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.  

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[1] Анастасия Стогней & Валерия Позычанюк, “За выполнением нацпроектов проследит искусственный интеллект”, The Bell, 17 НОЯБРЯ 2020

За выполнением нацпроектов проследит искусственный интеллект (thebell.io)

[2] National Projects p7nn2CS0pVhvQ98OOwAt2dzCIAietQih.pdf (government.ru)

[3] Accounts Chamber of Russian Federation

Accounts Chamber of Russian Federation (ach.gov.ru)

Счетная палата Российской Федерации (ach.gov.ru)

[4] Исполнение расходов бюджета на нацпроекты за 10 месяцев составило 70% (ach.gov.ru)

[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 

«Риск инвестиций в Россию не высокий, а запретительный»: бывший глава Morgan Stanley в России Райр Симонян об уходе из страны самого успешного западного инвестбанка (thebell.io)

[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.

Introduction

Some Russian commentators have expressed concern that US and EU sanctions against Russia will enable China to use Huawei 5G technology to create a “China-centered technology order” in Eurasia – a so called Pax Sinica – with “worrying” and “global ramifications”.[1]

However, contrary to this view, Russia may be able to use the 5G situation to its own international advantage.

As I wrote in February 2019, Russia is presently in an unenviable position regarding 5G technology. Any security fears it has regarding Huawei 5G technology will be greater in the case of Western suppliers such as Ericsson and Nokia. I concluded that “Russia is likely to use Huawei hardware while attempting to ensure that Russian software is used wherever possible”.[2] However, while I noted “this will be no easy task”, it may in fact be becoming easier due to both technological and political developments.

On the technical side, increased virtualization of 5G infrastructure means that many functions now built into hardware when it is manufactured will increasingly be transferred to software. In simple terms, this will be ultimately be similar to buying a number of laptop computers and then deciding what software you want to install when connecting them to each other.  

Huawei is seen as an efficient producer of 5G equipment and able to provide it at the world’s lowest cost, which is important for less developed countries and very important for the poorest countries which are able to benefit greatly from mobile telecommunications. However, Huawei’s quality standards — particularly software — have often been criticized. Russia does not have a good base for making telecommunications hardware, but it has a very high software capability and Huawei might benefit from this.

On the political side, the United States is putting pressure on other countries to refrain from using Huawei 5G equipment, and has been having some success because Huawei is seen as being ultimately under the control of the Chinese Communist Party and a probable agent for espionage and attacks on crucial infrastructure.

Moreover, a number of economic and trade tensions that existed at the end of 2019 have been exacerbated by the appearance of COVID 19 and the various responses to it. In particular, the economic lock-down policies adopted to some degree by most major countries to combat COVID 19 have resulted in great disruption and, even though no country was forced into adopting such policies, many are blaming China.

Russia might be seen by some countries as a more acceptable supplier of 5G software than China. This would be facilitated if Russia could adopt policies that make it seem less threatening to other countries.

What is 5G?

According to Doug Brake of the Information Technology & Innovation Foundation:

“At one level, 5G is simply the next generation of wireless infrastructure. New generations of mobile come in waves, requiring changes throughout the network. The first generation of mobile telecommunications was focused purely on basic voice service. The next generation, 2G, was still focused on voice, but made the switch to digital standards and enabled text messaging. 3G then introduced data services, expanding the functionality beyond voice to include multimedia and limited Internet access. It was not until 4G that a full specification based on Internet Protocol allowed for functional mobile broadband, in turn serving as a platform for dizzying innovation in mobile applications. These waves of technological changes have come in roughly decade-long cycles: 1G mobile voice in the 1980s, 2G in the 1990s, 3G basic data in the 2000s, and 4G LTE data in the 2010s. In one sense, 5G is simply the next step in this cycle.”[3]

The “LTE” aspect of “4G LTE” refers to “long-term evolution” which is the optional “incremental and evolutionary” rollout of various 5G capabilities based on interim use of existing 4G infrastructure.[4] When this is done, the network is called “non-standalone” (NSA), in contrast to a new purpose built “standalone” network for 5G.

Lower latency (delay before transfer of data begins), faster speeds, higher data transfer capacity and greater flexibility mean 5G offers increased possibilities for machine-to-machine interaction or Internet of Things (IoT) and the use of Artificial Intelligence (AI) in many daily activities such as managing city infrastructure, autonomous vehicles and remote robots.

5G uses higher-frequency radio waves (electromagnetic spectrum) than its predecessors which also travel less distance. Thus, in addition to the commonly seen tall 4G mobile telecommunication cell towers (or those located on tall building and elevated geography), there will be many more small cell boxes distributed in any geographical area (for example, on street lighting poles) which connect to individual mobile devices and then, in turn, connect via radio waves to large cell towers etc.

This part of mobile telecommunications infrastructure is known as the Radio Access Network (RAN), and is at the “edge” of the network. These large cell towers are then connected via “backhaul” fibre-optic to the infrastructure “core” where data processing occurs. This data processing (routing of network traffic) is what allow various mobile devices to be connected to each other.   

In comparison to 4G, more of the data processing in 5G can be done further from the “core” and closer to the “edge” in smaller data processing centres.

Putting the above basic idea into practice is complex, and involves numerous technical decisions. Moreover, international technical standards are still being developed.

As 5G technology continues to evolve, more processes are being “virtualized” by what is known as Network Function Virtualization (NFV). Rather than individual pieces of hardware being designed and manufactured to perform a few specific tasks, more general pieces of equipment are produced which can be centrally programmed with software to perform a wider variety of changeable tasks over the network. The acronym for this is vRAN.

That is, software-defined networking (SDN) techniques “essentially separate out the control over the routing of network traffic, and allows centralized software – rather than individually configured pieces of specialized hardware – to dynamically adjust the network”.[5]

RAN has several “subcategories”. In addition to the vRAN, one of these there is oRAN, or Open-RAN, which builds on vRAN to allow for hardware interoperability by separating hardware from software functions.[6]

The idea of oRAN is that instead of a specialized, integrated piece of equipment sourced and maintained from a single vendor (such as Huawei), vRAN could include a wider diversity of companies specializing in the software that runs aspects of the network, and generic hardware similar to high performance servers.”[7] Hardware becomes commoditized or commercial-off-the-shelf in a similar way to laptops, and system-wide software can then be independently chosen.

There is little immediate prospect of oRAN, but its potential is clear. On October 2019, “the director of the Cybersecurity and Infrastructure Security Agency at the U.S. Department of Homeland Security, expressed optimism for vRAN technologies to give the United States a new advantage when it comes to supply-chain security and competitiveness, going so far as to imagine a future wherein our concerns about Huawei are merely a “blip” in the rear-view mirror.[8]

According to the Belfer Center for Science and International Affairs, “the type of RAN that ultimately dominates 5G rollout will depend on international consensus (since the network itself is so globalized).”[9]

The major producers of RAN equipment are Huawei, Ericsson, Nokia, ZTE and Samsung.[10] Most experts appear to concede that Huawei presently has a lead in 5G technology, but that Nokia and Ericsson will soon eliminate this.[11] Having said this, Huawei is often accused of have “poor security and engineering standards”.[12]

International Acceptance of Huawei 5G Equipment

Concerns about the security aspects of Huawei telecommunication equipment in the UK led to the establishment of the Huawei Cyber Security Evaluation Centre (HCSEC) in 2010, which is owned by Huawei but supervised by an Oversight Board which is chaired by the CEO of the UK’s National Cyber Security Center (NCSC). The Oversight Board’s deputy chair is a Huawei executive, and it has representatives from government and the UK telecommunications sector. [13]

The HCSEC’s fifth annual report in 2019 said that “further significant technical issues have been identified in Huawei’s engineering processes, leading to new risks in the UK telecommunications networks” and that “no material progress has been made by Huawei in the remediation of the issues reported last year, making it inappropriate to change the level of assurance from last year or to make any comment on potential future levels of assurance”. 

