirations”.”[16]
According to Gusev, since Sergei Kiriyenko’s appointment as the Kremlin’s deputy chief of staff in 2016, regional governor’s “have looked more and more alike, from their surnames to their faces to their biographies. The selection of governors has become personnel policy rather than public politics, with local clans gradually deprived of input, even in the most autonomous of republics, such as Tatarstan, Bashkortostan, and Yakutia. By 2022, every region’s executive branch was reliably dedicated to meeting targets set by the Kremlin’s domestic politics directorate. The same happened at the municipal level, as mayoral elections were effectively canceled in favor of the appointment of figures approved not by local bosses but by the Kremlin.”[17]
Guzel Garifullina[18] says that there are now more likely to be “politically inexperienced and risk-averse individuals” in the positions of governors and mayors. “Despite increased centralization under Putin and due to the country’s vastness and heterogeneity, subnational officials—governors and mayors—play a major role in policy implementation and everyday governance in Russia.”
Despite this, Garifullina says “the September 2022 mobilization illustrates some of the effects of the existing institutions. We saw regional and municipal officials minimizing engagement with the public, mostly refusing to provide any clarification or to make commitments when challenged by citizens and shifting blame to individual local agents when pressed. Importantly, in the absence of rewards for risky behavior, cautious officials were not overzealous either: in this system, there is little benefit to be had from extreme loyalty. Except for the governors of the (Ukraine) border regions that are in a very different situation, we did not see many examples of public officials’ statements actively promoting the war effort. Many governors up for reelection (in ballots heavily controlled by the Kremlin) tried to avoid the theme altogether. Their lack of experience in public politics and their disconnectedness from the public, characteristic for ‘outsider’ governors, sometimes led to massive public relations meltdowns. Overall, as a result of local implementation, all the drawbacks of the ill-prepared national draft campaign were reinforced and led to public grievances from initially relatively loyal popular groups.” “There is little reason to expect that a whole new population of local politicians with different personalities and backgrounds will appear overnight in contemporary Russia, a system that has been consistently sanitizing the field of public politics.”
Ilya Tsypkin of ratings agency ACRA has calculated that the annexed Donetsk and Luhansk People’s Republics, Zaporozhye and Kherson regions received a third of all gratuitous transfers from the central government to highly subsidized regions. “New regions received mainly non-targeted subsidies, which allows their authorities to decide for themselves what to spend money on.”[19]
The budgets of the annexed regions are approved for one year, and not for three, as in other subjects of the federation: it makes no sense to plan them for three years, says Vladimir Klimanov, director of the RANEPA Center for Regional Policy. Compared to other regions of Russia, the annexed regions spend more on national security and security forces (7.5% of spending versus 1.3% in Russia), social policy (57.6% versus 23%), and less on the national economy (4 .5% vs. 19.2%), utilities (2.2% vs. 8.8%) and education (12.8% versus 23.8%), the Gaidar Institute notes.[20]
Subsidies are only part of the spending on new annexed regions in Ukraine. Numerous infrastructure facilities are being built directly by federal contractors, patronage is provided by other subjects of the federation at the expense of their regional budgets, Klimanov noted. The presidential administration has attracted other regions to “sponsorship” assistance, similar to the model that was applied after the annexation of Crimea in 2014. The subjects generally do not give money directly, but deliver humanitarian aid, transfer vehicles and construction equipment, repair and build roads, schools, kindergartens. In particular, the tram traffic in Mariupol was restored at the expense of St. Petersburg.[21]
Corruption
Corruption has been a perennial problem in Russia. As a foreigner I have generally only experienced it on a small scale except in the 1990s when I was offered at various times part ownership of a newly “privatized” building or participation in a scheme to move stolen goods on Russian railways.[22]
In May 2023, Svetlana Orlova, Member of the Board of the Accounts Chamber of the Russian Federation, said: “In 2022, 1,100 people were convicted of corruption crimes, which is 11% more than in 2021. For the first time, the value of regained property and seized assets exceeded the amount of caused damage.”[23]
The most corruptive sectors are still public procurement, construction and reconstruction, she says. In addition, year after year, the Accounts Chamber of the Russian Federation identifies systemic violations related to zero result of spent budget funds, primarily in R&D, design, engineering, and estimate documentation. “Everyone applies for R&D money, but there is no effect,” Svetlana Orlova emphasized. “And they are constantly re-writing design and estimate documentation. The cost of work increases as a result. Then there are affiliated companies that cannot perform these works. And, of course, another problem is buying unused real estate and other property. We checked a lot in this respect and see the risks.”
The push for Russian “technological sovereignty” – to be described and analysed later in this text – is going to boost such corruption in coming years. Indeed, the stories being told to Maxim Oreshkin (discussed earlier) may be part of this!
Part B. Early Putin Period
First Steps
The collapse of the USSR in the early 1990’s meant that much of its bureaucracy was split into geographical areas, sometimes as new independent countries and sometimes less radically into Russian regions seeking more independence from Moscow. Not only did this mean that officials found it sometimes impossible to carry out normal governmental tasks, but looting of public assets and their use for non-governmental purposes became widespread. All this was especially disruptive because the centralized economic planning and financing of the USSR ceased to work for most organizations previously dependent on it; and, as an analyst working for a foreign investment fund in the 1990’s, I had many discussions on this extremely difficult issue with Russian managers.
The arrival of Vladimir Putin to the presidency in 2000 led to a serious effort to reduce that chaos without attempting to completely re-establish what had been broken. By providing stability at the top Putin allowed remaining officials to again effectively provide many of the essential services of a government in an industrialized economy. He also appointed many competent officials in areas that were not directly related to his views on national security. While Putin has never been fully committed to an open liberal economy, he was initially smart enough to see that the Western economic model gives superior results to a tightly regulated economy.
As one commentator has noted, in the early 2000s Putin really achieved the strengthening of the state: increasing the collection of taxes, restoring funding for state bodies, and creating a single legal field throughout the country. However, progress quickly stopped, giving way to rare local successes against the background of general stagnation, and in some places even regression. But eventually “regime-building objectives” took precedence over “state-building objectives”.[1]
“Strategy2020” Research and Report
For me, it was encouraging that Putin was prepared to commission a very detailed economic study and support implementation of many recommendations.
Putin asked Vladimir Mau (Rector of the Russian Academy of National Economy and Public Administration) and Yaroslav Kuzminov (Rector of the Higher School of Economics), to oversaw development of “Strategy 2020”, [2] a plan for Russia’s socio-economic development over the following decade. The report was completed in 2013. Around 1000 experts were involved in the Strategy2020 development, and it is worth listing the 21 expert groups to illustrate its analytical ambition and comprehensiveness.
The “expert groups” were: (1) “New Model of Economic Growth. Securing Macro-economic and Social Stability”; (2) “Budgetary and Monetary Policy, Macro-Economic Parameters for Developing the Russian Economy”; (3) “Reform of the Pension System”; (4) “Strengthening market institutions. Securing stable conditions for ownership and development of competition, stimulation small business”; (5) “Moving from stimulation of innovation to growth on its basis”; (6) “Taxation Policy”; (7) “Labor market, professional education, migration policy”; (8) “New schools”; (9) “Reducing inequality and overcoming poverty”; (10) “Development of financial and banking sector”; (11) “Health and a healthy environment living environment”; (12) “Real federation, local self-government, budgetary relations between the center and lower levels of government”; (13) “Increasing the efficiency of government investment and government purchasing, creation of a federal contract system”; (14) “Optimizing the role of government: reducing regulatory functions, securing transparency and good communication with business and society”; (15) “Managing government property and privatization”; (16) “Development of social institutions”; (17) “Reform of budgetary sector of the economy”; (18) “Reform of natural monopolies”; (19) “Overcoming territorial and information barriers: development of transport system, communications and information”; (20) “International position of Russia: economic benchmarks”; (21) “Development of economic and social integration in post-Soviet area”.
During the period when the this report was being prepared, I sometimes wrote commentary on some of the research and ideas being considered. My first comments were posted on www.russianeconomicreform.ru on 11 June 2011 under the heading “New Russian steel industry on China’s door step”;[3] and others can be accessed on the right-hand side of this site’s main page by clicking on a topic.
The final “Strategy2020” Report was very comprehensive (864 pages) as was released in 2013. I wrote a brief summary/evaluation which can be accessed here.[4]
In 2015, Yaroslav Kuzminov described his joint work with Mau in an interview with Meduza: “Putin instructed RANEPA head Vladimir Mau and I to form the group of experts that prepared his 2020 program, and the President’s laws were largely based on the elements of that 2020 program that he agreed with. He didn’t agree with everything we suggested — for example, we proposed more extensive pension reforms. But he agreed with the core, with the economic program, so we consider the program Putin used to win the election ours.”
[2] Sergey Medvedev and Ilya Goryachev, “Yarovaya Law and new data storage requirements for online data distributors”, Gorodissky & Partners, 7 August 2018
[4] “Can Russia’s SORM Weather the Sanctions Storm?”, Gavin Wilde (Carnegie Endowment for International Peace, Washington D.C.) DOI: 10.3929/ethz-b-0006
“Russia’s Technological Sovereignty”, Russian Analytical Digest, No.298, 18 July 2023
[11] “Can Russia’s SORM Weather the Sanctions Storm?”, Gavin Wilde (Carnegie Endowment for International Peace, Washington D.C.) DOI: 10.3929/ethz-b-0006
“Russia’s Technological Sovereignty”, Russian Analytical Digest, No.298, 18 July 2023
[13] “Can Russia’s SORM Weather the Sanctions Storm?”, Gavin Wilde (Carnegie Endowment for International Peace, Washington D.C.) DOI: 10.3929/ethz-b-0006
“Russia’s Technological Sovereignty”, Russian Analytical Digest, No.298, 18 July 2023
[2] Sergey Medvedev and Ilya Goryachev, “Yarovaya Law and new data storage requirements for online data distributors”, Gorodissky & Partners, 7 August 2018
[4] “Can Russia’s SORM Weather the Sanctions Storm?”, Gavin Wilde (Carnegie Endowment for International Peace, Washington D.C.) DOI: 10.3929/ethz-b-0006
“Russia’s Technological Sovereignty”, Russian Analytical Digest, No.298, 18 July 2023
[11] “Can Russia’s SORM Weather the Sanctions Storm?”, Gavin Wilde (Carnegie Endowment for International Peace, Washington D.C.) DOI: 10.3929/ethz-b-0006
“Russia’s Technological Sovereignty”, Russian Analytical Digest, No.298, 18 July 2023
[13] “Can Russia’s SORM Weather the Sanctions Storm?”, Gavin Wilde (Carnegie Endowment for International Peace, Washington D.C.) DOI: 10.3929/ethz-b-0006
“Russia’s Technological Sovereignty”, Russian Analytical Digest, No.298, 18 July 2023
[20] “О национальных целях и стратегических задачах развития Российской Федерации на период до 2024 года (Указ Президента Российской Федерации № 204 от 07.05.2018)”
[9] Paul Goble, “Growing Problems With Russia’s Waterways Restrict Moscow’s Ability to Achieve Its Goals”, Eurasia Daily Monitor Volume: 20 Issue: 113, 13 July 2023
[10] Paul Goble, “Growing Problems With Russia’s Waterways Restrict Moscow’s Ability to Achieve Its Goals”, Eurasia Daily Monitor Volume: 20 Issue: 113, 13 July 2023
[11] Paul Goble, “Growing Problems With Russia’s Waterways Restrict Moscow’s Ability to Achieve Its Goals”, Eurasia Daily Monitor Volume: 20 Issue: 113, 13 July 2023
[14] An event which led me to move to Shanghai for two years before eventually returning to Moscow at the invitation of Vladimir Mau to work at RANEPA.
The impact on Putin’s psychology of his increasing time in power and of rising tensions with the West led Putin to wonder about his approach to political-economic issues.
The example of China has increasingly suggested to many people – not only Putin — that it is possible for a government to exercise tight political control while allowing “business” to flourish, and this has likely impacted on Putin’s thinking. While there are a number of factors underpinning the Chinese performance that are unlikely to be repeated in Russia – such as the level of economic development, the focus on exports, and the size of its domestic market – elements of the Russian bureaucracy seem to have convinced themselves that technological and economic sovereignty is an aim that can be successfully achieved to a large degree.
In 2016 Alexei Ulyukaev, Minister of Economic Development, was arrested (and later jailed) for taking a bribe in relation to state controlled Rosneft obtaining a stake in Bashneft, a large “privatised” oil producer. The arrest of Ulyukaev — which Rosneft CEO Igor Sechin carried out apparently with the help of FSB officers seconded to Rosneft — was seen by many people as “the privatization of elements of the state power apparatus by a political player who used this resource to attack a federal minister (ie. the state) for his own purposes and interests”.[1]
Whatever the exact truth of the case, a clear message was sent that people close to Putin — as is Sechin — have a some immunity if they can claim to be acting in the state’s interests.
Between 2015 and 2021, the IT sector in Russia was responsible for more than a third of the growth in GDP, even though that constituted just 3.2% of total GDP.[2] After the invasion of Ukraine, about 50-70 thousand IT specialists left Russia as a result of the first wave of migration, the Russian Association of Electronic Commerce (RAEC) estimated.[3] Other estimates are that up to 10% of employees of IT companies left the country during two waves of migration and did not return.
Other estimates are that “about 100 thousand IT specialists are now outside Russia. At the same time, 80% of them continue to work for Russian companies while in friendly countries.”[4]
The Ministry of Digital Development reportedly believes that a total ban on such remote work “may lead to a slowdown in the development of Russian digital platforms and solutions, which may ultimately have a negative impact on their Russian competitiveness”.[5] The Ministry has subsequently claimed that, based on data from SIM cards, up to 85% of those who fled have returned to Russia.[6] To keep software developers in the country, the Ministry proposed a package of measures, which, among other things, included tax and loan benefits for IT companies and their workers and deferment from conscription for military service.[7]
According to estimates by demographer Alexei Raksha, between 550,000 and 800,000 Russian citizens may have left the country in 2022. Analysts at Alfa Bank have placed the wave of emigration to be around 1 million people.”[8] Russia’s Economic Development Ministry in September estimated a decrease in the workforce — or citizens between the ages of 18 and 65 — of 600,000 people. “Russia has lost over 23% of top programmers; state and private clinics have reported the departures of highly skilled doctors, and a survey by the Gaidar Institute among top managers and business owners in the industrial sector revealed a severe shortage of skilled workers.”[9]
Some reports say the waves of emigration “personally affected” Putin. “Those whom he had been counting on mobilizing were leaving the country without hesitation, and the authorities, observing the events in real-time, did not have the legal means to stop it.” “The exodus infuriated [Putin]. He gave instructions to prevent similar situations in the future and to cultivate patriotism in people.” The response was the law on digitized summons which creates a registry of citizens who are not allowed to leave Russia and significantly restricts the rights of draft dodgers, including a prohibition on selling property and driving a car.[10]
Sociologist Lyubov Borusyak, who has been researching Russian emigration since the invasion of Ukraine, said many of those coming back are emigres from the second wave, which was sparked by Putin’s mobilization for the war in Ukraine. “The main reason they return is the lack of employment and money. Mostly, they departed spontaneously and in a panic,” she said. “People without a financial cushion had to return.”[11]
I spoke to quite a few young people before I left Russia in October 2022 and it was common to be told that they would like to leave but did not have enough money to do so.
In March 2022, the Kremlin blocked access to foreign social media platforms such as Instagram, Facebook, and Twitter, a move that helped keep Russians in an information-controlled bubble,[12] although many – like me while I was in Russia until October – used VPNs. Controlling online content is not the only way Russia wants to exercise digital sovereignty. After sanctions were introduced, the government started urgently promoting the goal of building up an entire self-contained tech ecosystem, encompassing everything from services and financing to hardware and supply chains. [13]
In addition to military censorship, Russia imposed restrictions on the release of economic statistics, removing an unprecedented amount of data from public view, including: information about international reserves; international trade data; export and transportation of energy resources (primarily oil and gas); and electricity production. “Banks were no longer obliged to disclose their balance sheets and state companies (and many private ones) were permitted to conceal information about management structures and transactions. Finally, the Finance Ministry ceased publishing detailed data on the national budget.”[14]
Official directions on the ability and obligation of companies to publish information on their activities are quite complex and has been subject to several adjustments. On 6 July 2023, Kommersant reported that the government has “extended the regime of secrecy in the corporate reporting of companies in order to reduce sanctions risks. New rules for the disclosure of sensitive information by issuers deprived them of the right to completely refuse to publish data, but significantly expanded the non-disclosure regime.”[15]
Kommersant reported that the head of the Central Bank, Elvira Nabiullina, has repeatedly called for the restoration of the publication of data by issuers, at least with exceptions. “Very important for investments is accessible and high-quality information about issuers and instruments. There will be no investment without disclosure. Therefore, we need to restore the publication of reports. It is important that ‘under the guise’ of the risks of sanctions do not hide the information that is needed for the development of the market.”[17]
National Projects
Following a May 2018 presidential decree[1], early 2019 saw the release of a document showing total expected expenditure equal to about 3% of GDP annually in the 2019-2024 period on various sectors of the Russian economy, including healthcare, education, the demographic situation (including increasing the fertility rate), culture (including strengthening Russian civic and national identity feelings), roads, city living conditions, ecology, science, promotion of SMEs, the digital economy, labour productivity, and international economic cooperation and exports. In addition to these twelve National Projects, there is a another concerning very large-scale modernization and expansion of large infrastructure such as pipelines, transport and ports (especially in the Russian Far East).[2]
The early 2029 document specified spending “targets and key results”. It was a generally well-prepared document with laudable aims, although it suffered from the typical Russian tendency to put specific target numbers on policy goals rather than explaining the rationale for them and the general principles at stake.
Again – and typically – detailed “KPIs” were prominent. These included for such things as the number of articles by Russian researchers published in international scientific journals and the proportion of Russian scientific researchers aged 39 or less, 900 domestically produced pianos to be provided to children’s art schools by 2024 and 140 new war memorials, specific numerical export targets for various industry sectors (for example, increase in agricultural exports to $45 billion, and “service” exports to $100 billion) etc.
The “digital economy goals and targets” included expenditure of 1,634.9bn rubles in the period from 1 October 2018 to 31 December 2020. Of this, 1.7bn rubles was earmarked for “regulation of the digital environment”, 772.4bn rubles for “information infrastructure”, 143.1 rubles for “human resources for the digital economy”, 30.2bn for “information security”, 451.8 for “digital technologies”, and 235.7bn for “digital public administration”.
Furthermore, the cost of developing the digital economy as a percent of GDP is specified for 2019, 2021 and 2024, with a breakdown into several types of expenditure. By the end of 2024, 120 thousand people are to be admitted into higher education information technology programs and 10 million people are to receive training via online digital development programs.
Also specified is 1350 “commercially orientated scientific and technical projects in a specified field will receive grant support by the end of 2021. And there are specified 2021 and 2024 numerical targets for such things as “share of households with broadband access to the internet”, “share of “socially significant infrastructure with the capability of connecting to broadband internet”, “Russia’s share of the world capacity for data storage and processing services”.
Implementation of the National Projects[3] initially was slow and erratic according to the Russian Accounts Chamber.
In July 2023, Prime Minister Mishustin told Putin that “the average level of achievement of national projects’ indicators is 98.95%.” The assessment methodology is based on three principles: all events spelled out at strategic sessions as ways of implementing national projects, finances and feedback on national projects, Mishustin noted.”[4]
I have no evidence to the contrary, but this extremely high percentage is extremely suspicious – even laughable! The national projects are highly diverse and measurement of “achievement” would be incredibly complex. Mishustin may be deluding himself because he has previously apparently pushed the idea of using Artificial Intelligence (AI) to do this based on project KPIs – something that I wrote about in December 2020.[5]
Also in July 2023, Kommersant reported that during a Forum of Future Technologies “Putin proposed to prepare a new national project for the formation of a data economy for the period up to 2030″. Putin “explained that it was not only about combining existing tools to support the development of the digital economy, AI and high-tech projects, but also about building a ‘holistic mechanism’ for the creation and implementation of advanced developments.”[6] “The national project should cover all stages of data life: collection, transmission and development of communication systems, storage, protection, standards and protocols for working with data, processing and analysis.”[7] “A part of the project will be ‘road maps’ on quantum communications and computing.”
According to the same Kommersant article, Deputy Prime Minister Dmitry Chernyshenko later explained that the project is “practically insurance that scientific developments will continue in the absence of the large guaranteed demand now” for them.[8] “It should be noted that the increased interest of the authorities in ‘quanta’ can be explained by the impetus that they are able to give to digital development. So far, the main customer of research is the state, according to Chernyshenko.”[9]
Pavel Rudnik, Deputy Head of the HSE Institute for Statistical Research and Economics of Knowledge, explained to Kommersant that “the main issue of further digital development is still the problem of data”. “Promising digital technologies, including artificial intelligence and the Internet of things, are based on data, the widespread introduction of innovations involves the constant production and circulation of large amounts of information, and there are tasks in this area, requiring state intervention: it is necessary to form mechanisms for interaction between producers and consumers of data, including regulating the processes of buying and selling, exchanging data arrays and enriching them by market participants.”[10] “The country has already created an extensive ICT infrastructure, and the removal of barriers and restrictions in the field of data will provide conditions for the realization of the accumulated potential.”[11]
As I noted earlier, these is now a tendency to restrict availability of much official and some non-official Russian data.
