Exposing Russia’s Potemkin Modernization

Vladislav Inozemtsev, a professor of economics, director of the Moscow-based Center for Post-Industrial Studies and editor-in-chief of Svobodnaya Mysl, writing in the Moscow Times:

The entire discussion of how to modernize Russia has developed in a rather strange manner. In most countries that have undergone modernization, the process involved accelerating industrial development, increasing the level of integration into the global economy, exploiting competitive advantages and enacting political reforms as a prerequisite to economic growth.

Everything is just the opposite in Russia today. Rather than strengthening the country’s highly uncompetitive industrial sector, the authorities have focused on creating an innovative “smart economy” from the top down. Moreover, instead of developing sectors with products that enjoy broad market demand, Russia’s leaders are fixated on reorganizing the space and nuclear industries, two fields that in all other countries depend on government support for their existence. And even when it could significantly reduce expenses for domestic firms by regulating the price of the raw materials and energy that Russia has in great abundance — thereby giving the country a competitive edge analogous to China’s cheap labor — the government instead raises those prices to world levels.

This is how the authorities turn Russian modernization plans into another illusion. Plans to develop nanotechnology under the aegis of Anatoly Chubais and Rusnano or to build an “Innovation City” according to Kremlin deputy chief of staff Vladislav Surkov’s vision are both classic examples of siphoning away huge sums from the federal budget with little or no results to show for it.

The fundamental problem in Russia’s approach to modernization is that it doesn’t seem to understand — or at least it blatantly ignores — the fact that you can’t have a centrally planned innovative economy. Such economies only appear as a result of real-sector demand and competition among numerous researchers and engineers striving to create something new and to benefit financially from their efforts. Nowhere in the world has a Silicon Valley blossomed because of decrees issued by bureaucrats, even if the decrees are backed up by government financing.

And that is not the only misconception. The liberal Institute of Contemporary Development recently issued a report titled “21st-Century Russia: Reflections on an Attractive Tomorrow” that emphasizes the importance of democratic institutions as a necessary prerequisite for economic modernization. But the vertical-power structure that Prime Minister Vladimir Putin has created is dominated by corrupt and incompetent bureaucrats and continues to be the primary obstacle to Russia’s modernization.

The country’s big push toward modernization started when President Dmitry Medvedev took office, but it is becoming clearer with every passing day that his modernization visions are illusionary. Even more depressing is the fact that some former Soviet republics have managed to formulate constructive modernization plans. The semi-authoritarian regime of Kazakh President Nursultan Nazarbayev is promoting a program to achieve an “industrial and innovative breakthrough” that emphasizes the industrial component. In Ukraine, former presidential candidate and potential prime minister Arseniy Yatsenyuk built his platform on the idea of a “new industrialism.” Both programs appear to be realistic in contrast to Russia’s dreams of nanotechnological miracles.

There is only one path Russia can take if it is serious about modernization. That is the path of industrial revival based on Western technologies, the rapid liberalization of the economy in combination with gradual political reforms and a fundamental rapprochement with Europe and the United States. Those are tasks requiring political will and competency, not demagoguery, populism and pie-in-the-sky dreams. Unfortunately, neither the authorities nor the opposition is ready to implement these reforms and changes in policy.

This is why modernization in Russia remains nothing more than a empty slogan. When Putin returns to the presidency in 2012, we won’t be hearing the word “modernization” anymore because Putin’s overly vertical political and economic models are completely incompatible with modernizing anything in Russia.

15 responses to “Exposing Russia’s Potemkin Modernization

  1. Weren’t the subdisized prices for energy for industry in Russia the main obtacle for their WTO-membership? And now that they decided that they’ll try to enter WTO as a custom union with Belarus and Kazakhstan which will take years, they also get rid of the cheap energy? Where’s the logic? Ou, right, it’s Russias economic policy, the black hole of logic.

  2. President Medvedev underlined a multi-billion rouble commitment at an international nanotech forum. According to the president, 318 billion roubles (around US$10.5 billion) will have been allocated to the industry by 2015.
    Despite promising ready funding for those with ideas, the State Nanotechnology Corporation has yet to allocate all of its money. Moreover, while billions of dollars seems impressive, other countries are still spending more. A pessimistic Mikhail Ananyan Head of National Nanoindustry Association recently said, “We were too late on the nanotechnology scene – governments were giving funding when we could not afford to,” said Ananyan. “We are not just behind the leaders, but those in the second tier. And the gap is getting bigger, not smaller.”