The annual report added that “HCSEC’s work has continued to identify concerning issues in Huawei’s approach to software development bringing significantly increased risk to UK operators, which requires ongoing management and mitigation; “no material progress has been made on the issues raised in the previous 2018 report”.

Furthermore, the annual report said that the Oversight Board: “continues to be able to provide only limited assurance that the long-term security risks can be managed in the Huawei equipment currently deployed in the UK”; “advises that it will be difficult to appropriately risk-manage future products in the context of UK deployments, until the underlying defects in Huawei’s software engineering and cyber security processes are remediated”.

“At present, the Oversight Board has not yet seen anything to give it confidence in Huawei’s capacity to successfully complete the elements of its transformation programme that it has proposed as a means of addressing these underlying defects. The Board will require sustained evidence of better software engineering and cyber security quality verified by HCSEC and NCSC”. “Overall, the Oversight Board can only provide limited assurance that all risks to UK national security from Huawei’s involvement in the UK’s critical networks can be sufficiently mitigated long-term”.

Ian Levy, NCSC Technical Director, says “there are no absolutes in cyber security, and there’s no such thing as a 100% secure system. In the end, cyber security is all about risk management, judgement, and trying to make your adversaries’ lives harder”.[14] He adds that “nothing we can do can entirely remove risk in any telecoms network with any vendor (of equipment) and so our intent is to get the risk down to an acceptable level in all the different networks using all the different vendors”.[15]

On 28 January 2020 the UK Government announced that “high risk vendors” would be “excluded from sensitive ‘core’ parts of 5G and gigabit-capable networks”, and that there would be a “35% cap on high risk vendor access to non-sensitive parts of the network”.[16] “High risk vendors” were described as “those who pose greater security and resilience risks to UK telecoms networks”. While there was no direct mention of China or particular companies, Huawei was clearly the main target.

Australia has completely banned Huawei from participating in its 5G network. A basic technical reason has been put forward by the head of its Signals Directorate: “5G is not just fast data, it is also high-density connection of devices – human to human, human to machine and machine to machine – and finally it is much lower signal latency (faster speed of response). Historically, we have protected the sensitive information and functions at the core of our telecommunications networks by confining our high-risk vendors to the edge of our networks (where the end-users of such services are). But the distinction between core and edge collapses in 5G networks. That means that a potential threat anywhere in the network will be a threat to the whole network. In consultation with operators and vendors, we worked hard this year to see if there were ways to protect our 5G networks if high-risk vendor equipment was present anywhere in these networks. At the end of this process, my advice was to exclude high-risk vendors from the entirety of evolving 5G networks.”[17] 

Many opponents of the use of Huawei equipment say that China’s 2017 National Intelligence Law obliges Chinese companies to assist the government in any espionage activity. Article 7 says “any organization or citizen shall support, assist, and cooperate with state intelligence work according to law”, while Article 14 says that “state intelligence work organs, when legally carrying forth intelligence work, may demand that concerned organs, organizations, or citizens provide needed support, assistance, and cooperation”.[18] This is taken to mean that Huawei will design its equipment so that it can be used by the Chinese government to spy on foreign users of that equipment.

US official policy on Huawei has been described as “scattershot”[19] by Brake of the Information Technology & Innovation Foundation (ITIF), with a “variety of different actors throughout the government doing what they can to limit Huawei in the United States – or even curtail its rise altogether”. Brake identifies the actions of the US Federal Communications Commission (FCC), as well as US trade policy, diplomacy, and legislation.

In November 2019, the FCC announced a policy to prohibit official financial subsidy money for high-cost rural 5G networks being spent to obtain equipment or services from a company considered to be a national security threat, specifically naming Huawei and ZTE.[20]

According to Brake, the US “has leveraged both import and export controls in an attempt to undermine Chinese wireless equipment manufacturers such as Huawei and ZTE”.[21]

A May 2019 US presidential “Executive Order”[22] gave “extremely broad authority for the administration to block the importation or use of risky 5G equipment”.[23]

On the export side, Huawei has been added to the Entity List of the US Commerce Department’s Bureau of Industry and Security[24], with the result that “no company may sell US technology, software, or other items without a special license”. Nevertheless, according to Brake, “over 160 major US companies have applied for – and at least some have received – licenses to do business with Huawei.

Even though Huawei is on the Entity List, a 15 June 2020 US Department of Commerce press release says that it still wants is companies to cooperate with Huawei in “standards-development bodies” because of “US national security and foreign policy interests”.[25]

On the diplomacy side, the US has been very aggressive in expressing its views. In May 2019, Secretary of State Mike Pompeo said that “Huawei is an instrument of the Chinese government”.[26] In December 2019, the US national security adviser, Robert O’Brien, told the Financial Times newspaper that: “It is somewhat shocking to us that folks in the UK would look at Huawei as some sort of commercial decision. 5G is a national security decision.”[27]

In February 2020, O’Brien said that: “We have evidence that Huawei has the capability secretly to access sensitive and personal information in systems it maintains and sells around the world.” national security adviser Robert O’Brien said.[28] However, no evident has been made public for this claim and some companies and experts are skeptical.[29]

US Deputy Assistant Secretary for Cyber and International Communications and Information Policy, has said that “there is no way that we can effectively mitigate the risk to having an untrustworthy vendor in the edge of the network”.[30]

According to Brake, numerous laws have been proposed, with two important one already implemented. The Secure and Trusted Communications Network Act of 2019[31], which became law in March 2020, prohibits use of US federal government funds “to purchase equipment from companies that pose a national security threat, and created a reimbursement program to remove and replace equipment in use that was manufactured by entities posing an unacceptable national security risk”.[32] Part of the National Defense Legislation Authorization Act means that, effective August 2020, the government can no longer use US government funds to purchase equipment from “covered” telecommunications companies (such as Huawei).[33]

On 30 June 2020, the BBC reported the UK’s Digital Secretary as saying that US sanctions are “likely to have an impact on the viability of Huawei as a provider for the 5G network”.[34]

Conclusion

In conclusion, 5G technology offers the prospect of very significant advances in the economic and social development of all countries, regardless of the present level of development. However, 5G technology is extremely complex and continues to evolve, and what exactly is best for one country may not be best for another.

Progressive “virtualization” of much 5G infrastructure will act to reduce the importance of particular hardware producers such as Huawei, and may allow Russia to play on its software strengths in much of the international market for 5G network products.   Political developments associated with US pressure and China’s own foreign and domestic policies may also favor Russia, with a combination of off-the-shelf hardware and Russian software seen as less of a security threat than a whole network provided by one seller. This would be facilitated if Russia could adopt policies that make it seem less threatening to other countries.

