Abstract
This paper examines the plans for modernisation of the Russian economy in the light of the challenges posed by both the global crisis to Russia in 2008–09 and the possible resurfacing of the crisis in 2012–13. Both developments help to understand the weaknesses of a process of change that after twenty years seems still to be incapable of supporting a sustainable and competitive market economy. Will liberal forces make their way through to finally challenge the obstacle to competition with accession to WTO? This paper addresses this question taking into account the possible impact of the reform-minded components of the new government formed in May 2012, but also that of forces hostile to change. The third mandate (2012–2018) of President Putin and his personal approach focused on the accelerated developments of some branches and far eastern regions send contrasting signals with regard to the balance between state and market policies in the pursuit of medium to long term goals. Whether new programmes are feasible under increasing competition from abroad after the 2012 entry into WTO and the controversial corporatist political system are also questions discussed by this paper.
Introduction
Russia's transition to market has been painful and, in many aspects, is still incomplete. After the demise of the planned economy, the Russian model of growth has been questioned more than once. The two financial and economic crises that hit Russia – in 1998 and 2008 – did so at just the point when the country appeared to be finally entering onto a sustainable path of growth, suggesting that an assessment of the viability of the current Russian growth model remains problematic. After almost a decade of robust growth from 1999 – marked by the gradual deployment of market institutions, but primarily by increasing oil prices – growth came to a halt in 2008 reversing under the effects of the international crisis and leading to a tremendous output fall in 2009. To date Russia is still struggling to recover from this crisis. Policy makers are simultaneously trying to understand the reasons for a comparatively poor performance during the crisis, whilst striving to lay down more solid foundations for sustainable growth as well as looking to prepare for possible onset of a new crisis.
This paper examines the plans for modernisation of the economy from above and followed-up criticism from below in the light of the challenges posed by the global crisis to Russia in 2008–09. It also discusses the challenges of the possible resurfacing of the crisis in 2012. Both developments – linked to international price and demand shocks – help better to understand the weaknesses of a process of change that after twenty years seems still to be incapable of supporting a sustainable and competitive market economy. Will liberal forces make their way through to finally challenge the obstacle to competition demanded by accession to WTO? This paper addresses this question taking into account the possible impact of the reform-minded components of the new government formed in May 2012, but also that of forces hostile to change. The third mandate (2012–2018) of President Putin (Putin III) and new economic policy guidelines focused on the accelerated developments of some branches and regions send contrasting signals with regard to the balance between state and market policies in the pursuit of medium to long term goals. Whether such programmes are primarily conceived to strengthen national security as such, or help the economy withstand growing foreign competition is unclear.
Over almost a decade Russian economic growth has been heavily dependent on natural resources and energy, sectors by and large under direct or indirect government control. Under the crisis the role of the state in the economy has increased and become too costly to public finances exposing the failures of the Russian model of growth. A debate on the worst aspects of Russian development stirred by President Medvedev himself with his manifesto “Russia, forward” in September 2009, laid the ground for a number of reforms that should have helped diversify the Russian economy away from natural resources thanks to drivers of innovation established by the government. An earlier concept to 2020 was thoroughly revised by a team of highly qualified experts to help accommodate these goals. New guidelines for reform also targeted at private businesses emerged and some significant reforms were approved. However by mid-2012 and the end of Medvedev's mandate a number of structural reforms had still to be implemented and results looked mixed. That diversification away from fuel and energy had to be pursued, but on a longer – possibly 2030 – horizon, found common grounds among government and experts. This raises the issue of new versus former goals that this paper tried to single out.
A change in strategies and priorities with the switching of mandates between Putin and Medvedev (the Premier selected by Putin III) is emerging though there are elements of continuity, the importance of which is difficult to assess a priori. The pursuit of strategic goals is constrained by the need to restore macroeconomic balances, while the economy remains exposed to a new cycle of international price shocks and likely economic slowdown in 2012–13. In this context, the new government chaired by Medvedev from May 2012 could be forced to relax its grasp on the economy and finally implement a new wave of privatisation. A broad programme of privatisation has, indeed, been announced by the government, but important issues, such as the fate of the fuel/energy complex, are still to be defined. More importantly the role of who is who in the current political arrangements is still unclear. It is also uncertain whether the balance of forces – the current power elite versus either established opposition parties or new movements that have become restless after the 2011 Duma elections and Putin's return to Presidency – will allow for a smooth evolution. The majority party, Edinaia Rossiia, earlier referred to as the single party in power, is also internally divided.
This paper focuses on a new approach to economic development and growth that is still unfolding, where the scope for private entrepreneurship appears to be broadening though still subject to “loyalty” to power. That loyalty is becoming costly. The most challenging national goals – from the development of Siberia and the Far East regions to the creation of a Single Economic Space to be expanded into an Eurasian Economic Space –could subtract resources to modernisation of Western regions and branches whose firms are more exposed to foreign competition. For the first time after the troubles of the nineties, the divide between contrasting priorities and disoriented constituencies has become sharper and may lead to unforeseen political developments where foreign policy concerns are also likely to play a major role. As a consequence, the construct of the existing political arrangement may need to change. The paper concludes with a discussion of the fissures in the structure of power that, under the current constraints to growth, can seriously erode its legitimacy.
Constraints on growth
The financial crisis of 2008–09 exposed the main weaknesses inherent to the Russian economic model– excessive dependence on prices of energy/fuel, commodity exports and world economic growth – compared to other emerging economies more resilient to international shocks. Public and private investment fell tremendously under tighter financial constraints. Despite huge government's subsidies and state guarantees to large-scale enterprises, and in particular to state companies, GDP and industrial output fell by 7.8% and 10.8% respectively in 2009 – the worst outcome within the BRICs group of large emerging market economies (Brazil, Russia, India and China and within the G20). Selective rescue operations in favour of system-forming companies and banks pushed the share of the state in the national economy up by 15% to reach 50% of the total output. 1 The financial sector was also badly hit. Bad loans increased from September 2008 to December 2009 by 7.2% up to about 10% of total loans according to Russian evaluation standards. 2 The collapse of the economy occurred unexpectedly after almost a decade of robust growth (an annual average of c.7% of GDP when growth and rising living standards were fuelled by increasing oil and commodity prices and exports due to favourable international developments including increasing capital inflows in 2006–07 that helped a credit boom.
http://www.vedomosti.ru/finance/news/2009/10/06/853393 (accessed on 6 October 2009) and even up to 75% if state indirect control is included, see A. Shokhin in http://www.rbcdaily.ru/print.shtml?2009/12/15/focus/447977 (accessed on 15 December 2009).
See I.O. Sukhareva, “Upravelnie problemnymi dolgami v bankovskom sektore: uroki krizisa” on 17.08.2011 from http://www.forecast.ru/mainframe.asp?ADDR_FROM=http://www.forecast.ru/news.asp. while on the basis of Russian evaluation standards, according to Sukhareva, bad loans were still high at 8.2% of total credit on 1 April 2011 Though, apparently, the banking sector started recovering in 2010, using international standards S&Ps in May 2010 estimated non -performing loans (NPLs) at c.40% of total credit, see http://top.rbc.ru/economics/19/05/2010/408807.shtml?print accessed on 19 May 2010.
Under the effects of the crisis, the public debate on economic diversification – a policy that should help emancipate Russian growth from oil/gas dependence – intensified. The oligopolistic structure of the economy feeding rent-seeking behaviour among investors and hampering the development of competitive markets was increasingly questioned. Public blame started turning against inefficient state entities. Decisions on the structure and management of large state companies, innovation schemes and several privatisation plans, as discussed below, were approved by the authorities in a hurry to speed up changes.
But the dilemma of whether economic diversification should be left to private entrepreneurs in a more favourable business environment pursued by government reforms or steered from above remained, and still is, unresolved with no clear sign of which option may prevail. On the one hand, the room for state support, either in the form of direct investment, state guarantees and/or state procurement, has shrunk in the aftermath of the economic crisis. Both central and regional budgets suffered from the crisis. On the other hand, the financial sector, as whole, is slow to recover.
The situation to date may still be worrying despite a short spell of world-wide economic recovery. The Russian economy started growing again in 2010 with growth picking up in 2011 mainly due to positive developments in the world economy and price upturns. Financial balances need still to be restored. The number of loss-making banks increased from 90 to 127 in six months from the beginning of 2011. 3 Despite tightening regulations and supervision that produced some good effects in 2010–2011, problem loans increased twice as much as reserves in the first months of 2012 hitting profits. The estimated share of bad loans started increasing again. 4 These data point to a possible new round of credit tightening, while many large companies that had managed to restructure their pre-crisis foreign loans are approaching their new debt maturity. There are signs, in mid-2012, that large companies are again approaching the government for state support in terms of guarantees for their debt. 5 Market-orientated reforms, such as divestment of state ownership and incentives to private investment, even if rapidly approved and implemented, would need time to take hold.
See http://www.banki.ru/news/bankpress/?id=3184702 accessed on 30 August 2011.
See http://www.vedomosti.ru/finance/news/1788141/gonka_plohih_kreditov?from=newsletter-editor-choice accessed on 28 May 2012.
Financial problems (discussed in relation to a large pipe-producing metallurgical company in Cheliabinsk that asked for state support) – are common in the branch inducing the new Ministry of Economic Development Belousov to consider extending state guarantees already used in 2009 to troubled companies that otherwise would not have access to bank loans, see http://www.vedomosti.ru/finance/news/1817528/nuzhny_garantii?from=newsletter-editor-choice accessed on 5 June 2012 and http://www.vedomosti.ru/opinion/news/1853258/bremya_gosudarstva accessed on 15 June 2012.
As is usually the case for Russia, effective economic growth and budget performance are more dependent on oil prices than on other factors. Estimates about which level of oil prices will be sufficient to balance the budget are recurrent and a subject of dispute between ministries and among outside experts and politicians. Fiscal balances are projected as rule in two versions: one is based on actual revenues and expenditures. The second is simulated in the absence of oil-related revenues. The tighter – although not necessarily the most reliable – are, obviously, the estimates by the Ministry of Finance (MOF). In August 2011, Mikhail Dmitriev, the head of the government Centre for Strategic Reforms, estimated that a fall of $10 in the price of oil would cause a fall of budget revenues equal to one percentage point of GDP. 6 Oil prices later increased helping most, but not all, worries to subside. Fiscal authorities remain vigilant. Recent Ministry of Finance (MOF) estimates reckon that a $1 fall of the price of oil causes Rouble 56bn loss to the budget (c.$1.5bn), while one percentage point fall in GDP would cause revenues to fall by 150bn Roubles (c.$5bn). 7 In the light of persistent economic uncertainties, the MOF continues to project –within the three year budget forecasting adopted by Russia – different levels of budget deficit according to a possible range of oil prices. 8 Due in part to the volatile world economic recovery in 2011 and in part to international turmoil in oil producing countries, higher oil prices provided for a 4.3% GDP growth and balanced budget in 2011. 9 While a better than expected outcome should be a relief to the MOF, concerns remain since economic recovery becomes a pretext for higher spending pressures from both government bodies and politicians.
See M. Dmitriev in http://www.novayagazeta.ru/data/2011/096/10.html?print=201101091247 on 30 August 2011. Late 2011 (13 September 2011) Kudrin cautioned that even an oil price of $116 pb in 2012 would be barely sufficient for a balanced budget, see http://grani.ru/Politics/Russia/m.191382.html.
See http://www.vedomosti.ru/finance/news/1827736/prizraki_2008_goda?from=newsletter-editor-choice accessed on 7 June 2012.
For 2011, versus the (usually) more optimistic 76US$ hoped for by the Ministry of Economic Development (Minecon), the MOF earlier projected a scissor of $50 to $70 pb, see http://www1.minfin.ru/ru/press/transcripts/index.php?id4=9676 accessed on May 14, 2010. However, given the scale of social spending incurred in 2009 and 2010 and pensions' rise approved by the government – despite a perverse combination of rapidly ageing population and excessively low retirement age – with falling oil prices there was a concern that even $80 pb could jeopardise macroeconomic stability. These projections were later changed.
Indeed, even a small estimated surplus of 0.8% of GDP and a primary surplus of 1.3% of GDP, but with an estimated budget deficit of −9.6% of GDP if oil prices are excluded, see Evsei Gurvich's estimates in http://www.eeg.ru/pages/22 accessed on 5 June 2012, the World Bank Global Economic Prospects accessed on 15 June 2012 from http://web.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/EXTGBLPROSPECTSAPRIL/0,,menu PK:659178∼pagePK:64218926∼piPK:64218953∼theSitePK:659149,00.htmland and MDE's report on 2011 in http://www.economy.gov.ru/minec/activity/sections/macro/monitoring/doc20120202_05 accessed on 2 February 2012.
The guardian of stability is the MOF as a whole, but the personality in charge also matters. Alexei Kudrin was known for his determination to keep fiscal balances under control. His removal may be not without consequences. Before his forced dismissal from the post of Minister of Finance on September 2011 after strong disagreements with Medvedev on planned expenditures and budget projections – Kudrin had predicted that in 2012 even $116 pb would barely be sufficient for a balanced budget warning that a new crisis was looming ahead and oil prices would, indeed, turn down. 10 That warning should have prompted the government to adopt lower oil reference prices in its budget projections in the effort to build large cautionary reserves – the policy that had helped Russia's public balances to withstand the effects of the crisis in 2009 without having to increase public debt – contrary to most OECD (Organisation for Economic Cooperation and Development) countries.
See Kudrin (on 13 September 2011) in http://grani.ru/Politics/Russia/m.191382.html.
But Kudrin's departure may cause more relaxation on spending. While Kudrin in the past succeeded with no much effort to have his budget projections approved by the Duma, the new MOF – Anton Siluanov – needs still to prove to be as tenacious. As a matter of fact, in the first reading (May 16 2012) the Duma had managed to amend and raise by $5, to $105 pb, the oil price reference projection for the 2012 budget (“Budget for 2012 and for the planning period 2013 and 2014”) submitted by the MOF. This could have entailed, according to the MOF, an estimated loss of 300bn roubles (about $10bn) to the Reserve Fund – where revenues earmarked above a certain oil (projected) price threshold are stored for precaution. 11 In the end, the budget projection – from the $100 pb estimate by the MOF – was even increased to $115, an unrealistic projection according to MOF Siluanov who, however, subsequently pledged that any further correction would not affect planned spending, therefore foreseeing the development of a budget deficit. 12
See http://ria.ru/economy/20120516/650565774.html?id= and http://www.1prime.ru/news/0/%7BEA0339D8-0ECC-443C-8A4F-56C2BE3F47D2%7D.uif?print=1 both accessed on 16 May 2012. It is worth noting that at the time of this writing the oil prices have already fallen to below $100 while a major international slow-down is looming ahead. In the context of economic uncertainty (June 2012) the IMF suggested the authorities to lower the reference oil price for the 2013 budget to $92 pb; much lower than projections by the MOF and the MED preliminary set at $97 pb and $100 pb respectively, see http://www.1prime.ru/news/0/%7B1AA7B563-A9F8-47AB-B398-8CE12BF4E195%7D.uif?print=1.