According to Kommersant, “the director of ANO Information Culture, Ivan Begtin, in his Telegram channel noted that the president did not say anything about the openness of data.”[12] “A clear focus on the data economy without openness is a ‘play’ towards large corporations that negotiate with the state on the use of citizens’ personal data, and, conversely, an increasing collection of information about citizens by the state through corporations.”[13]
Information Control, Education and Research
Informal censorship of Russia television – in terms of who could appear and what topics could be covered – began before the 2014 annexation of Crimean and gradually expanded to cover all information and social media forms following the February 2022 invasion of Ukraine. Referring to the “special military operation” as a “war” became a crime, and the effect on the way people spoke – including in my private conversations as I was still living in Russia at that time – and communicated in text messages was almost immediate, such was the accumulated fear of Putin and the Russian government.
Ben Aris of BNE wrote a very good article in August 2023 about the working situation of Russian journalists.[1] He quotes the editor of Kommersant newspaper: “It’s not a question of pushing press freedoms outwards, but of preventing them from shrinking inwards.” Aris also generally praises Kommersant’s attempts to be objective in a difficult political environment, and I agree with what he has written – and I have quoted many Kommersant articles in this report.
Aris notes that the most Russians get their news from television, and newspapers are not the main target for information control.
A notable step along the way to information control was the Yarovaya Law which from July 2018 required “online data distributors” (ie messenger and social media providers) to record information on all types of communication and to store that information in Russia.[2] But the technology to do this had been progressively put in place at least as long as Putin has been in power”.[3]
According to Gavin Wilde of the Carnegie Endowment for International Peace (CEIP): “The Yarovaya Laws forced telecoms companies and ISPs in Russia to retain all content (voice, text, video, and images) for six months and metadata (to, from, timestamp, and location indicators) for up to three years, as well as to make this data available to the authorities upon request. The logistical costs of adherence to these regulations were to be borne solely by service providers. In 2020, the FSB started demanding unfettered, remote access to all user data without exception, as well as automatic decryption of their communications.[4]
There have been reports that “Western sanctions and export controls put in place after Russia’s invasion of Ukraine have succeeded at blocking the Russian government from purchasing the technology it needs to prop up its sweeping surveillance of internet traffic and phone calls.”
According to CEIP,[5] “Russia has intensified its grip on domestic internet service providers (ISPs) in the wake of the invasion, and by summer 2022 the Russian Digital Ministry moved beyond fines and began stripping ISPs of their operating licenses if they were found to be out of compliance.” “Moscow’s shift from attempting to completely block the popular Telegram messaging app in 2018 to eventually adopting its widescale use by 2023 suggests some ability to decrypt traffic — either with or without Telegram’s assent.”[6]
According to the CEIP paper, while equipment from Nokia and Ericsson is already in place it can’t be serviced and updated, making it increasingly ineffective.”[7] “Nokia and Ericsson together had serviced nearly half of the total cellular base stations in Russia.”[8]
“Tech companies likely make up about 20% of the Western entities that withdrew from Russia in the wake of the war” and that “among other things, killed the Digital Ministry’s plans for a 5G rollout due to the lack of Western equipment.”[9]
I have previously written about Russia’s 5G prospects and highlighted the fact that Russian software abilities far exceed the country’s ability to produce 5G hardware.[10] “More recent signs point to this reality, as both the Digital Development Ministry and industry insiders acknowledged in spring 2023 that a broad-scale 5G rollout across Russia is unlikely until at least 2030 — blaming a lack both of foreign-made componentry and of domestic production capacity that might compensate for this.”[11]
For example, Kommersant reported that foreign-made computing servers comprise half the current Russian market. Dependency on China would bring its own risks, as outlined in a recently leaked memo from Russia’s Digital Development ministry to national security officials dated summer 2022.[12]The document warned of dangers not only to the functioning of critical information infrastructure, but also to the viability of homegrown tech firms, and suggested curbs on imports of Huawei and other Chinese equipment. Western sanctions appear to have dissuaded Chinese tech companies ike Huawei and ZTE from supporting Russia.[13] While Huawei (unlike Ericsson and Nokia) will continue to maintain and upgrade installed equipment in Russia, it has restricted Russian operations and halted new orders.
On the education front, Putin has increasingly sought to introduce nationalism and anti-Western thought into the system. Sitting before a group of children on their first day back at school in September 2022 in the Russian region of Kaliningrad, Putin set out the importance of Moscow’s “special military operation”, saying: “An anti-Russian enclave has begun to be created on the territory of today’s Ukraine that threatens our country. Our guys fighting there are protecting both the inhabitants of the Donbas and Russia itself.”[14]
The address by Putin was part of the first “important conversation” program to take place in Russian schools after the concept — designed to foster patriotism — was earlier announced by the Education Ministry. “Important conversations” include discussions about the “special military operation” in Ukraine as well as the virtue of “dying for the motherland,” Education Minister Sergei Kravtsov told a conference.
According to the “Important conversations”[15] internet site, “every Monday in all schools and colleges across the country begins with ‘Talk About the Important’ classes. The main topics cover key aspects of human life in modern Russia. A set of methodological materials for teachers is advisory in nature.” “Russian 3rd grade students will be told that ‘the happiness of the motherland is more precious than life’, and that ‘it’s not scary to die for the motherland’ alongside learning about national heroes like Soviet cosmonaut Yuri Gagarin.”[16] “Additionally, the Education Ministry materials suggest older age groups, starting with fifth grade, will be taught directly about the ‘special military operation’. This will include discussion about the ‘heroes’ of the special military operation and how ‘military assistance from the collective West increases the number of victims.”[17]
The “heroes” are regularly invited to schools to talk about patriotism. To boost morale, school and kindergarten administrators line up and lay out children in the form of the letter Z, the symbol of the Russian war against Ukraine. Schools are installing “hero desks” in classes featuring images of Russian soldiers who lost their lives in Ukraine.[18]
There is a new set of history textbooks for 10th and 11th graders, with that for the latter students containing an entire section is devoted to the “special military operation”.[19] Titled “Russia today: The special military operation”, it covers topics such as relations between Russia and the West in the 21st century; “pressure from the US”; “the falsification of history”; and the “rebirth of Nazism”. Among other things, the book says the idea of “destabilizing the situation inside Russia” is the “idée fixe” of Western countries.[20]
The text includes a quote from Putin in which he says that Russia launched the “special military operation” in order to “end the hostilities in Ukraine.” It also includes a photo taken in the Kremlin after Russia’s annexation of Ukraine’s partially occupied territories as well as one of Nurmagomed Gadzhimagomedov, the first Russian to be posthumously named a Hero of Russia.[21]
The textbook also covers the withdrawal of Western companies from Russia, saying: “Such unique times are rare in history. After the withdrawal of foreign companies, many markets are open before you all. That means you have fantastic opportunities for careers in business and for your own startups. Don’t miss this chance. Today’s Russia truly is a land of opportunities”.[22]
The new history books will be used in Russian schools starting on September 1, 2023. According to Kravtsov, new history textbooks will be issued for 5th–9th graders next year.[23]
“Students at Russian universities will be required to attend mandatory lectures on state ideology – “Foundations of Russian Statehood” – from September 2023. The lecture content is being developed under the supervision of the Kremlin’s first deputy chief of staff Sergei Kiriyenko and will aim to teach students ‘where Russia is headed and why”.[24] One of the authors of the “Foundations of Russian Statehood” project, Andrei Polosin, has recently been active in explaining the idea to Kremlin officials, deputy governors, and political scientists.[25] “The West is rotting, it has tried repeatedly to weaken Russia, but its time has passed.” “We [Russians] have a great future, a rich history and culture. We must take advantage of this moment of crisis and get everything from it.”
The ideology course will consist of “sections on Russian history, Russian culture, Russian foreign policy, and Russia’s ‘future image’. Each section will be assigned to a state-aligned expert in the discipline, such as the director of Russia’s State Hermitage Museum and the head of Russia’s Council on Foreign and Defense Policy, Sergei Karaganov. Students of history and political science will reportedly be required to attend the ideology classes throughout their studies, while those studying other social sciences and humanities disciplines will take the course for at least a couple of years. All other students will be expected to attend one year of ideology studies.”[26]
“As part of the university subject, students will be taught about the values supposedly intrinsic to Russian civilization. Apparently, a human is equivalent to creation, family to tradition, society to agreement, the state to trust in the intuitions of government, and the nation to patriotism. The course’s authors are also convinced that Russians believe ‘the authorities are competent and effective’, ‘the authorities and society as a whole are on the same side’, ‘there is trust in elections’” and “it’s important to ensure natural population growth”.[28] “The presentation of the course included a list of values supposedly inherent to all Russians, including service, sovereignty, and stability.”[29]
“In a bid to give their efforts some academic weight, the authors of the Kremlin’s faux ideology claim that their conclusions were reached as a result of real research. That isn’t the case: instead, they used brainstorming sessions attended by officials, teachers, and political pundits, and focus groups of pro-Kremlin students.”[30]
I find it hard to comprehend to what degree various officials and analysts actually believe these education themes and to what degree they have decided to conform for reasons of ambition and/or fear. In my view, most of what is related above is extremely ignorant thinking – and verges on pathological -and when combined with ideas of technological sovereignty will have a very significant adverse effect on Russia for many years.
A2022 paper joint authored by Andrey Klepach says: “Despite certain positive results, in general, the sphere of technology development and especially science is the Achilles’ heel of the modern Russian economy.”[31] “Russia is lagging behind developed countries in terms of R&D funding, patent and publication activity, and the number of research personnel is declining.”[32] “The problems that had accumulated over the years sharply escalated under the conditions of the hybrid war launched by the west against Russia, including actions to isolate the Russian scientific community from world science and a technological blockade.”[33] “The lag behind developed countries in the field of science and technology is quite large, which carries the preconditions for a ‘brain drain’.”[34] “The structure of scientific publications, as well as patent activity in Russia, is largely concentrated in the fields of mathematics, physics and engineering, in contrast to medicine and information technology, which are a priority in the West.”[35]
Klepach and his co-authors say that Russia has a “high share of public funding” of R&D “compared to Western countries”.[36] “In terms of absolute volumes, both state and, even more so, private funding per employee or per key area of research and development is extremely small. At the same time, Russian private business with large incomes, unlike Western countries, is concentrated mainly in the fuel and energy and raw materials sectors, where the relative level of R&D expenses in the West is also low.”[37]
Klepach and his co-authors say that “in contrast to Soviet times, the coordination of scientific and technological developments in the civil and military spheres is low.”[38] “The overall structure of science expenses in Russia is close to the similar structure in foreign countries. However, it is the sphere of applied research and development that is the most capital intensive, while in Russian conditions it is here that the main deficit of investments and equipment is concentrated. At present, the weakest link in the structure of the Russian scientific and technological complex is the link that ensures the transition from the stage of research and laboratory samples to pilot plants and small-scale production, refining and scaling new technologies.”[39]
“The system of innovation development institutions that has developed in Russia is mainly focussed on a variety of startup support mechanisms: the Innovation Promotion Fund, the Skolkovo Foundation, Rosnano, National Technology Initiative (NTI), RVC, etc. The activities of development institutions, for all their importance for the development of innovations, are characterized by limited scientific, especially the fundamental, component. Domestic startups in the overwhelmimg majority do not develop, but use technologies of varying degrees of readiness for the commercialization of products based on them.”[40] “The range of technologies developed by state-owned companies is very wide and is not inferior to the level of development in the leading foreign peer companies. However, in terms of microelectronics technologies, space and energy technologies, there is a significant lag behind the world level.”[41]
State Control of the Economy
Russian government control – and even ownership – of the economy will be tightened by the combination of increased spending for the war effort, the push for government directed economic/technology sovereignty, and the withdrawal of foreign companies and the forced takeover of many of their Russian assets.
The extent of this control before the invasion of Ukraine has been open to much debate, and depends significantly on the methodology used for calculations. According to a recent “Russia Matters” article, “respected international organizations and researchers have offered plenty of competing assessments, mostly in a range from 25 to 55 percent, and several experts queried by Russia Matters agree that the most realistic numbers they’ve seen in the past two years fall between 33 and 46 percent.”
Following the invasion of Ukraine many foreign companies withdrew from Russia ether by selling or abandoning assets, while some have had their assets effectively nationalized. Even if not formally controlled or owned by the state, the nature of what has happened – and the nature of the Putin regime – means that the numbers will become much greater than the above mentioned “between 33 and 46 percent”.
In August 2022, “Putin issued a decree banning foreign investors from “unfriendly countries” (as determined by the Russian government) from selling or transferring their stakes in strategic companies operating in Russia’s financial and energy sectors, from which only he may grant exemptions. Later, in December, the government introduced a rule forcing foreign companies leaving Russia to dispose of their assets at a discount of no less than 50% of market value.”[1] In March 2023, those requirements were expanded to include a compensation payment (of 10%) to the state, while in April, Putin authorized the expropriation of foreign-owned assets in response to the seizure and freezing of Russian assets abroad. These include the local subsidiaries of Finland’s Fortum and Germany’s Uniper, both energy companies.[2]
In April, Putin signed decree which obliges the Russian authorities to respond immediately to any actions affecting Russian assets in so-called “unfriendly” countries. Like other anti-sanctions laws adopted by Russia during the war in Ukraine, Putin’s decree leaves ample room for creative interpretation.[2]
Putin was supposedly “furious” when he heard about Poland’s seizure of assets of one prominent Russian businessman: “The boss [Putin] doesn’t care about yachts and cars, but assets are sacred.”
Seized companies are under “temporary management” of the Federal Property Management Agency.[3] According to Andrei Kolesnikov of the Carnegie Endowment for International Peace,[4] these companies are technically owned by the state but controlled by individuals appointed by those in power. These mini-, midi-, and macro-oligarchs are required to share super-profits with the state and consider the interests of the ruling group.”[5]
The Federal Property Management Agency has the right to change their structure, appoint a new board of directors and, most importantly, conduct an audit and come to its own assessment of the asset’s value. During this process, damaging findings might allow the asset to be sold off by court order. “Of course, nobody will act in the interests of the previous owners,” one source told The Bell.[6]
“But the Kremlin has set no clear rules about what would prompt nationalisation, leaving foreign investors unsure about how they will be treated.”[7] “There is no system as to who gets permission to sell, even at a deep discount, and who simply loses everything. All that matters is whether the asset is valuable or wanted by someone close to Putin,” said one person advising on an ongoing exit.[8] Natasha Tsukanova, whose firm Xenon Capital is advising on several exits, said: “No one wants to sell to a sanctioned buyer, let alone companies that are under sanctions themselves. However, those unaffected by sanctions often lack sufficient funds.”[9] “With Russia blocked from international capital markets because of the war, domestic buyers take out loans either from Russia’s top banks — all of which are sanctioned — or smaller lenders with questionable track records, she said.”[10]
Despite the advantages of state ownership for control of the Russian economy, advantages are also seen in privatization – particularly of abandoned or seized assets previously owned by foreign companies.
According to Ekaterina Kurbangaleeva, VTB CEO Kostin “joined in backing privatization by the government’s financial and economic bloc, led by Central Bank Governor Elvira Nabiullina, Finance Minister Anton Siluanov, and Economic Development Minister Maxim Reshetnikov. Their preference, however, is for limited rather than mass privatization.”[1] “Kostin’s argument in favor of privatization is that “it must be introduced to generate interest among investors and stem the outflow of capital.”[2]
Kurbangaleeva forecasts that “financial firms, natural resources, and other energy companies will be absorbed by state banks and companies in a kind of quasi-nationalization or pseudo-privatization”.[3]
She then offers an interesting take on privatization of “nonstrategic assets, such as in retail” which will be redistributed among the nouveau riche and the upper middle class: generally, the generations aged 35-55 and university-educated, whose wealth has come from either state-adjacent projects such as roadbuilding, or senior positions at state companies and private firms with Western investors.”[4] “Public servants, including representatives of the security state, may also get in on the action, having enriched themselves through petty corruption, though they will be sure to involve themselves strictly through proxies.”[5]
Thus, in the view of Kurbangaleeva, “the regime’s economic foundation will now consist of the state’s expanded asset base in natural resources, energy, and heavy industry”. “Meanwhile, at the top of the new social hierarchy will be the trusted lieutenants of the president and their heirs, along with select officials holding significant stakes in state-adjacent companies or directorships. The more the state brings under its control, the more such people there will be.”[6] “The middle layer of Russia’s social structure will be shaped by the redistribution of assets among those well-off Russians forced to focus on the domestic market by international sanctions. In return for their loyalty, they will receive high-quality assets at a significant discount, which may turn them into a pillar of the regime and a source of patriotic optimism and even radicalism. There could even be a ‘people’s privatization’, in which the wealthy are awarded minority stakes in state companies.”[7)
Russian Management
In 2019, Agge V. Nielsen[1], a European businessman with much experience in Russia wrote that Russian management techniques lagged those in Europe, summarising it this way: “Combine Russian engineers with Western management skills, culture and habits, and you have a winner!”
He wrote that “investments in technology, production facilities, support systems, etc. are one side of the coin, but the success of these investments depends on the ‘soft’ side of the coin, ie the ability to adapt management, middle and operational management, and other employees’ skills and culture in order to ensure improved productivity.” Nielsen, based on his extensive experience, says that many Russian companies lack these “soft skills”.
At various stages in my times in Russia since 1991 (see: www.russianeconomicreform.ru) I spent months investigating privatised Russian companies for a foreign fund manager, and later several years freelance teaching English to a very large variety of businesspeople — and I particularly made a point with all of them to discuss their approach to their business and the difficulties they faced. I have also taught international relations and business courses at four Russian universities (Moscow and Irkutsk), as well working with universities and business in Shanghai. In my view, there are many very good Russian managers who are capable of operating in a very difficult regulatory and business environment – and indeed more so than many managers that I have worked with in Australia.[2]
But the odds are now stacked against Russian “managers” doing sensible long-term corporate development. In my view, “Russian engineers” will make a good attempt at “technological sovereignty” –a very important issue to be discussed in detail later in this text — but cutoff from Western influence and international competition and under pressure from Putin and technological nationalism, Russian “managers” will often find it convenient to revert to more traditional Soviet-type authoritarianism and abandon the “soft skills” that Nielsen spoke about.
I elaborated on this in a 2020 article,[3] and quoted. a long-time head of Morgan Stanley’s closed Moscow office as saying that the Russian state “thinks that it can solve problems relating to scientific and technical progress by simply giving everyone KPIs”. I discussed the fetish for KPIs earlier when looking at Russia’s National Projects.
Moreover — and importantly — the increased emphasis on anti-Western ideology in the education system will impede the development of up-and-coming future managers in all areas of Russian society and the economy for many years to come.
[1] Aage V. Nielsen, Managing Director and Senior Partner, Vitus Bering Management Ltd and Deputy Chairman of the AEB Working Group on Modernisation & Innovations, “Improving productivity in Russian-based companies: challenges and barriers”, Association of European Business Quarterly Magazine, Spring 2019.
[2] After completing economics and history degrees I become a junior executive in two manufacturing companies before moving to the public service sector, including the central bank. Later I was chief economist of HSBC Australia and even later senior economic and taxation adviser in an Australian business association.
[1] Stanislav Tkachenko , Andrei Terekhov, “US CHIPS and Science Act and Its Impact on Russia’s High-Tech Sector”, Valdai Discussion Club, 13 April 2023
[7] Florian Vidal, “Russia’s Mining Strategy Geopolitical Ambitions and Industrial Challenges”, French Institute of International Relations (Ifri)”, Russia/Eurasia Center, 3 April 2023
[8] Florian Vidal, “Russia’s Mining Strategy Geopolitical Ambitions and Industrial Challenges”, French Institute of International Relations (Ifri)”, Russia/Eurasia Center, 3 April 2023
[9] Indra Overland and Julia Loginova, “The Russian coal industry in an uncertain world: Finally pivoting to Asia?”, Energy Research & Social Science, 8 June 2023
[9] Sergey Sukhankin, “Gosplan 2.0: Is Russia Taking Another Step Toward a Planned Economy?”, Eurasia Daily Monitor Volume: 19 Issue: 130, 7 September 2022
[11] Sergey Sukhankin, “Gosplan 2.0: Is Russia Taking Another Step Toward a Planned Economy?”, Eurasia Daily Monitor Volume: 19 Issue: 130, 7 September 2022
[2] Sergey Sukhankin, “Gosplan 2.0: Is Russia Taking Another Step Toward a Planned Economy?”, Eurasia Daily Monitor Volume: 19 Issue: 130, 7 September 2022
[3] Security chief says Russia has all necessary resources to reach economic sovereignty”, Tass, 10 January 2022
https://tass.com/economy/1560177
[4] Coordination Centre of the Russian Government, “Mikhail Mishustin holds a strategic session on strengthening technological sovereignty”, 11 April 2023
[2] Sergey Medvedev and Ilya Goryachev, “Yarovaya Law and new data storage requirements for online data distributors”, Gorodissky & Partners, 7 August 2018
[4] “Can Russia’s SORM Weather the Sanctions Storm?”, Gavin Wilde (Carnegie Endowment for International Peace, Washington D.C.) DOI: 10.3929/ethz-b-0006
“Russia’s Technological Sovereignty”, Russian Analytical Digest, No.298, 18 July 2023
[11] “Can Russia’s SORM Weather the Sanctions Storm?”, Gavin Wilde (Carnegie Endowment for International Peace, Washington D.C.) DOI: 10.3929/ethz-b-0006
“Russia’s Technological Sovereignty”, Russian Analytical Digest, No.298, 18 July 2023
[13] “Can Russia’s SORM Weather the Sanctions Storm?”, Gavin Wilde (Carnegie Endowment for International Peace, Washington D.C.) DOI: 10.3929/ethz-b-0006
“Russia’s Technological Sovereignty”, Russian Analytical Digest, No.298, 18 July 2023
[3] “О национальных целях и стратегических задачах развития Российской Федерации на период до 2024 года (Указ Президента Российской Федерации № 204 от 07.05.2018)”
Russia’s leadership is allowing nationalism, nostalgia and fear to drive an economic policy which is almost religious in its intensity – and which will eventually fail after causing much damage!