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[1] Alexander Gabuev, “Huawei’s courtship of Moscow leaves west in the cold”, Carnegie Moscow Center, 21 June 2020

https://carnegie.ru/2020/06/21/huawei-s-courtship-of-moscow-leaves-west-in-cold-pub-82131

[2] Jeff Schubert, “Russia’s Huawei 5G Conundrum”, Russian International Affairs Council, 11 February 2020

https://russiancouncil.ru/en/analytics-and-comments/columns/cybercolumn/russia-s-huawei-5g-conundrum/

[3] Doug Brake, “A US National Strategy for 5G and Future Wireless Innovation”, Information Technology & Innovation Foundation (ITIF), April 2020

https://itif.org/publications/2020/04/27/us-national-strategy-5g-and-future-wireless-innovation

[4] “5G Tech Factsheet For Policymakers”, Belfer Center for Science and International Affairs, Harvard Kennedy School, Spring 2020 Series.  https://www.belfercenter.org/sites/default/files/files/publication/5G_2.pdf

[5] Doug Brake, “A US National Strategy for 5G and Future Wireless Innovation”, Information Technology & Innovation Foundation (ITIF), April 2020

https://itif.org/publications/2020/04/27/us-national-strategy-5g-and-future-wireless-innovation

[6] “5G Tech Factsheet For Policymakers”, Belfer Center for Science and International Affairs, Harvard Kennedy School, Spring 2020 Series.  https://www.belfercenter.org/sites/default/files/files/publication/5G_2.pdf

[7] Doug Brake, “A US National Strategy for 5G and Future Wireless Innovation”, Information Technology & Innovation Foundation (ITIF), April 2020

https://itif.org/publications/2020/04/27/us-national-strategy-5g-and-future-wireless-innovation

[8] Doug Brake, “A US National Strategy for 5G and Future Wireless Innovation”, Information Technology & Innovation Foundation (ITIF), April 2020

https://itif.org/publications/2020/04/27/us-national-strategy-5g-and-future-wireless-innovation

[9] 5G Tech Factsheet For Policymakers”, Belfer Center for Science and International Affairs, Harvard Kennedy School, Spring 2020 Series.  https://www.belfercenter.org/sites/default/files/files/publication/5G_2.pdf

[10] 5G Tech Factsheet For Policymakers”, Belfer Center for Science and International Affairs, Harvard Kennedy School, Spring 2020 Series.  https://www.belfercenter.org/sites/default/files/files/publication/5G_2.pdf

[11] “Expert says Huawei’s cyber risks can’t be mitigated in a 5G network”, Howard Solomon, IT World Canada, 15 June 2020. Reporting on an interview with Melissa Hathaway.

Expert says Huawei’s cyber risks can’t be mitigated in a 5G network

[12] Ian Levy, Ian Levy, Technical Director, UK National Cyber Security Center, “Security, complexity and Huawei; protecting the UK’s telecoms networks”, 22 February 2019

https://www.ncsc.gov.uk/blog-post/blog-post-security-complexity-and-huawei-protecting-uks-telecoms-networks

[13] “Huawei Cyber Security Evaluation Centre (HCSEC) Oversight Board Annual Report”, 2019

https://www.gov.uk/government/publications/huawei-cyber-security-evaluation-centre-oversight-board-annual-report-2019

[14] Ian Levy, Ian Levy, Technical Director, UK National Cyber Security Center, “Security, complexity and Huawei; protecting the UK’s telecoms networks”, 22 February 2019

https://www.ncsc.gov.uk/blog-post/blog-post-security-complexity-and-huawei-protecting-uks-telecoms-networks

[15] Ian Levy, Technical Director, UK National Cyber Security Center, “The future of telecoms in the UK”, 28 January 2020

https://www.ncsc.gov.uk/blog-post/the-future-of-telecoms-in-the-uk

[16] Press Release, UK Department of Digital, Culture, Media & Sport, “New plans to safeguard country’s telecoms network and pave way to fast, reliable and secure connectivity”, 28 January 2020

https://www.gov.uk/government/news/new-plans-to-safeguard-countrys-telecoms-network-and-pave-way-for-fast-reliable-and-secure-connectivity

[17]  Mike Burgess, Director-General ASD, speech to ASPI National Security Dinner, Australian Strategic Policy Institute, 29 October 2018

https://www.asd.gov.au/speeches/20181029-aspi-national-security-dinner.htm

[18] Murray Scot Tanner, “Beijing’s New National Intelligence Law: from Defence to Offence”, Lawfare, 20 July 2017  https://www.lawfareblog.com/beijings-new-national-intelligence-law-defense-offense

[19] Doug Brake, “A US National Strategy for 5G and Future Wireless Innovation”, Information Technology & Innovation Foundation (ITIF), April 2020

https://itif.org/publications/2020/04/27/us-national-strategy-5g-and-future-wireless-innovation

[20] US Federal Communications Commission, “Protecting Against National Security Threats to the Communications Supply Chain Through FCC Programs”, 26 November 2019

https://docs.fcc.gov/public/attachments/FCC-19-121A1.pdf

[21] Doug Brake, “A US National Strategy for 5G and Future Wireless Innovation”, Information Technology & Innovation Foundation (ITIF), April 2020

https://itif.org/publications/2020/04/27/us-national-strategy-5g-and-future-wireless-innovation

[22] “Executive Order on Securing the Information and Communications Technology and Services Supply Chain”, 15 May 2019

https://www.whitehouse.gov/presidential-actions/executive-order-securing-information-communications-technology-services-supply-chain/

[23] Doug Brake, “A US National Strategy for 5G and Future Wireless Innovation”, Information Technology & Innovation Foundation (ITIF), April 2020

https://itif.org/publications/2020/04/27/us-national-strategy-5g-and-future-wireless-innovation

[24] Sylwia A. Lis, Paul Amberg and Meghan Hamilton, “US Government Imposes Comprehensive Restrictions on Exports/Reexports to Huawei and its Affiliates and Issues Executive Order to Secure Information and Communications Technology and Services in the United States”, Baker & McKenzie, 19 May 2019

https://sanctionsnews.bakermckenzie.com/us-government-imposes-comprehensive-restrictions-on-exports-reexports-to-huawei-and-its-affiliates-and-issues-executive-order-to-secure-information-and-communications-technology-and-services-in-the-un/

[25] Press Release, US Department of Commerce, “Commerce Clears Way for U.S. Companies to More Fully Engage in Tech Standards-Development Bodies”, 15 June 2020

https://www.commerce.gov/news/press-releases/2020/06/commerce-clears-way-us-companies-more-fully-engage-tech-standards

[26] Doina Chiacu, “U.S.’s Pompeo says Huawei is an ‘instrument of Chinese government’ Reuters, 29 May 2019,

https://www.reuters.com/article/us-huawei-tech-usa-pompeo/u-s-s-pompeo-says-huawei-is-an-instrument-of-chinese-government-idUSKCN1SZ178

[27] Jon Porter, “UK defies US and refuses to ban Huawei from 5G networks”, The Verge, 28 January 2020

https://www.theverge.com/2020/1/28/21083762/huawei-5g-network-infrastructure-uk-national-security

Demetri Sevastopulo, “US warns Boris Johnson over Huawei risks to UK citizens’ secrets”, Financial Times, 24 December 2019

https://www.ft.com/content/686bfaf2-25d7-11ea-9a4f-963f0ec7e134

[28] Bojan Pancevski, “U.S. Officials Say Huawei Can Covertly Access Telecom Networks”, Wall Street Journal, 12 February, 2020

https://www.wsj.com/articles/u-s-officials-say-huawei-can-covertly-access-telecom-networks-11581452256

[29] Bojan Pancevski, “U.S. Officials Say Huawei Can Covertly Access Telecom Networks”, Wall Street Journal, 12 February, 2020

https://www.wsj.com/articles/u-s-officials-say-huawei-can-covertly-access-telecom-networks-11581452256

[30] “LiveAtState with Economic and Business Affairs Bureau Deputy Assistant Secretary Robert Strayer, Office of International Media Engagement, US Department of State, 29 April 2019

https://www.state.gov/liveatstate-with-economic-and-business-affairs-bureau-deputy-assistant-secretary-robert-strayer

[31] H.R.4998 – Secure and Trusted Communications Networks Act of 2019

https://www.congress.gov/bill/116th-congress/house-bill/4998

[32] Doug Brake, “A US National Strategy for 5G and Future Wireless Innovation”, Information Technology & Innovation Foundation (ITIF), April 2020

https://itif.org/publications/2020/04/27/us-national-strategy-5g-and-future-wireless-innovation

[33] Doug Brake, “A US National Strategy for 5G and Future Wireless Innovation”, Information Technology & Innovation Foundation (ITIF), April 2020

https://itif.org/publications/2020/04/27/us-national-strategy-5g-and-future-wireless-innovation

[34] “Huawei: Ministers signal switch in policy over 5G policy”, BBC News, 30 June 2020

https://www.bbc.com/news/technology-53239789

This article is part of a debate between Alexander Lukin and myself that has been conducted on “The Asan Forum” internet site about Russia’s position in Eurasia. See: http://www.theasanforum.org/category/alternative-scenarios/?post_id=9372#slide_header

Alexander Lukin, in his Positive Scenario 1, writes that “the course to transform Russia into an independent Eurasian center of power and world influence has today become the official policy of the Kremlin and the main direction of thought of the majority of Russian experts on foreign policy strategy”.[1]

In my first essay I took quite a broad approach and now have little to add, except to reiterate several of my views by saying that Lukin is extremely optimistic when he talks of a “boost to the Shanghai Cooperation Organization” and the possibility of “a division of labor between the Eurasian Economic Union and the Silk Road Economic Belt or, more broadly, the Greater Eurasian project and the Belt and Road Initiative”.