See http://www.rosbalt.ru/business/2012/05/28/985719.html accessed on 28 May 2012 and http://ria.ru/economy/20120622/679182855.html accessed on 22 June 2012.
Apart from departmental skirmishes and squabbles that are common in any country, however, increased spending in Russia as projected for the decade to 2020 may come under pressure from a more moderate pace of economic growth for the years to come, certainly compared to the early 2000s. A tentative 4.0–4.5% annual average rate of growth (some three percentage points less than the annual average from 2000 to 2007) has been projected, indeed, in a scenario” to 2030 drafted in April 2012 by the MED (Ministry of Economic Development), possibly extrapolating from optimistic short term forecast by the IMF and the OECD. 13 Despite looking comparatively enviable by most OECD countries, this growth rate may still be insufficient for the ambitious agenda of structural changes envisaged over 2011–2020 and beyond. Such costly modernisation plans range from technical re-equipping of the armed forces estimated to cost some 20 trillion roubles (c.$666bn) to innovation as such that over the same period would need some 16 trillion roubles (c.$533bn) according to the Ministry of Economic Development. 14 State railways programmes need investments up to 400bn roubles (some $13.5bn) to finance the upgrading of the network over 2011–2015. 15 Such plans are already becoming problematic. The MOF soon after Presidential elections has made clear that spending cuts must be envisaged to start soon for plans to 2020, including cuts to priorities such as defence expenditures that may have to fall by some 4 trillion roubles out of a total cut in spending equal to 7 trillion roubles. 16
See The World economic Outlook, IMF 2012, p.68 in and the government's innovation scenario projections in http://government.ru/docs/18778/ accessed on 26 April 2012. The 2012 Spring Economic Outlook by the OECD projects a 4.5% GDP growth.
See http://www.vedomosti.ru/finance/news/1353016/dorozhe_armii and http://www.europarussia.com/posts/2326 both accessed on 2 September 2011 on an estimated military expenditure of $650bn over 2011-2020. The round figure published by this source is not correct though widely quoted: it should refer only to the armaments programme, not all military spending over the period (courtesy comment from J.M. Cooper). Note that the text bases, as a rule of thumb given the highly volatile rates, dollar estimates on a virtual exchange rate of $30 per rouble.
See http://www.vedomosti.ru/companies/news/1355059/milliardy_dlya_yakunina on 2 September 2011. Putin later estimated that 5 trillion roubles would be needed to modernise Russian railways, see http://www.vz.ru/news/2012/4/26/576299.html, accessed on 26 April 2012.
See details of planned spending cuts year by year to 2020 in http://www.ng.ru/printed/269144.
Increased spending could be in principle financed by debt emission. However, despite the Russian government's comparatively easier access to foreign lending (justified largely by Russia's good track record in honouring foreign debt) envisaged in the 2010–2012 budgets on debt emission, financing strategic goals has become dubious in the light of world recession already looming by the third quarter of 2011. 17 A Sberbank study published in May 2012 warns that, if the European economy collapses due to the disordered fall-out of the Greek crisis, Russian GDP could fall by 2.1 percentage points and inflation increase to 6.7% (compared to earlier MED's projections of 3.8% and 4.5–5.0%) with oil prices falling possibly to $80–85. 18 If this scenario materialises and Russia is hit again severely by the waves of a new crisis, is difficult to see how earlier plans together with new projects aiming at an accelerated development of the eastern regions (as described below) could be financed out of the state budget. All in all the financial constraints to growth have become tighter raising the rather common dilemma of how to reduce spending while at the same time making it more efficient.
See Malle S., “The Impact of the Financial Crisis on Russia”, Nato Defence College Forum paper, Research Division, Rome, December 2009, pp.11–12 on easy access of Russia to the international market and http://www.vestifinance.ru/articles/11662 accessed on 18 May 2012, on MOF refusing to increase foreign debt on account of the worsening economic environment.
See the summary of the study led by Ksenya Yudaeva of the Centre of Macroeconomic Research of the Sberbank in http://www.vedomosti.ru/finance/news/1779385/evrogrecheskij_udar?from=newsletter-editor-choice and http://www.orelbanks.ru/shownews.php?id=72833 both accessed on 24 May 2012. See also M. Dmitriev's belief on an incumbent new crisis in http://www.svpressa.ru/society/article/55967/ accessed on 8 June 2012.
The context of modernisation under government rules
Uncertainties and worries about future economic developments of the world economy and their impact on Russia jeopardise confidence in the blueprints for economic development worked out earlier in a time of rapid growth. Earlier plans will need to be made consistent with tighter fiscal policies that may limit scope and scale of state support. Until now, post-2009 crisis government policy was driven by expediency on the one side, and opportunism, on the other. There was no firm direction of change. New constraints at present could either force a re-thinking of priorities or prompt the undertaking of liberal reforms. If the authorities keep muddling through, the two paths could tentatively proceed in parallel, but such policies would not send a clear message to would-be domestic and foreign investors.
Grand projects for a post-soviet Free Trade Area to develop into an Eurasian Economic Union 19 as well as plans to develop the backward regions bordering the increasingly invasive power of China announced by Putin III in the aftermath of his election (as discussed below), combine with government changes in 2012, a weakened premiership and the cooling down of relations with influential OECD countries. This is unlikely to stimulate the approval and implementation of a liberal agenda. The social environment is also altogether hostile or suspicious. While a few circles call for privatisation to increase efficiency and complete the 90s market reforms, the vast majority of the population, as well as top public officials in charge of large state companies, are in favour of keeping state control of the economy. 20 Putin's economic programmes published before the start of his Third Presidential mandate and immediately after while not explicitly ruling out more radical reforms, 21 retain, nonetheless, the emphasis on priority for development in selected areas where the main concern remains that the state should not lose control. It is difficult to assess how mutually compatible different policies, one orientated to market reforms, the other to accelerated (or forced) economic progress, can be and which priorities will be pursued de facto given tightened budget constraints.
Cfr. J.M. Cooper's presentation “Prospects for the Eurasian Economic Union” – kindly made available – that examines developments form on the tri-partite Customs Union (Russia Belarus and Kazakhstan), the Single Economic Space up to the Eurasian Economic Union planned to be formed in the near future, at Saint Antony's College, Oxford, 21 May 2012.
See the results of an opinion poll in www.vedomosti.ru/newspaper/article/2009/11/10/218439 accessed on 10 November 2009.
A summary of 11 decrees (ukazy) approved by Putin on 7 May 2012- the first day of his Third Presidential mandate can be found in http://www.vz.ru/politics/2012/5/8/577872.print.html. The ukazy are published in the Presidential website.
For example, Putin III's long-term policies on innovation and modernisation (as (published in his May 7, 2012 ukaz) focus, on the one hand, on the need for technological forecasting 22 for the manufacturing sector of the economy, and on programmes to increase the competitiveness of industry, on the other. These policies are hardly consistent. Why technological forecasting would be needed in an increasingly open economy that would easily send the right signals and, if the case, provide for supply is unclear. Indeed, a concern for self-sufficiency – or perhaps security in some field – looms through the lines and is strident with the requirements for membership into the WTO (World Trade Organisation). In this context, the fact that WTO membership and its economic effects are not even mentioned in Putin's ukaz sounds singular.
The importance of strategic forecasting for economic development had already been evoked by Putin earlier, see http://premier.gov.ru/events/news/18791/print/ accessed on 26 April 2012.
A (selective) branch approach to innovation – with aviation industry, space activities, pharmaceutical and medical equipment industry, shipbuilding, electronics specifically listed among Putin III's state programmes – remains prominent as formerly under President Medvedev's innovation plans. The socio-economic development of Siberia and the Far East emerges as a priority in planning transport infrastructure, but it is unlikely that it could remain limited to that area given the very nature of transport logistics in a large country. 23 Costs could grow beyond control: a targeted plan for the socio-economic development of the Far East and the Baikal region to 2013 with an estimated total cost of 954.3bn roubles (c.$32bn) was already in place earlier. Unsurprisingly, costing estimates and the starting of the new plan to 2025 have been postponed by the MOF to 2013. 24
See http://www.kremlin.ru/news/15232 for the ukaz on long-term economic policy (accessed on May 7 2012). See also Putin on the need to support aviation and ship building that otherwise could not make them on their own, see http://er.ru/news/2012/2/7/putin-aviastroenie-i-sudostroenie-ne-mogut-razvivatsya-bez-gospodderzhki/ accessed on 7 February 2012.
See http://www.1prime.ru/news/0/%7B077E8149-FD6D-420A-BB55-01B7A5C423E2%7D.uif also for interdepartmental conflicts on cost estimates, and http://www.newsru.com/finance/13jun2012/gosprogrammy.html listing some 36 plans to be fixed in 2012 that do not include development of the Far East.
Accelerated development in some branches and regions provides the context for the working out of possible development scenarios to 2030 assigned to the MED in early 2012. The MED came out with two scenarios to 2030 – one innovative and the second conservative. Interestingly, the scenarios had to be redrafted after circulation of an earlier version under pressure to show that growth would be higher than initially forecast thanks to boosts in investment, with a ratio of investment to GDP in the innovation (more liberal) higher than in the conservative (less market-orientated) scenario up to 29.5 and 27.3 of GDP by 2030 respectively. More revealing, perhaps, circa a slower pace of economic diversification than earlier hoped for in particular by the MED, investment projections to 2020 have been corrected upward, with investment to GDP up to 24% of GDP from 22.2% in the former version stemming from higher investment in fuel/energy complex from 5.9% GDP to 6.5% GDP. 25 Interestingly in both scenarios the rate of investment to GDP is much higher than projected for 2020 with both private and public investment contributing, though with different weight in each scenario. It is unclear whether the effects of the possible privatisation of oil companies have been taken into account by MED, since Putin III making clear that such companies are still considered strategic appointed the former First Deputy Minister for Energy, Igor Sechin, a notorious opponent of privatisation as the Head of Rosneft.
See http://ria.ru/economy/20120607/668033868.html accessed on 7 June 2012.
Nonetheless, despite the continued emphasis on government-led plans, changes in Russian government's policy regarding privatisation and Foreign Direct Investment (FDI) discussed below in separate sections, suggest that a more liberal approach to reforms at least in certain areas may find its way through stubborn state-orientated mind-sets.
The liberal context of post-crisis structural reforms
Efforts to speed up the modernisation of the country date back to the second mandate of Putin and need to be assessed in that perspective. Major plans of modernisation and diversification (M&D) were contemplated in Putin's Concept-2020 – a long and detailed strategic programme – launched on 21 July 2006 and finally approved on 17 November 2008. 26 The concept envisaged the progressive emancipation of Russia from dependence on energy. The key drivers of this programme were to be innovation, investment and infrastructure with an emphasis on innovation in the financial sector capable of developing in Moscow an international financial hub.
See on this, Malle S. cit., pp.24–26 and the Conception of Long-Term Development of the Russian Federation to 2020 in http://www.comission.economy.gov.ru/minec/activity/sections/strategicPlanning/concept/concept accessed on 17 November 2008.
A welcome focus on institutions was added by Medvedev under his Presidential mandate although he never challenged Putin's long-term policy goals. It is worth noting that the institutional driver is not irrelevant in comparing the pre- to the post-crisis approach to structural reforms as discussed below. Medvedev pushed, as a President, and may continue to push through the Parliament as a Premier, anti-corruption laws complying by and large with OECD best practices, also preparing for membership into this organisation that should come after WTO membership. Those include making income declarations obligatory for state officials, new provisions on state procurement, an area of widespread corruption and bribery, higher test requirements to enter police corps, interdiction to top state officials to hold managerial positions in state companies; facilities for foreign direct investment; and a number of other reforms meant to create if not the critical framework for a modern state at least better grounds for implementation of the rule of law.
Important reforms to the Russian Civil Code have been passed in the first reading by the Duma on 27 April 2012 providing for more transparent regulations for corporate entities, common law concepts of obligations and liabilities, immovable property (to be sold together with premises as an integrated object of transaction), the liability of internet providers for IP infringements, etc. 27 Some laws have been passed, other are expected to pass; whilst some provisions – notably on state procurement – encounter resistance. 28 Nonetheless a process of change after many years of inaction has been taking place. It is clear that even when approved, reforms will take time to deliver, and could even be reversed. But it would be wrong to dismiss efforts to improve the institutional environment trying to respond to the demands from both the more advanced sections of society and the international community. 29
See http://www.russianlawonline.com/content/civil-code-reform accessed on 31 May 2012.
See http://www.vedomosti.ru/politics/news/1353993/zakupka_nevypolnima on 1 September 2011 and http://www.ng.ru/printed/258889 on 2 September 2009 where Nabiullina, the Minister of Economic Development, announces tentatively the approval of new state procurement provisions by end-2011/beginning 2012 warning that at any rate they will need at least three years to be put in force.
See a positive assessment – albeit with caveats on little market competition, from a successful young Russian businessman operating mainly in the tertiary sector, in “How Much is Russia Changing?” Goldman Sachs Equity Research, Fortnightly Thoughts, June 5 2012.
While Medvedev also indulged in ruling from above, so common to Russian history, 30 – such as work done by the Commission for Modernisation and Technological Development (CMTD) that has been attached to the Presidential Administration on May 20 2009 – 31 his interest for institutional change was altogether more evident. The CMTD composed by influential government officials, businessmen, state managers and experts used to meet monthly to discuss progress in priority areas specifically targeted for development and worked under instructions from the President almost in parallel with similar initiatives from Putin as a Premier whose visits (and patronising benevolence) to large-scale factories were always reported more prominently in the press. In June 2012 the CMTD has been transformed into one of the many Presidential councils by Putin III – whose personal networks with industry are multi-faceted and nation-wide – possibly losing status, in so far that as Medvedev practically is to take responsibility assuming this time, though, the chair of the Presidium as mere chief of the government. 32
Perrie M., “ Modernisation under the Tsars and the Soviets”, Unpublished paper presented at the CREES Annual Conference, Cumberland Lodge, Windsor Great Park, 4–6 June 2010 presents a fascinating overview.