    Russian Nano tec openly admits that their current technology is 2 or 3 generations behind the world leaders USA, Japan, South Korea, and EU, now that’s anywhere from 5 too 10 years, And it might as well be 500 years. Who hasn’t bought a brand new mobile phone then a year later bought a new memory card and found out its no longer compatible with our 1 year old mobile, this is a fast paced industry,

    Russia has a State Nanotechnology Corporation, with the emphasis on “state” this fledgling venture is already bogged down in red tape and corruption, unless Russia fundamentally modernises the way it does business this corporation hasn’t got a snowballs chance in hell of competing in this cutting edge fast paced industry, they are pouring money down the drain, Russia is not even in the WTO even if they came up with an idea ahead of their competitors it would take so long to get to market the idea would have been replicated and on sale before the Russians could draw breath.

    Russia’s State Nanotechnology Corporation only available market is within Russia itself, now Russians are patriotic but they will not buy goods that are years behind foreign competitors, a prime example is the car industry, Russians have shown that they will not buy shoddy unreliable home-grown cars from dinosaurs like Alta-vaz preferring German, French, Japanese and US quality,

    Russia will continue its inevitable decline until the state “backs off” and privatises the bulk of the 60% of the economy it now holds prisoner.Its Russias only chance of unleasing its potential, but with Putin holding the nation in his death grip …forget it.

    • The Russian business environment is still immature, and there’s no question that corruption remains rampant – Putin himself acknowledges it is worse than ever – but I would dispute that Russian decline is inevitable. Recent American experience strongly suggests that privatisation without commensurate government regulation is not the panacea it is often perceived to be. Economic collapse, anyone?

      The foreign-investment sector needs work. Foreign companies are reluctant to sink money into Russia’s undeniable potential (owing to generous natural resources and a small population) while the government continues the simple bait-and-switch game of waiting until a foreign investor has sunk substantial funds into research and development, and the process is all but complete, then seizing and nationalizing the company. That really only works once, and while the domestic owners might chuckle among themselves over their cleverness, the damage done by the example costs much more in the long run.

      Bitter experience frequently reminds that the choice is often between the crooks and rotters who somehow remain charismatic and dynamic leaders, and the ragged homespun rebels who capture the imagination of the downtrodden, but are for one reason or another unable to lead effectively. Perhaps that’s because they’re at their best when they’re in protest mode. Lech Walesa serves as an object example: the West poured considerable resources into his Solidarnosc movement, and he had the will of the people behind him, but the leaps of imagination that might have made him an effective governor proved beyond him. He was unable to make the transition from insurgent to ruler.

      Give Russia time and encouragement; the world’s great industrial and technological powerhouses did not achieve that status in little more than a decade. There are hopeful signs – the production of Russia’s first domestic hybrid auto for market, investment in infrastructure of the gas and oil industry, Putin’s threats to fine oligarchs who do not reinvest some of their ridiculous profits in the country and the improvements made in advance of the 2014 Sochin Winter Games, which could serve as an example of the country’s capability to improve infrastructure, transport and standard of living when it has the incentive to do so.

      National pride is indispensable to achievement. Pouring ridicule upon it merely encourages Russia toward other spheres of influence, rather than toward useful partnership. What is China, the emerging superpower, gobbling up at a horrifying rate? Its own natural resources. How much more of an economic juggernaut would it be if it could rely on the energy and natural-resources supermarket next door? Only ancestral mistrust prevents it. Is it in the West’s best interest that China’s explosive growth be restrained? You be the judge.

      • Russian business environment is not just immature, but the product of its own destructive proclivities.

        The middle class and aristocracy was destroyed by communism. Moscali had to go out and eat up all their neighbors to survive.

        At least the Chinese are doing it in a workable manner, so that their products (not just their weapons) are highly competitive on the worlds market.

        Meanwhile Moscow threatens to put nukes on Polands doorstep in Kaliningrad and has these frozen conflicts all over and just created another.

        There is no positive trend as seen, when the shiftless savoks invaded Georgia, which was doing fine on its own and making headway.

        There is no stopping China from eating Moscow’s lunch. Forget about it, the US should just get the hell out of Afghanistan and let it go.

        Filthy and immoral RaSSiyskis only trade weapons for Dope there, and it deserves to go down if this continues. Eight years is to long to train Afghan Police. Afghans just want to be left alone. The US cannot afford it anymore than Savokia could.

        Roosha is already gone to the dogs. Saving the decent specimens would require another revolution and won’t be long in coming.

        Change cannot be peaceful as any Rooshan Riot never is. European and Western Civilization’s survival is more important than proping up Putin’s gang.

        The Rooshans can protest but they already know the value of good breeding in this study.

        • Pssssst! Georg! Don’t use “Arms Marketer” as a cudgel to beat nations with whom you disagree, at the risk of alienating those you favour. The one you currently favour is the world’s largest arms dealer.

