Russian Economic Reform » Archive » Russia’s Economic Future: Part 3

Russia’s Economic Future: Part 3

Published on August 21 2023

Posted by: jeff

Part C. Later Putin Period

Economic / Technology Sovereignty

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]

[1] https://russianeconomicreform.ru/2018/11/speech-by-jeff-schubert-to-baikal-global-start-up-forum-1-november-2018/

[1] Лола И.С., Семина В.В., Мануков А.Б., “Тенденции импортозамещения в промышленности в 2022-2023 гг.”, М.: НИУ ВШЭ, 2023.