See the Ukaz No. 579 in http://graph.document.kremlin.ru/doc.asp?ID=52509 accessed on 20 May 2009.
See http://www.kremlin.ru/news/14818 probably the last meeting of the Commission accessed on 21 March 2012. See also http://www.vedomosti.ru/politics/news/1853242/modernizaciyu_delyat_na_dvoih accessed on 15 June 2012 discussing future options and on Putin's decision to establish a council see http://ria.ru/economy/20120618/676090489.html accessed on 18 June 2012.
The still untamed financial crisis could help stimulate a more market institutions-friendly approach. This clearly surfaced in 2011 when 21 groups of experts, under the direction of respected scholars Vladimir Mau and Iaroslav Kuz'mynov, were charged by the then Premier Putin to propose appropriate changes and amendments to the Concept-2020. 33 The first draft of this document – Strategy-2020 – was presented to the government on December 2011 and later published in the understanding that the authors welcome comments. It is still unclear whether the new government presided by Medvedev will adhere to the new Strategy's approach and prioritising. The authors were always adamant in stressing that the Strategy is not a programme but the presentation of alternative options and their possible effects on the economy, while it will be up to the government to choose its own programme. 34 At this stage, two aspects can be easily discerned: first, the Strategy compared to the Concept is far more market-orientated than the original document; second, rapid economic diversification is ruled out, since more than a decade will be needed during which time any structural change will have to be financed out of export revenues from natural resources. This conclusion that could be seen as a rejection of Medvedev's calls for accelerated structural changes, as discussed below, are probably simply a warning to all policy-makers that solid market foundations, as described in the revised document, need to be mutually consistent and will take time for implementation. Strategy-2020 – very firm on the need to maintain sound macroeconomic fundamentals – seems also to be at odd with the MED's “innovation scenario” that projects oil revenues to the budget to fall from 11% of GDP in 2011 to 5.3% of GDP in 2030. By a combination of a larger tax base, optimisation of spending and selected cuts in expenditure the budget deficit should be contained within a range of 1.5–2.0% of GDP, but the state debt would increase to 20–25% of GDP (from c.9.7% of GDP in 2011). 35 According to the MED the share of non-primary goods in exports should increase in the decade from 2020 to 2030 from 25% to 45%, but it is unclear which factors would make it possible to turn the Russian economy to a manufacturing economy in such a short time, though market friendly structural reforms are implicit in the innovation scenario.
See http://www.kommersant.ru/doc.aspx?DocsID=1576907&NodesID=2 accessed on 31 January 2011.
See Vladimir Mau in http://strategy2020.rian.ru/news/20120120/366250470.html, accessed on January 20 2012.
See the presentation of the two scenarios by Andrei Klepach of the MED in http://www.nr2.ru/rus/382746.html/print/ and the MED's detailed scenarios and forecast to 2030 in http://www.economy.gov.ru/minec/activity/sections/macro/prognoz/doc20120428_010.
It is possible, however, that generational changes foster the realisation of a more liberal economy and society but this would also need a liberal structure of power.
Relatively young Medvedev has been often portrayed as a liberal compared to mature Putin, though the difference between the two personalities might be more one of emphasis than substance, considering that the mastermind of Russian-style structural reforms has remained for quite a while Vladislav Surkov, a Putin ally and from May 2012 deputy prime Minister in the newly formed Medvedev's government. 36
See Vladimir Frolov, “Medvedev's Motor to Drive Modernisation”, The Moscow Times November 23, 2009.
On a would-be liberal agenda Medvedev scored some points in his favour compared to Putin thanks to the seeds of discontent with economic performance manifest in his public speeches that fostered a debate on modernisation to rapidly evolve into questioning the structure of power. Whether intended or not, Medvedev's criticism of an economy that “to a large extent ignores the needs of the people” forced both reform-minded experts and their antagonists to start competing from different points of view on criticism of the economy and its ruling. 37
See Silvana Malle, “The Policy Challenge of Russia's Post-Crisis Economy” Post-Soviet Affairs (PSA), 2012, 28, pp.79–81 for an appraisal of the public debate and its unfolding character. This paper will be cited thereafter as PSA.
At the same time, efforts to capture protest and steer it into more pragmatic purposes, appeared to coalesce around Medvedev when occasional dissent from Putin on both internal and foreign policy could be interpreted as to provide the ground for an alternative party. 38 Medvedev, indeed, cautiously linked economic to political modernisation in some official meetings. 39 His occasional comments on the need to broaden party representation in the regions suggest that, fearing that criticism on the state of the economy could backlash unless political changes were put in place, the leadership started envisaging political arrangements that would provide for an improved, though not necessarily oppositional, political debate.
See Frolov V., “A Medvedev Tea Party Could Be the Answer” The Moscow Times, March 22, 2010. See also http://www.profile.ru/items/?item=31987 accessed on 6 October 2011where Petr Orekhin argues that different political visions between Putin and Medvedev could become the foundations of a dual party system.
While in China in mid-April 2011 he affirmed that his own “course is modernisation of the economy and modernisation of the political life”, see http://www.rg.ru/printable/2011/04/13/medvedev.html accessed on 20 April 2012.
A dual party system could have helped, indeed, frame the (hoped for) image of a country gradually moving out of the inward-looking stigma impressed upon by the two first mandates of Putin. There were attempts to stimulate this development.
Occasionally Shuvalov and Kudrin were pinpointed as possible leaders of alternative parties. 40 The billionaire Mikhail Prokhorov tried unsuccessfully to take-over the Right Cause Party in 2011. 41 With Kudrin flatly dismissing any party membership, both before, and after his departure from the Ministry of Finance on September 2011, and Shuvalov joining the All-Russian National Front created by Putin in May 2011 (and discussed in the last section) the electoral landscape remained broadly favourable to Edinaia Rossiia that, despite having shrunk in numbers, won the majority in the Duma elections of December 4 2011 and remains, not without problems (discussed at the end of this paper), the party of power whose official leader soon after obtaining membership on 22 May 2012 has become Medvedev. 42
As possible leaders of Right Cause for Shuvalov see http://www.vedomosti.ru/newspaper/article/257257/igorya_shuvalova_vedut_napravo accessed on 30 March 2011 and http://www.polit.ru/event/2011/03/25/povorot_print.html accessed on 25 March 2011and for Kudrin in http://www.gazeta.ru/news/lenta/2011/03/16/n_1748981.shtml accessed on 16 March 2011.
See S. Malle, PSA 2012, cited, pp.82–84.
Noticeably, Medvedev had been the unofficial leader of the party since December 2011 elections when he accepted to drop out of the race for a new Presidential term implicitly accepting Putin's offer to become the next Premier, see http://top.rbc.ru/politics/22/05/2012/651500.shtml?print accessed on 22 May 2012.
Cumbersome political developments suggest that a liberal approach to modernisation and innovation is unlikely to become pre-eminent unless major reforms in the structure of power take place, but also that the constituency for effective democracy with larger participation in, and accountability for, decision-making is still insufficient.
The M&D drive: Skolkovo, the agency of strategic initiative and WTO
The Russian government's efforts to speed up modernisation and upgrade the technological level of production in many domains is multi-faceted. Some are better known than others. All projects seem to be driven by a sentiment of urgency where personal commitment to immediate results seems to matter comparatively more than the feasibility of each programme. Medvedev and Putin are both engaged in modernisation programmes that, examined individually, appear to be neither well interrelated nor mutually consistent. Implicit in all programmes is the belief that little or nothing will develop unless the state intervenes. This section deals with two major programmes – Skolkovo and the Agency for Strategic Initiative – and concludes with some remarks on businesses sentiments on modernisation and Russian entry into WTO. It is WTO membership, indeed, that should be highlighted as a major driver of structural reforms, but this major achievement is rarely referred to by the authorities when the issue of M&D is discussed.
Under President Medvedev the drive to M&D produced results mainly in terms of organisation and memorandums of intent. Among his initiatives, the major event is known as Skolkovo, Russia's equivalent to Silicon Valley: a national project aimed to propel Russia into the modern IT-high tech era in a decade by attracting brains and resources from home and abroad. 43 A memorandum of intent has been signed with the US Michigan Institute of Technology (MIT). Skolkovo enjoys preferential treatment in a number of areas including allocation of land, material provision related to residential housing and offices and easier access to the release of licences. What clearly emerges from Skolkovo developments that by the time Putin had come back to Presidency in May 2012 remain mainly confined to projects, is the effort to push ahead with plans on innovation despite a number of obstacles enshrined in existing laws that must be modified in a short time to make the project start. Medvedev's warning that every step should remain under his control suggests his strong personal commitment to push forward innovation along schemes that Russia had experienced with mixed results more than once in her tsarist (Peter the Great, Catherine the Great, Alexander II) and Soviet past. 44 Historical parallels have been used by both Medvedev and Putin to strengthen the “national” foundations of their own projects. While Medvedev apparently found his inspiration mainly in Alexander II, Putin on some occasions referred to his predecessor Pyotr Stolypin. 45 Medvedev's confidence in this project was probably supported by some improvements in the international climate that helped attract some major foreign investors to Russia. 46 While Medvedev's projects of modernisation and innovation stem from a top-down approach typical of Russian history, his hope is that in a short period of time Skolkovo's resident companies will move on to sign joint ventures with Russian partners with no need for supplementary support from the state. The projected cost to the budget has been estimated at about $3billion from 2011 to 2014: not an extraordinary burden compared to the budget of more than $650bn to 2020 assigned to the military as described above. 47 The funds for Skolkovo will be diminishing each year according to the 2012–2013 budget projections: from 27.1bn roubles in 2012 to 17.1bn roubles in 2013 in the expectation that private businesses will gradually take over the cost of financing. 48 However, luring big foreign companies into financing Skolkovo's project is not always easy: BP, for instance withdrew unexpectedly late September 2011 from a project on “Intensification of heat transfer and catalysis” where it was supposed to provide, on a 50/50 deal with Skolkovo, £6.7m. 49 State companies are neither eager to have deals with Skolkovo: a complaint raised by Medvedev who also lamented red tape in screening the applications and the lack of expertise in evaluating some projects. 50 A few large-scale Russian companies, like Lukoil and KamAZ that committed to develop in Skokovo own R&D programmes, may have had no choice. 51 Interestingly, following Medvedev's critical comments, it has been envisaged in March 2012 that Russian state companies transfer to Skolkovo's Development Fund 1% of their R&D budget. 52
According to President Medvedev's sherpa A. Dvorkovich, Skolkovo was expected to be working at full capacity in 5–7 years from 2010, see http://www.rian.ru/economy/20100521/236891341-print.html accessed on 26 May 2010. See on Skolkovo's developments also S. Malle, PSA, cited, pp.85–90.
See Perrie M., cit.
See on Medvedev, The Moscow Times 9 March 2011 in http://www.themoscowtimes.com/opinion/article/reading-medvedevs-mind/432208.html and on Putin The Moscow Times 8 August 2011 in http://webcache.googleusercontent.com/search?q=cache:WTe2bTeykF4J:themoscownews.com/politics/20110808/1889101.
On the number and profile of international companies signing memorandum of intents in Skolkovo, see S. Malle, PSA, p.87.
Ibidem, p.88. See also See C. Weaver, “Welcome to Russia's Silicon Valley” Financial Times, August 22 2011.
http://www.vedomosti.ru/finance/news/1369642/rashody_byudzheta_na_skolkovo_prevysyat_27_mlrd_rub_v accessed on 19 Septmber 2011.
See http://www.kommersant.ru/doc/1782731 accessed on 28 September 2011.
See http://news.kremlin.ru/news/15139/print accessed on 25 April 2012.
See http://www.themoscowtimes.com/topics/medvedevs-silicon-valley/403389.html accessed on 25 May 2012 on Lukoil and http://top.rbc.ru/economics/18/05/2012/651102.shtml on KamAZ accessed on 18 May 2012.
See A. Dvorkovich's reference to $1bn to be earmarked in three years to the Skolkovo Scientific Fund, thanks to donations from companies such as Gazprom, Aeroflot, RusHydro and the Railways company RZD in http://rt.com/business/news/russia-skokovo-skoltech-innovation-069/print/ accessed on 21 March 2012.
By 31 March 2012, despite problems mentioned above, the record of Skolkovo on paper appeared to be moderately successful with 427 registered resident companies, 100 grants assigned for a total sum of 6.3bn roubles and the presence of 17 amongst the largest multinationals. 53 Information technology and telecommunications are among the most attractive clusters. 54
See the meeting on Skolkovo at the Bauman Institute convened by Medvedev on 25 April 2012 in http://news.kremlin.ru/news/15139/print accessed on the same day.
See http://www.polit.ru/news/2012/03/28/jump_skolkovo_400/print/ accessed on 28 March 2012.
Nonetheless, the problem remains as to whether this and similar projects 55 that are being discussed in some regions will help build a critical mass of truly new high tech projects, processes and products to help kick off the demand for, and the diffusion of new techniques all over the economy in order to bring Russia in reasonable time at par at least with the two other major BRICs economies – China and Brazil – that on innovation have been moving much faster. While China has been climbing in the global ranking on innovation from 43 to 29 and Brazil from 68 to 47 in one year, from 2010 to 2011. Russia was still lagging behind in 2011, albeit her ranking improved from 64 to 56 in the same period. 56 All in all, the lack of expertise in judging certain R&D applications, as mentioned by Vekselberg, the Skolkovo's CEO, is revealing. That could become, indeed, a major obstacle to innovation programmes run from above. 57 The question of how independent, “independent” examiners can be in the Russian context, is not a minor one either.
See the performance of other regions on innovation in http://www.ng.ru/printed/266971 accessed on 27 March 2012 and plans for the creation of a brand new R&D town-centre at Innopolis (Tatarstan) expected to host 155,000 people from other regions and from abroad, see http://government.ru/docs/19246/print/ accessed on 12 June 2012.
See http://www.globalinnovationindex.org/gii/GII%20COMPLETE_PRINTWEB.pdf, p.xviii accessed on 25 May 2012.
At the meeting with Medvedev on 25 April 2012, see FN 76.