In May 2022, former president and currently deputy chairman of the National Security Council, Dmitry Medvedev, “suggested that officials should use the term technological sovereignty instead of the previously used import substitution when talking about the process of replacing foreign products with Russian ones, especially when it comes to industry and critical technologies”.[1] Deputy Prime Minister Denis Manturov has spoken of the need to take a turn “from absolutist market-type industrial policy toward a policy aimed at securing industrial sovereignty”[2]
The much broader term “economic sovereignty” has been used by the Secretary of the Russian Security Council Nikolay Patrushev, who just prior the February 2022 invasion of Ukraine, reportedly said in an interview: “To attain economic sovereignty, our country is building a robust, modern, autonomous economy. Russia possesses all the necessary resources. We have to learn how to use them and be careful with our riches, both natural and intangible.” “Russian businesses should be focused on the domestic market. Both private capital and the government should consider the country’s long-term development.”[3]
Patrushev might be considered an ideological extremist, but this is not the case with Prime Minister Mishustin who opened a meeting on 11 April 2023 saying:[4]
“Strengthening technological sovereignty is one of the key objectives that the President has outlined. I spoke about this in detail during my Report to the State Duma. Last year, an active restructuring of logistics and cooperation chains began. By promptly taking measures, we prevented a massive shortage of materials, components and equipment. In order to keep our key industries operating stably, we must largely ensure our independence in creating technologies, innovations and engineering solutions, as well as master the production of almost all essential products quickly. This work must be carried out with our own resources and, most importantly, our own expertise. Therefore, we have to strengthen the production, personnel and scientific potential of Russia, and in fact, raise it to a completely new level. We will build up industrial capacities, launch the necessary production facilities on a large scale, and open high-tech enterprises; actively develop key industries, such as machine building, the chemical industry, energy, aircraft manufacturing, shipbuilding, agrotechnology and biotechnology; and pursue leadership in artificial intelligence, robotics, unmanned systems and other innovative areas. It is also necessary to continue reviving the national engineering school and to not forget about its traditions, as well as to launch additional educational programs. In his Address to the Federal Assembly, the President spoke about the importance of training skilled personnel to ensure the country’s technological sovereignty. At the same time, we have to build a training system and also literally accompany each young specialist to a specific enterprise and interest him or her in finding a job related to his or her education. And it is necessary to offer such conditions so that a person can work for many years at one organisation, gaining experience and skills, and ultimately bringing great benefits not only to a particular company, but to society as a whole. At a recent meeting, the President pointed out the need to urgently introduce new measures to support industry, giving priority to revitalising sectors affected by the sanctions. It is necessary to develop long-term systemic solutions in order to stimulate business activity as much as possible, increase the investment attractiveness of projects and, most importantly, give an impetus to the development of so-called end-to-end technologies, which have a significant impact on all sectors of our economy. When visiting various enterprises in the regions and getting acquainted with their proposals and initiatives, I can see that they often lack funding for their implementation. Almost all representatives of industrial enterprises speak about it. Small technology companies as well as school and student startups also need help. They have a lot of useful ideas that need to be improved and put into practice. Of course, we will provide such support. At the same time, decisions at the local level are of great importance, including the provision of land plots for a small fee to create new production facilities. Here I would ask the heads of Russian regions to work out all possible measures for the accelerated development of industry in their regions.” “Today we will discuss the technological development concept for the next eight years. It offers completely new approaches in this area. We will also discuss the first results attained in various sectors. Moreover, there are already some successful examples of achieving technological sovereignty. This is very positive experience. It is important to analyse it in detail and draw the appropriate conclusions, including when setting priorities for the current year.”
Not only has Mishustin listed almost any technological orientated industry that can be imagined – machine building, the chemical industry, energy, aircraft manufacturing, shipbuilding, agrotechnology and biotechnology, artificial intelligence, robotics, unmanned systems – but he also advocates a large degree of centralized supervision and planning about how people and organizations make decisions.
In January 2023, a press release by the Ministry of Science and Higher Education reported on a meeting in which an attempt was made to explain technological sovereignty and the Concept of Technological Development until 2030[5]. It was attended by “representatives of the business community (venture funds, development institutions, major banks), scientific and educational circles (representatives of the Russian Academy of Sciences, leading universities and scientific organizations) and authorities (ministries, the Presidential Administration, representatives of major regions)”.
It appears that the meeting basically discussed in more detail many of the same things mentioned by Mishustin. However, it was explained that the Concept consists of three sections: “sustainable technological sovereignty, technologies as a factor in economic growth and the development of the social sphere, and technological support for the sustained functioning of production systems”.
In my view, such attempts at classification seem too theoretical and aimed at some sort of planning documentation rather than a more basic recognition of the need to reduce impediments to Russian technological development. The most positive thing about the Concept as described in the January discussion was the conversion universities and research institutions outputs into actual economically useful and commercial products. The difficulty of doing this is a common complaint in many countries, but Russians with experience of China often note large comparative difficulties in Russia.
A later roundtable,[1] also in April, added little information and suggests that its advocates are still looking for a coherent approach to technological self-sufficiency. Nevertheless, the general idea of technological sovereignty has clearly become religiously entrenched in the higher levels of the Russian government.
Such detailed economic supervision sometimes worked quite well in the past when production of metals, basic chemicals, cloths, early electrical products and engines were the basics of industrialization – for example in the earlier years of the USSR. But the USSR approach could not cope with the rapid advances of electronics, IT and automation of the so-called Third Industrial Revolution beginning in the 1970s.
So, what are the prospects of success in a time of the Fourth Industrial Revolution?
The simpler idea of “import substitution” existed before the 2014 annexation of Crimea and the resulting foreign economic sanctions, but was given additional impetus by these events. In response to foreign sanctions, Russia introduced various “counter sanctions” mainly covering “certain types” of agricultural products. But it was only at a meeting of the State Council in late 2015 it was announced that hundreds of import-substitution projects were under way and a Government Commission on Import Substitution officially met for the first time.[2]
But even then there was a view that Russia needed to take action to develop its technology base to become more competitive both internally and an exporter to world markets. Hence, the Skolkovo Innovation Center and the National Technology Initiative (NTI). While the formation of Skolkovo Innovation Center had been announced by President Medvedev in 2009, it continued with its main aim of development of Russian technology and science and associated businesses, it also actively sought foreign company and institutional involvement.[3] The NTI was initiated by President Putin in 2014, when he said: “On the basis of long-term forecasting, it is necessary to understand what challenges Russia will face in 10-15 years, which innovative solutions will be required in order to ensure national security, quality of life, and development of the sectors of the new technological order.”[4]
The NTI[5] had an emphasis on providing conditions so that Russian high-tech companies could be successful in various identified global markets.[6] I wrote an extensive report on the NTI in 2016 after spending several days participating in some of its work.[7] My report was highly critical of a number of aspects of the NTI, but was not critical of its international focus.
The new-found Russian official emphasis on technological and economic sovereignty rejects – or at least severely mutes — many of the internationally orientated ideas of Skolkovo and the NTI.
In April 2023, according to Kommersant newspaper, the government provided more details about “techno-sovereignty” projects. It said that such projects were aimed at creating new capacities, technologies and expanding production in industries where the degree of localization is less than 50%.[8] Officials of the Ministry of Economy said that “more often it is only 10-20% localization or products are not yet produced in the country”.
Kommersant also reported that a “special register” of projects will be assessed by an interdepartmental committee, formed from banks and expert organizations. Ministry of Industry and Trade officials said that “the criteria for inclusion of projects are the share of imported products in consumption by civilian industries, compliance with import substitution plans and the list of critical components”. “The secretariat of First Deputy Prime Minister Andrey Belousov reported that the resolution was synchronized with the draft Concept of Technological Development until 2030”.[9]
Aside from the issue of which industries and products should be domestically promoted and protected from foreign competition and promote sovereignty, the question is how best to do it?
In mid-2022 reports emerged that the Ministry of Industry and Trade wished to introduce elements of “planned organization”[1] (ie. planned economy) in a number of key the industries – such as civilian jet aircraft, shipbuilding, the pharmaceuticals, and various high-tech special equipment — to minimize foreign inputs. The justification was that the majority of large businesses simply do not know how to deal with economic sanctions. The reports quoted business surveys which suggested strong support for some “serious strategic planning for the successful development of the Russian economy”.[2] “Managers converged on the opinion that it would be extremely hard – if not impossible – for large Russian businesses to overcome the consequences of Western sanctions without the state acquiring a larger role in managing available resources and giving directions for further development.”
It was reported that “several leading Russian universities—including Bauman Moscow State Technical University, Plekhanov Russian University of Economics, Moscow State University and Moscow University of Finance and Law—have already started working on a ‘digital Gosplan’ that envisages a return to the Soviet-style five-year plans”.
According to August 2022 article in Russian business portal RBC, Russia planned to build its new import-substitution strategy (with elements of planned economy) around so-called “pulling” projects—also referred to as “beacon-projects,” which are strategic initiatives that are given top priority — that will be supplemented by investment and interregional agreements.[3] RBC claimed the import-substitution business model could be organized in the following way:
“The state will conduct extensive consultations with large businesses and consumers to understand the quantities they will require for raw materials, parts and components imported from abroad that are indispensable for production. Then, Russian companies and entities capable of producing these materials will be located. Finally, once successfully located, added privileges and perks for companies involved in the initiative will be indicated and clearly defined.” “The new economic model will not result in the emergence of a ‘full-fledged Gosplan’.” “Yet, supplementary evidence suggests that, in pursuit of this model, Russia might emphasize the creation of clusters hoping to somehow match these with elements of a planned economy.” “This was highlighted by Putin during the June 2022 St. Petersburg International Economic Forum when he stated that he had ordered the Russian government to conduct extensive research and finalize main conditions related to aspects of cluster functioning, such as financing, taxation, support at the early-production stage (lower than 7 percent credit rate and complete lack of administrative checks), facilitated administrative procedures and the creation of mechanisms guaranteeing demand for the final product.” [4]
It is unclear to what degree the reported “digital Gosplan” ideas of mid-2022 will be adopted, but implementing technological sovereignty as being suggested will clearly need a lot of planning and government control. For example, a March 2023 videoconference meeting of the State Council Commission on Energy[5] reported that:
“Taking part in the meeting were deputy ministers of Energy, deputy minister of Industry and Trade, deputy minister of Construction, Housing and Utilities, deputy minister of Digital Development, Communications and Mass Media, representatives of the relevant federal and regional executive bodies and organisations from the electricity and heating sectors. The participants discussed ways to ensure Russia’s technological sovereignty in the electricity and heating sectors, including by localising the manufacturing of energy-efficient equipment for high-capacity gas turbines and providing for the maintenance of imported gas turbine power units, as well as switching to Russian software in the electricity and heating sectors.”
According to an April 2023 Kommersant[6] article “the state is ready to offer companies an impressive range of investment promotion tools that compensate for the peculiarities of the Russian business climate. These are agreements on the protection and promotion of investments, guaranteeing investors the stabilization of regulatory conditions and compensation for part of the costs of investment projects; also among the preferential investment regimes are all kinds of special economic zones and industrial parks. The benefits package is provided for innovative and high-tech companies that can replace imported production and technology. Systematic work to stimulate investment is also being carried out as part of the roadmap for transforming the business climate, and the system for providing tax investment deductions is also being reformed. In addition, the government has made progress in reducing the administrative burden on businesses through regulatory and regulatory reforms, and now work is underway to reduce the criminal risks of business.”
But will all this be enough for technological and economic “sovereignty”? And, what about Chinese help with Russian “sovereignty”?
According to official statements, Chinese president Xi Jinping’s March 2023 visit to Moscow resulted in a number of agreements on Russia-China cooperation. Following his meeting with Xi, Mishustin said: “I would like to highlight co-operation in high-tech areas. We are discussing aircraft construction, mechanical engineering, machine tool construction, space research, and end-to-end technologies aimed at creating innovative products and providing services. I am convinced that expanding innovative co-operation will strengthen Russia’s and China’s technological sovereignty”[1].
Mishustin’s comments suggest flexibility in the “sovereignty” policy if “cooperation” with friendly countries is possible. But the Russian experience with China in technology cooperation has not been particularly positive and fears remain!
Despite the alleged cooperation between Russia and China on aircraft construction (mentioned by Mishustin), Russia has bad experience in this area in the form of CR929[2] – a 2014 politically supported project for China’s COMAC and Russia’s United Aircraft Building Corporation (UAC) to jointly develop a wide-body long-range aircraft scheduled to enter service in 2026. It involved equally shared development costs, but in mid-2019 reports emerged that China wanted to separately sell the aircraft inside China, leaving the Russian side locked out of the expected Chinese market of nearly 800 planes which compares with that in Russia and other countries of probably less than 100.[3]
At this time I attended in a Russian International Affairs Council (RIAC) seminar in Moscow devoted to CR929 developments. The Russian participants pressed the Chinese participants for answers on various issues, but were frustrated by the evasive Chinese. In June 2022, Russian Deputy Prime Minister Yury Borisov, told a forum that Russia was “decreasing” its participation in the CR929 project, saying it was “not going in the direction that suits us”. Borisov added that “China, as it becomes an industrial giant, is less and less interested in our services”[4].
A mid-2023 media report[5] cited a 2022 Russian Communications Ministry memo expressing concern about excessive reliance on Chinese technologies which “poses a danger” to Russia after losing access to sophisticated Western components. It particularly mentioned Huawei, as well as electronics, network devices and chips. This led the memo to contain suggestions for import quotas to help boost Russian industry.
So, it would appear – in my view at least – that there will not be a lot of high-tech cooperation with China!
But there is much more to the Russian economy than high-tech! Russian agriculture generally benefited from past import substitution efforts[6] because there was so much that was easy to improve after years of post-Soviet neglect.
In July 2023, Kommersant reported that “new rules for the localization of seed production in Russia caused concern among European market participants”. The Euroseeds Association (includes Bayer, BASF, Corteva, etc) raised risks for further work in Russia, with concerns about the obligation of foreign producers to create joint ventures with local organizations with a share of non-residents of no more than 49%, carry out full-cycle selection and report on localization to the Ministry of Agriculture. Seed imports to Russia could only be allowed for companies with a localization plan. Kommersant reported that “the doctrine of food security assumes that by 2030 Russia should be provided with seeds of local selection at the level of 75%. At the end of 2022, the average was 60%. Kommersant reported fears that while the reduction in the number of foreign seed suppliers will free up a niche in the market for local breeders, it threatens to reduce yields. For example, “rye hybrids are being developed in the world, yielding an average of 7.5 tons per 1 ha, while Russian counterparts have 4 tons per 1 ha”.
According to Florian Vidal writing in a 2023 report,[7] “Russia’s largely privatized mining sector faces great and numerous restrictions relating to the obsolescence of its infrastructure, lack of investment and a shortage of qualified human resources.” “In order to reduce the technological lag, Russia must implement a profound change in its operations, incorporating such concepts as automation and the Internet of Things and the digitization of production systems. The introduction of new technologies in the sector also requires bringing personnel up to standard, with the development of adequate initial and continuing training to be able to implement these new processes.” “Since the beginning of the century, the mining sector has not succeeded in adapting so as to make innovation the heart of its modernization strategy, to secure its technology transfer chains in the long term. Now, in a competitive environment, Russian private companies in the sector, with the support of government authorities, are making an effort to adopt, for example, more efficient methods of geological exploration and to accelerate the introduction of new technologies in terms of production and processing tools.” “Led by the Russian federal government, much public support for innovation in the mining regions is provided by research and development (R&D) centers backed by the Skolkovo Foundation and various universities. There is still insufficient integration between universities, the industry and government authorities. Furthermore, the endemic problems of the Russian economy (corruption, lack of attractiveness, low productivity) have been further worsened by the sanctions imposed since 2014 — even if the government policy of “import substitution” has made it possible to meet the needs of the mining sector thus far. However, the wave of sanctions imposed since February 2022 has disrupted the functioning of the sector and the projects under development. Problems accessing both certain technologies and capital are slowing the growth of mining activity in the country.”[1]
Overland and Loginova in a report say that a coal mining industry recovery from a collapse in the 1990s was “facilitated by government-led restructuring, federal subsidies and private investments”. While this modernization resulted in new production capacity of 300 million tonnes, it left the industry “dependent on imported machinery”.[2]
In 2021, the Ministry of Industry and Trade drafted a federal plan entitled ‘LNG Market Breakthrough’ that was designed to coordinate the efforts by both business and state to boost research and development (R&D) in key areas of the LNG sector. The programme’s main objective is to launch large-scale production of 18 types of equipment for liquefaction plants, including heat exchangers and gas turbines, by 2030.”[3] The programme aims to increase the share of domestic components in LNG projects to 40% by 2024 and to 80% by 2030. But, there are doubters. According to Yakov & Partners (formerly McKinsey in Russia), “it may take up to five years to conduct R&D alone to enable Russian production of critical LNG equipment.”[4]
So, what is the likely overall result of Russia’s technology and economic sovereignty program?
Economic sovereignty – or extensive import substitution – is a version of more classic autarky and unlikely to bring positive results overall, even if certain technological developments will occur with other countries such as China. While a number of countries have successfully conducted domestic industrialization policies in the past, there has been an increase in international cooperation in producing such traditional products such as machine tools because of their growing complexity. Moreover, the increasing complexity of information technologies (such as 5G which I have written about[5]) and products of the Fourth Industrial Revolution (such as 3D printing, artificial intelligence, robotics and biological sciences) means that even countries such as China (with a much bigger market and industrial and technology base) cannot completely go it alone.
Both China and the US are presently trying to promote domestic industries such as silicon chips while restricting the access of the other to some products, but this is very different to the all-encompassing approach of Russia and its Concept of Technological Development until 2030.
While Russian public discussion of the Concept does not focus on military technology, it will undoubtedly be very important and a consideration of aspects of military technology can help us understand the difficulties that the quest for more general technological and economic sovereignty will face. I wrote a quite detailed report on the “Russian economy, technology and military power”[6] in 2019.
At the present time Russian nationalism – and fears – are driving the ideas of technological and economic sovereignty. It may take a few years, but eventually the folly will become very clear. Some people may talk of a new North Korea, but in my view Russians have too much experience and knowledge of the outside world for this to happen – and a more intelligent approach to technology and economics will eventually be adopted.
Indeed, not all Russian officials are completely on-board with the new policy. Russian Central Bank Governor Elvira Nabiullina, speaking at the 2023 St. Petersburg International Economic Forum, said: “The temptation to manage economic restructuring can lead to [a situation] where we suppress private initiative [by businesses], not to mention the risk of restoring a planned economy.” “It seems that this is impossible since we have a market economy,” she said, “but in fact, all that’s needed is for the state to take upon itself the responsibility of deciding which industries and projects require development, and where to direct financial resources.”[1]
In addition to the flawed concept of “technological sovereignty” and it upper-level and sectoral planning, there is the issue of implementation at individual product level.
“In June 2023, Kommersant[2] reported that the government is expanding the number of organizations able to classify Russian products as suitable for state support under the import replacement program and specified criteria for this. It also reported that business “is afraid of subjectivity” by classifying organizations. “Classifying organizations will be required to have a testing laboratory and testing ground or engineering center.” “This fits into the logic of the recently approved Concept of Technological Development of the Russian Federation until 2030, which requires, among other things, the widespread use of reverse engineering.”
The same Kommersant article said that “in 2022, experts subordinate to the Ministry of Industry and Trade issued more than 130 opinions on the absence of analogues to more than 50 applicants. It should be noted that expert opinions are necessary to obtain state support, both by producers of unique industrial products and by customers of critical imports”. Maxim Tretyakov, of the Opora Rossii (business association), was quoted as saying that business is “afraid of the subjective approach of experts who make decisions about the uniqueness of products based on their own assessment of the degree of superiority of the characteristics of imported equipment over the available Russian counterparts – it is impossible to prescribe the entire set of analyzed characteristics and the desired degree of their superiority”. “De facto, in the approved structure, access to state support will be determined by experts, and not by demand from buyers, which may lead to a repetition of the situation that the government has already gone through in its attempts to establish import substitution after the sanctions caused by the annexation of Crimea in 2014.”[3]
The Ministry of Economy will reportedly bring together innovators and their customers in one register.[4] “Against the backdrop of a sharp decline in the venture capital market in the Russian Federation, which suffered greatly in 2022 after the outbreak of hostilities in Ukraine, the government intends to provide start-ups with not only financial, but also administrative support. Thus, by the end of 2023, the government plans to launch the information system ‘Register of Small Technology Companies (MTC)’ – a platform that will bring together investors and start-ups.”[5] “Companies from the ‘showcase of start-ups’ will be able to apply for targeted state support measures, the portal will help investors choose an object for investing. The authorities hope that the registry will become a tool to popularize private venture financing in the country, although the need of industries for private investments so far significantly exceeds the interest in them.”[6] The MTC portal was expected to become available to a wide range of people by the end of 2023. “MTCs included in the register will be able to apply for targeted state support (in development), while investors will have access to dozens of key aggregate indicators of startups, data on their revenue, funds raised and needs.