In this essay I want to focus on Lukin’s argument that “Russia’s military might is fully in keeping” with its Eurasian ambitions, “but its economic development still noticeably falls short”. That is, they are dragging each other down.

In my view, Russia’s “military might” and “economic development” are related with efforts to boost the former presently adversely affecting the latter, and the latter adversely affecting the former.

Let’s consider the “military might” issue first.

Russia’s military could be used against another country in Eurasia, or to defend another country in Eurasia from a third country which may or may not be Eurasian. For example, sometime in the future Russia might decide that it needs to take military action against China or Afghanistan, or defend itself against either. Or, if Russia decides that it needs to defend Afghanistan against China or the US, the conflict – particularly if it involves the US – could partially take place outside of Eurasia. Moreover, the intensity and duration of any conflict is impossible to predict. 

A country in Russia’s position, bordering on many countries, and facing multiple possible threats ranging from terrorism to nuclear conflict, needs to be prepared with a broad range of military capabilities.

The danger of focussing to much on a narrow range of anticipated threats is something that US policy makers have now re-learnt, and is impacting their own planning. After the 11 September 2001 attacks in the US, its defense focus was on terrorism (and regime change) which led to military action in Afghanistan and Iraq. However, the US National Defense Strategy now says: “Inter-state strategic competition, not terrorism, is now the primary concern in U.S. national security.”[2]

So, how real is Russia’s “military might” and how sustainable is it?

Earlier this year, General Valeriy Gerasimov, Chief of the Russian General Staff said: “As new realms of warfare appear, the methods used in contemporary conflicts are more and more often shifting toward fusion of political, economic, informational, and other non-military measures, backed by military force.”[3] Gerasimov then added: “Nevertheless, the main content of military strategy is the preparation for war and its conduct, first and foremost using the Armed Forces.”

In this essay, I will concentrate on the “military force” aspect of “warfare”. Moreover, I will not attempt to look at issues of military doctrine or strategy. I will only consider the effect on Russian military capabilities of broader technology and economic issues, as well as the interplay between the two.

In my view, Russia is likely to remain comparatively weak in military technology and economics unless it adjusts many of its policy settings.

Russia can presently mobilise a very large number of armoured vehicles which could be used in the Central Asian part of the Eurasian land-mass, although the focus is on its Western periphery.[4] Since the conflict with Georgia in 2008, Russia’s ground combat capabilities have particularly benefited from reorganization,[5] updated weapons and investments in electronic warfare.[6] Russia can also clearly use its air-force to bomb weakly defended targets in a larger geographical area, and does have some powerful technically advanced offensive and defensive weapons.

Nevertheless, according to Aleksandr Golts, “the legacy of the Soviet Union is still very much present in the modern Russian army, as many of its cutting-edge systems “are the development of good, old Soviet systems and the modernization of that type of technology”.[7]

Having visited quite a few Russian companies (including factories) in the early/mid-1990s, I put the view in 2001 that one of the main reasons for the collapse of the Soviet Union was that “the industrially centrally managed economy was struggling to cope with the move toward advanced electronics, services (and “information”) activities. The gigantic factory approach of Russian central planners, workable for an earlier simpler age, was incapable of taking the Russian economy further”.[8]

That is, the Soviet Union had trouble taking advantage of the Third Industrial Revolution, when production moved from “logic and functioning” that were generally “directly observable and understandable” to the beginning of the information age in which so much is unseen.[9]

According to Gustav C. Gressel, the 1990s “provided a window of opportunity for the defense industry to catch up in sectors where the Soviet industry traditionally lagged behind. The computing revolution increased the availability of commercially available hardware, allowing Russia to modernise legacy systems with advanced electronics, sensors, and communication equipment. This has been the core of Russia’s modernisation efforts of the last two decades.”[10] Indian analysts also believe that Russia, even to now, has maintained very significant defense technology proficiency in metallurgy.[11]

Upgrading existing major hardware platforms with continuously improving bits and pieces is, of course, not exclusively a Russian issue. The US’s B52 bomber produced in the 1950s is still in service and continues to be upgraded, perhaps for several more decades.[12]

The more general problem for Russia is that modern weapons systems (along with technology generally) are rapidly growing in complexity. Russia lacks both a diverse commercial technology base and ready access to foreign technology that it could support the production of domestic high-tech modern weapons. One indication of this is the very low level of complex manufactured products in its exports, with “high-tech” export items being very rare.[13] This is more than just a function of Russia’s so-called “resources curse”, as a country rich in resources such as Australia still manages to have a reasonably sized high-tech export sector (with much of it based on the SME sector).

US analysts say that its “defense leaders are increasingly aware that the impetus for innovation for much of the next generation of military equipment, both hardware and software, will come from the commercial sector and that this sector is increasingly globalized. This is particularly true with respect to information technologies, software development, artificial intelligence, robotics, and the biological sciences.”[14] Thus, the US is working to increase its access to and ability to use technologies being driven by the commercial sector,[15] and the Chinese are doing the same.

However, it must be conceded here that there is some debate on just exactly how important such a commercial industrial base really is, and this may arguably be relevant to Russia.

Andrea Gilli and Mauro Gilli (writing mainly about China’s efforts to imitate and steal foreign military technology) argue that modern weapons systems continue to become so complex[16] that simply possessing a generally high-standard commercial industrial and technology base is less sufficient than in the past for achieving specialized military innovation and production because of the many special requirements of the latter.[17] 

They say that “defense and civilian industries have come to differ dramatically, to the point that even realms such as defense and commercial shipbuilding or aviation have limited opportunities for synergy”, and say that “even the defense and commercial divisions of companies like Boeing enjoy limited opportunities for synergies”.[18]

Yet, they also point out that the Aegis anti-missile defense system, “one of the most advanced military technologies of the U.S. Navy”, which was “fielded in 1983” – and which “remains unrivalled in the world” – “relies on dual-use technology for more than 75 per cent of its components”.[19]

Whatever the exact situation with individual military items, the Gillis persuasively argue that a solid commercial industrial and technology base is not sufficient for modern military innovation and production.

However, in my view, it is still very necessary. There may not be horizontal synergies, but there will be many common vertical roots.

It is just unrealistic to believe that all such technological development occurs only in military factories and defense research centres. A lot of it, including the basic development of a broader labor force skilled enough for selected workers to be moved into specialized military production, will depend directly or indirectly on developments in the supply chains for production of consumer and other industrial goods.

Many of the best students entering technical universities will not be attracted to the production of military goods and services –just ask Google about Project Maven[20] and its response to AI[21] — but their commercial work will help build and country’s technology base, and ultimately military production capability. Even if the use of dual-technologies is as limited as the Gillis suggest, some of these innovations will then be further developed for specific military application.