The chances of success from a horizontal industrial policy based on institutions that would promote a favourable business development are no doubt higher than those of government traditional industrial policy as such. Nonetheless, there are also arguments in favour of the latter on the score of several countries' experience, such as China, Israel, Chile and even the Silicon Valley in California. 58 Transport infrastructure, railways and motorways in particular, in many Western European countries has been financed by the state. Tax incentives are still massively used to promote investment in the areas of climate change and energy savings.
See Rodrik Dani, One Economics. Many Recipes. Globalization, Institutions and Economic Growth, Princeton: Princeton University Press, 2007, pp. 99–152.
But there are problems with traditional industrial policy that Russia, in particular, should not ignore. First, innovation is fostered only by competition. Few would engage in costly (and not always or immediately successful) R&D if they were not afraid that their competitors could beat them by moving earlier. The lack of interest for modernisation/innovation in Russia reflects by and large a non-competitive environment. Second, when a new high tech product/process develops, there is the question of how to ensure its diffusion in the economy as a whole. This was a problem also in Soviet Union where, sophisticated military technologies remained confined to defence, contrary to the West where competition normally help speeding up the pace of technological change by adapting defence-related innovation to civilian output. Third, the innovation process may turn out to be simply too costly and fundamental research not properly protected under Russian IPR legislation and enforcement, a still problematic area. 59 There is also a risk that money be wasted in re-inventing the wheel. Finally, rushing to show that they conform to modernisation and innovation dogmas, there could be herding and window dressing by local administrations in competing for project-clusters, rather than concentrating on how to improve market institutions. 60
See on the need not only for property, but for property rights, to ensure a dignified life, M. Trubolyubov in http://www.vedomosti.ru/opinion/news/1355034/zadacha_novogo_pokoleniya on 2 September 2011.
It is worth noting that a number of technological parks created around Moscow thanks to state were expected to become in time self-financed business centres, but de facto only few managed to survive and develop this way, whilst the other disappeared pointing to waste of money, see http://polit.ru/news/2012/03/28/jump_tehnopark2018/ accessed on 28 March 2012.
On a separate path, Putin as the chairman of the government (2008–2012), set up in 2011 his own agency, the Agency of Strategic Initiative (ASI), with the aim of engaging Ministers and banks' directors to provide support to talented young business people striving to set up and/or to further develop their own undertakings. 61 Underlying such initiative was Putin's hope that in 10 year from 2011 the share of high tech in total output will increase from 12% to 25–35%. 62 The Agency is supposed not to cost anything to the budget and develop out of donors' funding and/or other sources of off-budget financing. But in the Russian environment where state control is pervasive costs and possible losses are likely be borne by state controlled financial institutions and “loyal” commercial banks. 63 The Sberbank – that promised to invest $800 million to build a techno park in Skolkovo – has also been called to help financing the ASI's projects. 64 It is yet unclear whether any level of state administration will also be asked to provide own guarantees and bear the burden of contingent liabilities. For the time being, there are not spectacular results from ASI. The website of the Agency lists all the projects that have been approved by its committee, but there is no indication of whether the projects have been financed and/or materialised. 65 According to the ASI's CEO Nikitin, each week the Agency receives about 40 projects. Around 70 projects have met the criteria of the agency by end 2011 and 40 of them have been approved by the advisory council. But only 10 are being pursued thanks to specific measures of support. The projects range from technical applications, such as for instance energy saving pipelines, to social initiatives including the establishment of nurseries, kindergartens and similar institutions. 66
See on this Putin's presentation in http://premier.gov.ru/events/news/15348/ and a summary of the tasks and means devoted to this project in http://www.rbcdaily.ru/2011/05/25/focus/562949980304986/print/ accessed on 25 May 2011. See also Malle, PSA, cited, pp.88–89 for more details on the local organisations and scope of ASI.
See Putin instructing the Ministry for Industry and Trade to provide for high tech in machine building through recommendations on either state purchase or output, http://www.vedomosti.ru/newspaper/article/260055/tabachnyj_kollajder accessed on 12 May 2011.
See on the role of the VEB and estimated costs of ASI http://www.vedomosti.ru/newspaper/article/262487/proekt_putina accessed on 21 June 2011.
See http://ru.reuters.com/article/businessNews/idRURXE76B01Z20110712 on 12 July 2011 and http://www.vedomosti.ru/politics/news/1330856/gref_pomozhet_putinu reporting the appointment of Gref to the supervisory committee of ASI, on 2 August 2011.
See http://premier.gov.ru/events/news/17335/print/ accessed on 9 December 2011.
Interestingly, though, some participants started complaining that in order to be able to improve the business climate and cut costs, major reforms must be carried out in the areas of energy infrastructure, access to unused municipal land and customs procedures that remain excessively cumbersome for small businesses. 67 This suggests that in time a lobby for market-friendly reforms may arise and fight for new provisions and accountability for implementation. Comparing individual success may also help. An Annual Forum on Innovation Progress was planned to be launched in 2012 under the supervision of Surkov that continues to be in charge of modernisation in the government led by Medvedev from May 2012. 68
See http://www.rg.ru/printable/2012/04/27/biznes.html accessed on 24 April 2012.
While it is difficult to predict whether Skolkovo and ASI projects will survive under the Putin III, it is noteworthy that, according to Surkov – and despite the relative backlash of ER in December 2011 elections – Skolkovo as the main hub for innovation was to remain in the government's agenda. 69 Moreover, judging from Putin's long-term economic policy programme, the approach to innovation from above does not appear to have changed.
http://www.vedomosti.ru/politics/news/1457261/surkov_innovacionnoe_razvitie_rf_ostanetsya_aktualnym_i accessed on 19 December 2012.
Neither Skolkovo nor ASI seem to be fully consistent with WTO membership that should bring about stronger competitive pressures and easier access to foreign technology due to lower import duties in a number of areas, such as automotive industry, aircraft, machinery, construction equipment, electrical machinery, plastics, agricultural equipment and other. Such government initiatives might have been undertaken precisely in the belief that the economy should be strengthened and entrepreneurship encouraged before accession to WTO – and the consequent fall of the average tariff from 10% in 2011 to 7.8% – hoping that a stronger economy would help tame opposition to WTO.
There is no strong constituency for liberalisation in Russia. While on the consumer side, it is easy to predict benefits from lower prices and higher quality, on the production side worries, justified by concerns for low competitiveness and productivity of labour, have been increasing.
Benefits from WTO membership may not accrue to the Russian economy in the very short-term, 70 but a number of experts estimate that there will be significant benefits in the medium-long term provided that the economy adapts to the requirements of a competitive market economy, i.e. to WTO requirements. 71 The OECD estimates that costs to business should fall by $900bn with an additional $10–15 to 18bn coming from more effective law enforcement on the part of Russia. 72 While some sectors will suffer more than others from increased competition, exporters may gain from better market access for their output. Ex-ante, it is difficult to assess how fast the Russian economy will be able to adapt. Prima facie, considering the structure of the economy and the lack of market-orientated reforms in recent years, one could bet on a difficult process of adaptation. However, it is worth noting that very high (and immediate) benefits from international trade and foreign investment to China after WTO membership came unexpected to most. One should not rule out positive outcomes for Russia as well, mainly in fields where fundamental research is still strong and may help to foster specialised/niche R&D. After all, success stories like that of Yandex or Kaspersky, privately owned companies both engaged in internet technology and security, suggest that the potential for innovation and growth may be higher than commonly referred to, especially in the tertiary sector. But other sectors – including those that need foreign components for their output – may also gain. 73 On the side of state companies, many of which are rightly blamed for inefficiency, Rosatom stands out for good performance, being the world's 4th largest nuclear electricity generation producer, while providing 40% of the world uranium enrichment services. 74 Notably, this is also a company that may support rapid modernisation in the area of medical equipment as desired by the government. Both Rosnano and Rosatom (of which more below) stand out for the open approach to learning from foreign companies. WTO may facilitate cooperation fostering technological change. Among the many projects in which its 250 companies are engaged, Rosatom, for instance, will produce tomography equipment in Russia in an agreement with Philips that is technologically advanced in this area. 75
The budget will be hit first. Losses due to cut in tariffs have been estimated by the MOF at about 310bn roubles in 2013 (c.$1.5bn) see http://www.rg.ru/2012/06/08/budjet-site.html accessed on 12 June 2012.
On the benefits of WTO membership my main source is Richard Connolly, (2012)‘The Economic Significance of Russia's Accession to the World Trade Organisation,’ External Report for the European Parliament, Brussels & Strasbourg: European Parliament June 2012. Downloadable from. poldep-expo@europarl.europa.eu.
See Belousov on WTO's effects at the government meeting on 7 June 2012 in http://government.ru/docs/19194/, and D. Tarr and N. Volchkova, “Russian Trade and Foreign Direct Investment Policy at the Crossroad”, The World Bank. Research Development Group. Trade and Integration Team, Policy Research Working Paper 5255, March 2010 who estimated that Russia will gain about $53bn per year in the medium term and $177bn per year in the long term due largely to her own commitments to reforms in its own business service sectors.
See Editorial, “A Genuine Success Story Made in Russia”, The Moscow Times 26 May 2011.
See http://www.jmu.ru/en/index.php?cid=44 accessed on June 2, 2020.
See http://www.vedomosti.ru/newspaper/article/262425/rosatom_protiv_raka accessed on 20 June 2011.
While the implementation of grand innovation/investment projects will take time, 76 two areas of reforms could have faster impact on economic structure and performance and help shape the contours of “modern” Russia in the near future: the privatisation of costly state entities and FDI policy. Medvedev set the stage for the transformation of large scale state entities under special regime into joint stock companies that could be gradually privatised in the future. Putin promised to carry on with the privatisation programme approved under Medvedev's Presidency, although with some caveat. Both have been looking forward to increase the share of Foreign Direct Investments (FDI) to foster progress. As discussed below, such reforms are met with resistance from powerful vested interests in the status quo. At the plenary meeting of the Duma on 8 May 2012 when Medvedev was appointed premier of the government, Putin III had to step forcefully in the discussion against opposition parties critical of privatisation programmes, foreign investment and entry into WTO. 77 In that context Putin's speech sounded cautious with regard to benefits from the accession to WTO – that, however – he warned – was on the agenda – but aggressive in stressing that foreign investment and joint ventures with highly performing foreign partner would, indeed, be beneficial. Finally, trying perhaps to find some common grounds with unusually rude opposition, Putin pointed to the integration of the post-soviet economic space as a number one priority. 78
A. Dvkovich optimistically projects that it will take from 5 to 7 years to Russia to become a leader in new technology, see http://www.rg.ru/printable/2010/12/13/dvorkovich-anons.html accessed on 13 December 2010.
Putin, presenting his report on government policy in 2011 at the Duma on 11 April 2012 stressed that the formation of the tripartite Customs Union (Russia, Belarus and Kazakhstan) just approved and the Eurasian Economic union to be launched in 2015 “represent the most important geopolitical and integration feature in the post-soviet space from the time of the disintegration of the Soviet Union, see http://premier.gov.ru/events/news/18671/. See also the approval by the Duma's speaker Naryshkhin, in http://er.ru/news/2012/5/17/naryshkin-sozdana-rabochaya-gruppa-po-podgotovke-sozdaniya-evrazijskogo-parlamenta/ accessed on 17 May 2012.
See http://news.kremlin.ru/news/15266/print accessed 8 May 2012. On this project see a rather positive assessment by A. Rahr, “The Eurasian Union offer Candidates more incentives than the EU” in http://valdaiclub.com/near_abroad/39940.html accessed on 14 March 2012. Showing approval for Russia's regional policies and criticism for excessive concern in the West, see F. Lukyanov, “The Eurasian Union. A Reiterated priority”, published on 28.12.2011 in http://valdaiclub.com/near_abroad/36740.html
On some positive (budgetary) effects from turning illegal into legal immigration, particular if poor countries such as Kyrghystan and Tajikistan enter the Union. see http://www.eabr.org/general//upload/docs/CCI/migration-resume-eng.pdf accessed on 25 May 2012.
Putin III's improvised reaction to the opposition challenging the government policy is perhaps more telling about his 2012–2018 agenda than the several programmes and decrees that marked the starting of his third mandate. In forcefully challenging the Communist Party – de facto the only meaningful opposition in the Duma – Putin made clear what the cornerstones of Russian policy until 2018 will be under his ruling. Putin remained cautious on privatisation, pointing to persisting state property of strategic sectors, like oil, in several OECD and non-OECD member countries. He also reminded the communist opposition that while the Russian state intended to keep a controlling stake in such sectors, it was obvious that foreign partnership was needed. Putin, finally, warned the audience that the geopolitical dimension of Russian economics and politics was his primary concern: a clear message to government colleagues and businessmen at home primarily, but also intended for a broader international audience.
The privatisation dilemma
From 2000 onwards until the financial crisis hit Russia privatisation had almost disappeared from the government agenda. Privatisation revenues fell from a top of 2% of the budget (2000) to a low of 0.4% (2009). 79 New developments in this area emerged in 2009–2011 under the pressure of falling fiscal revenues and fiscal imbalances.
See detailed diagram in http://www.1prime.ru/news/articles/http/www.1prime.ru/-201/%7BA3089D77-5788-4E8C-8398-2F074719C7DF%7D.uif.
Interestingly, while in early 2009 the government seemed to be still preoccupied with national security in devising privatisation plans, thus ruling out sales of major state banks or production companies, such concerns weakened by the end of the year when it became clear that growth and investment had collapsed and the room for subsidising failing enterprises out of the stabilisation funds had badly shrunk.
Two privatisation plans – one approved on 30 November 2009 and the second announced by the government on 26 July 2010 – opened the room for the privatisation of important stakes in a number of formerly listed as strategic companies after in April 2010 Medvedev had approved by decree the reduction of the number of strategic join stock companies from 211 to 41 and the number of unitary state enterprises (utilities) from 230 to 159. 80 Non-controlling stakes in ten large scale state companies, including, among others, Rosneft, Transneft, Sberbank, VTB, Rossel'khozbank, Rosagrolizing, RusGidro and Russian Railroads were listed to be sold between 2011 and 2013. 81 The Ministry of Finance estimated that over 2010–2013 a total of about 1 trillion roubles (983bn exactly), c. US$33bn would be earmarked to the budget. 82
See for details on the companies and number of shares to be offered for sale, Malle S. PSA, cited, pp.97,102.
See Financial Times, 27 July and 2 August 2010 and http://www.finiz.ru/news/article1270655/?print accessed on 12 August 2012.