Kommersant noted that, “de facto, this proposal turns the state from a regulator into an organizer of venture deals – but with an unclear degree of responsibility for the results of this work.”[7]
Several days later, Kommersant reported that “the government conceived a ‘census’ of industrial products as part of the system for distributing benefits to manufacturers of industrial products. “Among other things, the document introduces digital product passports – this will allow identification of similar products in catalogs, aggregate data about them and help customers find analogues to imports. The new mechanism will allow the state to identify the missing positions, as well as to determine the priorities of import substitution and support. Until now, the state’s attempts to digitize’ the industrial production market have complicated by its scale and dynamism, however, this time the producers themselves are interested in getting into the new register.[1] “Unlike previous registry mechanisms, a passport is perceived as a dynamic tool for identifying goods, works and services of the same type. Now there is no such mechanism – there are only catalogs and reference books with different descriptions of the same type of products. Now if, when loading goods, works or services into the register, the system finds a generated passport, it does not create a duplicate.”[2] Data in the digital passport will be open to users of public and private electronic trading platforms.”[3] “It is also proposed to introduce the labelling of Russian goods – a QR code will identify products and show a record about it in the state information system of industry.”[4]
According to Kommersant, Business Ombudsman Boris Titov said that the process of recognizing a product as Russian begins even before a QR code is assigned. “This is technical expertise that takes time and costs money. If the introduction of a digital passport for industrial products will bring manufacturers savings in this regard, great. But so far this issue has not been clarified.”[5] “Anna Nikitchenko, a member of the General Council of Delovaya Rossiya (business association), believes that the mechanism can ensure transparency and eliminate corruption risks in the distribution of government orders among domestic producers.”[6] Kommersant added “that attempts to ‘digitize’ this market by the state are complicated by new players and products constantly appearing on it”.[7]
In 2020 – before the more recent religious intensity of “economic sovereignty” – Prime Minister Mishustin oversaw the approval of the “Strategy for the Development of the Russian Electronics Industry until 2030”. The strategy sets out three stages: a first phase of import-substitution, followed by a phase of promoting Russian technology on international markets, and finally an attempt to achieve technological preeminence.”[1]
An April 2023 Russian Valdai Discussion Club report[8] quoted, Andrei Shastin, Director for Strategic Initiatives and Partnerships at Auriga, as saying that import substitution face limited scaling opportunities for Russian IT products. “Russian tech companies, including those developing and experimenting with semiconductor manufacturing, have under 100 employees, which means that achieving full-fledged import substitution and especially a new modern chip production industry in Russia is not feasible. Even if there are companies that offer high-quality sought-after products, their modest resources and limited customer bases prevent them from promoting innovative products even on the Russian market.” “After the start of the special military operation in Ukraine, the development of specific components for the national digital platform, along with the industry’s almost entire output, has been geared toward the Russian domestic market. The generally optimistic projections for the Russian ICT sector’s growth prospects do not apply to the semiconductor industry which is developing slowly, substantially lagging behind both world leaders and the needs of major Russian corporations. The chips produced in Russia or in cooperating countries based on Russian designs can decently manage a narrow scope of tasks related to the country’s defence capacity and maintaining digital components of the public administration system (but) imported chips are still necessary for addressing a wider scope of production tasks.”
Kommersant has reported that “those software companies that stayed in Russia are seeing much more substantial demand for their products but they are also facing obstacles. Primarily, they need investment, as they have to scale their production to meet growing demand. But they are also facing technology issues and personnel shortages following a mass exodus of IT professionals from Russia”[2] following the invasion of Ukraine.
In July 2023, BNEnews reported that “it is still too early to say if Russian IT companies have been able to adequately replace imported software solutions with local equivalents as new fully-fledged software takes many months or even years.”[3] “In March 2022, Russia adopted a law banning the use of foreign-made software by companies belonging to the “critical information infrastructure” as of 2025. However, it is already clear that the deadline is unrealistic. In the spring of 2023, companies in the energy sector requested an extension of the deadline to 2026 or even 2028, warning about the risk of energy shortages.”[4] “To speed up the process of replacing imported software with local solutions, the Russian government promised support to the developers.” “Russian software developers could capitalise on tax breaks and government contracts.”[5] “The Russian government has promised software development contracts for major local companies. The cash is supposed to come from major Russian state-run corporations, rather than from the state budget.” According to the article, “Mishustin told an industry conference that the government will facilitate access to sizeable contracts from state-run companies, as long as the software companies invest in the development of their business. Companies that reinvest funds received as payment for contracts will be considered ‘systemically important’ and will be given preference when it comes to getting more contracts from the public sector.”[6]
The BNE article noted that “one key issue for Russian IT companies trying to capitalise on the situation is brain drain. Scared by the prospects of a possible collapse of the local IT sector, the Russian government adopted a set of measures a few months ago focused on incentivising IT professionals to stay in their home country. The two main components of this policy are exemption from the military draft and low-interest mortgage loans for those employed in the IT sector.”[7]
“Like China, Russia’s problem is less having a work-force with the appropriate skills and more its ability to build the necessary ecosystem and supply chains for semiconductors.”[8]
The July 2023 BNEnews article noted that “the Russian government has promised ‘unprecedented financing’ for its electronics industry, potentially amounting to more than 3.19 trillion rubles ($41.2 billion) by 2030”. “But building that sector will be a challenging game of catch-up: even the government’s own estimates place Russia’s chip industry 10 to 15 years behind the rest of the world. Before the sanctions, Russia imported some $19 billion worth of high-tech goods annually, with the largest share of those imports (66%) coming from the EU and US.”[1]
As noted by Niclas Poitiers, “Russia is not a terribly sophisticated economy in many ways, meaning that they don’t have a lot of high-tech industries”. Because of trade restrictions, Russia has also lost access to products from a range of leading companies, including Cisco, SAP, Oracle, IBM, TSMC, Nokia, Ericsson, and Samsung.[2] “Russia’s already fragile position when it comes to hardware has been intensifying due to international sanctions that particularly target the national semiconductor industry. Technological sovereignty through ‘indigenization’ of the semiconductor industry seems highly unlikely.”[3]
On 13 July 2023, Kommersant [4]reported that “participants in the drone market differed in their assessments of the plan of the Ministry of Industry and Trade to ban the supply of foreign devices for government orders. Some of them hope that this will help promote the products of Russian companies. Others object that it is impossible to replace foreign suppliers so quickly, and, coupled with the introduction of a localization scoring system, this will cut many players off from state tenders. As a result, the initiative may result in the supply of “Chinese drones with Russian nameplates” to departments and state-owned companies, and an increase in the cost of equipment and services. The share of products of Russian manufacturers in the civilian segment of the market, as reflected in the strategy for the development of unmanned aircraft until 2030, is only 22%. The strategy envisaged that this share in the state order would grow to 60% by 2026 and 80% by 2030 in the baseline scenario. Now the strategy will be adjusted, and some market players believe that they will have time to prepare for innovations. “The restrictions will definitely benefit Russian manufacturers”, said one businessman, but “at the same time, it is would be necessary to exclude the possibility of gray imports and sticking Russian ‘nameplates’ on Chinese drones”. “Foreign components are used to some extent in the production of almost all drones, and there are likely to be “problems, first of all, with the production of electric motors, as well as in microelectronics.”
The same businessman, according to Kommersant, then added added that here are “almost no” problems with drone software alone. I have elsewhere put the view – in particular in relation to Open-Ran 5G – that Russia has a considerable comparative advantage in software compared to production of hardware in high-tech products.[5]
In late July 2023, the Chinese government announced a ban on exports of large civilian drones from 1 September. The ban affects drones weighing over 7 kg and flying for more than half an hour, as well as “equipment and some engines.”[6] “Parallel import worked, works and will continue to work,” one person told Kommersant, but the prices for both imported components and the devices themselves on the Russian market will ‘grow somewhat’”.[7] More detrimental to Russian consumers and manufacturers could be a ban on the supply of components, said one industry person: “Russian drones contain up to 90% of Chinese components, this is the main dependence.”[8] “But to bring the existing (Russian) experimental developments to serial deliveries will take from two to three to five years, depending on the type.[1] Only a few companies are currently developing electric motors, and “whether the component base they use is Russian is a question.”[2]
According to a Kommersant article in June 2023[3], government associated leasing companies have been seeking orders for the Russian made MS-21 aircraft for delivery during between 2023 and 2030. Despite the inclusion of subsidies from the National Welfare Fund, the planes are more expensive than similar aircraft from Airbus or Boeing. The MC-21, a mid-size plane with around 150 passengers, first flew in 2017. Deliveries had been expected beginning in 2022, but sanctions prevented the supply of Pratt & Whitney engines. Instead, the aircraft will use Russian engines, which will be more expensive because of lower production runs. Analysts say that Russian expenses are lower only for salaries, while the purchase and production of materials and components cost comparable amounts or more than foreign. Thus, some people think that Russia has built the most expensive aircraft in is class.”[4]
To circumvent the sanctions, Russia intends to use only Russian avionics and engines. On 7 April 2022 Mishustin said that the substitution should be completed within 2–3 years, and the Russian government expects that the percentage of domestic components in the MC-21 will be 97% by 2022–2024, making it independent of imported equipment.” Kommersant reported that “some analysts doubt this is possible.[5]
In July 2023 Paval Luzin[6] wrote the program for MC-21 production projected an average annual production rate of 36 aircraft, with a peak option of 45 planes. Moreover, almost half of these aircraft were meant to receive Pratt & Whitney engines, while the other half were planned to receive Russian engines of which annual production was to be 50. “Yet, according to the current plans, annual production of the Russian must reach 160. Such a massive increase is hardly possible, especially when considering that only 12 engines were planned to be produced in 2024.”
As with CR929 – which was discussed earlier in the context of Russian-Chinese technological cooperation — Russia is very far from being “sovereign” in modern civilian aircraft development and production.
Moreover, according to Luzin, Russia the Russian space program is highly dependent on imported space-grade electronics.[7] According to RadioFreeEurope/RadioLiberty, “the first launch of the transport spaceship Eagle had been planned for this year, but a few months before the launch the head of Roskosmos, announced a postponement until 2024. The Moscow Times said that the project implementation deadline had to be revised due to the war in Ukraine.”[8]
On 10 July 2023, Kommersant[9] noted the first day of Russia’s Innoprom[10] exhibition with the theme of “Sustainable production: renewal strategies” to show that Russia has adapted to the sanctions and faces new challenges of technological development without relying on imports.[1] Mishustin noted the various official funds and financial programs to assist companies to invest in and develop necessary materials and components for industrial and technological sovereignty. “There will be no return to the previous models of work – based on the import of foreign technologies”, he stated.[2]
Kommersant noted that “it is probably too early to talk about the full adaptation of the Russian industry to the sanctions – we can rather talk about the infrastructure and the regulatory framework ready for these purposes. The launch of replacement industries takes time, products need to be improved to a competitive state, while technological renewal will cost money”.[3]
According to Kommersant, Mishustin – again – mentioned civil aviation industry efforts, saying: “Everything is going according to plan”.[4]
In my view, Mishustin seems to like being optimistic and giving good news! Recall that in July 2023 he told Putin that “the average level of achievement of national projects’ indicators is 98.95%!”[5]
Kommersant noted the attendance of prime ministers of Belarus (“the partner country of the exhibition”) and Kazakhstan (which “became “a hub for solving the logistical problems of Russian business in 2022”). It also noted that if “friendly countries” in 2022 “were required to help’ Russian businesses solve problems with financial settlements and stabilize supplies that fell due to restrictions, then in the future they are expected to cooperate and implement joint projects”. “As an example, the session participants considered cooperation with Belarus, in which dozens of Belarusian factories manufacture components for Russian automakers, and companies in the Russia produce engines for Belarusian special equipment”[6]
Reflecting on “cooperation with Belarus”, Kommersant somewhat wryly noted that “the model of deepening of international cooperation, including with Chinese partners, obviously conflicts with idea of technological sovereignty without imports.”[7]
Deputy Prime Minister and Minister of Industry and Trade, Denis Manturov[8] gave a media interview about the Innoprom event in which he extolled the virtues domestic automobile manufacturers replacing foreign companies – although he had to admit there were some difficulties. Manturov also spoke about modernization of United Shipbuilding Corporation (USC) — which is 100% state owned and unites more than 50 design bureaus, shipbuilding, ship repair and machine-building plants, research centers and enterprises in 15 regions of the Russian Federation. USC is responsible for the construction of almost all warships and most of the civil ships in Russia.[9] Manturov said his ministry has developed a draft plan for financial support of USC, including subsidizing losses in the purchase of foreign equipment due to sanctions).[10] Apparently, for some reason, the Ministry of Industry and Trade wanted to transfer USC to Rosatom but Rosatom rejected this idea.[11] The shares will now be will be transferred to the trust management of VTB.[1] Andrey Kostin, CEO of VTB, had previously and publicly expressed doubts that USC would be able to “promptly and effectively cope” with the need to “build hundreds of new oil tankers, gas carriers, offshore vessels, container ships, and other specialized civilian products.”
The issue of foreign gas turbine also came up in the media interview with Manturov. Earlier this text related some reported discussion at a March 2023 videoconference meeting of the State Council Commission on Energy[2]: “The participants discussed ways to ensure Russia’s technological sovereignty in the electricity and heating sectors, including by localising the manufacturing of energy-efficient equipment for high-capacity gas turbines and providing for the maintenance of imported gas turbine power units.”
Manturov is – at least publicly – being dismissive of a problem: “Currently, there are about 1,600 foreign gas turbines in the Russian Federation, of which only about 100 units are manufactured by General Electric. The departure of General Electric and Siemens did not come as a surprise to us, moreover, since 2019 we have been developing new Russian gas turbines and are already entering the full cycle of their mass production. The installed foreign gas turbine equipment in the Russia is very diverse. Therefore, there is logic in organizing the localization of the repair of the largest groups of foreign equipment, and replacing single and difficult-to-learn equipment with Russian counterparts. Also, the Ministry of Industry and Trade, together with the Ministry of Energy, developed an information card for servicing and repairing foreign gas turbine equipment in Russia. With its help, equipment operating organizations can obtain information about the competencies of domestic repair companies – before, many were simply not interested in working with them due to long-term contracts with foreign players.”[3]
On 8 July, Kommersant reported[4] on some discussion at the 2023 Russian Central Bank “Financial Congress”[5]
The same article said that the “opinions of experts are divided”[6] on whether the “strict trade embargo of the G7 countries, primarily on the products and technologies of mechanical engineering in the Russian Federation, means the technological degradation of the Russian economy”.
Earlier in this text I briefly described the described the Russian financial and monetary system as being rather conventional in international terms. As in other countries the Russian Central bank is interested in the possibility of a controlled digital currency, but in Russia this has morphed into talk of “financial sovereignty” as a part-of or companion-of broader economic/technological sovereignty.
In July 2023 the Agency for Strategic Initiatives (ASI) and National Technology Initiative (NTI) held a foresight session on “Financial Sovereignty”, which has been defined by head of the Central Bank, Elvira Nabiullina, as the stability of the financial system against external shocks and the conduct of an independent monetary policy.[8] The ASI-NTI session prepared a number of strategic initiatives to ensure Russia’s financial sovereignty.[9]
I have earlier mentioned the NTI[1] and my participation over several days in one of its “foresight” events – a process which did not impress me[2] because, as noted by Kommersant when reporting on the July joint ASI-NTI event, the resulting report “looks somewhat chaotic — this, however, is the cost of foresight sessions and attempts to place financial stability in the context of simple decisions.”[3]
The ASI Internet site[4] says that it is about “creating possibilities for ambitious leaders” and that it is an “agent of change, working together with leaders on large-scale initiatives and uniting the efforts of society, business and the state”. Basically – like the NTI — it is an officially sanctioned, financed and led organization that tries to interact with business. Its supervisory board is led by Putin and includes various federal officials, regional governors, city mayors and an assortment of businesspeople.
According to the ASI-NTI report, “financial sovereignty is one of the three elements of the big task that we solved at Archipelago 2022[5] (yet another government financed event aimed at building technological capacity)” These were described as: “the task of understanding economic sovereignty; personnel sovereignty; and technological sovereignty.[6]
There is clearly a lot of discussion – and organizational involvement – regarding various aspect of Russian economic and technological sovereignty, but I find it hard to conclude that the end results will be particularly positive – just as I did with my work with the NTI.[7] But this does not mean that the organizers will not put a positive spin on the results. For example: “A number of projects and initiatives that were born during the foresight and later are already being implemented and receive support from the ASI and NTI,” said Andrey Siling, adviser to the head of the ASI.[8]
Not surprisingly, a “digital currency to create an additional channel for financing critical companies and projects” was recommended, as was a “decentralized analogue of SWIFT, a DCMS (decentralized interbank messaging system) which will be integrated into banking information systems and will quickly transactions using smart contracts and automatic currency conversion services.[9] “Among other suggestions of experts to ensure the financial sovereignty of Russia[10] were “development of a cross-border platform for trade and settlements with friendly countries, including using hidden fees;[11] “creation of alternative instruments – digital currency – to ensure cross-border payments and settlements between countries on current transactions;[12] “improvement of legislation on digital” financial assets to ensure the possibility of placing them on foreign platforms and using them as a counter representation for goods, works, services.”[13]
There was also talk of – “creation of an experimental legal regime in the form of an international financial center in Russia to ensure the security of using digital currency and tokens”.[14]
When I lived in China around a decade ago, I did research on development of Shanghai as in international financial center (IFC),[1] and gave the example of failed Russian attempts beginning in 2010 to launch Moscow as an IFC[2] and the “fundamental delusions” involved. These delusion clearly persist!
The ASI-NTI report has even more delusions, such as “creation of supranational reinsurance companies in the BRICS and EAEU countries.[3] “To ensure effective supranational regulation, experts suggest expanding Russia’s cooperation with the EAEU member countries, including through increased regionalization and increased payments in national currencies. In their opinion, the Russian ruble can become the main currency of the EAEU, but the formation of a single payment area is hindered by the low level of integration of the financial markets of the participating countries and their disproportion.[4] It is necessary to review the existing financial integration management system in the EAEU, build a unified infrastructure with a digital payment space, and create a working group to form such a space under the Financial Markets Advisory Committee of the Eurasian Economic Commission (EEC).[5] It is planned that the creation of a supranational digital unit of account of the EAEU is possible on the blockchain. On a single platform, goods will be exchanged, payments will be made in different currencies with the possibility of online conversion. This will contribute to the formation of a single financial field of the EAEU member countries, experts are sure.[6]
As, I will explain later in this text, EAEU countries have absolutely no interest in such financial integration!
As already discussed iwhen briefly looking at the issue of the ruble exchange rate, on 14 August an article by Maxim Oreshkin, economic aide to Putin, was published in Tass[7] and he argued that “the economy is successfully changing its structure, faster than anyone predicted.” He spoke of visits “to dozens of enterprises in more than 20 regions. There are positive trends everywhere. The main change of the last year is the increase in enterprises’ investments in the creation of new technological solutions, scientific groundwork and personnel training. These trends are actively supported by the government and regional authorities.”[8]
On the other hand, on 3 August 2023 Kommersant reported that “the restructuring of Russian industry under the pressure of sanctions looks rather problematic in the dynamics of the first half of 2023”. “Basically, we are talking about redistributing the load on existing capacities with a growing shortage of personnel, reducing inventories and switching to Russian rather than Chinese components and equipment.”[9]
Interestingly, Kommersant also implied that while 2022 saw many companies “quickly transition” from imported Western components to Chinese, early 2023 has seen Russian components making gains.”[10]
So, how real is this restructuring?
For seven years until 2004 I was economic adviser at a manufacturing orientated Australian business association and conducted lots of surveys of association members. I learnt to be quite careful in interpreting survey results, and somewhat distrustful of many types of answers. Nevertheless, apart from Maxim Oreshkin’s assurances and media reports we do not have much to go on except surveys!
The HSE Center for Market Research of the Institute of Statistical Research and Economics of Knowledge internet site says it has surveyed more than 1,000 “industrial organizations” looking “at key import substitution trends prevailing in industries in 2022-2023”.[1] Organizations surveyed were “large and medium-sized industrial enterprises, engaged in activities in the manufacturing industry, mining minerals, as well as to provide electricity, gas and steam, air conditioning, water supply, sanitation, organization of collection and disposal waste and elimination of pollution.”[2]
“According to the results of 2022 and the first half of 2023, 65% of production facilities have the potential for implementing production of import-substituting products. More detailed distribution opinions of respondents shows that 25% of enterprises are at the maximum level ability to produce import-substituting products, 27 and 13% – at medium and low ability respectively. A third of industrial enterprises, according to the results of the survey, do not have such possibilities.”[3]
“Industry assessments indicate an accentuated need for industrial enterprises in new domestic equipment, which is not inferior in quality to foreign analogues. In in particular, 45% of production managers note a high demand for Russian equipment, comparable to foreign, 32% have an average need and only 10% do not need it. The greatest need for new competitive domestic equipment is in mining enterprises: 85% of coal mining organizations and 84% of organizations providing services in areas of mining,”[4] according to HSE.