It is unclear how future technology developments, particularly those associated with the so-called Fourth Industrial Revolution, will affect Russia, but some of the signs are not good. For example, according to a recent report by FOI, the Swedish Defense Research Agency, Russian machine tool builders “have so far overlooked the on-going paradigm shift, where especially high-end machine tool companies are transforming from being merely manufacturers to becoming ‘process solution partners’ that are more or less integrated into their customer’s entire business and manufacturing processes”.[22]

According to Andrey Kolganov at the MGU, there is now only experimental production of “industrial robots”.[23] Of course, this does not mean that the Russian military in uninterested in robots. In early 2019 General Gerasimov said that “the next direction of research is related to the large-scale of military robotic systems, starting with UAVs, to contribute to a wide range of missions”. Instead, it probably means that is insufficient appreciation in the Russian security-defence establishment of the role of commercial activities ultimately contributing to military capabilities.

Writing in early 2017, Andrey Frolov, Editor-in-Chief of “Arms Export” magazine, said that “if the sanctions against Russia persist for a long time, the Russian defense industry may again seek full autarky, which would have a negative impact on its innovative potential in the long term”.[24]

Frolov, again writing in a late 2017 ISS report, says that “one of the main problems with import substitution is the lack of a modern machinery base for the production of goods to replace those previously acquired from abroad”. It says that “this is emerging as one of the most important issues, especially under the current restrictions on obtaining new machine tools suitable for the production of military products and dual-use goods”.[25]

Fearing the effects of continued foreign sanctions, the Russian government has attempted to be pro-active and promote domestic production of machine tools. The FOI report says that “the government’s efforts to ban foreign-made machine tools in military-related production have turned out to be futile” as “most defense companies have either chosen to deliberately circumvent the import ban or to abstain from their planned capital investments”. The latter response obviously has long-term consequences that will often remain hidden in the short-term.

The FOI report adds that it “seems highly likely that production within Russia’s strategic industries – particularly within the defense industry – will rely, by and large, on foreign machine tools well into the 2030s”.[26] Moreover, most imports are at the high-tech end of the machine tool market where, as notes by the Gillis, technical specifications for defense product output tend to be extremely precise.

Gressel says that the increasing cost and complexity of weapons is leading “medium sized powers” (such as France) to co-operate more with other countries. “But”, he says, “that is not the Russian way. So far Russia is prioritising independence over efficiency. Given the nature of the Kremlin’s foreign policy and its reluctance to engage in deepened cooperation with other states, Russia has failed to build a permanent and structural partnership with any other international player.”[27]

In contrast, the US approach seems to be that “a 21st century” defense industrial base must be “international”. According to Daniel Goure,“the pace of globalization in the aerospace and defense industry is quickening. In part, this reflects the great expense involved in many large aerospace programs”, and “in part, this also reflects the reality that many foreign countries, particularly US allies in Europe and Asia, now possess critical design skills, production capabilities, and products.”[28]

“In the case of the F-35 Joint Strike Fighter”, according to Goure, “eight foreign allies are part of the consortium to develop and build the aircraft.” Although in some cases, international politics rather than technical capacity may be a major consideration. For example, according to F-35 program manager Vice Adm. Mathias Winter around 6 or 7 percent of parts are made in Turkey.[29]

Having said all this, the international open source nature of much advanced software[30] means that Russia’s defense industries will always have an international input.  

So, in the final analysis, is Vladimir Putin’s emphasis, in an early 2018 speech to Russia’s Federal Assembly, on a limited number of powerful hypersonic nuclear and a few super-punch weapons a sign of strength or weakness?

Some Russian policy makers seem to see such talk as a sign of strength. Former foreign minister Igor Ivanov said that Putin was really offering an “olive branch” and wanted to get the US to negotiate.[31] But given the overall assertive Russian foreign policy stance outside of Eurasia and the present US perception of Russia, the reality is that it is likely to have the opposite effect.  

Here it should be noted that General Gerasimov, when talking about the “new types of weapons”, says that “sufficient numbers will be deployed to ensure deterrence” and that “there is no doubt we are clear leaders in this field when compared to technologically advanced countries”.[32]

But, as Andrea Gilli and Mauro Gilli note, “the history of military innovation is, in the end, the history of innovation, counter-innovation, and further innovation”.[33] Or, between better swords and better shields.

It may be that technology is at such a stage that the shield has permanently lost the battle, but the US is clearly not prepared to accept this as it explores the possibility of using laser and micro-wave shields against hypersonic missiles.[34] If the US cannot quickly develop such shields, it is likely to take advantage of the relative size of its economy, and simply produce more swords than Russia. That is, more hypersonic weapons aimed to take-out Russian launch pads as soon as possible.[35]

China, despite present good relations with Russia, is likely to react in the same way as the US. Gerasimov’s confidence that the “new types of weapons” will “allow Russia not to be drawn into an arm’s race”[36] is very optimistic, to say the least.

Moreover, Russia is hardly likely to use such weapons in defense of another Eurasian country, so they do little to increase its attractiveness as an Eurasian pole.

Alexander Lukin writes that “on the basis of its political and military prowess, Russia is having partial success in being recognized as an autonomous pole in Eurasia”. Despite some claims that Russia can be a “security provider”, it is hard to think of any Eurasian country that might view Russia in this way. China fully intends to be its own security provider, although it will be grateful if Russia can play a role in helping keep things quite is its Central Asian backyard. And, other Eurasian countries should not expect support from Russia in any disputes with China!  

Lukin wrote that “coverage of Russia’s economy is beyond the scope of this scenario”, but then he continually refers to Russia’s actual and prospective economic performance.

The best that he can say is that “the economic system of today’s Russia, to a large degree, corresponds to the Eurasian ideal” where “all transformative historical reforms were done with the help of the state, which played the most active role in the economy”.

There is considerable truth in this statement when it comes to the initial industrial development of Japan, South Korea and China, and its is also the case that defense requirements were the basis for or pushed the development of many modern-day technologies. But, as noted earlier there is evidence of “radical change” with general technology innovation often outpacing military innovations in many areas.[37]

My own view is that Russia should concentrate on taking greater advantage of its natural resource base in a similar way to that done by Australia to maximise is total economic output and wealth. I set out in detail the reasons for this view in my 2016 report on Russia’s National Technology Initiative.[38]

However, such a strategy is most effective if a country also has ready access to advanced foreign technology (and labor skills) which it can directly use or adapt to its own specific circumstances, and if the country can be acceptably integrated into international production supply chains.

The rapid advance of 5G illustrates Russia’s predicament.[39] The hardware (and associated software) is so complex that pulling it apart and understanding it in order to ensure that it has no malicious capability is leading some countries to ban or severely restrict the use of Huawei products. (This is similar to the situation that the Gillis note with Chinese attempts to imitate US military technology.)

Russian “state” led efforts – corresponding to the Lukin “Eurasian ideal” – to develop a complete domestic 5G production (hardware and software) capacity would only lead to a second or third-rate product. China might be able to become self-sufficient in 5G because of the size of its market and its extensive manufacturing base, but the Russian funds can be better allocated to taking advantage of its natural resources. 

All this does not mean that Russia should not aim to develop an advanced military-technology sector. What is does mean is that excessive efforts in this direction – particularly the “full autarky” mentioned by Andrey Frolov – will have an adverse effect on Russia’s total wealth creation and, in the final analysis, on Russia’s ability to spend money to defend itself in a sensible and measured way.

Taking the machine tools example further: “Is Russia prepared to cultivate sufficiently good relations with the West to get what it needs in high-end machine tools, or will it make do with what it can find from wherever it can get it? Either of those choices might in their own way deny Russia from meeting its long-term geostrategic goals.”[40] 

Foreign sanctions on Russia and Russia’s own pride in its self-sufficiency are ultimately negative factors for both its total military prowess and its total economy. A more balanced policy approach is needed if Russian realistically wants to be an “independent Eurasian center of power and world influence”.