See http://www.rian.ru/economy/20100805/262018664.html accessed on 5 August 2010. The conventional exchange rate used here is 30 rouble to the US$.
Many IPOs planned sales were cancelled in 2010 and 2011 due to unfavourable market developments; some did take place, but with revenues from sales lower than initial estimates. Only in few cases sales were successful. Even the London based IPO of the well-known Russian Helicopters company, planned for 11 May 2011 was cancelled due to lack of interest of the part of investors. 83
See http://top.rbc.ru/economics/11/05/2011/589981.shtml accessed on 11 May 2011.
Nonetheless, plans for large scale privatisation went on. In late August 2011 a plan for privatising 21 (potentially) profitable companies was announced, including large scale companies in energy and diamonds, some of which are to be fully divested by the state. A rough estimate of revenues from this sale – $75bn – suggests that much progress has been done in setting the stage for a major divestment of state property. Unfortunately, once again, market developments have turned unfavourable from the end of 2011 and look likely to discourage the authorities from taking long-awaited action in the field as planned for 2012–2013. The privatisation plans for 2011 were fulfilled by 42%; large scale privatisation did not take place and revenues to the budget were much less than expected. 84 The wait and see government (and MOF) position has been criticised by many in Russia, from Gref, head of Sberbank to Dvorkovich and Shuvalov, who focused on collateral benefit for institutional improvement, apart from budget revenues from privatisation. 85 Despite government assurance that privatisation plans will not be cancelled, Gref at the time of this writing, was still waiting for the visa on the privatisation of his bank's package of shares. 86
See http://www.rbc.ru/rbcfreenews/20120521104309.shtml accessed on 21 May 2012.
See Gref's position in http://ria.ru/economy/20111121/493989685.html accessed on 21 November 2011; Dvorkovich's position in http://www.vedomosti.ru/politics/news/1600923/privatizaciya_goskompanij_v_rf_budet_idti_po_planu#ixzz1r4bKsNCy accessed on 4 April 2012 and Shuvalov backing the long awaited privatisation of 7.6% shares of Sberbank in 2012 as planned, in http://ria.ru/economy/20120416/627689178.html accessed on 16 April 2012 while about a monthlater Ulyukaev in London, vice governor o the Central Bank, ruled out Sberbank's projected sales, see http://ria.ru/economy/20120522/655437860.html accessed on 22 May 2012. On Shuvalov later aligning with the wait and see position of the Central Bank (the effective owner of the controlling package of shares (57.58%)) see http://www.ng.ru/printed/269613 accessed on 8 June 2012. At last Sberbank managed to sell its packet of shares in September 2012.
The revised Strategy-2020 dated 22 November 2011 pointed to the still paramount presence of the state in the economy through state participation in companies and banks and control of state entities despite a reduction in the number of state enterprises as such. The share of the state in market capitalisation was estimated to have increased from 24% to 40% between 2004 and 2007 reaching c.50% in 2009. 87
See http://2020strategy.ru/data/2011/12/02/1214531946/%D0%93%D1%80%D1%83%D0%BF%D0%BF%D0%B015_%D1%84%D0%B8%D0%BD%D0%B0%D0%BB3.pdf accessed on 2 December 2011.
The privatisation of state entities known as goskorporatsii (GK) deserve special consideration; first, because of the intriguing nature of such entities, and second, because of their questionable importance for security. Not all of them have been listed for privatisation and, when listed, privatisation schedules are frequently changed under the pressure of vested interests in their survival.
GK are large state holdings, frequently in control of hundreds of production units, set up under special regime in their specific branch. These entities were set up under Putin's second presidential mandate. Their managers appointed by the government were not made accountable for economic outcomes, they could incur losses, avoiding nonetheless bankruptcy procedures. GK enjoy fiscal and tariff preferences. 88 By the combination of economic and political power these entities easily accessed state subsidies that helped them survive the economic crisis.
See for more details on goskorporatsii Malle S., “The Impact of the Financial Crisis in Russia”, cit., pp.15–20.
In November 2009 Medvedev announced that some GK will be transformed into joint-stock companies under 100% state control and others will be liquidated after completion of their tasks.
While in principle enforcing a new legal framework should not be difficult, it has become clear that GK restructuring will take time 89 and that some will remain under state control for a quite a while. The official reason is that they perform a number of different functions that will need to be separated before undertaking radical reforms, 90 but of course vested interests in the status quo also matter.
See the scheme in Izvestiia 26 February 2010 in http://www.izvestia.ru/economic/article3138982/index.html.
See Minecom's programmes as reported in http://www.rg.ru/printable/2010/02/25/korporacii.html accessed on 25 February 2010.
By February 2010 the time schedule for GK restructuring was agreed and published. 91 A relative long timetable for change allows GK to increase their assets in the meantime. It is worth noting that Mergers and Acquisitions (M&A) are not always profitable to GK which are supposed to abide by government policy and, if this is the case, to incorporate unprofitable companies. Under the tacit understanding with the government the losses incurred this way are due to the tasks they are required to perform in support of social and economic stability, GK try to exploit that to their advantage. Thus, one way or the other, the sheer number of enterprises a major state holding succeeds to put under control becomes a source of large economic and political power. Rostekhnologii with its 562 Russian enterprises under control, of which more than 300 work for state defence, has been particularly active in M&A. 92 It is now trying also to get state contracts for the establishment of medical/oncological centre, within a programme that figures out as a priority for long-term economic policy. 93
Two GK- the Fund for Communal Housing and Olimpstroi (overseeing construction for the Winter Olimpics planned for 2014 – were set to be liquidated in 2013 and 2015 respectively. Rosatom (nuclear energy) is to remain in force with legal changes eventually introduced after 2011. Decision on the legal status of VEB (Vneshekonombank) – to become either a joint stock company (JSC) or a public company –was postponed to end-2012. No deadline has been set for the Deposit Insurance Company to be transformed into a public agency. Rosnano (nanotechnology), Rostekhnologii (advanced technology) and Rosavtodor (motorways) were set to become joint stock companies in 2014 (the first) and 2015 (the other two). Actually, Rosnano, managed by Chubais, was transformed into a 100% state ownership JSC in March 2011. See http://www.rg.ru/printable/2010/05/12/rosnano.html accessed on 12 May 2010and http://top.rbc.ru/economics/11/03/2011/557582.shtml?print accessed on 11 March 2011.
See S. Malle, PSA, pp.91–93 for a detailed description of deals pursued by Chemezov, the long-standing head of this GK until mid-2011. By May 2012 the number of companies and workers were about 600 of which 60% working for defence and about 800,000 workers employed, cfr. Putin in http://news.kremlin.ru/news/15373/print accessed on 18 May 2012.
Finance with more than a billion roubles by the government, http://www.rostechnologii.ru/archive/0/detail.php?ID=11516&print=y accessed on 18 May 2012.
Rostekhnologii and Rosatom have been given a highly preferential treatment in the programmes and schedule for privatisation. Rostekhnologii is likely to remain for a long time a state holding in charge of overseeing the development of its companies – many of which otherwise will get bankrupt. Concerning Rosatom that, in the field of nuclear energy, appears to have acquired an increasingly evident geopolitical role, much like Gazprom in its own field, there are no plans of privatisation in a foreseeable future. Rosnano is also practically to remain under state control for a while: originally (August 2011) only 10% of JSC Rosnano's shares were envisaged for sale late in 2017. This deadline may be shortened in the light of new privatisation plans worked out in 2012. Nonetheless, private shareholders are unlikely to gain a controlling stake. Whether explicit – though government agreements or implicitly, such major GK are perceived as by foreign investors and lending institutions as public organisations whose loans benefit from sovereign guarantees; GK are therefore in a comparatively better position to access the international financial market for capital and will continue taking advantage of this favourable situation.
In the new government's plans still to be clearly defined – before submitting for approval to the Duma – the transformation of GK into JSCs and their successive privatisation stand as a priority as announced by Medvedev at the first meeting of the government. Medvedev listed the privatisation of the companies already approved for sale as his sixth – out of seven – priority according to a new schedule, making clear, however that the actual sales will depend on the developments in the financial markets. 94 By decree Putin instructed the government to prepare by November 1, 2012 changes to privatisation plans for 2011–2013 and approve the plan of privatisation for 2014–2016. 95 The newly appointed Minister of Economic Development A. Belousov clarified that the companies slated for privatisation, implicitly referring to non-strategic companies, in the next 3–5 months did not need the approval of the President. 96 Putin, indeed, had formerly approved decree on the privatisation of energy companies 2013–2015 that are considered to be strategic, and therefore under his responsibility, foreseeing, however, a certain amount of consolidation in the sector under the advice of former first deputy-minister Igor Sechin appointed head of Rosneft after falling out of the Medvedev's government. 97 While privatisation in this sector is officially postponed due to unfavourable market developments, it is unclear whether such moves aim at keeping the energy sector under state control indefinitely. 98 A number of federal state unitary enterprises operating in the field of cartography have also been excluded from privatisation. 99 A more positive – and somewhat unexpected – development could take place, however, concerning Rostekhnologii after Putin warned the holding that it could not sit forever on its own assets and demanded a plan for the commercialisation of its companies to be prepared in view of their future privatisation. 100
see http://government.ru/docs/19003/ accessed 21 May 2012.
See http://www.kommersant.ru/doc/1930174?stamp=634721856682120029 accessed on 9 May 2012.
MED had listed already by 28 May 2012 the stakes to be privatised in 3–5 months. The list includes 7.58% minus one share of Sberbank, up to 49% shares of the United Grain Company, up to 10% shares of Rosnano, up to 25% minus one share of Sovkomflot (shipbuilding) and indefinite number of shares of Alrosa (diamonds). Apparently also amber producing concerns are considered for privatisation. See as accessed on the same day http://www.gazeta.ru/business/news/2012/05/28/n_2362457.shtmlhttp://www.gazeta.ru/business/news/2012/05/28/n_2362861.shtml.
For details on developments in the field of energy companies, see http://www.gazeta.ru/business/2012/05/24/4599105.shtml accessed on 24 May 2012.
The Wall Street Journal complained about the confusion created by contradictory announcement concerning privatisation in the sector versus immediate consolidation plans, see issue 25 May 2012. Adding to confusion is the Sechin's appointment to Head of the Presidential Commission in charge of strategic issues of development of fuel/energy (TEK) and ecological safety, see http://www.kremlin.ru/news/15656. The Commission has very broad powers including norms, tax, tariffs, prices and utilisation of subsoil.
See http://www.1prime.ru/news/0/%7BA42AF889-882F-4728-A95E-05608F6DBCB8%7D.uif?print=1 accessed on 30 May 2012. The issue may stir conflicts in the government. Interestingly, Dvorkovich, as a deputy-premier in charge of energy, among other, intervened critically on specific issues, such as the consolidation in the oil sector prospected by Putin and Sechin and on the opportunity to decrease state participation in the Sberbank to a blocking stake complying with following Strategy-2020 advice to divest a much large package of shares to allow this bank to restructure and become more competitive.
See http://www.rbc.ru/rbcfreenews/20120518194437.shtml accessed on 18 May 2012also noting that by 1 March 2013 Putin expected to be informed about the efficiency gained from consolidation of many state companies. See also http://news.kremlin.ru/news/15373/print accessed on 18 May 2012.
The main guidelines on privatisation over 2011–2013 by Premier Medvedev have been laid down on 7 June 2012 and detailed by the newly appointed Minister of the Economic Development, Andrei Belousov. 101 The number and quality of assets planned for sale is very large. In synthesis this concerns: package of shares of 1408 JSCs, as well as shares of public companies with state participation the total number of which is 2714. The number of shares for sale are 1300, including 7.4 package of shares belonging to the charter capital of such companies. To prepare for further sales the government also plans to commercialise 278 Federal State Unitary enterprises out of a total of 2427. Belousov also detailed the schedule of sales in 2012 and 2013, noting that the privatisation of the bank VTB package of shares in 2011 had earmarked 95.7bn roubles out of a total of 121bn from whole assets sold in that year. By September 2012 30bn roubles were expected to the budget from the sales of 200 small and medium size enterprises and a small number of large enterprises. Large, and more profitable companies, were announced for sale in the “near future”, including the long awaited packages from Sberbank (7.58 minus one share that would impair majority control by the CB that opposes the deal, as mentioned earlier), Sovkomflot (25% minus one share), Alrosa (undetermined) 102 , United Grain Co. (49%) and Rosnano (10%).
See Government Meeting in http://government.ru/docs/19194/ accessed on 7 June 2012.
According to Shuvalov the proceedings from sale of this huge diamond company (30% of world output) would be used to finance infrastructure in the territory (Yakutiia) of its location, see http://expert.ru/2012/06/7/chuvstvitelnyij-vopros/?n=666 accessed on 9 June 2012 implicitly meaning that the federal budget will renounce its (majority) share of revenues from sale.
More interestingly, but postponed up to 2016, there are plans for total divestment of state property in a number of banks (VTB and Rosselkhozbank), as well as giant companies such as Alrosa, RusGidro and Rosneft. In some companies the state wants to keep a golden share or a small non-controlling number of shares. In other companies, such as Railways, FSK EEC (innovation company for electricity) and Transneft, the state intends to retain 75% plus one share; state participation has been lowered to 50% plus one share in the United shipbuilding corporation, OAK (United Aircraft Corporation) and Uralvagozavod (Machine building/defence). Finally the list of enterprises and stakes planned for sale in 2012–13 was approved by the government on 20 June 2012 along the lines exposed by Belousov but with no details on effective deadlines and or caveat on adverse market developments despite warnings by experts. 103
For an immediate grasp on what will be on sale and when, see a nicely done diagram in http://www.itar-tass.com/g51/2394.html accessed on 9 June 2012. The list of companies/stakes for sale (Rasporazhenie of 20 iunia 2012 г. N
As mentioned earlier, all these plans are somewhat dependent on market developments, not unlike highly indebted countries in Europe, despite reiterated commitment to sell by the Russian authorities. While for many European countries, however, the main concern is earmarking enough to help fiscal balance in order to be able to honour public debt, Russia should be worrying more about how to increase efficiency and competitiveness, advertise and speed up sales even in a less than highly favourable environment.
Are foreign investors finally welcome?