Earlier in this text I noted that Russian mining (including coal) was claimed to be in need of significant amounts of foreign technology and services, based on reports by Florian Vidal[5] and by Overland and Loginova.[6]
HSE reported that “despite the increased need for new domestic equipment comparable in terms of quality with foreign analogues, only 25% of industrial enterprises have it.”[7]
HSE also reported that “absolute leaders in the availability of new domestic equipment, which is not inferior in terms of the quality of foreign analogues are oil and natural gas production enterprises, the share of which is 90%.”[8] Earlier I noted claims that a lot of effort was going into Russian production of oil and gas equipment, particularly LNG,[9] although there were significant doubts about the time-frame for success.[10]
HSE also said that “22% of businesses receive or purchase critical important components within the framework of parallel import substitution. 54% of respondents assess the procedure as difficult, compared to 35%, for whom it does not cause any difficulties.”[11]
So, it is probably the case that some of the “dozens of enterprises in more than 20 regions” are adjusting and telling Maxim Oreshkin the truth. But most are probably like Mishuskin and prefer to deliver good news to Oreshkin — particularly if it offers the prospect government contacts or funding!
My view is that the scale of the Russian “economic and technology sovereignty” policy – in terms of number of industries and depth in each – is extremely unrealistic!
Finally, I want to offer a “conclusion” which I offered to Russian students in a speech near Lake Baikal in 2018:
“For innovative people thinking about starting a technology orientated ‘start-up’, there are no rules except a desire to create, and a willingness to accept the risk of failure (and some would say, even embrace it). For governments, the rules for an innovative society are two-fold: Firstly, get out of the way. Russia (and China) need to reduce the extent in controlling what happens in society. This is the case at any official level. Secondly, getting “out of the way” does not mean abandoning the responsibility for ensuring that honesty is the basis of society relations and business dealings.”[1]
[5] Florian Vidal, “Russia’s Mining Strategy Geopolitical Ambitions and Industrial Challenges”, French Institute of International Relations (Ifri)”, Russia/Eurasia Center, 3 April 2023
[6] Indra Overland and Julia Loginova, “The Russian coal industry in an uncertain world: Finally pivoting to Asia?”, Energy Research & Social Science, 8 June 2023
[3] “Sanctions Calling: The Dire Prospects for Russia’s Chips Industry”, Julien Nocetti (French Institute for International Relations (IFRI), Paris) DOI: 10.3929/ethz-b-0006215
“Russia’s Technological Sovereignty”, Russian Analytical Digest, No.298, 18 July 2023
[6] “Ни кола, ни дрона”, Kommersant, 31 July, 2023
https://www.kommersant.ru/doc/6136203
[7] “Ни кола, ни дрона”, Kommersant, 31 July, 2023
https://www.kommersant.ru/doc/6136203
[8] “Ни кола, ни дрона”, Kommersant, 31 July, 2023
https://www.kommersant.ru/doc/6136203
[1] “Sanctions Calling: The Dire Prospects for Russia’s Chips Industry”, Julien Nocetti (French Institute for International Relations (IFRI), Paris) DOI: 10.3929/ethz-b-0006215
“Russia’s Technological Sovereignty”, Russian Analytical Digest, No.298, 18 July 2023
[8] “Sanctions Calling: The Dire Prospects for Russia’s Chips Industry”, Julien Nocetti (French Institute for International Relations (IFRI), Paris) DOI: 10.3929/ethz-b-0006215
“Russia’s Technological Sovereignty”, Russian Analytical Digest, No.298, 18 July 2023
[1] “Товарам выдадут паспорта”, Kommersant, 24 July 2023
https://www.kommersant.ru/doc/6122746
[2] “Товарам выдадут паспорта”, Kommersant, 24 July 2023
https://www.kommersant.ru/doc/6122746
[3] “Товарам выдадут паспорта”, Kommersant, 24 July 2023
https://www.kommersant.ru/doc/6122746
[4] “Товарам выдадут паспорта”, Kommersant, 24 July 2023
https://www.kommersant.ru/doc/6122746
[5] “Товарам выдадут паспорта”, Kommersant, 24 July 2023
https://www.kommersant.ru/doc/6122746
[6] “Товарам выдадут паспорта”, Kommersant, 24 July 2023
https://www.kommersant.ru/doc/6122746
[7] “Товарам выдадут паспорта”, Kommersant, 24 July 2023
https://www.kommersant.ru/doc/6122746
[8] Stanislav Tkachenko , Andrei Terekhov, “US CHIPS and Science Act and Its Impact on Russia’s High-Tech Sector”, Valdai Discussion Club, 13 April 2023
[2] “Тест на отсутствие аналогов”, Kommersant, 29 June 2023
https://www.kommersant.ru/doc/6070251
[3] “Тест на отсутствие аналогов”, Kommersant, 29 June 2023
https://www.kommersant.ru/doc/6070251
[4] “Государство выложит венчуры на витрину”, Kommersant, 21 July 2023
https://www.kommersant.ru/doc/6112258
[5] “Государство выложит венчуры на витрину”, Kommersant, 21 July 2023
https://www.kommersant.ru/doc/6112258
[6] “Государство выложит венчуры на витрину”, Kommersant, 21 July 2023
https://www.kommersant.ru/doc/6112258
[7] “Государство выложит венчуры на витрину”, Kommersant, 21 July 2023
https://www.kommersant.ru/doc/6112258
[1] Florian Vidal, “Russia’s Mining Strategy Geopolitical Ambitions and Industrial Challenges”, French Institute of International Relations (Ifri)”, Russia/Eurasia Center, 3 April 2023
[2] Indra Overland and Julia Loginova, “The Russian coal industry in an uncertain world: Finally pivoting to Asia?”, Energy Research & Social Science, 8 June 2023
[7] Florian Vidal, “Russia’s Mining Strategy Geopolitical Ambitions and Industrial Challenges”, French Institute of International Relations (Ifri)”, Russia/Eurasia Center, 3 April 2023
[1] Sergey Sukhankin, “Gosplan 2.0: Is Russia Taking Another Step Toward a Planned Economy?”, Eurasia Daily Monitor Volume: 19 Issue: 130, 7 September 2022
[3] Sergey Sukhankin, “Gosplan 2.0: Is Russia Taking Another Step Toward a Planned Economy?”, Eurasia Daily Monitor Volume: 19 Issue: 130, 7 September 2022
[2] Sergey Sukhankin, “Gosplan 2.0: Is Russia Taking Another Step Toward a Planned Economy?”, Eurasia Daily Monitor Volume: 19 Issue: 130, 7 September 2022
[3] Security chief says Russia has all necessary resources to reach economic sovereignty”, Tass, 10 January 2022
https://tass.com/economy/1560177
[4] Coordination Centre of the Russian Government, “Mikhail Mishustin holds a strategic session on strengthening technological sovereignty”, 11 April 2023
The Eurasian Economic Union (EAEU) consists of Russia, Belarus, Kazakhstan, Kyrgyzstan and Armenia. Efforts to attract Uzbekistan, Tajikistan and Turkmenistan have failed for various reasons, but this does not mean that Russia regards these countries as unimportant. According to its internet site, the EAEU is an international organization for regional economic integration. It “provides for free movement of goods, services, capital and labor, pursues coordinated, harmonized and single policy in the sectors determined by the Treaty and international agreements within the Union.”[1] There is no provision for common foreign policy and security arrangements, which has given Kazakhstan room to manoeuvre as it expressed views on Russian actions in Ukraine.
Li Ziguo of the China Institute of International Studies notes that Russian stitched together the EAEU by offering costly “benefit lures” such direct payments, subsidies, and preferential tariff and import rule exceptions. He summarizes the issue in the following way: “While the European Union puts forward various requests to applicant countries if they want to join the union, the situation in the EAEU is totally opposite: applicant countries put forward various requests before they agree to join the union.”[2]
A July 2023 RIAC report on the EAEU says that “for Russia, the implementation of an EAEU integration project was an opportunity to attain and strengthen its status as a leader in the international economic and political scene.”[3] Moscow is interested in labour migration from Central Asia” because it helps “compensate for the shortage of labour in low-level positions”, “helps maintain social stability in the countries that export migrants” (remittances from migrant workers are very important for several Central Asian countries); and “promotes Russian soft-power” in the region. Citizens from EAEU countries find it easier to obtain work in Russia than non-EAEU countries in Central Asia who must apply for visas.
According to a report prepared by the Russian Ministry of Economy,[4] 1.7 million people came to work in the Russian Federation in 2022 from the other four countries of the EAEU – the same as in 2021 – with more than half of the workers from Kyrgyzstan (1 million people).
In the first quarter of 2023, 350,000 Tajik citizens entered Russia; as did more than 630,000 Uzbek citizens; and nearly 173,000 Kyrgyz citizens. According to Russian authorities, a total of almost 1.3 million foreign citizens entered Russia in the first quarter of 2023 (January 1-March 31) with “work” as the stated purpose of their visit — 60 percent more than the same period in 2022.[5]
The remittances send to Kyrgyzstan in 2022 were equal to nearly a quarter of GDP, but in the case of Kazakhstan it was less than 0.5% of GDP.[6]
According to Kommersant, “the share of workers from the EAEU countries is not the most significant part of labor migration to the Russian Federation. During the year, up to 9–10 million people can work in the country in total, a significant part of which are visitors from Uzbekistan and Tajikistan which are not EAEU members.”[7] “It should be noted that the relatively massive exodus of Russian citizens from the country, which occurred after the start of the military operation, and then in connection with mobilization, somewhat changed the migration flows in the EAEU. Thus, according to the estimates of the Armenian government, last year about 100 thousand Russians moved to that country, while labor migration from Armenia to Russia is estimated by the authors of the government report at 300 thousand people. Apparently, a comparable number of Russian workers also left for Kazakhstan (200,000 in the opposite direction). However, it is still impossible to estimate what part of those who left continue to work remotely for Russian companies, thus actually remaining part of the Russian labor market.[8]
As noted earlier in this text, there are many estimates of the number of workers who left – and even returned – after February 2022.
According to Putin, internal EAEU trade grew by 14% in 2022 to $83.3bn. The July 2023 RIAC report says that since the establishment of the EAEU, its combined GDP (PPP) has fluctuated within 5.5–5.7% of the global GDP. “In 2021, the Union’s share in global GDP (in current prices) was 2.1%, or slightly above $2 trillion in absolute terms.”[9]
Earlier in this text I wrote about the National Projects covering development and expenditure on various aspects of Russian society and economy in the 2019-2024 period.[10] One of these national projects concerned “International cooperation and export” which includes “formation of an effective system of division of labor and production cooperation within the framework of the EAEU in order to increasing the volume of trade between the Member States of the Union not less than one and a half times and ensure the growth of the volume of accumulated mutual investment by one and a half times”.
Deputy Prime Minister and Minister of Industry and Trade, Denis Manturov, was asked about this particular national project in a media interview in July 2023.[11] He said that it had been extended from 2024 until 2030 and said that “for the first time in the ten years of the existence of the EAEU, an effective mechanism of financial support will be launched, which will allow enterprises of the EAEU countries to implement significant cooperation projects, develop industrial cooperation and create new joint ventures. Support will be provided through subsidizing interest rates on credits and loans issued by international and national financial organizations. In May, the heads of the EAEU member states signed a protocol on amending the treaty on the EAEU, which provides for the possibility of implementing such a mechanism. The next step is the development of criteria for selecting cooperative projects for financial assistance. It has already been decided that such projects should be implemented by participants from three or more member states of the union. Moreover, we are talking about both technological cooperation and industrial cooperation, as well as the use of raw materials and materials, and the establishment of supply chains.”[12]
On 16 July 2023 Kommersant reported on how this cooperation might begin. Lists of types of work needed to replace foreign supplies and to create new production facilities have been sent to Russian regions. “It is assumed that they know the optimal points for industrial growth: the federal center does not have data on the numerous needs of various industries.”[13] Analysts at the Higher School of Economics (HSE) have done their own statistical study hoping to identify regions in Russia and other EAEU countries that have industries where such cooperation is most likely.[14]
The HSE report says “the potential of industrial cooperation was assessed through the identification of complementary branches of specialization based on the analysis of intersectoral balances according to the OECD.[15] Thus, we get these types of examples:
Steel production has ties to nine industries, including: motor vehicle manufacturing; computers, electronic and optical products; electrical equipment; other machines and equipment; rubber and plastic products; furniture, other finished products; mining; water supply, water disposal, waste collection and disposal; supply of electricity, gas and steam, air conditioning.”[16]
“Chemicals and products manufacturing has ties to eight industries, including: coke and petroleum products; electrical equipment; rubber and plastic products; medicines and materials; textile products; mining; wood processing, production of paper, wood products and paper; supply of electricity, gas and steam, air conditioning.”[17]
I certainly get the idea of clusters, but these examples are so broad to be almost meaningless. One could almost make a similar type of claim of connection between industries that use electricity!
EAEU member countries – particularly Kazakhstan — may fear Russia, with the example of Ukraine clear to all, but neither do they want to be left alone in the face of rising Chinese power and assertiveness. In my view, the future of the EAEU is not bright, although it is not about to collapse any time soon.[18]
In 2017 I wrote a very long report on Russia’s relationship with Central Asia and China within the context of the Belt and Road Initiative and the Shanghai Cooperation Organization (SCO) entitled “New Eurasian Age: China’s Silk Road and the EAEU in SCO Space”, which can be accessed here.[19]
In light of the Russian invasion of Ukraine, Kazakhstan is showing a quite strong streak of independence. It has never recognized Crimea as part of Russia and Kazakh President Kassym-Jomart Tokayev has openly refused to support Russia. Domestically, Kazakhstan has countered any signs of support for Russia’s war on among Kazakh society by banning Russian military propaganda symbols. Russia, in turn, seems to have decided to punish Kazakhstan more than once reducing – for claimed “maintenance” reasons – the flow of Kazak oil through the Caspian Pipeline Consortium (CPC). This pipeline which goes to the Russian port of Novorossiysk on the Black Sea, handles about 80% of Kazakhstan’s oil exports.
A May 2022 summit of EAEU[20] leaders focused on improving energy ties and developing regional trade routes. Despite not being a EAEU member, Uzbekistan maybe interested in working with Russia and Kazakhstan on a “trilateral gas union”[21] which may include supplying natural gas to China. Uzbekistan was initially hesitant, but recent energy problems may be causing a rethink.
Kazakhstan is interested in the idea of a n international North-South transport corridor (INSTC) running from Russia south through Kazakhstan, Turkmenistan and Iran to the Persian Gulf with a sea route to India etc. An alternative route would go from Russia, through Azerbaijan to Iran.
Two other proposed international transport corridors (ITCs) are the Trans-Caspian International Transport Route (TITR) and the East–West Transport Corridor (EWTC). The last of these runs through Russia.
The Trans-Caspian International Transport Route (TITR) is mostly used to ship cargo from China to Europe via Kazakhstan, Azerbaijan and Georgia, bypassing Russia. The TITR is also linked to Ukraine. Nevertheless, the bulk of the commodity turnover is contributed by exchanges between the EU and China, whereas trade between the remaining participants is modest (about $10 billion in 2021). Therefore EAEU countries on this route are not exploiting its full export potential.[22]
China
In October 2022 the Centre for Contemporary China Studies, a think-tank inside the Indian Ministry of External Affairs, asked me to go to New Delhi to speak on “China-Russia Relations in the Era of Putin and Xi”. I prepared a long background paper to my presentation which can be accessed here.[1] My general views about this relationship remain unchanged.
Russia and China are not an easy fit as far as people go. There has been a Russian tendency in the words of a former Russian diplomat, Georgy Toloraya, to “habitually look down on China”.[2] Sergei Karaganov, a prominent Russian commentator who favours closer relations with China, noted in early 2018 interview with an Indian newspaper that “there are some members of the Russian elite who are fearful of China”.[3]
In 2017, a Chinese academic gave his opinion on the superficiality of this partnership: “We don’t trust each other and the partnership is unreliable. It’s just that we don’t have a choice, because we are great neighbours. Russia’s strategic position is isolation. The Russians only like Europe and the United States, but it is not reciprocal because nobody likes them.”[4]
Wang Huiyao, a Chinese foreign policy advisor and president of the Center for China and Globalization, a Beijing-based think tank, said in June 2023: “It’s not that China wants to be closer to Russia. It’s that the U.S. is forcing that.[5]” Dmitri Trenin, a prominent Moscow analyst, has succinctly summed up the the relationship saying it is “founded on the premise that the two will never turn against each other, but neither will they automatically follow each other: a fine combination of reassurance and flexibility” [6]
A September 2022 Valdai paper, “Russia-China Strategic Partnership in the Context of the Crisis in Europe”[7] says that “when future historians will look for the starting point of the collapse of the old international order and the rise of a new world order where a small group of powers can no longer claim undivided leadership, they can begin with the February 24, 2022” Russian invasion of Ukraine.
While acknowledging some sanctions caused difficulties between Russia and China, and – in my view – optimistically painting a positive picture of future developments, the Valdai paper concludes that “in their decision to openly confront Russia over Ukraine, the Western countries underestimated the scale and depth of the Russia-China strategic partnership in the new era”. This Valdai paper is typical of many of its previous reports in attempting to promote a – in my view – unrealistic or even romantic vision of the Russia-China relationship.
Alexander Gabuev says that “Russia is reorienting itself to China. But their relationship now is deeply asymmetric. China is clearly the stronger partner”. “That said, the Chinese are skillfully massaging Russia’s ego with their rhetoric. And their broader attitudes toward each other helps. China doesn’t care about Alexei Navalny, and Russia doesn’t care about Xinjiang. That provides a type of glue for their relationship that makes it more comfortable for them to talk.”
Nearly a year and a half into the full-scale invasion, the relationship between Russia and China is largely following the same pattern as before. Chinese investment in Russia remains relatively small compared to it investments elsewhere, partly because Moscow is not prepared to accept Chinese investment without certain restrictions.
A RIAC 2022 report focussed on Russia-China relations barely mentions cooperation in science and technology, which is hardly surprising because for most of 2000 and all of 2001 travel between Russia and China was severely restricted. The RIAC 2001 report[8] does, however, have quite a large section which claims that “scientific cooperation between Russia and China is marked by its sheer diversity, touching on many fields and using numerous mechanisms at the same time. While these areas are not always fully coordinated, they are nevertheless in the spirit of the general logic to continue to search for new projects and expand interaction.”
The RIAC 2022 report then goes on to say that “despite the long list of areas in which the two sides cooperate, real and productive research interaction can only be seen on a small range of issues”:
“Several hundred agreements on scientific, technical and educational interaction have been concluded between the countries’ research institutions and universities over the past decade. However, many of these agreements remain on paper as the sides do not really know how to carry out this interaction, and because the documents themselves are full of abstract plans and declarative statements. Many initiatives are limited to science exchanges and research conferences, with no joint research projects being carried out at all. However, more active forms of interaction have appeared in recent years, mainly in hi-tech fields.”
I have already covered some aspects of Russia-China cooperation earlier when looking at Russia’s policy of “technological sovereignty” – including aircraft construction — and will not elaborate further here.
Views on military cooperation between Russia and China vary. Alexander Gubaev seems convinced that it is “robust” and points to lots of meetings between high-level officials.[9] However, he does not provide much substantial evidence besides this. It may be that these meetings are a harbinger of what is to come, but I think that China will remain very cautious.
In June 2023, the publication “War on the Rocks” reported on a study “using a comprehensive collection of Russian and Chinese language media reporting and technical articles on bilateral military ties”.[10] The authors say they “analyzed key bilateral agreements and official statements, all major arms sales and other forms of military-technical cooperation, exchanges of military personnel for education and training, joint military exercises and operations, and other relevant military-to-military engagements” primarily covering the period from 2014 to November 2022.”
According to the study: “Despite a number of rhetorical flourishes at leadership summits, after undergoing a period of rapid expansion from 2014 to 2019, Russian-Chinese military cooperation has largely plateaued in recent years. There is little evidence of continued expansion since 2020 in either military-technical cooperation or joint military activities.”[11]
“When discussing purely military technology development, the partnership has remained somewhat one-sided, with little evidence of technology transfer from China to Russia. Russia has turned to China in its efforts to replace key Ukrainian and Western dual-use components, especially in areas such as optics and electronics, although these projects have been limited to some extent by sanctions. Some projects initiated after 2014, especially the purchase of Chinese marine engines, have been curtailed because Chinese equipment was found to be of insufficient quality.” “Overall, Russian-Chinese military-technical cooperation continues to operate at a high level, though there is potential for further growth if the two sides can overcome lingering concerns over issues such as reverse engineering, competition in global arms markets, reluctance to share sensitive technologies, and an enduring preference to maintain self-sufficiency in defense production.”[12]
“Russia and China have demonstrated relatively few aspects of the advanced military cooperation practiced by the United States with its European and Asian allies which generally occurs through the establishment of integrated military command centers, joint deployments, base sharing, and, at the highest levels, the formulation of a common defense policy.”[13]
Temur Umarov and Alexander Gabuev write:[14] “Unlike Russia, which views its security interests in Central Asia in terms of national security and geopolitical competition, China is content with protecting its commercial interests and making sure that developments in neighboring countries do not endanger political stability at home. Xinjiang Province, in China’s far west, borders Kazakhstan, Kyrgyzstan, and Tajikistan, and it resembles them in culture, ethnicity, language, and religion far more than it resembles other parts of China. Ever since these nations gained independence following the breakup of the Soviet Union, Beijing has sought friendly ties with them for fear that they might otherwise inspire or foment separatism in Xinjiang.”