This does not mean that Russia should surrender its national security interests.

In my view, Russian had considerable justification for the annexation of Crimea given the actual and professed expansionist ideas of NATO. However, instead of logically offering some form of apology and compensation after the event, Russia clearly supported Ukraine separatist forces with extensive military support.

This great emotion with its mainly Soviet Union historical roots is Russia’s Archiles heal, and one of the reasons it cannot be a pole in Eurasia. Most of Eurasia was never part of the USSR, but the present Russian leadership cannot accept this fact nor the possibility that it may have been different.

Apart from the technology and natural resource aspects, the best way for Russia to have a stronger economy is to concentrate on building the rule of law and honest institutions. I first wrote about this in 1992 when, after my second visit to Russia, I said that there was “too little emphasis on the need for rapid and vital reforms in the accounting, banking and legal spheres, including anti-monopoly legislation” and it was “is almost as if this very important component of an effective market economic system will rise by itself”.[41] Russia has been making progress in some areas, but very little in others.  

A recent AT Kearney report on “Russia’s readiness for the Fourth Industrial Revolution” concludes that Russia’s “economy risks becoming less competitive over time if it does not make major improvements to its institutional framework, its technology and innovation”.[42]

In conclusion, in this essay I have tried to demonstrate that Russia’s “military might” is not “fully in keeping” with its ambitions to be “an independent Eurasian center of power and world influence”, and that many of its official policies aimed at achieving this “military might” are adversely affecting its “economic development”. This, in turn, ultimately adversely affects “military might”.  

PDF print version with footnotes is available here:

Russian economy, technology and military power

The action being taken by various governments to limit the involvement of China’s Huawei in the provision of equipment for 5G has brought into sharp-focus an issue that has been around for some time, but is now becoming more acute for national security of individual countries. That is, how to ensure that purchased Information and Communication Technology (ICT) hardware and software does not contain aspects, either at time of purchase or later, that offer the possibility of being maliciously used on a large scale – either for espionage or sabotage of crucial national infrastructure.

Australia has totally banned the use of Huawei equipment in its future 5G telecommunications network, while the US has banned its use by official organizations. The US, UK and a number of other developed countries may eventually follow the Australian lead.

 “Innovation has no rules except a desire to create, and a willingness to accept the risk of failure”

Historical Context

Many people say that today we are in the midst of a fourth “industrial revolution” – the so-called “Industry 4”

Life before the Industrial Revolution (s): People mainly worked growing crops and caring for animals, or lived in towns where the manufacturing that did occur was generally small in scale. Energy came from animals (mainly horses), water and wind mills, and small furnaces (producing heat and sometimes steam).

The First “Industrial Revolution” — second half of the 18th century to the early 19th century: Mechanization allowed “industry” to began to replace agriculture as the main economic structure of society. Advances in steam engine technology (which in its basic form had been around for a very long time), along with advances in metallurgy, led to railways.  

The Second Industrial revolution – beginning in last part of 19^th century: Emergence of a new source of energy (electricity, gas and oil), advances in basic materials (steel, chemical etc), and the internal combustion engine brought forth the motor car and the airplane, the telegraph and the telephone. The world’s most influential business writer, Peter F. Drucker, wrote that:

“In the late nineteenth century … a new major invention leading almost immediately to the emergence of a new major industry, surfaced every few months on average. This period began in 1856, the year that saw both Siemens’s dynamo and Perkins’s aniline dye. It ended with the development of the modern electronic tube in 1911. In between came typewriter and automobile, electric light bulb, man-made fibers, tractors, streetcars, synthetic drugs, telephone, radio, and airplane—to mention only a few. In between, in other words, came the modern world.”[2]

Third industrial revolution – second half of 20^th century: Mankind discovered the ability to control nuclear energy in the mid-1940s, but the knowledge behind the atomic-bomb “invention” was limited in its application for some time. Drucker wrote that “no truly new major industry was started after 1914 until the late 1950s, when computers first became operational”.[3] This was the era of great advances in electronics, miniaturized material which allowed space research and biotechnology, and increased automation in production, with programmable machines and robots.

Fourth Industrial revolution (Industry 4) is now: Merging technology that blurs the lines between the physical, digital and biological spheres leading to transformations to entire production, management and governance systems. Its most important enabler is the emergence of the Internet.

But what exactly is “Industry 4”?

The Boston Consulting Group has identified some important technologies: autonomous robots, simulation, horizontal and vertical system integration, the Industrial Internet of Things, cyber security, additive manufacturing, augmented reality.[4]

What is Innovation?

The priority areas for the Baikal Global Startup Forum (BGSF) are the National Technology Initiative’s SafeNet, FoodNet, and HealthNet “market group” areas. On the National Technology Initiative (NTI) internet site[5], these are described in the following ways: 

SafeNet –new personal security systems;

FoodNet — system of personal production and food and water delivery;

HealthNet — personal medicine.

Using a similar approach to the Boston Consulting Group, the leaders of the National Technology Initiative (NTI) have also identified the following “technologies”: digital design and simulation; new materials; additive technologies; quantum communications; sensory; mechabiotronics; bionics; genomics and synthetic biology; eurotechnologies; big data; artificial intelligence and control systems; new sources of energy; unit base (including processors)[6]

When I first wrote about the NTI two years ago (after participating in the 2016 “Foresight Fleet” journey down the Volga River)[7] the NTI internet site only identified the “market groups” – with the identified “technologies” more recently added.

The “markets” approach always seemed rather vague, and I assume that the “technologies” have been more recently identified to give a clearer technical direction to the program.

Yet, 30 years ago (in the time before the “Internet age”) Drucker, wrote:

“Innovation is not a technical term. It is an economic and social term. Its criterion is not science or technology, but a change in the economic or social environment, a change in the behavior of people as consumers or producers, as citizens, as students or as teachers, and so on. Innovation creates new wealth or new potential of action rather than new knowledge.”[8] An innovation has to be “new and different”.

He wrote that “innovation is not science nor technology, but value” and that “innovation in a business enterprise must therefore always be market-focused”. “Innovation that is product-focused is likely to produce ‘miracles of technology’ but disappointing rewards.”[9]

So, I think that Drucker would favour the NTI’s “market grouping”, even if many people find it easier to think in terms of “technologies”.

I have always had the feeling that the collapse of the USSR was not only due to the sheer cost of the arms-race with the USA, which many commentators seem to think is the case. The lack of “market” mechanisms for determining allocation of resources (to produce Drucker’s “value”) probably played a large part in the USSR (including Russia) not taking advantage of the advances in electronics which was a major part of the 3^rd industrial revolution.[10]

A much more recent (2017) book by Eric Schmidt (a former CEO of Google) and Jonathan Rosenberg, “How Google Works”, focusses on the “Internet age” and also emphasises the importance of the market and usefulness (ie “value”).[11] They wrote:

“To us, innovation entails both the production and implementation of novel and useful ideas”. Novel is defined as not only “radically new functionality”, but also “surprising”. “If your customers are asking for it, you aren’t being innovative when you give them what they want; you are just being responsive”.[12] 

They also offer a “more inclusive definition”, saying “innovation isn’t just about the really new, really big things”: Google “releases over 500 improvements to its search engine each year. Is that innovative? Or incremental?” While they are “new and surprising” and “useful”, each one is not “radically useful” – but “put them all together, though, and they are.” Thus, “Google’s search team, working on a product that is 15 years old, is just as much in the innovation business as Google(x), the team working on the self-driving car.”[13] 

So, in their view “innovation” does not necessarily need to be a product, but may be a new way of making better use of an existing product. In 2010, a Tencent senior official dismissed cloud computing as “old wine in a new bottle, nothing new”. However, Alibaba’s Jack Ma said: “[If] we don’t do it, we will die in the future.” Alibaba is now the biggest player in China’s cloud sector.[14]

Drucker and the authors of “How Google Works” are in agreement that aspiring technology start-up founders need to consider much more than their technical skills if they want to succeed.  