Unlike other post-communist countries, and China, Russia has never shown much sympathy for foreign investors, in particular foreign direct investment (FDI). In the nineties the latter were practically non-existent. The situation appeared to be changing in 2000s. FDI increased from US$2.7bn in 2000 to US$72.8bn (including 65.4US$bn in the non-financial sector) in 2008. 104 According to independent research, the volume of FDI accumulated in the country as of the beginning of 2011 was $116.2 billion. 105 Though not impressive in absolute terms, the rate of increase has been significant. Such developments have occurred despite on-going complaints against corruption, bureaucratic harassment and poor business environment. An overview of the main indexes and rankings that are supposed to be relevant for foreign investments seem to reveal altogether little progress in a number of areas of potential concern to investment, though the increasing openness of Russia to the world may help bring in favourable changes.
Based on Russia's Central Bank as reported in http://www.cbr.ru/statistics/print.aspx?file=credit_statistics/inv_in-country.htm and http://www.vedomosti.ru/newspaper/article/2010/03/01/226955 both accessed on 1st March 2010.
See S. Kulikov, “Investors avoid many regions”, Nezavisimaia Gazeta, 31 August 2011.
Russia in 2011 still ranks 143rd only on 182 for (perceptions on) corruption even after moving 11 ranks upwards from the previous year. 106 On the World Bank's “Doing Business Index 2011, Russia's ranking is 120 compared to China 91, Brazil 126 and India 132. 107
Compared to Brazil (73rd) China (75th) and India (95t) see http://cpi.transparency.org/cpi2011/.
Nonetheless other aspects may have become more favourable. The 2012 FDI Confidence Index reports that emerging markets have eclipsed developed countries in terms of FDI inflows, absorbing more than half of global FDI inflows for the first time in history, and now comprise more than half of the Index's top 25 countries. 108 Russia did even better than many OECD countries and quite a few other emerging market economies (EMEs), but not China, India and Brazil ranking respectively 1st, 2nd and 3rd, finally attaining the 12th position in 2012, 6 ranks higher than in 2010 (18th) and returning close to the 9th position attained in 2007. While Russia is still far behind the other three BRICs', the fact that 19% of the respondents estimated that the situation compared to the previous year was improving versus 13% manifesting an opposite view, shows that Russia is making progress in the view of foreign investors though not enough to become comparatively more attractive than other large EMEs. While, in 2012, the severe Freedom House for the first time in 8 years estimated that the freedom of the press had not worsened, Russia still scores rather badly (172nd on 197). 109
The ranking is based primarily on a proprietary survey of more than 200 executives from 27 countries and 17 industry sectors. See the report in http://www.atkearney.com/index.php/Publications/cautious-investors-feed-a-tentative-recovery.html accessed on 30 May 2012.
See http://www.kommersant.ru/news/1927255 accessed on 1st May 2012.
Conversely, the country ranks rather well (47th on 208) on the Globalisation-2012 Index– albeit due more to positive social and political interaction rather than in the economic field– and much better than China (73rd), Brazil (74th) and India (110th). 110 Taking into account her long history of self-seclusion and economic autarchy, Russia appears to be open to integration and capable of interacting with the world despite her large geographical dimension, (still) medium income level 111 and problematic institutional arrangement.
See http://globalization.kof.ethz.ch/ accessed on 30 May 2012This source also explains the methodology based primarily on international flows and interaction in each particular domain.
Two third of the population never went abroad, see http://www.gazeta.ru/social/news/2012/04/05/n_2277797.shtml accessed on 5 April 2012.
All in all, Russia may find herself in a more favourable environment for FDI than in the past. Given the volume and quality of state assets announced for privatisation in mid-2011 – and basically maintained, with some (possibly temporary) exceptions, in 2012 – lack of interest on the part of private investors is unlikely, though their actual participation in auctions will depend on a number of circumstances, including proper procedures, the general business environment and prospects for profit. Unless acquisitions entail broad opportunities for restructuring, labour layoff and changing the profile of the business, investors are likely to be prudent. Concerning the Russian programme of privatisation outlined above, the government should pay attention to fixing reliable procedures and deadlines. Uncertainties may matter more to investors than any perception of the business climate of the country in the past.
While new provisions that should reduce the number of strategic sectors and open the room for foreign investment also in banking have been submitted to the Duma on February 2011, 112 and the accession to WTO provide favourable premises for a renewed surge in FDI after the dismayed 2009–2011 performance, uncertainties on companies, number of shares and strings attached in the few cases of full divestment persist. Contrasting signals – such as government's announcements not backed by either the Presidential Administration, the President himself or the Central Bank as described in the previous section, as well on-going consolidation in some sectors officially (but is that sure?) aimed at increasing the value of possible sales in the future – may end up hampering the comparative advantage that an emergent economy like Russia should pursue in an international context where demand for FDI is likely to overshoot supply.
The Duma passed them in the first reading in March 2011, See the number 503176-5 in the website of the Duma, http://asozd2.duma.gov.ru/ accessed on 24 May 2011. An overview of the amendments to the Law on Strategic Investment can be found in http://www.pwc.ru/en/tax-consulting-services/legislation/paket-popravok-Zakon-ob-inostrannyh-investiciyah-strategicheskie-otrasli_.jhtml accessed on 25 May 2011.
Along similar lines, it is difficult to gauge how significant are new provisions for the management of special economic zones (SEZ) approved in the apparent aim of giving more freedom in decision-making to the provinces. By his October 5, 2009 decree, President Medvedev suppressed the Federal agency for the establishment of special economic zones devolving its functions to the Ministry of Economic Development and assigning to regions a wider scope for decision-making. 113 While in principle decentralisation should help identifying the most favourable areas for development, in practice, the less endowed territories may find it more difficult to finance the necessary infrastructure. Perhaps other plans will be worked out to meet these challenges. There are 25 SEZ in Russia in 2012 from 13 in 2009 and 24 in 2011. 4 industrial production zones and 4 technological and innovation zones; 14 tourist and recreational zones and 3 port zones.
See http://www.rg.ru/2009/10/06/medvedev-oez.html accessed on 6 October 2009.
In 12 regions technological parks are being developed where 670 resident companies are registered to become operative over a large spectrum of products, from nanotechnology to medicine and construction materials. The expected volume of investment is about $12bn. Companies from 24 countries are involved at one stage or the other of the production plans. Large companies such as Saint Gobain, Novartis and Nokia Siemens are present. 114 The technological parks are to be developed in Saint Petersburg, Moscow and Moscow Region and Tomsk. The industrial zones are located in Lipetsk, Tatarstan, Samara and Sverdvlosk. Interestingly, and perhaps explaining Putin's focus on the need for the central government to speed up the development of Siberia and the Far East, there are no special production zones in these areas. The advantages of SEZ consist in having access to a single window for administrative procedures, special tax treatment (lower income tax, and temporary tax exemptions on property, land, transport; free customs regime (no import duty and refundable VAT). Benefits have increased under President Medvedev in terms of tax reduction or duration of tax exemptions and SEZ regime. The latter is now planned to last 49 years instead of 20. But transport infrastructure matters a lot. It is not surprising that the SEZ for production or technological purposes are situated in comparatively more developed regions.
See Putin's report to the Duma on 20 April 2011, http://premier.gov.ru/events/news/14898/ and http://www.economy.gov.ru/wps/wcm/connect/6febcf00444c33568765e7af753c8a7e/sez_eng.pdf?MOD=AJPERES&CACHEID=6febcf00444c33568765e7af753c8a7e published on 21 March 2012.
The concern that the government should do more to attract FDI has been increasing together with the awareness that it will be difficult, at least in the short term, to improve bureaucratic behaviour and reduce red tape in the whole country. The establishment of special institutions has, thus, been looked to as a means to overcome such obstacles more quickly. In this context one should appreciate Medvedev's decision to dispatch ad hoc presidential ombudsmen to the regions in order to assist foreign investors getting through the bureaucratic hurdle often encountered in dealing with elementary needs. 115 There can be reasonable doubts that federal officials often unaware of local constraints will be fully up to the task. 116 But the intention that they should is to be welcome.
See http://news.kremlin.ru/transcripts/12173/print for a meeting with ombudsmen on 2 August 2011.
See A. Yakovlev's critical comments from regional experience with ombudsmen in http://www.hse.ru/news/1163611/33557103.html on 4 August 2011.
Much alike the hesitant moves in privatisation, actual and announced changes in FDI policy may not be convincing enough to many foreign companies – especially those with less experience in working with EMEs – to seriously engage in the Russian market. While prospects for profits may look highly favourable depending on market developments, economic performance in general ranks low, with Russian productivity estimated to be 5 times lower than that of advanced countries. 117 Criminality is widespread and often goes unpunished. A law increasing penalties against reiderstvo – a criminal operation through which companies are annihilated and their assets taken over by fraudulent seizure – has been approved on July 5, 2010, in the hope of paving the way to the creation of a more secure business environment. 118 The record until now is far from reassuring, on the score of estimated 3 million raids over the past ten years concerning all sorts of businesses and a number of quite a few instances still under justice procedures. 119 Interestingly, the number of appeals against reiderstvo have increased five times and the number of criminal sentences three times after changes in the Criminal Code that were aimed at facilitating the fight against such practices by clarifying/broadening the nature of reiderstvo compared to past provision, such as making prosecution possible for filing false tax office data on the founders, for forgery of the general meeting of shareholders and board of directors, for falsification of register and the voting results. 120 The struggle may take long time and, while small-medium size companies are more likely to be attacked, large companies are not totally safe either when among the “raiders” there are high profile public officials. While, statistically, the cases of reiderstvo examined by justice have increased and that likely points to more transparency and confidence in justice, the sheer numbers of cases submitted to courts are worrying in revealing the extent of economic abuse.
See estimates in http://expert.ru/2011/04/1/rabotat-ne-hochetsya/ accessed on 1st April 2011.
See the text of the law and comments in http://www.rg.ru/2010/07/05/zakon.html accessed on 5 July 2010.
“Russian business Groups try to Address Asset Grabs”, Oxford Analytica 18 May 2012.
See http://www.izvestia.ru/news/521674 accessed on 12 April 2012.
Nonetheless, by themselves corruption and abuse by authorities or criminal gangs are not a decisive deterrent to FDI. 121 The increase in FDI in the early 2000s – when the incidence of economic abuse started increasing – as mentioned above suggests that the scope for foreign investment remains large, though it needs to be further supported by targeted reforms. It will depend on the commitment of the government at all levels, both central and local administrations, to make sure that law is not violated and law infringements severely punished. The institution of one window for all type of licencing and a further nation-wide establishment of arbitrage courts that had been introduced in the early 2000s could help. Reforms of the highly corrupt police system pursued by Medvedev need to continue and their results closely monitored. New government appointments, such as General Vladimir Kolokoltsev to head the Interior Ministry may also help thanks to a good reputation as a professional with long experience working within the Ministry's structures. 122
See R. Connolly (2012), “Emerging Europe after the crisis: the challenge of structural transformation”, “ Russia e Europa dell'Est. Progetti e prospettive di crescita”. Serie Studi Scientifici- Rapporti di Ricerca, Polo Scientifico Didattico di Vicenza, Università di Verona, pp. 8–31, on lack of meaningful statistical correlation between corruption and FDI.
See the proclamation of the new Minister at MVD by Putin in http://news.kremlin.ru/news/15402/print accessed on 22 May 2012.
The political context for M&D
The concluding section of this paper provides a view on the interdependency between M&D goals, as conceived by the leadership, and the organisation of social and political consensus deemed necessary to implement structural changes. Past and new government priorities and programmes to 2018 – the end of the current Presidential mandate of Putin – need to be seen in the light of elections results and possible challenges from opposition movements.
The approach to modernisation from above as described in this paper is hardly compatible with pluralism and time consuming democratic debate. The emphasis on urgency in the Russian approach to M&D calls for rapid decision-making: in the Russian authorities' view (and the country past experience) this is better pursued by a corporatist state, an organisation that allows for relatively fast and unchallenged top-down decision-making. The model is not unique to Russia, where it rests on the so-called vertical of power structure. Democracy (under methods and procedures still questioned not only by the authorities, but also by the population at large) is expected to develop later after the benefits of growth from M&D will materialise and spread to society. A corporatist approach to reform – with priorities set from above and social consensus looked for through ad hoc privileges for the elite and populist policies for the rest of society – has been shared by both Medvedev and Putin in their changing roles, albeit with some different emphasis on priorities. This approach is consistent with an economy where resources and monopolistic behaviour play a dominant role for growth and competition is almost inexistent making the economy more dependent on the government's mediatory role in economic and social interactions, and at the same time more stable. The contours of the Russian corporatist state have been examined in a previous publication. 123 Other definitions, such as managed democracy or authoritarian state, would not explain, in the view of the author, the difference between the post-Soviet political developments in Russia and those of developing or emerging market countries that – though falling under the label of authoritarian states – have not yet achieved the level of cultural, social and individual development that is peculiar to Russia. The comparatively higher human and social capital of Russia means that the need for consensus is higher in Russia than in other hoped for “emerging democracies”, while – to a large extent as a by-product of Russian history – social organisations – that provide the seeds of pluralism in society – are not mature enough to be able to produce a critical mass of reasonable challenges to government policies.
See S. Malle, PSA pp.67–74.
While we can observe that still existing authoritarian states show little hesitation in crushing any form of opposition and/or are likely to resuscitate in a similar format if opposition forces manage to take over one way or the other, the Russian leadership in front of disorganised opposition or criticism from a few liberal circles behaved in a remarkably different way. It has been careful, first, to find ways to broaden consensus well beyond that granted by its representative party in the Duma – Edinaia Rossiia (ER) – and, second– when grass root opposition emerged after the elections – not to let numbers grow, by luring bright people into its ranks through the establishment of ad hoc bodies. 124 It should also be noted that most of the “liberal” opposition figures that emerged in the nineties managed to find – and keep, apparently unchallenged – for themselves high ranking positions either in state controlled or private companies. Criticism occasionally raised against government policies from these figures is, at best, implausible. A meaningful opposition to Putin united under shared principles and feasible alternative programmes has not managed to materialise in Russia, while their numbers have been gradually shrinking to irrelevance. The post-Presidential election period due to the fading away of unproductive opposition has rightly been called by Andrew Monaghan 125 “the end of the opposition era” contrary to the focus on the approaching end of Putin's era portrayed by the media in Russia and abroad.
This operation was probably successful exactly because many people, albeit critical of the government, opposed more vehemently street demonstrations. The rating of both Medvedev and Putin has been raising along with opposition movements taking the streets, see VTsIOM's opinion poll in http://www.kommersant.ru/doc/1956023 and the earlier Levada Centre's poll and graph in http://www.levada.ru/ both accessed on June 9 2012.