In 2016 Putin spoke about coordinating the work of the EAEU and the Silk Road Economic Belt (SREB) — which is the land part of what is now called the Belt and Road Initiative (BRI) — to “promote an extensive Eurasian partnership, which promises to evolve into one of the formative centres of a vast Eurasian integration area.”[15] At the May 2017 Belt and Road Summit in Beijing, Putin said: “I believe that by adding together the potential of all the integration formats like the EAEU, the OBOR (One Belt. One Road now known as BRI), the SCO and the ASEAN, we can build the foundation for a larger Eurasian partnership”.
While Putin spoke of the “extensive Eurasian partnership”, some Russian analysts referred to “a partnership or community of Greater Eurasia”.[16] A succession of Valdi Discussion Club reports — under the influence of Sergei Karaganov – with the general motto “Towards the Great Ocean” calling for “the transformation of Central Eurasia into a zone of joint development” by combining the SREB with the Russian EAEU project[17][18] were subsequently released.
References to “security” eventually were eventually included in these reports, with a “rejuvenated SCO with China, India, Kazakhstan, Pakistan, other regional powers, and eventually Iran.”[19] That is, a “Community of Greater Eurasia” geopolitical bloc which will include “China, Russia, India, Kazakhstan, Iran, and many other states”. However, whereas Kazakhstan as a country continually gets a separate mention in the Valdai reports, Putin has never separately mentioned Kazakhstan in his speeches or written documents – but rather always envisages it participating in Eurasian integration as part of the EAEU and not as an individual country.
It is noteworthy that when Xi Jinping visited Kazakhstan just prior to the 2022 SCO summit in Uzbekistan, he specifically said that “China will always support Kazakhstan in maintaining national independence, sovereignty and territorial integrity”[20].
On their side, the Chinese have few ideas of their own about Greater Eurasia and – in my experience – when directly asked about it are likely to refer to the writings of Karaganov and express scepticism. According to Ka-Ho Wong, writing in a RIAC ‘blog’, “A Comparative Study of the Greater Eurasian Partnership: The Chinese and Russian Perspectives”, “Chinese scholars understand the Greater Eurasian Partnership by reading Sergei Karaganov’s articles and the relevant Valdai club reports”.[21]
Ka-Ho Wong says that Russian scholars perceive the “Greater Eurasian Partnership” initiative as “grand strategy”, while Chinese scholars consider it an “opportunistic move” by Russia to cope with its “international isolation”. The Chinese consider the idea to have a “bleak future” because of its “vagueness” and “strong political sense”. They consider Russia a “Eurocentric country” which will abandon the partnership “following rapprochement with the West”. “Meanwhile”, Ka-Ho Wong adds, “the EAEU has suffered from institutional deficiency and consequently most cooperation between China and the EAEU member states is on the bilateral level”.
The mainstay of Russia’s exports to is energy, which accounted for 75% of Russia’ exports to China in 2022. In 2022, China’s exports of high-tech products to Russia surged by 51%, and its exports of automobiles and parts increased by 45%.
In early 2023, Russia surpassed Saudi Arabia to become the largest crude oil exporter to China. In 2022, Russia accounted for only 10% of Chinese LNG imports and 25% of pipeline gas imports; Turkmenistan is the main supplier of piped gas to China. [22] In 2022 the value of Russia’s agricultural product exports to China increased to $US7 billion. China imports about 110 million metric tonnes of grain every year, and only about 1 million tonnes of it is imported from Russia, accounting for less than 1%. China imports only 1% of its soybeans from Russia.
According to a “chinarussiareport.substack.com”, “Beijing is emphasizing to Russian elites that it seeks ties with Moscow due to an alignment of fundamental national interests. While Beijing is still expressing support for Putin, it’s also underscoring the non-personal aspects of the Sino-Russian bilateral relationship in the wake of the Wagner ‘mutiny plus’.”[23] “Despite its attempt to institutionalize the relationship, it appears that the China has abandoned calling Russia an ‘all-weather friend’, as it did briefly in 2021.”[24] “Accordingly, Beijing’s new framing of the Sino-Russian relationship – and avoidance of the ‘all-weather friend’ designation – appears aimed at institutionalizing ties and de-emphasizing the Xi-Putin personal relationship while also assuaging Russian anxieties about a junior partnership.”[25]
Other significant near countries and regions
During the next decade or so, it is very hard to see Russia having extensive two-way economic relations with any country other than China or those in the EAEU or Central Asia. No significant country in Europe will want to deal with Russia in this way, while such countries as India, Turkiye, Iran and Azerbaijan will only be significant because of specific trade items or possible trade routes. A later section in this text will look at Russian international economic relations based of various Russian exports categories.
In 2018 I wrote a report on “Russia’s Approach to India and China (within Eurasia).[1] I concluded that Russia clearly, and logically, puts more emphasis on its relationship with China than with India. India, in recent years, has mainly been seen as a market for Russian military equipment and civilian nuclear technology. This has led Russia to be sometimes very casual when considering India’s broader interests. As a result, some Russian analysts believe that “Russia is losing India”. However, there are also signs that India’s growing ambitions — as evidenced in Russian eyes by the Quad — are leading to some Russian refocus on India.
Russia has been pushing for Turkiye to become a hub for distributing some of its natural gas to Europe, but Turkiye seems to have decided that it wants such a hub to handle non-Russian gas as well.[2] Russian natural gas imports account for around a third of Turkish natural gas consumption, with Iran and Azerbaijan also being significant suppliers.[3] It is also clear that Ankara sees Turkiye as a rising power in the region and is trying to boost its influence with countries of Central Asia with which its people generally share the Islam religion.
According to a 7 July 2023 Kommersant article[4], “Russia and Iran have begun substantively discussing partnerships in the field of IT and telecommunications. The Russian Ministry of Digital Development offered Tehran technological support for the North-South transport corridor (INSTC) – which was discussed earlier in this text – including strengthening data transmission channels. “The IT technology market in Iran is growing rapidly. However, experts note that the sector is well developed, effectively supported by the state, and the question is whether Russian solutions will be in demand.”[5]
Products
The research company “World’s Top Exports” has produced useful data on Russian International Trade.[1] It says that the following export product groups represent the highest dollar value in Russian global shipments during 2022. Also shown is the percentage share each export category represents in terms of overall exports from Russia:[2]
Mineral fuels including oil: US$348.3 billion (69.5% of total Russian exports)
Iron, steel: $21.5 billion (4.3%)
Fertilizers: $17.4 billion (3.5%)
Gems, precious metals: $16.9 billion (3.4%)
Aluminum: $10 billion (2%)
Wood: $8.6 billion (1.7%)
Fish: $7.8 billion (1.6%)
Cereals: $7.24 billion (1.4%)
Copper: $7.16 billion (1.4%)
Inorganic chemicals: $5.8 billion (1.2%)
The importance of Russian energy exports to the economy is clear.
Energy Exports
According to the 2023 “Statistical Review of World Energy”[1] published by the Energy Institute (and formerly published by BP): in 2022 Russia produced 11 million barrels of oil per day which (equal to 11.9% of world production); 618 billion cubic meters of natural gas (equal to 15.3% of world production); and 439 million tonnes of coal (equal to 5.3% of world production). Russia is the world’s largest exporter of fossil fuels.[2]
During his speech at the St Petersburg International Economic Forum (SPIEF) on June 16 2023, Putin claimed that Russia is “getting off the needle” of its raw materials export dependency and that the government is making progress in diversifying its revenue sources.[3] I assume that Putin was particularly referring to the policy of “economic and technology sovereignty” which I have already extensively discussed, and will not again do so here.
Bruegel, the “European thinktank”, has a “Russian crude oil tracker”[5] site which says in 2021 – a year earlier than for the above mentioned Energy Institute data – Russia produced 540 million tonnes of crude oil (accounting for 13% of global production). Of this, 260 million tonnes were exported directly as crude oil (comprising 13% of global exports). Russia refined the remaining 290 million tonnes, of which 140 million tonnes were exported as refined products (11% of global refined exports)
The Druzhba pipeline system carries oil to the EU, which has not been sanctioned by the EU, while the Easter Siberia – Pacific Ocean (ESPO) pipeline carries oil to China.[6]
Remaining Russian crude oil has historically been mainly exported by sea to the EU and China. “Historically, seaborne EU crude oil imports from Russia originated from Urals fields via western ports in the Baltic and Black Sea.” Bruegel says that “this is where the largest impacts of the Ukraine related embargoes and price caps are being felt. Eastern Siberian fields have historically served Asian customers, largely China.”[7]
Just what will be the influence of oil exports on Russia’s economic future is an extremely complex and speculative issue involving the war in Ukraine, OPEC policies, world demand (including the influence of climate change policies which are addressed later in this text) etc. I do not propose to attempt to delve into the oil issue here, except to note its importance for the macro-economic position of Russia.
According to the 2023 “Statistical Review of World Energy”[8] Russia produced 618 billion cubic meters (bcm) of natural gas — both pipeline and LNG (natural gas liquified by being cooled to minus 163 Celsius and transported by ships) — in 2022.
Before its February 2022 invasion of Ukraine, Russia sold over 150 billion cubic meters (bcm) of gas to Europe per year,[10] which was equal to about a third of Europe’s imports.[11] Most of this gas was sent by pipeline – including Nord Stream – from the Yamal Peninsula in the north of Russia. These gas flows have now mainly stopped.
European plans unveiled in 2021 to reduce use of fossil fuels meant that even before the invasion of Ukraine and associated events, Russia needed to think about new markets for Yamal gas.[12] China was the obvious potential market. According to the 2023 Statistical Review, in 2022 China accounted for about 26% of world primary energy (commercially traded fuels, including renewables used to generate electricity) consumption.[13] Over half of this was from relatively heavily polluting coal, so there would appear ample scope for increased use and imports of natural gas.
Russia already supplies about 16bcm gas to China each year via the Power of Siberia pipeline launched in 2019, and is expected to reach maximum capacity of 38 bcm per year in 2024[14] This gas comes from dedicated gas fields in eastern Siberia, which are far from the gas fields on the Yamal Peninsula, so Russia wants to construct another pipeline, known as Power of Siberia 2 (or PS2), to supply gas from the now idle fields in the Yamal Peninsula. The pipeline would cut across Siberia, pass by Irkutsk, and cross Mongolia to China.[15] However, even if Power of Siberia 2 is successfully constructed by 2030 with a capacity of 50bcm per year as suggested by some reports[16], it will not be able to compensate fully for the loss of the European market.[17][18]
China presently gets about 5% of it gas from Russia, and that PS2 would lift this to about 20%. China appears to be in no hurry to agree to PS2 as it wants to have a diversified group of gas suppliers.[19] China also imports about 35 bcm of gas per year from Turkmenistan via three almost parallel pipelines, and wants a fourth – known as Line D.[20]
The already mentioned a possible Russia-Kazakhstan-Uzbekistan “gas union” would allow gas produced in the latter two countries to be exported to China with Russia providing compensatory gas to them, basically using existing pipeline networks. An analysis by Russia’s Yakov and Partners (former McKinsey)[21] reportedly concluded that up to 20 billion cubic meters can be delivered to Kazakhstan and Uzbekistan[22] and another 10 billion cubic meters can be delivered through Turkey if a project to create a gas hub is implemented.[23]
Despite Russian hopes for PS2 – and any financing commitments – and a “gas union”, China may prefer to rely more on LNG which is transported by ships with its supply not tied to fixed pipeline routes and suppliers.
World LNG demand is expected to increase very significantly over the coming decade, with greatly increased production in mainly the US and Qatar. A significant part of the plants under construction in these countries are expected to start production around 2025”[24]
In 2022, Russia was the world’s fourth largest LNG exporter with sales of over 40 bcm, equal to 8% of the total world market.[25] A 2021 document entitled “The Long-term Programme for the Development of Liquefied Natural Gas Production in the Russian Federation” assumed Russia would produce about 195 bcm per year by 2035, equal to 15-20% of total market.[26]
While the forecasts in the 2021 document have not been officially changed, Russian officials have more recently spoken about achieving LNG production capacity of around 140 bcm per year “in the medium term”.[27] The probable reduction in the production target from 195 bcm to 140 bcm can be attributed to the difficulties arising from the sanctions” and the need to develop home-grown technologies and train the personnel that would boost the potential of the domestic LNG sector.”[28]
Russian plans to boost domestic technology in LNG was noted earlier when discussing “technology sovereignty”, [29] as were doubts about how fast this could be achieved.[30]
Whatever the possibilities for the future, a production line at the Novatek Yamal LNG project with a capacity of over 1 bcm a year reportedly already operates using the Russian “Arkticheskiy kaskad” technology, [31] although Novatek has at times complained about the poor quality of components that were supplied by Russian companies.[32]
Western sanctions have also hit construction of Russia’s LNG transport capacity, both by Russian shipyards and foreign shipyards.”[33] In a July 2023 media interview, Deputy Prime Minister and Minister of Industry and Trade, Denis Manturov[34] spoke about ice-class LNG carriers for the Northern Sea Route: “At the present time five LNG carriers for Novatek are being built at SSK Zvezda in cooperation with partners. Ahead is the construction of 10 more such vessels. In addition, a roadmap for the design of a fully domestic gas carrier is currently being prepared: it will include the stages and deadlines for all work. This ice-class gas carrier is planned to be designed using Russian equipment. Therefore, at the moment, as part of the implementation of comprehensive projects for the creation of ship component equipment, measures are being taken to create domestic equipment for this gas carrier. The number of vessels in the domestic series and even the number of series of completely Russian gas carriers will depend on the actual need for the volume of LNG transportation from the Arctic fields.[35]
World coal production in 2022 was about 8,803 million tonnes,[36] of which Russia produced 440 million tonnes — or 5% of world output and 18% of global exports. (By contrast, China produced 4560 million tonnes.)
In commentary terms, Russian coal exports have received much less attention than oil or gas. However, in early 2023 – a year after Russian invasion of Ukraine — Indra Overland and Julia Loginova published a very useful overview of the Russian coal industry and its prospects,[37] and I quoted their report when looking at “technological sovereignty” issues earlier in this text.
They say that “Russian coal exporters have attempted to accelerate their shift to the East following the European Union’s sanctions over the war in Ukraine and the Russian coal infrastructure is being expanded to serve the Asia-Pacific market. The analysis concludes that the Russian coal industry is not preparing for more long-term changes in international coal markets, and this exacerbates the magnitude of risks for local communities and regional economies within Russia as well as for global de-carbonisation.” Overland and Loginova say this contrasts with the Russian oil and gas industries which have “demonstrated a significant capacity to adapt to new constraints such as low prices and Western sanctions”.[38]
The 2020 strategic program for the coal industry out to 2035 has scenarios for exports ranging from a “slight decline” to a rise of “almost 50%”. In the high scenario, the Russian Ministry of Energy hopes to raise Russia’s share of the world coal market to 25%.[39] Overland and Loginova say that “Russian strategic coal policy pays scant attention to global energy transition”, and has not been adjusted to reflect the impact of various (mainly EU) sanctions introduced on Russian coal in 2022.
Overland and Loginova say that “for over a decade” Russian policy has “focused on creating incentives for accelerated development of transport and coal handling infrastructure linking major coal basins in Siberia” with Asian markets. It invested over $10 billion “in the infrastructure along the Trans-Siberian Railway and the Baikal-Amur Mainline (BAM) and seaports in the Arctic and Far East in the expectation that Asian demand for imported coal will continues to rise”, and coal companies also invested in modernized facilities and transport capacity. “Despite these long-term efforts, the pressing need to swiftly shift to Asia following international sanctions remain constrained by railway and seaport bottlenecks.”[40]
Overland and Loginova are not very optimistic about the future of the Russian coal industry. Apart for climate change, foreign sanctions and transport logistic issues, they say that “coal production costs are already very low’ and that “coal freight is a is a low-margin business for Russian railways where it faces significant competition from other commodities (timber, minerals) and goods”.
[1] “2023 Statistical Review of World Energy”, Energy Institute
[2] Indra Overland and Julia Loginova, “The Russian coal industry in an uncertain world: Finally pivoting to Asia?”, Energy Research & Social Science, 8 June 2023
[9] LNG weights about 45% of that of water. It is sometimes measured on tonnes, with 1 million tonnes equal to about 1.4 bcm. I have chosen to convert all the numbers in my referenced sources to bcm using this on-line Novatek calculator:
https://www.novatek.ru/en/press/calculator/
[10] Sergey Vakulenko, “Can China Compensate Russia’s Losses on the European Gas Market?”, Carnegie, 1 June 2023
[37] Indra Overland and Julia Loginova, “The Russian coal industry in an uncertain world: Finally pivoting to Asia?”, Energy Research & Social Science, 8 June 2023
[38] Indra Overland and Julia Loginova, “The Russian coal industry in an uncertain world: Finally pivoting to Asia?”, Energy Research & Social Science, 8 June 2023
[39] In a later section on Russia’s “National Projects” I note the importance attached to KPIs. In regards to coal, Overland and Loginova wryly suggest that perhaps “one should not attach too much importance to official government planning documents, which might reflect political needs and the desirability of presenting ambitious targets, reminiscent of the Soviet fixation on output targets”.