The term National Technology Initiative clearly puta an emphasis on technology. But how much technology does a “start-up” need?  

Kyle Young, in a recent Harvard Business Review (HBR) article entitled, “The Simple Question That Can Make or Break a Start-up”, describes the “Chop House Burger” restaurant in Texas which sells “six innovative burgers”.[15] I have not been to this restaurant, but I am almost certain that there is a limit to how much technology can be fitted into a hamburger! 

But, there was serious intent behind this burger example. It was the “value of establishing demand before you launch” a business. Young refers to an early 2018 “extensive review” of business failure by CB Insights: “After analysing 101 start-up post-mortems, the reviewers found that 42% suffered from a lack of demand for the product or service being offered.” “This one flaw harmed significantly more companies than well-known start-up challenges such as cash flow (29%), competition (19%), and poor timing (13%), to name a few.” 

This leads to the obvious question of how to measure the possible demand before you start-up (as a verb) your start-up (as a noun)! Quite a bit has been written about this issue,[16] and I will not delve in to this issue here in any depth.  

However, the authors of “How Google Works” had this to say:  

“Before innovation, there needs to be the proper context for innovation. This is usually found in markets that are growing quickly and full of competition (eg self-driving cars). Don’t look for empty space and then be lonely; it is much better to use an innovative approach to become a player in a space that is or will be large. This may seem counterintuitive, since many entrepreneurs dream of entering ‘greenfield’ markets that are brand new and hence have no competition. But usually there is a reason the market is empty. It’s not big enough to sustain a growing venture. It still may be a good business opportunity …. but if you want to create an innovation, it is better to look for big markets with huge growth potential. Remember, Google was late to the search-engine party, not early.”[17] 

Yet, the same authors also write that “giving the customer what he wants is less important than giving him what he doesn’t yet know he wants”.[18] 

Presumably there was plenty of “empty space” for the light bulb and the airplane? So, does the product meet market demand, or does the product create the market?  

The same authors also say that “if you focus on your competition, you will never deliver anything truly innovative”[19]. Yet they say that Google “focussed on search because it was something we felt we were better at than anyone else”,[20] and, indeed, they relate how the 2009 Microsoft launch of Bing “intensified our efforts on search”.[21] 

The authors of “How Google Works” wrote that account needs to be taken of evolving technology, and that would be innovators need to realistically consider their ability (talent) to take advantage of it.[22] Having said this, Jack Ma of Alibaba “stands out as a tech company founder with no background in technology”. In 2013 he said: “Even today, I still don’t understand what coding is all about, I still don’t understand the technology behind the Internet.”[23] 

Innovation has no rules …

Drucker wrote about the “dynamics of innovation”, and that “there are so many factors in whatever causal patterns may exist that no one can possibly unravel them”. But he disagreed with what he described as the “common belief that innovation is haphazard and incapable of being predicted or foreseen.”[24]

He wrote that “an innovation does not proceed in a nice linear progression. For a good long time, sometimes for years, there is only effort and no results. The first results are then usually meager.”[25]

He added that “timing is of the essence”. “For every successful innovation that has results faster than anyone anticipates, there are five or six others—in the end perhaps, equally successful ones—which for long years seem to make only frustratingly slow headway. The outstanding example may be the steam-driven ship. By 1835 its superiority was clearly established; but it did not replace the sailing ship until fifty years later. Indeed, the “golden age of sail” in which the great clippers reached perfection began only after the steamship had been fully developed. For almost half a century, in other words, the steamship continued to be ‘tomorrow’ and never seemed to become ‘today’.”

“But then, after a long, frustrating period of gestation, the successful innovation rises meteorically. It becomes within a few short years a new major industry or a new major product line and market. But until it has reached that point it cannot be predicted when it will take off, nor indeed whether it ever will.”

Timing can be lucky or unlucky. There is often a need for “complementary innovations” – that is innovations in related areas. For example, the first steam trains depended on advances on metallurgy to enable railway lines that were strong enough to support their great weight.

When has an innovative product been innovated enough?

The authors of “How Google Works” wrote that “new ideas are never perfect right out of the chute, and you don’t have time to wait until they get there. Create a product, ship it, and see how it does, design and implement improvements, and push it back out. The companies that are fastest at this process will win.”[26] “In the Internet age, “product development has become a faster, more flexible process … (with) lots of iterations. The basis for success then, and for continual product excellence, is speed.”[27] “The products should be great at what they do, but it’s OK to limit functionality at launch.” “Figure out some way to let people experience the product, and use the data to make the product better.”[28][29]

The advice on “How Google Works” is very focussed on the “Internet age”, and its advice is not practical on many other areas.

Steve Jobs delayed the planned roll-out of the first Apple Store by 3-4 months after being persuaded that the layout should reflect “what people might want to do” with its products (in other words, their “usefulness”) rather than being organized by the “type of products” (ie “technology”) being sold. Jobs said: “We’ve only got one chance to get it right.”[30] The same applies to other physical products such Tesla and General Motors automobiles cars (which of needed, are very expensive to recall for modification)!

… Willingness to fail

If you are afraid of failure, do not attempt to innovate.

Drucker wrote: “The majority of innovative efforts will not succeed. Nine out of every ten “brilliant ideas” turn out to be nonsense. And nine out of every ten ideas which, after thorough analysis, seem to be worthwhile and feasible turn out to be failures or, at best, puny weaklings. Innovative strategy therefore aims at creating a new business rather than a new product within an already established line. It aims at creating new performance capacity rather than improvement.”[31]

However, the authors of “How Google Works” might disagree with Drucker when it come to Google’s 500 “improvements” each year to its search engine!

Nevertheless, Drucker continued, writing that innovation “aims at creating new concepts of what is value rather than satisfying existing value expectations a little better”. “The aim of innovating efforts is to make a significant difference. What is significantly different is not a technical decision. It is not the quality of science that makes the difference. It is not how expensive an undertaking it is or how hard it is to bring it about. The significant difference lies in the impact on the environment.”[32]

Drucker wrote that “the first products” of innovation efforts “are rarely what the customer will eventually buy”. “The first markets are rarely the major markets. The first applications are rarely the applications that, in the end, will turn out to be the really important ones.”[33] 

According to the authors of “How Google Works”: “To innovate you must learn to fail. Learn from your mistakes. Any failed project will yield valuable technical, user, and market insights that can help inform the next effort.”[34] “Most of the world’s great innovations started out with entirely different applications, so when you end a project, look carefully at its components to see how they may be reapplied elsewhere.” They give the example of radio which was initially sold only as a means of ship-to-shore communication, and the steam engine as a water pump.[35] 

The authors of “How Google Works” wrote:

“We have long felt that the start-up model, with small, autonomous teams located in one office led by passionate founders, is the most effective way to achieve remarkable new things (or fail quickly in the effort).” So they devised a way to “think big (solving big problems by taking advantage of big-company assets such as talent, resources and technology) while simultaneously acting small (growing ‘start-ups’ built through bottom-up insights and with the autonomy to move fast)”.  