See A. Monaghan, The End of the Putin Era?, The Carnegie Papers, Carnegie Europe, Carnegie Endowment for International Peace, Washington D.C, July 2012 pp.15–17.
In this section the forms of co-optation devised by the leadership are described and explained as skilful, though not necessarily always effective, tools to gather the necessary consensus for reforms in a society where the elite in power, with all possible caveats, has shown to be much more forward-looking than any opposition party represented in the Duma. It is true that the threshold for party representation in Russia is higher, at 7% of those voting, than in a many OECD countries, but it is also lower than the 10% threshold in Turkey often referred to as the only Muslim democracy in the Middle East. As established by Medvedev in 2011 the lower threshold – 5% – that was in force in the nineties – and is common in many European countries – will be restored and applied at the next elections. Whether this will help broadening the spectrum of parties 126 in the Duma is debatable. Even in the case of success, one can fear that post-election coalition governments would hardly provide for better and stable alternatives. Intriguing in Russia is the lack of efforts, or inability, on the part of liberal opposition parties to find common grounds for a stronger, if not a major coalition party. 127 Even Kudrin and Prokhorov have long shied away from forming a new party. 128 Billionaire Prokhorov – despite being a new, youthful and financially independent figure in the political scene – after finally forming a new party in July 2012, did not really make efforts to attract on his own side well-known figures from mainstream liberal opposition. 129 Alexei Kudrin does not plan to transform his Committee for Civil Initiative into a party either, while still playing some role in threading with government officials, including primus inter pares, Putin that he continues to respect although admitting political disagreements. 130
There are to date 21 parties registered at the Ministry of Justice, see http://news.mail.ru/politics/9267454/. The number of parties increased after the approval in April 2012 of provisions lowering the necessary number of signature to apply for party registration from 40,000 to 500.
Though moves in this direction may be taking place after the disarray of street demonstrations. See the proposal to join forces by Kasyanov, Ryzhkov and Nemtsov and the possible formation of a Republican Party of National Freedom,http://www.vedomosti.ru/politics/news/1761953/parnas_i_rpr_obedinyatsya_v_respublikanskuyu_partiyu accessed on 19 May 2012.
See on Kudrin's hesitant moves in the regions http://www.izvestia.ru/news/527039 and on Prokhorov's questioning the usefulness of parties compared with other means of attracting supporters and build consensus in http://www.izvestia.ru/news/526921 both accessed on 9 June 2012.
See on Prokhorov S. Malle, PSA, pp.72 and 82–83. On post-election 2012t developments see http://www.vedomosti.ru/politics/news/1817530/prohorov_stavit_na_servis?from=newsletter-editor-choice accessed on 5 June 2012 and http://www.mk.ru/print/articles/703508-politologi-mihail-prohorov-blizok-k-politicheskoy-smerti.html accessed on 15 May 2012.
See BBC Monitoring 25 May 2012 and http://www.akudrin.ru/news/intervyu-finam-fm-18may.html.
The Russian state may not encounter a serious challenge to corporatism for quite a long time. 131 An evolutionary path – an option that people at large and experts critical of the current establishment approve, should not prevent the leadership from improving the quality of participation in decision-making from outsiders.
See http://www.izvestia.ru/news/527011 (accessed on 9 June 2012) reporting an opinion poll by VTsIOM on democracy and revolution. The first would be welcome by 3% of the population versus revolution by 1%.
Co-optation which is key to corporatism has been by and large successful. It was adopted by the party Edinaia Rossiia that remains the majority party with the officially recorded 49.3% of the voting in the 4 December 2011 elections. 132 Namely, A. Shokhin, the head of the Russian Industrialists Association, and often an outspoken critic of government policies, is a member and a component of the Presidium of the Party.
http://ria.ru/ accessed on 5 December 2011.
Co-opting on a larger scale was successfully pursued by Putin through the creation of the All Russian National Front in May 2011 under the slogans of love for the Fatherland, improvement of people's welfare, strengthening of the might of the state and social justice. 133 Medvedev tried a similar approach after September 24 when together with the candidature of Putin for President, the latter promised that, if elected, his candidate for Premier would be Medvedev.
http://premier.gov.ru/events/news/15108/print/ accessed on 7 May 2011.
It is unclear whether the ARNF will survive in its present form as a grass root organisation of the (pro-Putin) willing, skilfully used by Putin against Edinaia Rossiia when needed, or it will be transformed into an either legal body or state entity. The fact that the opinion polls' rating of Putin after the Duma elections remained much higher than that of ER shows that his distancing from the party and appealing to a broader network like the ARNF has been key to gathering large support for the Presidential elections. 134 The alternative, after the election, is apparently for the ARNF members either to join ER – and possibly challenging its organisation, commanding heights and vision from within – or more likely after the appointment of Medvedev as the leader of ER, in the view of the author, form its own organisation to better exploit gained political power. 135 According to Putin, indeed, the supra-party status of the ANRF is a strength that should be maintained under any alternative legal form. 136 This suggests that will be up to Medvedev to pull ER to back reforms pursued by the government – not necessarily an easy task 137 – while Putin will be freed from Party constraints and criticism that are likely to increase under political pressure from both within the Duma and outside.
See http://ria.ru/politics/20120120/544568435.html accessed on 20 January 2012.
On Shokhin's view that Putin would not take the leadership of such an organisation, see http://www.kommersant.ru/doc/1946427 accessed on 30 May 2012.
See http://www.rg.ru/printable/2012/04/04/putin.html accessed on 4 April 2012.
For an until now rare clash, at the Duma, between the representative of the government on tax policy and two ER members, Makarov, the head of the Budget Committee and Naryshin, the speaker of the Duma, on the ground that tax policy should be discussed in the Parliament and not in the corridors of the government, http://www.vedomosti.ru/politics/news/1792562/nashli_mesto_dlya_diskussij accessed on 29 May 2012.
As a weakened political figure and in need of larger support for reforms, Medvedev, as a would-be Premier after September 24 2011, moved to create an “Open Government” that people of good will were invited to join in the aim of contributing to the working out of a reform agenda. 138 On 8 February 2012 he signed a decree establishing “a working group for the formation of Open Government” under the direction of S. Ivanov, A. Dvorkovic and M.A. Abyzov with the purpose, among other, of analysing the realisation/effectiveness of the Presidential priorities at all levels and forming groups of experts – including social organisations – willing to advise on social and economic issues. 139 The process of formation of an open government by Medvedev proceeded in parallel, and apparent coordination, with Putin's efforts to broaden his own base of supporters out of his ASI initiative (discussed above) whose meeting in Skolkovo on 13 March was set to precede that organised by Medvedev for 14 March. Both meetings basically discussed the same issues: how to involve business and reform-minded people – as an expression of an emerging middle class – in the work of the government. 140
See on Medvedev's co-optation projects in http://www.izvestia.ru/news/512593 20 January 2012.
See http://news.kremlin.ru/acts/14467/print accessed on 8 February 2012.
See http://mn.ru/politics/20120314/313460226-print.html on Putin's meeting in Skolkovo and. http://www.rg.ru/2012/03/14/medvedev-site.html on Medvedev's meeting the day after where the issue of choosing the best public officials on a competitive basis was raised, both accessed on 14 March 2012.
As this process has developed, it has become apparent that the key dilemma for the leadership is how to build broader consensus to support their projects and priorities – some of which are going to entail pains in terms of lay-offs and bankruptcies if modernisation is, indeed, seriously pursued under financial constraints while simultaneously having no much to offer in exchange to large sections of would-be supporters. Efforts now concentrate on how to co-opt valuable skills through material or moral incentives, i.e. either the prospect of appointment to government jobs or – since the posts available are limited – the promise that their advice will matter in decision-making. 141 This approach is not absolutely new. At the beginning of his mandate in 2008, Medvedev worked out a list of people – called reserve of cadres – to be considered for future positions at the centre or in the regions. It is unclear how useful that list was in practice. In forming the Open Government the issue of valuable human resources to back government projects from within, or close to, the government re-emerged. But, while it is possible to assure loyalty – that is an essential component of a corporatist state 142 – by offering in exchange top positions/status to the comparatively less well-off, 143 it is more problematic to win on-going support from the better-off or academics. The former are in the position to compare government's rewards with private options, while academics may resent being distracted from their regular job to serve the government. That this can hardly be done for free was an issue candidly raised by the Rector of the HSE at one of the meetings of the Open Government chaired by Medvedev. 144
See Medvedev's promise that his experts' council will not be decorative but really influential on decision-making in http://government.ru/docs/19012/ accessed on 22 May 2012.
See in http://www.polit.ru/article/2012/05/21/tk200512/print/ (accessed on 21 May 2012) a revealing article by Tikhon Kraev, Loyalen, nenalezhen. Doverennoe litso V.V. Putina.
See the unexpected appointment by Putin of Igor’ Kholmanskikh, a rank and file worker of the wagon factory in Nizhny Tagil, Uralvagonzavod, the third manufacturer of military output in Russia, that, before elections, openly challenged the street demonstrators against Putin threatening to come to Moscow with all his fellow workers to Presidential plenipotentiary for the Urals, http://www.kremlin.ru/news/15368 and his biography in http://www.ria.ru/spravka/20120518/652152509.html both accessed on 18 May 2012.
See Ya.I.Kuz'minov's objection to the request the experts continue to serve the government with no precise appointment, at the meeting of Open Government with Medvedev http://government.ru/docs/19012/ accessed on 20 May 2012.
Co-optation goes on also in extra government jobs related, one way or the other, with government programmes or state property. By co-opting business people to the government or government projects, such as the billionaire Vekselberg to overview state-led innovation developments in Skolkogo, 145 or the new appointees to the government many of which are rather wealthy according to their income declarations, and by granting support to powerful state managers such as Chemezov (Rostekhnologii), Chubais (Rosnano) and Miller (Gazprom) among many others, Putin has managed to build a self-sustaining political organisation whose backbone is provided by the interpenetration of private business and party/state structures. Under his leadership the Russian corporatism has strengthened and nationalism is becoming a set of values broadly shared also among the opposition. It is remarkable that in a recent opinion poll, Minister of Foreign Affairs Sergei Lavrov and Deputy Prime Minister for Military Matters Dmitri Rogozin have been rated higher than any other politician. 146 While this reflect a perhaps excessive concern for security, the glue nationalism provides for a country that come out of the sudden disintegration of the Soviet Union and an abrupt collapse not only of output but also of self-esteem could be beneficial to growth without necessarily turning into an aggressive mind-set – that should be considered as the worst outcome – if the conditions for growth and stability remain reasonably under control.
See http://www.xn–o1aabe.xn–p1ai/Default.aspx?CatalogId=7971 accessed on 24 March 2010.
See http://www.vedomosti.ru/politics/news/1817527/nepopulyarnyh_smenili_na_neizvestnyh?from=newsletter-editor-choice for an opinion poll carried out on 26–27 May 2012.
The social conditions for the continuation of a corporatist order are there, but need to be sustained. A social order that is not hostile to reforms but also suspicious of abrupt changes, is supported by Russian businesses at large. With the entry into the WTO lobbying for protection and subsidies from the government have increased, but it is doubtful that the government will be in the position to satisfy all demands. 147 Costly social policies aimed to assure for a certain time the support of the working class cannot be sustained if growth and budget revenues subside under the effects of a new international slow-down and/or the need to revise the order of priorities, for instance, shifting resources to the East. Occasional visits by the leadership to large scale companies and benevolent meetings with their workforce have frequently be used to gather support from the regions. But if political reforms – that are under discussion will return power to local governors, the latter will need to respond to local demands and, in turn, strive to win political support if necessary at the expense of federal power.
See an overview of widespread branch complaints and demands in http://www.vedomosti.ru/companies/news/1806994/kollektivnye_strahi#ixzz1wWuYQ59K accessed on 1 June 2012.
While from what is described above the Russian corporatist state appears as a rather solid construct, there are fissures and elements of erosion that under domestic and foreign pressures may lead in time to another state order, hopefully more liberal but possibly also more authoritarian.
Sources of instability
This section will briefly discuss some fissures that can be already perceived in Russian corporatist construct, drawing the attention to topics more immediately related to economic as well as political change discussed in the paper as well as to their interaction. One of the strong points in the model of economic growth chosen by Russia was the focus on (social) stability and (economic) growth. This model, though, can hardly be sustained for long – in an open economy – unless the outside word is also stable. In synthesis, instability may arise out of conflicting aims and elements of social disaggregation among which the following deserve attention.
The very process of modernisation/innovation is one of “creative destruction” necessarily entailing economic and social costs. The issue of lack of legitimacy has been raised for the first time with regard to the elections that have been accused of fraud and manipulation. The economy needs to adjust to pressures perceived rightly or wrongly at the Eastern borders in the light of the growing importance of China. The development of Siberia and the Far East is necessary, but also costly and potentially destabilising.
Either the programme of M&D will be pursued– as it should at least to confront WTO's challenges – or it will be slowed-down/frozen waiting for better times if the looming new economic crisis worsens. In either case it will be disruptive and costly.
Russian corporatism rested for a long time on the mutually supportive relations between businesses and state and overwhelming state management of companies. It occurred – and was quietly accepted – that top public officials also run such companies. Medvedev's decree approved in April 2011 forbidding state officials from holding company board's position and chairmanship produced a first blow to such as corporatist arrangement. Ministers and deputy-ministers nicely installed on the board of a number of companies were removed from 17 state-owned companies by July 1. 148 While more still have to go and formal substitution may not guarantee that independent directors will take their place, the new provisions militate, at least in principle, against corporatism.
See the list in http://news.kremlin.ru/ref_notes/900 (2 April 2011) and comments by Guriev (HSE) and Tsyvinski (Yale) in http://www.themoscowtimes.com/print/article/the-purge-of-the-kremlin-chairmen/434935.html accessed on J7 April 2011.
Instability may also arise from restructuring entailed by M&D government projects. For longer than a decade stability has been assured thanks to growth induced by rising-oil prices. Russia has remained a resource-based economy open to the vagaries of international market. The re-orientation of the economy towards more innovative products should entail a shift in resources and changes in the relative prices of production factors and output that could be highly destabilising in an economy where mobility is low, therefore comparatively more expensive, and more adaptable skills are scarce. Change in relative prices will entail also changes in relative well-being, with the less endowed Asian regions suffering even more compared to the European regions. Regionally perverse demographic trends 149 will also hit the worst off regions by attracting their more educated/skilled labour to better paid jobs in the Western regions. At the same time industrial adjustment towards innovative products/processes will also entail lay-offs in less perspective branches/companies located in the Western countries that – given the skills needed for innovation – will not necessarily find easily redeployment to jobs in the same sector. The whole country may suffer from labour shortage to a greater degree than a free market economy where labour redeployment is made easier by disperse decision making and schedules, with sub-contracting to more agile and small production units taking care of costly components and contracts such as factoring and leasing spreading the costs and benefits of restructuring over a larger section of businesses and services. In addition, changes to the pension age that would help preserve access to skilled labour in some areas are being postponed in Russia adding another obstacle to diversification compared to more advanced market economies.