[40] Indra Overland and Julia Loginova, “The Russian coal industry in an uncertain world: Finally pivoting to Asia?”, Energy Research & Social Science, 8 June 2023
[10] Dmitry Gorenburg, Elizabeth Wishnick, Paul Schwartz and Brian Waidelich, “How Advanced is Russian-Chinese Military Cooperation?”, War on the Rocks, 26 June 2023 https://warontherocks.com/2023/06/29000/
[11] Dmitry Gorenburg, Elizabeth Wishnick, Paul Schwartz and Brian Waidelich, “How Advanced is Russian-Chinese Military Cooperation?”, War on the Rocks, 26 June 2023 https://warontherocks.com/2023/06/29000/
[12] Dmitry Gorenburg, Elizabeth Wishnick, Paul Schwartz and Brian Waidelich, “How Advanced is Russian-Chinese Military Cooperation?”, War on the Rocks, 26 June 2023 https://warontherocks.com/2023/06/29000/
[13] Dmitry Gorenburg, Elizabeth Wishnick, Paul Schwartz and Brian Waidelich, “How Advanced is Russian-Chinese Military Cooperation?”, War on the Rocks, 26 June 2023 https://warontherocks.com/2023/06/29000/
[18] Toward the Great Ocean 4: Turn to the East – preliminary results and new objectives”, Valdai Discussion Club, 2016 http://valdaiclub.com/files/11431/
Ben Aris of BNE has written a very useful article on Russian metals and minerals exports[1] and this section quotes him extensively. Russia is the fourth-largest exporter of aluminium in the world. Rusal shipped 3.9mn tonnes of aluminium in 2021, according to company data.[2] Russia exported 15.9mn tonnes of semi-finished steel and 16.8mn tonnes of finished steel in 2021.[3]
Russia is already a major producer of copper, but its share in the global copper trade still remains small. However, some analysts expect this to change as there are new copper mines under development and Russia is on course to become a major supplier of the metal.[4] Thanks to the ongoing digital revolution, and especially the rapid expansion of the electric car industry, the demand for copper is expected to soar.[5]
Russia supplies about 10% of the world’s nickel. The International Energy Agency (IEA) has forecast that nickel demand in electric vehicles (EVs) will grow by a factor of eight from 2020 to 2030.[6]
Russia is the third-largest producer of titanium with a share of around 13 to 13.5% after China and Japan.[7] “Russia holds a key role in the titanium market and titanium is extremely important not just for commercial aircraft, but is also used for the production of defence equipment. Titanium alloys account for approximately 15% of the Boeing 787 airframe by weight.[8] The US remains particularly vulnerable to disruptions in the global titanium supply chains, as it imports 95% of the titanium it consumed in 2019.[9]
Agriculture
Agricultural exports can be a continual success story for Russia in it medium-longer term economic futures, with the potential to feed two billion people, according to the Food and Agriculture Organization of the United Nations (FAO). Four federal districts (the Central, North Caucasus, Urals, and Volga) produce 73% of agricultural outputs in Russia. “Russia has brought in a new all-time high record harvest of 153mn-155mn tonnes of grain”, Putin said in March 2023, up from the previous record of 135mn tonnes of grain.”[12]
“Russia the world’s top wheat exporter as the 2022/23 agricultural trading year comes to an end, the US Department of Agriculture (USDA) says in its latest update July 2023.”[13] “With record production of 92mn tonnes. Russia is estimated to export 45mn tonnes in 2022/23. Its main destinations are in the Middle East, North Africa, and Central Asia.”[14]
In 2019, Russia was the world’s largest producer of barley; the second-largest producer of sunflower seeds; the third-largest producer of potatoes and milk; and the sixth-largest producer of eggs and chicken meat.[15] In 2018, the Russian Government announced a $51 billion plan to boost domestic agricultural production, setting the ambitious goal of increasing food exports by 70 percent by 2024 (to $45 billion).[16]
“According to data from the World Bank (2020), the country’s value-added agriculture (in constant 2010 prices) increased from $45.9 billion in 2000 to $66.2 billion in 2019. However, a share of the agriculture (in value added terms) in Russia’s gross domestic product decreased from 5.8% to 3.4% for the same period.”[17]
A 2021 – and thus pre-invasion of Ukraine – report by Eurasian Research Institute, International Hoca Ahmet Yesevi Turkish-Kazakh University[18] says that “Russia’s agricultural development model is mainly state-centered, but based on the state-private partnership. Large farms and agro holdings mainly represent the private sector. The government of Russia supports the sector through financial interventions, where the state-owned agricultural bank Rosselkhozbank plays a key role.”[19]
As discussed earlier in this text, Russia’s counter sanctions on Western countries – particularly after the annexation of Crimea – targeted agricultural products. As a result, the Russia’s imports of food products decreased from record $43 billion in 2013 to $30 billion in 2019. For the same period, its exports increased from $16 billion to $25 billion.”[20]
This seems to have been a success that is – in my view – very unlikely to be repeated in “advanced technology” although the Russian government has made it a priority to increase domestic production of agricultural equipment and is providing manufacturers with incentives to localize as part of its strategy to achieve the goals of having 80% of agricultural machinery used in Russia produced domestically, tripling overall equipment production, and increasing exports of agricultural equipment by a factor of 12 by 2030.[21]
Agricultural machinery and food processing equipment are not subject to U.S. sectoral sanctions or Russia’s “countersanctions” on agricultural products and are generally allowed to be sold without restriction.[22] However, Russia’s agricultural machinery market has been highly dependent on imports. In 2019, the share of the imported machinery accounted for 42%. In the total number of tractors produced in Russia in 2019, the share of Russian brands was 51%.[23]
The Turkish-Kazakh University report says that “food production and processing represent a key component of Russia’s economy. As of 2019, there were more than 22,000 food processing companies operating in Russia, employing an estimated 2 million people.”[24] “There are currently more than 2,000 companies involved in the packaging process and about 900 companies involved in the production or distribution of packaging machinery. Russian food and food processing industry enterprises often buy equipment directly from manufacturers, and large businesses enterprises typically prefer new, imported equipment. Less expensive, second-hand models are often purchased by small- and medium-sized businesses.”[26]
The Turkish-Kazakh University report concludes: “The ban on imports of food from many countries, along with the Russian government’s import substitution policy, means that the Russian food industry will continue to develop and expand in a favorable competitive environment, incentivizing investment in modern technology for processing and packaging.”[27]
Manufactured and Tech Products
As discusses earlier, the professed ideology of “technological sovereignty” does not exclude the idea of boosting Russian exports of technologically complex products – especially to “friendly” countries! There is, for example, no suggestion that Russia will seek to limit exports of nuclear technology – either physical products or services associated with them – or any suggestion of a planned reduction in military exports.
As should be clear from the earlier section on Russian “technological sovereignty”, I am high sceptical that this approach will eventually satisfy Russia’s internal needs. I find it hard to believe that it will result in the sort of high-quality products and services that will be competitive; although there will be niches where lower (possibly government subsidized) prices will still make them attractive despite lower quality, or where export restrictions of other countries are in play.
Russian nuclear technology is largely an exception in that it is “general considered to be amongst the safest in the world”[28] and is price competitive (sometimes with the help of Russian loans). Russia had over $100bn of orders for Nuclear Power Plant (NPP) exports at various stages of commitment before the invasions of Ukraine, and have since increased.
There are about 60 reactors under construction around the world, 300 more in the planning stages.[29] Many of the 30 countries generating nuclear energy in some 440 plants are importing radioactive materials from Russia’s state-owned energy corporation Rosatom and its subsidiaries. Rosatom leads the world in uranium enrichment, and is ranked third in uranium production and fuel fabrication, according to its 2022 annual report.[30]
Rosatom, which says it is building 33 new reactors in 10 counties, and its subsidiaries, exported around $2.2 billion worth of nuclear energy-related goods and materials last year, according to trade data analyzed by the Royal United Service Institute. The institute said that figure is likely much larger because it is difficult to track such exports.[31] Rosatom’s CEO Alexei Likhachyov told the Russian newspaper Izvestia the company’s foreign business should total $200 billion over the next decade.[32]
NPP hardware deals usually come with 60 years of fuel supply and maintenance deals that keep the customers dependent on Russia for decades afterwards. While both Russia and Kazakhstan are big producers of the uranium 235 fuel the NPPs burn in the eastern bloc, processing and refining of the ore is almost all done in Russia.[33]
“NPP construction projects take about 11 to 12 years to construct and commission. For instance, the agreement between Russia and Turkey for the construction of the Akkuyu NPP was signed in 2010; construction of the first of the four planned reactors did not begin until 2018. Negotiations in advance of the start of an NPP project can also take considerable time. Commissioned reactors will then operate for decades, requiring fuel, maintenance and servicing – all of which is often bespoke to the reactor.[34]
Russia’s role in the global nuclear market includes not only the construction of nuclear reactors, but also the mining of raw uranium, conversion of uranium ore into fuel-useable compounds, the fabrication of nuclear fuel assemblies, and the provision of other services across the nuclear fuel cycle – ‘from assessing and developing key nuclear infrastructure components in customer countries to NPP decommissioning’, as the company notes in its 2021 annual report. According to the 2021 report – the latest available – Russia occupied the greatest share of the global uranium enrichment market (38%) (other sources show that it had 46% of the world’s total operational and planned uranium enrichment capacity), was second in the world in terms of uranium production (15% of the market) and third in its share of the global nuclear fuel market (17%).[35]
According to Matt Bowen and Paul Dabbar of Columbia University’s Center on Global Energy Policy, subsidiaries of Rosatom provided 31% of enrichment services to EU nuclear utilities and 28% to US ones. They point out that “replacing Russian uranium enrichment and conversion capacity is possible, but that additional alternative capacity will need to be brought online, likely resulting in higher nuclear fuel prices. Alternative nuclear suppliers will also need to be convinced that the resources they invest in expanding their operations will not be in vain should any restrictions on Russian nuclear supplies be rescinded in a few years”.[36]
Alternative suppliers would also have to be found for the fabrication of nuclear fuel. Bowen and Dabbar note that reactors often rely on unique components produced by the original equipment manufacturer (OEM), which results in significant dependence on the OEM for replacement parts and servicing.[37]
“Bulgaria, Czechia, Hungary and Slovakia all continued to purchase Rosatom uranium, unable to source the fuel elsewhere; although Bulgaria and Slovakia have announced plans to cancel Russian uranium imports and swap to other suppliers.”[38]
Ukraine has five working NPPs and was also a Russian customer until recently, when it cut ties and now sources its uranium from Westinghouse Electric Co.[39]
Russia is also building Turkey’s first NPP and gave Turkiye a $20 billion loan at one stage to help with this.[40] In 2014 Hungary commissioned Rosatom to construct two new NPP, largely financed by a €10bn Russian loan. The facilities should go operational in 2025-2026, according to the original schedule.[41] Rosatom is also in talks with other countries around the world from Iran to India to China for similar deals.[42]
Still heavily dependent on Russian nuclear power technology and fuel, the West has shied away from sanctioning Russia’s nuclear industry.[43] Russia supplied the U.S. nuclear industry with about 12% of its uranium last year, according to the U.S. Energy Information Administration. Europe reported getting about 17% of its uranium in 2022 from Russia.[44]
Russia’s arms exports dropped 31% in the five years that ended in 2022, compared with the five years ended in 2017, according to the Stockholm International Peace Research Institute (SIPRI). Russia’s share of global arms exports dropped to 16% from 22%.”[45] SIPRI uses multiyear periods because annual figures can be distorted by large deliveries; it bases its figures on a points system that calculates the military value of arms exports.[46]
While the Russian military has proved to be very effective in setting up defences to counter the present Ukraine counter-offensive, it has displayed much less capability on the offensive. Despite this, in August 2023, the head of Russia’s Federal Service for Military-Technical Cooperation, told state news agency TASS that operations in Ukraine have led to increased interest in Russian weapons from countries in Africa, Latin America and elsewhere.[47] If this is true, lower prices and Russia’s Western qualms about supplying some potential customers are probably significant factors. For example, “Germany’s Leopard 2 tanks each cost more than €10 million, the equivalent of about $10.68 million, while Russia’s new T-90 tanks will likely sell for less than half that price”, says Nicholas Drummond, a defense-industry consultant.[48]
China and India, typically big Russian customers, are producing more of their own weaponry. Russian arms exports to China have been falling since 2005, SIPRI data show. While China was once dependent on Russian technology, it is increasingly developing its own, analysts say, including switching to Chinese engines in its jet fighters.[49]
India is also working to reduce its reliance on Russian arms. Soon after Russia’s invasion of Ukraine, India’s Defense Ministry published a list of foreign-made components that it wanted to produce at home, including parts for Russian weaponry – although this policy also predates February 2022.
According to Alistair MacDonald and Jon Emont in a WSJ article,[50] “other Asian countries appear to be stepping away from Russian arms. Vietnam in December held an arms expo that it said was aimed at diversifying where it sourced weapons. Before 2014, almost all Vietnam’s weapons imports came from Russia. Since then, Vietnam has for the first time in decades bought some U.S. equipment, including reconnaissance drones and electronics.”
China’s rise as an arms manufacturer could challenge Russia’s dominance over the West at the lower end of the market.[51]
Balance of Trade
The research company “World’s Top Exports” has produced a useful analysis of data on Russian International Trade.[1] Below are exports from Russia that result in negative net exports or product trade balance deficits. These negative net exports reveal product categories where foreign spending on home country Russia’s goods trail Russian importer spending on foreign products. The data is for 2022, so will often be influenced by natural volatility:
Machinery including computers: US$31.5 billion
Electrical machinery, equipment: -$18.5 billion
Vehicles: -$13.6 billion
Pharmaceuticals: -$12.9 billion
Optical, technical, medical apparatus: -$6 billion
Plastics, plastic articles: -$5.3 billion
Fruits, nuts: -$4.1 billion
Footwear: -$3.2 billion
Knit or crochet clothing, accessories: -$3.1 billion
Other chemical goods: -$2.7 billion
The World’s Top Exports Site says that “Russia has highly negative net exports and therefore deep international trade deficits for machinery including computers”. The site says that the data indicates “key opportunities for Russia to improve its position in the global economy through focused innovations”.
While this statement may have some truth to it in some niche areas, it is on the whole quite silly!
The “terms of trade” is a more important issue than many people will suspect because it is basically the ratio of foreign currency import prices to foreign currency export prices. If Russia diverts certain production resources from producing and exporting particular basic commodities to producing and exporting particular technology products, then in economic terms Russian will generally be worse off if prices for these particular technology products decline relative to prices for the particular basic commodities. That is, the Russian economy would have been better off selling basic commodities and importing technology products. I wrote more about this in my 2016 report on Russia’s National Technology Initiative.[2] I noted the historical trend for ICT prices to fall relative to commodity prices.
Earlier in this text I wrote about the National Projects covering development and expenditure on various aspects of Russian society and economy in the 2019-2024 period.[3] One of these was for “International cooperation and export” covering (in addition to EAEU issues):
1. Achieving the volume of exports of non-commodity non-energy goods in the amount of $US250 billion[4] per year, including products of mechanical engineering – $US60 billion per year
2. Achieving the volume of exports of agricultural products $US45 billion per year
3. Achieving the volume of exports of services rendered in the amount of $US100 billion per year
4. Growth in the share of exports of manufacturing products, agricultural products and services in the country’s GDP by 20%
Deputy Prime Minister and Minister of Industry and Trade, Denis Manturov, was asked about this particular national project in a media interview in July 2023.[5] He said that it had been extended from 2024 until 2030 and that “after the sanctions imposed on our exporters and the import of our goods, in order to fulfill our tasks, we will not only have to increase exports in the coming years in absolute terms, but also fundamentally change the export geography, developing new sales markets. In addition, it is necessary to develop transport and logistics interconnectedness and ensure the functioning of efficient payment solutions. Given the ongoing challenges and increased sanctions pressure, work on reformatting the national project and extending its implementation for the period up to 2030 continues. It involves updating existing and creating new instruments to support exports, and the emphasis is on new markets, primarily the markets of friendly supporting countries. The transport subsidy will be finalized – we will focus on stimulating the use of priority international transport and logistics corridors. We are also updating preferential lending instruments to ensure the possibility of providing long-term financing.[6]
Manturov then said the “volume of non-commodity non-energy exports” is planned to grow “by 31% compared to the base level of 2020, and in 2035 by 70%”.[7]
So, as indicated earlier, there is still a export development component to “technological sovereignty – but the questions remains as to what degree the former will be impeded by the latter.
Irrespective of whether or not climate change is really a huge man-made problem that can be countered by government and social policies, it is clear that it much of the world sees it as a threat – and this will affect Russian exports.
The February 2022 Russian invasion of Ukraine took place four months after the October-November UN Climate Change Conference (COP26) in Glascow. A very large and influential group of Russian officials and corporate executives attended this conference, and it seemed that after years of trying to ignore the climate change debate and possible consequences Russia was going to take the issue very seriously.
The COP27 conference took place in Shar-El Sheikh, Egypt with the war and its consequences of well under way. But Russia still attended and advocated the same main approaches that the world should take and reiterated its own intentions. This should not have been a surprise because Russia was never going to follow a path that complied with the wishes of the West and its supporters, but instead would pursue its own interests and try to persuade other countries to fall in line with it. This is not a criticism of Russia because most other countries are taking the same approach.
Besides defending the advantages of natural gas, Russia argues nuclear power should be accepted as “green” and that the carbon absorption of forests should be part of the calculation of a country’s contribution to fighting climate change. These approaches are very unlikely to change irrespective of who or what group is governing Russia.
As already discussed in this text, Russia has built very significant expertise and has a good international reputation for utilizing atomic energy both domestically and as an exporter of its technology and builder of power stations. Russia’s technological capabilities and the international market opportunities mean that Russia will stick with it position on nuclear power irrespective of what other countries may decide or agree to.
The war in Ukraine has most likely made it more difficult for Russia to put the case that the carbon absorption capacity of forests should be taken into account when calculating a countries contribution to fighting climate change. Whatever countries individually or in groups decide, the calculation of the carbon absorption capacity of forests will depend on a myriad of data and judgements about the ability of different types of forest to absorb CO2. Generally, tropical rainforests are considered most effective in this, and Russia has none of these. Sensible consideration of all these forest associated factors depends of a high degree of trust, but Russia’s actions in Ukraine have destroyed much goodwill and built up a reservoir of distrust. Moreover, “other countries with vast northern forests, such as Canada, Sweden and Finland have not joined Russia in raising this issue”.[1]
The practical use of hydrogen as an energy source is controversial,[2] but Russia thinks it has advantages in the international market because of its natural resource base and experience in dealing with gas issues on a large scale. At this time, no concrete proposals have been put into play, but Andrei Belousov, Russia’s First Deputy Prime Minister, said in late 2021 (just prior to COP26) that Russia “can occupy more than 20% of the global hydrogen market on the 20-year horizon”.[3]
Within Russia, the war in Ukraine and its consequences have resulted in some rolling back of environmental regulations. For example, vehicle emission standards have been eased because foreign sanctions mean that some specific foreign technology used in domestic vehicle production is no longer available.[4]
Russia’s “pivot to the east” – so lauded by many – means that much less attention will be paid by both officials and business to the views of Europe. The European Union’s proposed Carbon Border Adjustment Mechanism (CBAM) to impose taxes or tariffs on imports of various goods produced in carbon intensive industries clearly got Russian attention. Just prior to COP26 Prime Minister Mishustin warned Russian producers that they could face a domestic carbon tax, as it would clearly be better if such payments went to the Russian finance ministry rather than EU revenue authorities.[5] The situation in Ukraine, irrespective of the outcome, is unlikely to change this view even though trade with Europe has been significantly reduced.
On the other hand, the views and action of China will assume greater importance. China, like Russia, has pledged to become “carbon neutral” by 2060 and it is unclear whether China might eventually follow the EU example.
Russia wants good relations with so called “Global South”, and by “employing rhetoric about neo-colonialism and the construction of a multipolar world”, is attempting to bring non-Western countries over to its side.[6] Russian officials also keep saying, at COP27 and in general, that Russia and other non-Western countries should develop their own “sovereign” green agendas and not just follow Western understandings of what is ‘green’ and good for the climate.[7] Similarly, Russia continues to insist on the principle of “technological neutrality”: that each country can decide for itself how it will reduce emissions.[8]
Russian government positions and policies will also be influenced by views on what the effect of climate change might be on the Russian economy and society. At one level, Russia – like many countries – might decide that climate change is a world-wide phenomenon and that it can do little to change the situation. However, Russia has a bigger influence than most countries because of its size and its importance as a producer of hydrocarbon energy.
While Russians can be quite ecologically minded on some issues such as garbage dumps and pollution in Lake Baikal, two factors are likely to limit the public pressure to take broader action for the greater good of mankind. One is the general lack of economic growth that is likely to be a at least medium-term consequence of the conflict in Ukraine and the poor relations with the more economically and technologically advanced West. The second reason, in my view, is that public interest groups – such as those concerned about the climate – will find that they are not particularly welcomed either by the government or society because of a more nationalist stance in Russian society as a whole engendered by both the war in Ukraine and government propaganda.
It is possible, however, that adverse climate change – or even “weather” – driven events could provoke a more concerned response from society and the government. There are a number of reports that list and attempt to measure the effect of climate change.
Russia’s Audit Chamber[9] has reported in that various direct climate change effects could lower GDP by 3 percent annually in the next decade.
Any significant events or series of events that could be attributed to climate change could build on the thoughts that prompted such a large Russian representation at COP26 in 2021 in which has seemed to herald a new approach much more proactive official attention to climate change after years of inattention and even ridicule. Well known analyst Dmitry Trenin[10] noted that “Russia sent a large delegation — 312 people — to COP26: more than the host country itself, and twice as many as the United States. It included representatives of not only the presidential administration; the ministries of energy, forestry, and economic development; the London embassy; and the Moscow city government, but also of leading banks like Sberbank and VEB, and major corporations like Rosatom, Gazprom, Severstal (metallurgy), Inter RAO (electricity), and Sibur (coal). All of those people came not only to listen and learn, but also to engage and build contacts. Intensity of the Russian engagement reflects sea change that has occurred in the Kremlin’s attitude to climate change over the past year or so.”
In September 2021, Russian central bank Governor Elvira Nabiullina said that the regulator had moved from “neutrality” on climate issues to pressing financial institutions to take account of climate risks. There may have been an element of being fashionable in this change, but it is not likely to be reversed.[11]
There are also other views. Russia has a somewhat proprietary attitude to Arctic issues, and particularly the Northern Sea Route (NSR) which is expected to be become more convenient as climate change reduces the amount of ice. Many see this as an advantage for Russia.
There is also significant resistance to the idea that changes are needed. For example, Rosneft CEO Igor Sechin has warned that it would be big mistake to reduce investment in long-term fossil fuel projects because the next few years likely to see increased demand for traditional energy.[12]
“Legislation introduced in 2019 as part of Russia’s ratification of the Paris Agreement would have instituted emissions quotas and carbon pricing, but lobbying efforts by the influential Russian Union of Industrialists and Entrepreneurs significantly diluted the bill, resulting in weaker provisions on emissions reporting and the elimination of a national carbon trading system and penalties for polluters.”[13]
The war in Ukraine has also changed the ability of Russia to meet own climate goals, irrespective of their motivations. Import substitution policies and foreign sanctions have reduced access to some foreign technologies. And then there is the “technology sovereignty” policy which I discussed in depth earlier in this text.
Vedomosti, a Russian business newspaper, has reported that Russian “decarbonization largely depends on imported equipment and technologies, including from unfriendly countries”. According to Alexander Shirov, director of the INP RAS, “dependence on imported equipment and technologies necessary for decarbonization in the oil sector is 55%, in the coal industry – 45%, in the power industry – 31%”.
At this stage there is no sign that Russia’s plans to achieve “carbon neutrality” by 2060 will be publicly changed. As part of import substitution, a reorientation to domestic components of technologies necessary for decarbonization is being carried out, a representative of the Ministry of Industry and Trade said.[14]
Writing in January 2023, nearly one year after the invasion of Ukraine, Angelina Davydova, wrote that: “Russian authorities continue to pass legislation related to the climate and carbon regulation, and new projects are being launched. Companies are standing by their emissions reduction targets and ESG (environmental, social, and governance) measures”.[15]
When asked “what order of proportion of GDP will be required for such a transition?”, Belousov replied: “The order of the numbers is not fantastic. Just for example: we have our entire so-called intensive scenario in the energy transition strategy worth about 90 trillion rubles. For 28 years. That means 3.2 trillion a year. That is, we are talking about less than 3% of GDP.”[16]
“The Strategy for the Socio-Economic Development of Russia with a Low Level of Greenhouse Gas Emissions until 2050, assumes that Russia will invest an average of 1% of GDP from 2022-2030 in reducing net emissions. However, the various federal funding streams that were intended to implement approved climate policies failed to materialize.”[17]
As I have argued in other sections of this book, most aspects of Russia’s future will be determined by the actions of Russians and their government. Even more so than Russia’s real external security situation and relations with other countries, any real effects of global climate change will need to be adjusted to rather than influenced by Russia. The country will adjust but the other objectives of its authoritarian government and weak social institutions mean that the path is likely to be erratic.