Based on the idea that Google employees are “allowed and encouraged to work on projects of their own choosing” for 20 percent of their time, Google developed a new program called Area 120. A “select group” of Google employees are given “the opportunity to spend 100 per cent of their time on 20 per cent projects (100+20=120!)”. “Teams are given the money, space, and autonomy to pursue their ideas”. “We attempt to re-create the Darwinian world of start-ups by establishing aggressive milestones and timelines. For example, of the inaugural class of 14 teams at Area 120 in September 2016 (selected from more than 300 applicants), we expect half to fail within 6 months.”[36] 

Drucker wrote that “it is as important to decide when to abandon an innovative effort as it is to know which one to start”. It is important to be able to “admit that what seemed like a good idea has turned into a waste of men, time, and money”. “And near-success can be more dangerous than failure. There is, again and again, the product or the process that was innovated with the expectation that it would ‘revolutionize’ the industry only to have it become a minor addition to the product line, neither enough of a failure to be abandoned nor enough of a success to make a difference. There is the innovation which looks so ‘exciting’ when work on it is begun, only to be overtaken, during its gestation period, by a more innovative process, product, or service. There is the innovation which was meant to become a ‘household word’ that ends up as another ‘specialty’ which a few customers are willing to buy but not willing to pay for.”[37] The Segway is sometimes given as an example of this.[38]

The authors of “How Google Works” agree that “the timing of failure is perhaps the trickiest element to get right”,[39] and argue that a “good failure is a fast one” so as to “avoid further wasting of resources”.  If the innovative product idea is not working out, do not be afraid to abandon it. And, it should not be forgotten that some of the information and ideas from the failed product, might be very useful for a new product.

What Can Governments Do?

You may have noticed that my 2016 article on the National Technology was quite dismissive of the NTI – at least in the way that it was being promoted at that time![40]

Apart from the flawed “Foresight Procedure”[41], one of my criticisms was the NTI envisaged designation of high-tech “national champions” – whether it be companies or products – means that someone must make a decision on which high-tech issues are to be pursued. The rapid changes in technology make this selection process very difficult – and mistakes can be very costly.

I asked: “Who will be the final arbiter here? Would the arbiter of only a few years ago have designated Nokia and Research in Motion (manufacturer of the BlackBerry) as national champions if they had been Russian companies? “National champions” can quickly become “national failures”.

An excellent 2015 McKinsey report says that “digitization seems to intensify competitive churn. Today’s market leaders are vulnerable to being knocked off by the next wave of innovation.”[42] And this probably remains true today.[43]

The last thing that Russia needs is some government officials, no matter what their good intentions may be – making such decisions about which innovation projects to spend money and other resources on.[44]

My main criticism of the NTI was on the emphasis on developing new technology and the lack of emphasis on “using” available technologies.

Australia, with a similarly “resource cursed” economy to Russia, has developed few new technologies or been particularly innovative, but has been good at taking advantage of existing technologies and innovations and using these to create additional value.

Russian President, Vladimir Putin, speaking at the Valdai Discussion Club, in October 2018 said: “Of course, the American economy is high-tech and introduces contemporary innovative technologies quickly, so both Russia and China have something to work on and to learn from our American colleagues.”[45]

So, maybe the Russian government is moving a little closer to my point of view.[46]

Chinese bureaucracy, and the desire for government control, does impeded the adoption of innovative technologies in many areas. But, China has had the advantage of a rapidly increasing consumer market – and competition for it can be an enormous driver of innovation. The Chinese consumer has been allowed to receive many innovative products, particularly those associated with the Internet.

In Russia, lower income growth and a more comprehensive bureaucracy – generally based on the period of the 3^rd industrial revolution – seems to impede the adoption of contemporary technologies.[47]

The authors of “How Google Works” argue that the “defining characteristic” of innovation is its “lack of process”. It cannot be forced; instead it must be “allowed”[48] by those in power.

One of the best ways for the Russian government to improve Russia as a high-tech “producer” is to push structural economic reform because increasing competitive pressures encourage organizations to become better “users” of high-tech.

In general, apart from limited areas associated with national defense issues, the best approach of government to innovation is to get out of the way as much as possible – that is, do not try to pick winners! Governments should not try to stop use of new innovations just to protect some existing interest group! But Government does have a role to protect IP and to ensure that innovations are not abused for dishonest and anti-competition purposes.  

Conclusion

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 (including number of forms and people involved) 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.

PDF print version of this article with footnotes is available here:

Speech to Baikal Global Start-up Forum 1 November, 2018

 

Introduction

Two themes dominate Russian foreign policy.

One is the almost pathological need to assert the importance of Russia as a powerful player in world affairs, and this is the main reason for Russia’s actions in Syria where it now has secure military bases and has demonstrated to the world its willingness to use force.

The other theme is the more rational desire to secure its border areas by maximizing influence over its neighbors, and in particular countries of the former Soviet Union. In the face of actual and mooted NATO expansion, this was the prime motivator for the annexation of Crimea and the support of separatists in eastern Ukraine.

These two themes jointly account for Russia’s enthusiasm for the Eurasian Economic Union (EAEU), which – despite its name – is seen by Russia more in political than economic terms. The EAEU is really an attempt by Russian to exert political influence in what might be called Eurasia. In Russian foreign policy eyes, Eurasia can in practical terms best be defined as encompassing the countries which are presently members of the Shanghai Cooperation Organization (SCO) – Russia, China, Kazakhstan, Uzbekistan, Tajikistan, Kyrgyzstan, India and Pakistan – plus Turkmenistan, Afghanistan, Mongolia and possibly Iran. Sometimes the term “Greater Eurasia” is used, often for a wider grouping of countries that even includes ASEAN.

Russia regards China as being far more important than India when thinking about issues in the EAEU, Eurasia and the World.

China’s economic power, Russia’s long border with China, their energy-trade based economic relationship, and their shared interest in restraining US influence and power, mean that Russia and China look to assist each other in ensuring that Eurasia is a place of relative stability while they face what each sees as a generally hostile wider World.

India has little to offer Russia, apart from being a second-rank participant in its ideas about Eurasia (or Greater Eurasia) and as a buyer of Russian military and nuclear power equipment. Because Russia’s Eurasia concept has an anti-US bias, it has largely tossed aside historical warmth towards India and now warily sees it as a possible US ally in containing both Russia and China.

Conclusion 

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 s result, some very influential analysts to believe that “Russia is losing India”. However, there are also signs that India growing ambitions, as evidenced in Russian eyes by the Quad, are leading to some refocus on India. According to Karaganov, Russia’s “relations with India are clear and there are unused opportunities that have been missed in the last 30 years”.

The entire 8,000 word paper can be read here:

http://russianeconomicreform.ru/wp-content/uploads/2018/08/Russias-Approach-to-India-and-China-in-Eurasia.pdf

 

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

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

TABLE of CONTENTS

INTRODUCTION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1.    Political Relationship

2.    Economic Relationship

3.    Influence of Domestic Policies on the Relationship

Part B:   CENTRAL ASIA

1.    Introduction

2.    Domestic and International Economic Data

3.    Relationship between Central Asian Countries

4.    Astana International Financial Center

Part C:  RUSSIA, CENTRAL ASIA & the EAEU

1.    Introduction

2.    Eurasian Economic Union (EAEU)

3.    Russia and Individual Countries of Central Asia

4.    The Way Forward?

Part D:   CHINA & CENTRAL ASIA

1.    Introduction and Security Issues

2.    Economic Issues

3.    Individual Countries

Part E:  SHANGHAI COOPERATION ORGANIZATION (SCO)

1.    What is the SCO?

2.    The Way Forward?

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

Part F:  “BELT & ROAD” INITIATIVE.

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

(a)   Reasons for the “Initiative”

(b)   Official Chinese view of the “Initiative”

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

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

2.   Implementation of the SREB

(a)   Practical implementation of SREB

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

3.    Belt and Road “Associates”

(a)   Asian Infrastructure Investment Bank (AIIB)

(a)   BRICS bank

Part G:  PULLING TOGETHER IN THE FUTURE?

1.  Introduction

2.   The Russian View

3.    The Chinese View

4.    Central Asian View

5.    Some Other Issues

(a)  The Thucydides Trap

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

CONCLUSION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

READ THE WHOLE BOOK HERE:

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

Overview (of full paper)

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

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

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

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

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

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

Reasons for this paper

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

Conclusion (of full paper)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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