By 2010 Russia had lost 2.3 million people compared to 2002 census. The most depopulated areas are in the East (see http://en.rian.ru/infographics/20111222/170405728.html. Nonetheless there are some improvements in recent years, to a large extent due to immigration, as revealed by the 2010 census with total population of 142.9 million (about a million more than 2009 estimates) and life expectancy up to 62.8 for men and 74.7 for women approaching the pre-transformation level of 1990, see E. Gavrilenkov, “Demograficheskaya situatsiya v Rossii uluchshaetsya”, podderzhivaya ekonomiku, accessed on 12 March 2012 from http://www.vedomosti.ru/finance/analytics/24772/demograficheskaya_situaciya_v_rossii_uluchshaetsya.
If M&D is slowed down or suspended the whole economy will retrench to the former commodity/resource structure that is also becoming increasingly costly because of more difficult access to sub-soil deposits or because of increasing competition from either developing countries with much lower labour costs or advanced economies successfully adapting to price pressures by shifting R&D to other energy sources or materials. These countries show that innovation feeds itself. That is hardly the case of innovation planned and largely financed from above as in Russia.
The issue of lack of legitimacy raised as such by Mikhail Dmitriev has been preceded and followed by similar grievances concerning the electoral process and the validity of the results. While Dmitriev argued that the leadership had lost its legitimacy basically because of inability to deliver on promises, rightly or wrongly a number of people resented the procedures and results of elections. Many became convinced that elections to the Duma once again had not been “clean” and that increasing “dirt” concerned essentially, if not only, the majority party Edinaia Rossiia (ER), despite this party being the main loser of votes. Compared not only to past elections and to some parties that succeeded entering the Duma, but, more humiliating, compared to expectations of attaining a constitutional majority ER shrunk to slightly below 50%. Demand for transparency and revision of electoral results continued until Presidential voting and beyond. Prokhorov challenged in court the results of elections for President where Putin won with 69.1% of the voting with evidence of wrongdoing in some electoral sites. 150 This paper does not discuss the issue of elections per se. More relevant to the purpose of this paper is that the structure of power and its self-reproduction are being questioned. After a while, the government, unless major mistakes are made, may re-conquer the legitimacy necessary to rule simply because there are no alternatives.
See http://www.vedomosti.ru/politics/news/1833034/prohorov_sporit?from=newsletter-editor-choice accessed on 8 June 2012.
But mechanisms are now in place that are likely to continuously challenge government's “legitimate” decisions from within and from outside. A few examples may help to clarify this assessment. First, ER, as a rather “battered” winner of 2011 elections, needs to re-conquer its own legitimacy in front of its lost electorate. A symptom of how problematic that can be is that the party started questioning its own soul: should the party be left-wing, right-wing or somewhere in the middle of the political spectrum? 151 As a rule, any party before elections tries to position itself on the margin in such a way as to gather more consensus depending of the changing mood of society while keeping its core vision. But soul searching by ER after elections and its uneasy relations with independent deputies that managed to be elected in its lists thanks to Putin's instructions and the successive ARNF's mobilisation suggest that the party has lost cohesion and self-confidence 152 and – with party member competing with each other to win in their own constituencies – may become a more uncomfortable cushion to the government than it was in the past. In this context it will be interesting to see how the leadership will try to enhance the role of ARNF's members. The alternative is either granting this organisation a legal status, or some of his leading figures prestigious posts. 153 But, either way, passing government policies at the Duma will be more difficult and the search for compromise may become time-consuming and distracting from the main concern that should be one of well-conceived structural reforms.
On the need for ER to maintain a clear ideological position but at the same time cover a broad political spectrum and renounce being the party of power, see http://www.ng.ru/printed/267807 accessed on 13 April 2012. On three platforms (liberal, patriotic and social) advantageous for ER see http://www.vz.ru/politics/2012/4/6/555124.print.html accessed on 6 April 2012 On ER going left or right see http://www.izvestia.ru/news/520601#ixzz1qyauvz2f accessed on 2 April 2012. On Isaev pushing for the left, see http://er.ru/news/2012/4/2/isaev-ideologiya-edinoj-rossii-dolzhna-razvivatsya-v-levom-napravlenii/ accessed on 2 April 2012. On the need for a party referendum to decide on what ER should be, see http://www.izvestia.ru/news/520572 accessed on 2 April 2012.
It is worth noting that Medvedev (see http://ria.ru/politics/20120609/669619952.html accessed on 9 June 2012) is dissatisfied with ER's lack of proposals for the new round of regional elections scheduled by end 2012, while ER is once again looking for outside support from ARNF organisations and non-party members, see http://www.izvestia.ru/news/527041 accessed on 9 June 2012. Apparently Medvedev is also trying to convince the youngest members of his government to adhere to Edinaia Rossiia in order to create stronger linkages with the latter's apparatus, see http://www.izvestia.ru/news/527151 accessed on 12 June 2012.
Developments to date suggest that the ARNF is moving to demand a legal status while also trying to conquer seats in the legislative bodies at the regional level, eventually competing against ER, see http://www.vedomosti.ru/politics/news/1843103/partii_putina?from=newsletter-editor-choice accessed on 15 June 2012 and http://www.izvestia.ru/news/527272 accessed on 12 June 2012.
Second, the “Open Government” (OG) may also become an obstacle to reforms, despite good intentions, to the extent that its very structure and duties are fluid and the participants do not know how important their advice will be in actually drafting reforms. Advice by this body or by selected advisors on special subjects is not mandatory by law. The government, or the Premier, may or may not indulge in this form of crowdsourcing. It is unclear what would be the role of other organisations such as business organisation on the one side, and trade unions, on the other within the OG and whether they would indeed have any role. 154 While trying to legitimate the government's composition and policy in the eyes of society, these developments may erode two main pillars of corporatism: on-going support to government's policy by business associations and by trade unions.
See critical comments by A. Shokhin on this structure from the point of view of businesses and their associations. While under previous arrangements, the association of industrialist run by Shokhin had managed to work out together with the MED some provisions, this cozy arrangement may be sacrificed to the need for “ social legitimation”, see http://www.kommersant.ru/doc/1953290 accessed on 6 June 2012.
While M&D programmes and restructuring under tight WTO requirements will introduce per se elements of instability that more spending in social policy may fend only in part, in front of military priorities and unpredictable oil-sustained budget revenues as described above, the costly accelerated development of Siberia and the Far East – that will take long time to deliver more balanced growth – will add own disturbances into the Russian corporatist construct. A new Ministry has been created to this purpose. Igor’ Shuvalov, the current First Deputy Premier estimates that this programme to 2018–2029 may need 2 trillion roubles. The charter capital of the existing Fund for the Development of Far East the Baikal Region set up by the state bank VEB amounts to only 500 million roubles to date. 155 As noted above, Putin reiterated more than once that this programme is a priority. Indeed, in the light of the growing worries for the proximity (in a broader than geographical sense) of China, Russia is rapidly re-orientating her main foreign policy and security concerns towards the East. The combination of costly development programmes and foreign policy concerns in the Eastern part of the country represents a new development: resources and production factors will need to be shifted to the East whilst the rationale of the M&D plans developed un the Presidency of Medvedev was Westward-orientated.
See on the appointment of Victor Ishaev former Governor of Khabarovsk's region to Minister for the Development of the Far East, http://www.vedomosti.ru/politics/news/1764374/dalnim_vostokom_zajmetsya_ministr accessed on 21 May 2012. His biography in http://lenta.ru/lib/14164555/ accessed on the same day.
Either the shift of resources to the East will severely impair Medvedev's M&D subtracting, even more than in the past, legitimacy to his government and to the entire power structure, or a solution must be found by which progress in the western part of the country will have to be left to private undertakings and growing competitive pressure – along a liberal reform path while accelerated development controlled/forced from above will take place in the East along a possibly tightened corporatist model that will need to resort to a mix of incentive and command to speed up progress. Between the either/or scenario – one opening to democracy and reforms – a possibility according to Chubais and a necessity according to Shokhin 156 – the other turning towards authoritarianism, 157 there could be a third option with regions forced to operate under different systems of incentives and/or constraints depending on their location. How can this model be legitimised? By opening comparatively more to the West commercially and socially also via a more relaxed visa system, whist implementing protectionist policies in the East, to the extent allowed by the WTO, via selected non-tariff barriers and tightly controlled immigration policies. The idea that accelerated development will also need a special institutions and rules has already surfaced in the press. The “Chinese threat” until now debated only in narrow circles is likely to become a major topic of discussion in the near term in the aim that nationalism will help accept policies otherwise rejected by most. At the same time, though less evident to the masses, the development of the East, as hinted by Russian experts Barabanov and Karaganov, could help improve the relations between Russia and the US through joint ventures in the exploitation of new energy sources. 158 It is not unforeseeable either that common concerns for the excessively rapid expansion of China help Russian and the US to find a better understanding on other issues related to defence in the West.
See Shokhin in http://www.kommersant.ru/doc/1953290 (cited) and Chubais in BBC Monitoring from Ekho Moskvy Radio 1 June 2012).
Also a possibility under pro- authoritarian pressures from socio-nationalist groups, see Aleksandr Nagorniy, “ Krivaia vertikal’. Kremlyovskaia vlast’ vyrastila sebe mogil'shchika” in http://zavtra.ru/content/view/krivaya-vertikal/ accessed on 6 June 2012.
Oleg Barabanov, “Russian's Far East. The Challenges of the Next Decade” “Valdai Club”, 29 May 2012 in http://valdaiclub.com/asia/43500/print_edition/ for an insightful comment on the need for Russia to develop the Far East that would also help to improve relations with the US. S, Karaganov develops on the subject stressing that any project aiming at developing the Eastern part of Russia must look forward, taking into account the challenges of Chinese rapid industrialisation, and try to lure in investment from highly developed OECD countries, provide the necessary transport and energy infrastructure, as well as preferential treatment for investment, but refrain from approaching this issue as a wall against other countries Eastwards or Westwards, see “Rossia nuzhna esche odna stolitsa – Sibirskaya” in http://www.rg.ru/printable/2012/05/16/stolica-site.html accessed on 17 May 2012.
Concluding remarks
In the aftermath of the 2009 financial crisis Russia has embarked on an ambitious programme of modernisation and diversification focused on new technology and institutional reforms. While institutional reforms, many of them carried out under Medvedev's Presidency, would provide for improving the business environment through a horizontal industrial policy approach, the main focus has remained on government plans for M&D monitored from above. The blueprint for change – Strategy-2020 – developed before the crisis has been revised to take into account the effects of the crisis, tighter financial and fiscal constraints and the need for an evolutionary path to change that cannot dismiss at once, in a few years, the contribution of material resources and energy to GDP growth. New scenarios for growth to 2030 are being drafted with increasing focus on investment in the fuel and energy sector. Among a number of specific reforms, the innovation centre at Skolkovo and the Agency for Strategic Initiative have received strong government backing, though most funds are expected to be off-budget.
Reforms have been carried out from a strong technocratic viewpoint shared by and large by society and with the support of large scale businesses. This is consistent with the structure of Russian corporatist state that developed under the two (2000–2008) first mandates of Putin and survived to date thanks to support from powerful rent-seeking businesses circles and influential sections of the working class linked to large scale companies and state entities. While one cannot rule out specific projects of M&D to succeed under government's pressure and incentives, the chosen path is patchy and costly. It is also unlikely to help modernise the entire economy and become a self-propelling engine for change, unless competitive pressures are let to grow out of further integration into the international economy through membership into the WTO, that is expected to take place by the end of 2012 and the OECD that is to follow. Entry into WTO is feared by many and seen with suspicion by the would be losers in competition.
Interestingly, it is finally, after some hesitations in the past, the government as a whole that supports entry into WTO – despite the concomitant focus on regional free trade area policies carried out from 2008 to date (from the tripartite Customs Union between Russia, Belarus and Kazakhstan to the Single Economic Space from the beginning of 2012 to the Eurasian Economic Union in 2015) – against opposition parties in the Duma and a number of reservations stemming also from the majority party Edinaia Rossiia. The new government under Premier Medvedev is overall new blood and reform-minded. Conservative Putin has kept in the Presidential Administration some of the more experienced and tenacious former ministers. Rather than hinting to parallel governments structures, the present arrangements look much more cohesive and determined to carry forward structural reforms.
The need for foreign investments and support in research and development is finally openly acknowledged by the leadership. Amendments to strict provisions on investment in strategic sectors and legal changes to the status and management of major state holdings point to a certain relaxation of direct state control on production. In addition, by contributing to tighter fiscal balances, the on-going international crisis forces the authorities to accelerate the implementation of market-orientated reforms. The volume of state assets slated for privatisation has increased tremendously. There are plans to open some large scale companies to private investors and in some cases to divest state property completely. It appears that the government is determined to retain control of some strategic companies for a while but will not hesitate to sell large stakes if market conditions become favourable. While more clarity on deadlines and number of assets for sale would be welcome, the current plans clearly represent a major step forward towards openness to FDI and competition.
Pace and intensity of reforms will depend on constraints – available resources and oil prices – and social consensus. While until now extra-state structures, such as Putin's ARNF and the Medvedev's Open Government helped to build consensus and are still considered as important social pillars for government policies, more ambitious goals and change in priorities declined by Putin in assuming Presidency may introduce fissures in an apparently solid state construct. Strong emphasis on the development of Siberia and the Far East, compared to M&D projects by and large confined to the more advanced European regions, will entail a redistribution of resources, capital and manpower, and changes in relative prices within the country, at a time when efforts should concentrate on improving the competitiveness of sectors exposed to the European Union, as the main trade partner of Russia. A conundrum that perhaps could be solved by enforcing two different regimes – a liberal one in the West and one under tighter state administration and control in the East. All in all this might not represent the worst evolutionary way out of Russia's form of corporatism that might, as it currently exists, have become too tight for the whole society.