Arctic
A July 2023 RIAC report on the “The Future of the Arctic Council”,[18] says that “the Arctic Council Council is recognized as the most authoritative intergovernmental forum for inter-state cooperation in the Arctic. It determines (in terms of global climate change) areas for regulating environmental and socio-economic activities in the Arctic region, and consolidates support from the Arctic.[19]
“The Arctic Council was not created based on an agreement between states, and its status as an intergovernmental organization has never been officially recognized at the interstate level. Despite the fact that it is not an organization in the formal legal sense (i.e., it is not subject to international law de jure), this “high level forum” has over the years, unquestionably strengthened the Arctic’s legal stability, especially in terms of multilateral environmental and social economic cooperation between the countries of the region. It has almost gained universal recognition as a necessary international mechanism for managing the Arctic, and is a much-needed producer of multilateral legal norms that clarifies regional legal issues. This includes, first of all, international agreements negotiated first at the Arctic Council which have now entered into force: the 2011 Agreement on Cooperation on Aeronautical and Maritime Search and Rescue in the Arctic; the 2013 Agreement on Cooperation on Marine Oil Pollution Preparedness and Response in the Arctic;11 and the 2017 Agreement on Enhancing International Arctic Scientific Cooperation.”[20]
The RIAC report goes on to say thar “traditionally, the Arctic Council avoided dealing with matters related to military security”[21] but “Western member states broke the foreign policy tradition of maintaining Arctic ‘immunity’ from disagreements among Arctic states that arise in other regions by publishing a Joint Statement on March 3, 2022 on the events in Ukraine. The Statement reads:
“Canada, the Kingdom of Denmark, Finland, Iceland, Norway, Sweden, and the United States condemn Russia’s unprovoked invasion of Ukraine and note the grave impediments to international cooperation, including in the Arctic, that Russia’s actions have caused.
• The core principles of sovereignty and territorial integrity, based on international law, have long underpinned the work of the Arctic Council, a forum which Russia currently chairs.
• In light of Russia’s flagrant violation of these principles, our representatives will not travel to Russia for meetings of the Arctic Council.
• Our states are temporarily pausing participation in all meetings of the Council and its subsidiary bodies.”[22]
According to the RIAC report, “some have referred to the Joint Statement of the seven Western member states as a ‘majority decision’ of the Arctic Council, which is erroneous from an international legal point of view. The Arctic Council only makes decisions by consensus. Neither the founding document of the Arctic Council (the 1996 Ottawa Declaration) nor its Rules of Procedure allow for a different procedure in making decisions.”[23]
“The second Joint Statement of the seven Western Arctic Council states released on June 8, 2022 reiterates previous points on Russia’s “invasion of Ukraine,” the “flagrant violation of the principles of sovereignty and territorial integrity,” and the “pause” in the participation of the Western states in the Arctic Council.”[24]
The RIAC report raises the possibility that Russia could withdraw from the artic Council and looks at possible implications. It notes that “Russia has the longest continental coast in the Arctic Ocean; it has the largest population (among the Arctic states) living beyond the Arctic Circle; it has a unique military and civilian infrastructure in the Arctic, including an icebreaker fleet, etc.”[25]
The RIAC report raises the possibility that Russia could withdraw from the artic Council and looks at possible implications, which include increased US influence. Given such as view, I see no reason for Russia to withdraw from the council.
At other times there have been suggestions regarding Russia-China differences on Arctic issues. This seems odd to me given that China has no territory or territorial aspirations in this region and is thus not an “Arctic state”.
In contrast to several earlier RIAC annual reports on Russia-China relations, the 2021 and 2022 versions do not have a specific section devoted to Russia-China cooperation in the Arctic. However, the 2020 version[26] did say that some “Arctic states have also voiced certain concerns about China’s strategic intentions in the Arctic” and the 2022 RIAC report – somewhat cryptically – says that “it appears particularly important to foster a climate of mutual trust between Russia and China in Arctic affairs. When launching cooperation projects in the Russian Arctic, the advantages of all the parties need to be carefully assessed and their interests should be taken into account, with due consideration of the special status of Arctic states.”
The issue of Russia-China trust was more directly tackled in a February article in the Eurasian Daily Monitor[27] which states “Russia has promoted the Northern Sea Route with the expectation that China will be a major user. And it is assertively advocating for the development of natural resources, such as natural gas in the Arctic, with the hope that China will be a major customer. Both of these calculations, combined with the economic pressure from the Western sanctions regime, have pushed Moscow to cooperate ever more closely with Beijing in the Arctic and Russian High North. However, concerns are growing in Moscow that the ambitious Russian goals for the region may not work out in the ways it hopes. Some Russian observers worry that China will graduate from a junior partner in both spheres to a dominant player. One fear is that Beijing will ultimately transform Russia’s Northern Sea Route—an east-west maritime corridor that follows the Russian Arctic coast—into just a constituent segment of a Chinese-dominated Polar Silk Road. Another anxiety is that Beijing could exploit cooperation in the development of Russian Arctic gas fields as a basis for further expanding China’s political-economic interests at Russia’s expense. As a result, worried voices in the Russian capital are now suggesting that China is helping Russia today but may push it aside later.”
Whatever the real situation about such Russian concerns, The Diplomat magazine says that “whereas the 2015 version of the Naval Doctrine stated that the ‘development of friendly ties with China is a key component of national maritime policy in the Pacific direction’, China is completely absent from the new 2022 Naval Doctrine.[28]
On the whole, unless climate change significantly changes the physical Artic environment – and, of course, some people claim it will — the Arctic issue is of secondary importance to Russia’s economic future.
CONCLUSION
Within a few hours of the announcement of the February 2022 “special military operation”, the Kremlin had summoned about 40 Russian businessmen to a face-to-face meeting with Putin. “We will support our businesses in spite of sanctions, and you must be patriotic”, one source familiar with the substance of the meeting described the tone to The Bell[1].
In early 2022, after the invasion of Ukraine, Russian authoritarianism moved to serious dictatorship, and most people became quite fearful of what they said and wrote. I was living in Russia at the time (and remained there until October 2022) and found that Russians who I had known for years responded to my explicit talk of “war” by using the term “special military operation” when replying to me (even when we were having one-on-one conversations when no-one else was around). In some cases they seem to believe the Putin propaganda, but most cases it seemed to be a practiced defensive way of speaking to make sure that there was no possibility of them being reported to the security services following other conversations.
Thus, we are left with a Russia that has slid into dictatorship by one man. It may be of interest that I have written a book on dictatorship, entitled “Dictatorial CEOs & their Lieutenants – Inside the Executive Suites of Napoleon, Stalin, Ataturk, Mussolini, Hitler and Mao” — and Putin now fits in with them.[2] Like these other dictators, Putin is a very talented man who has remained in power by strength of character and personality and ideas; persuading those close to him that he is the best man for the job – although fear is increasingly used for this persuasion!
But, not surprisingly, after over 20 years in power Russia now has a leader who no longer listens to proposals from various government agencies and then chooses the one he thinks best. According to an October 2022 article in Meduza by Andrey Pertsev, Putin previously “would voice scenarios that he thought were likely and ask, ‘What if we do this? What will the consequences be? And what if we do it this way? Then what?’ But that’s stopped, said a source close to the government. According to the source, after the start of the pandemic, Putin (who’s known to worry obsessively about his health) stopped consulting the ministers altogether — and limited his decision-making process to brief discussions with his ‘inner circle’ (which, in recent years, is believed to consist primarily of the heads of Russia’s security agencies).”[3]
Russia authorities can point to an economic system that has weathered the situation since Februay 2022 quite well. But, as I have argued at various stages in this text, the longer-term outlook is much less favourable partly because of foreign sanctions which will most likely remain in place to a great degree for years – and certainly will remain in place while Putin is in power – and because of the mixed medium-longer term outlook for its export products and Russia’s relations with near countries.
But, very importantly, Russia has increasingly adopted domestic policies that will have an adverse medium and longer-term effect on its economy and on its political and social life. One is the almost religious zeal for “technological sovereignty”, and another is the effective nationalization of many foreign business assets which will hinder any significant future foreign investment – including from so-called “friendly” countries such as China – no matter how the fighting in Ukraine pans out. Perhaps the worst policy from a longer-term point of view is the intellectual corruption of the education system with wild propaganda stories that will tend to push many students away from the ability to think rationally about important economic and political issues.
At the present time, however, many of these adverse effects will only be clear further down the track. On 8 July, Kommersant reported[4] on some discussion at 2023 Russian Central Bank “Financial Congress”[5] which suggested that visible national statistical effects of the war in Ukraine, and foreign sanctions, on the structure of the Russian economy are scant – as opposed to those on foreign trade![6] However, at the sector level there was evidence that “the replacement of the supply of departed medium-sized foreign manufacturers by Russian companies in the domestic market, are proceeding quickly and actively”.[7]
The big question is what is the quality of this “replacement of supply”? I have argued in this text that the overall quality is not going to be high.
Natalya Zubarevich from Moscow State University, said that “a significant part of the regional processes in the economy and the labor market do not show signs of structural transformation – it is mainly about the resumption of the “pre-COVID” situation, the reason for which she sees in large-scale budget compensations to the population in 2020 –2022”.[8]
Kommersant also reported that “the only consensus so far is that on the horizon until 2040 there are no grounds to talk about the departure from the rent-based (resource-based) nature of the Russian economy, although the ‘non-resource’ component in it will inevitably grow (if only due to restrictions on commodity exports and the plans of the EU and other countries for energy transition and the introduction of carbon regulation, which, according to most experts at the Fincongress, are overestimated)”.[9]
Kommersant reported that “in many ways, a rather strange picture – active investments in import substitution at an average level (more precisely, in replacing artificially limited imports with a sharp decrease in competition in the domestic market) without visible traces of major structural shifts in the economy (which would manifest themselves, for example, in structural unemployment and massive investment in the retraining of personnel, increased labor mobility, etc.), apparently a consequence of rather large stocks (including imported intermediate goods) formed in 2020–2021, as well as a decline in consumption in 2021–2023 compared to normal.”[10]
The Kommersant article concluded that “in this case, the question of in what directions the attempts of a new positioning of the industries of the Russian Federation will be carried out both in the domestic and foreign markets should be asked in 2024-2025.[11]
[3] Andrey Pertsev, “‘People are scared shitless around him — but it’s fear without respect’ Putin is 70. Meduza’s sources say his ‘power vertical’ is ‘collapsing’.” Meduza, October 7, 2022
Former US Secretary of State George Shultz wrote, “Trust is the coin of the realm. When trust was in the room, whatever room that was—the family room, the schoolroom, the locker room, the office room, the government room or the military room—good things happened. When trust was not in the room, good things did not happen. Everything else is details.”
I lived in Russia for many years until late October 2022 – ten months after the February 2022 Russian invasion of Ukraine — and I can attest that “trust” in the Russian government and between Russians themselves was quickly falling. Instead of using the term “war” as I did, many people that I knew – often for several years as friends – continued to use the term “special military operation” when we discussed events in Ukraine even in private conversation. They had quickly become afraid and had determined to never use the “war” word in any circumstances lest they find themselves without a job or even in jail.
So, much information and commentary that comes out of Russia should not be trusted. This has led to calls to ban such information.
On 29 March Reuters reported that “Ukraine and seven other central and eastern European nations have called on the world’s top tech firms to act to fight disinformation on their social media platforms by hostile powers which they say undermine peace and stability. In an open letter signed by their respective prime ministers, the countries said tech platforms, such as Meta’s Facebook, should take concrete steps such as rejecting payments from sanctioned individuals and altering algorithms to promote accuracy over engagement by users. Foreign information manipulation and interference, including disinformation is being deployed to destabilize our countries, weaken our democracies, to derail Moldova’s and Ukraine’s accession to the European Union and to weaken our support to Ukraine amid Russia’s war of aggression,” the letter provided to media said. “Big tech companies should be vigilant and resist being used as means of advancing such goals.” ‘The letter was signed by the prime ministers of Ukraine, Moldova, Poland, Czech Republic, Slovakia, Estonia, Latvia and Lithuania, and released by Czech Prime Minister Petr Fiala’s office. The article quotes a Meta spokesperson as saying: “We’re also restricting access to (Russian media) RT and Sputnik across the EU and Ukraine, and adding labels to any post on Facebook that contains links to their websites, so people know before they click or share them. We’re continuing to consult with governments in Central and Eastern Europe to tackle this issue.”
These are nice sentiments and words, but who decides what is “accurate” and what is “disinformation”?
I know from personal experience that not all Russian sources of information should disbelieved or even banned.
Artyom Lukin, an international relations university teacher in Vladivostok has been “suspended” by Twitter because he “violated Twitter Rules”. I have lived in Vladivostok and I have found his Twitter posts about recent events in that part of Russia and Russia more generally both interesting and useful. I read all his pre-suspension comments and can only conclude that those people responsible for the suspension are ignorant or stupid. His account is: https://twitter.com/artyomlukin
I also often watch Cross Talk on RT – https://www.rt.com/shows/crosstalk/ — which is hosted by Peter Lavelle who I know quite well because we lived in the same apartment building in Moscow for a time, but – like many people – had a falling out with him because he cannot abide people who disagree with him. But, having said that, I do find some of the commentary of his guests useful.
I certainly do not agree with much of what is on RT, and sometimes disagree with Artyom Lukin on Twitter, but at least they present an opportunity to help understand another point of view – one that is not anti-Russian in almost all respects!
The term “Global South” has gained some currency among analysts who see that many people and governments outside of the West do not regard Russian aggression as a problem or concern for them. In October 2022 I gave a presentation on “China-Russia Relations in the Era of Putin and Xi” at the Centre for Contemporary China Studies, Indian Ministry of External Affairs, New Delhi. After my presentation the chairman commented that it was good to get a “nuanced” view of the Russia-China relationship. See: https://russianeconomicreform.ru/2022/10/china-russia-in-era-of-xi-and-putin/
Agreeing to the request of the prime ministers — of Ukraine etc – would only lead even more people in the West to have a one-sided view of events and fail to understand why the “Global South” may have different views to them. And, there is no reason why we should put so much trust in Zelensky or the Ukraine prime minister!
A Russian internet site, The Bell, recently reported that prime minister, Mikhail Mishustin, intends to use Artificial Intelligence (AI) to “monitor the implementation of new” Key Performance Indicators (KPIs) for Russia’s National Projects.[1]
Reportedly, Mishustin “presented a new plan to achieve five national goals with 25 KPIs, for which members of the government will be “personally responsible”. KPIs will be “decomposed” to each ministry, department and region and monitored by AI. This was described as “”mega-KPIs according to the Chinese principle.”
According to the article, “the system will control both the KPIs themselves and the expenditure of funds to achieve them”. Moreover, it was said that “AI sees and shows how demographics fall or grow from the implementation of a national project on the digital economy”.
Just how this new system would work is very unclear!
This blog considers two issues that suggest it would not work very well. One is the propensity of Russian officials to use KPIs as a crutch instead of personal complex thinking. The second is the nature of AI itself.
But first some description of the National Projects and their implementation is needed. Following a mid-2018 presidential decree, early 2019 saw the release of a document[2] showing total expected expenditure equal to about 3% of GDP annually in the 2019-2024 period on various sectors of the Russian economy, including healthcare, education, the demographic situation (including increasing the fertility rate), culture (including strengthening Russian civic and national identity feelings), roads, city living conditions, ecology, science, promotion of SMEs, the digital economy, labour productivity, and international economic cooperation and exports. In addition to these twelve National Projects, there is a another concerning very large-scale modernization and expansion of large infrastructure such as pipelines, transport and ports (especially in the Russian Far East).
The early 2029 document specified spending “targets and key results” – or KPIs!
KPIs included such things as the number of articles by Russian researchers published in international scientific journals and the proportion of Russian scientific researchers aged 39 or less, 900 domestically produced pianos to be provided to children’s art schools by 2024 and 140 new war memorials, specific numerical export targets for various industry sectors (for example, increase in agricultural exports to $45 billion, and “service” exports to $100 billion) etc.
The “digital economy goals and targets” included expenditure of 1,634.9bn rubles in the period from 1 October 2018 to 31 December 2020. Of this, 1.7bn rubles was earmarked for “regulation of the digital environment”, 772.4bn rubles for “information infrastructure”, 143.1 rubles for “human resources for the digital economy”, 30.2bn for “information security”, 451.8 for “digital technologies”, and 235.7bn for “digital public administration”.
Furthermore, the cost of developing the digital economy as a percent of GDP is specified for 2019, 2021 and 2024, with a breakdown into several types of expenditure. By the end of 2024, 120 thousand people are to be admitted into higher education information technology programs and 10 million people are to receive training via online digital development programs.
Also specified is 1350 “commercially orientated scientific and technical projects in a specified field will receive grant support by the end of 2021. And there are specified 2021 and 2024 numerical targets for such things as “share of households with broadband access to the internet”, “share of “socially significant infrastructure with the capability of connecting to broadband internet”, “Russia’s share of the world capacity for data storage and processing services”.
Now, there is nothing wrong with such detailed planning provided that it is not done so far in advance and in such detail by one document covering the whole nation. Greater flexibility – and economic efficiency – would be achieved by devolving authority for details to lower levels of government and relevant institutions. Mishustin seems to be proposing the opposite.
Implementation of the National Projects has not been going well. According to the Accounts Chamber of Russian Federation[3] in a November report[4] only about 70% of allocated funds for the January-October 2020 period had actually been spent.
Returning to the Russian use of KPIs, a long-time head of Morgan Stanley’s closed Moscow office was quoted as saying that the Russian state “thinks that it can solve problems relating to scientific and technical progress by simply giving everyone KPIs”.[5]
Rather than thinking about good policy principles and concepts, the emphasis is excessively on centrally determined numerical outcomes. While this partly reflects the Soviet central planning tradition, it also reflects the desire of the present Russian authorities to maximise control over events. The resulting constraint on thoughtful innovative thinking and decision making by mid and lower level officials is a drag on Russia’s economic performance.
This view is indirectly supported by 2019 comments by Aage V. Nielsen, Deputy Chairman of the AEB Working Group on Modernisation & Innovations, who said that “combine Russian engineers with Western management skills, culture and habits, and you have a winner!”[6] He explained that Russian managers lack “soft skills” and that “just 2 years ago we asked approximately 25 Scandinavian top managers in Russia how many employees they would typically see in Russian companies in their industries compared to Western Europe. With a few exceptions, all stated 2.5 to 3 times more staff in Russian companies.”
Personally, based on my experience in Russia mainly in educational institutions and talking with Russian businesspeople, I think that 2.5-3 times is partly a result of the excessive paper work demanded – and it is often literally on “paper”, if only because some superfluous stamp needs to be applied! But, there is also a basic preference for detailed planning amongst many Russian managers – and computers and the digital age often allow these to be more complex than necessary.
If AI is to be used to “control” and/or “monitor” National Projects KPIs, then some standard and uniform measures – either in words or numbers – will be needed.
Despite the word “intelligence”, AI is really only a form of computer program that recognises number or word patterns in data bases. Moreover, this recognition only comes after much training on data bases where many many examples are given. It is very unclear what data is to be used to train the AI algorithm (s) used to in Mishustin’s KPI project.
Moreover, the sheer number of examples given to the AI algorithm and the iterative way that its looks for matches in the data set it is given the task of examining means that the reason for or cause of any match is generally not clear to humans.
So, essentially, trying to use KPIs as input to an AI algorithm means trying to use difficult to understand and measure items as input to a difficult to understand AI evaluation process. The result is likely to be some numbers or words that may be very misleading, or even perverse.
All this does not mean that Mikhail Mishustin is entirely wrong in wanting to use AI as part of an economic policy tool-kit. When head of the national tax office, he implemented a program that allows all expenditures recorded on business cash registers to be almost immediately sent to Moscow. Over time, it may be possible to train an AI algorithm to use patterns in such detailed expenditure data to forecast aspects of broader economic performance.
[1] Анастасия Стогней & Валерия Позычанюк, “За выполнением нацпроектов проследит искусственный интеллект”, The Bell, 17 НОЯБРЯ 2020
[5]Анастасия Стогней, “Риск инвестиций в Россию не высокий, а запретительный»: бывший глава Morgan Stanley в России Райр Симонян об уходе из страны самого успешного западного инвестбанка”, The Bell, 29 March 2019
[6] Aage V. Nielsen, Managing Director and Senior Partner, Vitus Bering Management Ltd and Deputy Chairman of the AEB Working Group on Modernisation & Innovations, “Improving productivity in Russian-based companies: challenges and barriers”, Association of European Business Quarterly Magazine, Spring 2019.