          • OK Mark, but it is Not the same when supplying weapons to drug dealers, in Afghanistan, to buy drugs that are used on your own people in the streets of Moscow, is it?

            • No, you’re right about that. Although it is a common tactic for many governments, not all of them autocratic ones, to funnel funding to drug dealers and criminal elements in countries that you wish to destabilize. But you’re quite right that it’s a despicable thing to do, no matter who is doing it.

      • Mark, you said Russia should be given “time and encouragement” and the “world’s great industrial and technological powerhouses did not achieve that status in little more than a decade.” Well, Russians frequently tell us how great their achievements are, and how life in Russia is as good as in the West, and how they have everything, and how all their stuff is best, science, culture, art, language, food, everything except public restrooms.

        But seriously, I’d say, it’s not true Russia has not had enough time. It’s has been almost 20 years since Gorbachev dissolved the U.S.S.R. In such a time span, South Korea developed from a peasant third world country in the modernistic industrial and democratic powerhouse that it is today. So did Taiwan. So did Singapore. And there are other examples, you can think of some yourself.

        As to the lack of “encouragement,” are you kidding? Russia is treated by the West like a bride before the wedding night.

        She was made a member of the G-8. What is this but encouragement? You don’t think that Russia really is the 8th most developed country in the world, do you?

        Russia got loans from the West, that’s another example of encouragement.

        Her threats against her neighbors are routinely overlooked and disregarded by the West. Her cooperation with terrorist entities (Iran, Syria, Hamas, etc.) is glossed over and not taken seriously. France agrees to sell her powerful naval weapons. Aren’t these signs of encouragement?

        The West allowed investments in Russia. Aren’t these signs of encouragement? How would they explore all that oil and gas without Western assistance? Making holes in the grounds with picks and shovels and pitchforks?

        Finally, I don’t understand why you think that “Putin’s threats to fine oligarchs” who refuse to invest in Russia is a “hopeful sign.” I think it’s a sign of corporate state, also known in history as Fascism. Mussolini did the same in his day.

        If Russia has free society and economy, as she frequently boasts, then it’s not Putin’s money and none of his business how private persons invest them. It’s their money!

        I understand that they of course stole a lot of that, but I thought it was agreed in Russia to move on. Otherwise, if they are required to use their money as directed by Putin, how is that different from confiscation.

        Maybe they deserved that, they are thieves after all. But then, Putin should come out and pronounce it loudly, instead of lying and hiding behind the facade of “capitalist” economy.

        • These criticisms are sensible and well-supported. It’s true that some Russians do brag about Russian achievements, but I’ve found from those I know that that’s simply a result of the way they were taught. The USSR was a dispenser of domestic propaganda second to none, as their relative success in selling communism to the population attests. There was just enough good to the ideal to make it attractive, but it should have been obvious that it would require 100% commitment to realize anything like success, whereas the probability that freeloaders would use it as an excuse to reap a reasonable standard of living while contributing nothing and the corrupt would use it to seize advantage made failure only a matter of time.

          Still, it would be difficult to argue that Russia then is preferable to Russia now, at least from an international standpoint. Both Singapore and South Korea had much more incentive to develop into industrial movers and shakers, not having the option of relying on their natural resource base, neither having aspirations to be a world leader in anything but a fairly narrow industrial/technological field and both enjoying broad Western acceptance as trading partners. In the case of South Korea, its rapid development owed much also to Western interest in using it as a counterbalance to the North. With the right approach, Russia could serve a similar function as a counterweight and limiting force on China. Nobody needs reminding that China, although modernizing on every front (except perhaps human rights, which enjoys neither the same support or the same popularity as it does in the West) at an enviable speed, remains Communist and ideologically opposed to Western ideals.

          You’re also right that it’s none of Putin’s business how Russia’s biggest profiteers invest their money. However, he comes under constant criticism for not reining in the oligarchs, and arguably this is a wise use of his semiautocratic power. By demanding they reinvest a portion of their profit domestically, he forces them to assume a joint responsibility for Russia’s economic success, as they will not otherwise receive a return on their (forced) investment. It’d never work in North America, and it may not work in Russia either, but doing nothing is not an option.

          Putin didn’t attempt to justify it from behind the facade of capitalist economy – they were summoned for a one-way conversation, he even threw a pen at one of them, and the substance of the exchange was broadly published in Russia (see http://www.rbth.ru ).

          Yes, the West does invest in Russia, although some of that is by dint of necessity owing to their status as an energy producer, and with considerably greater caution after having been burnt by the unscrupulous Russian practices I mentioned earlier.

          I’m perfectly ready to acknowledge Russia is a fractious and prickly potential partner. I’m simply arguing that it is vastly more to the advantage of the West to encourage positive development in Russia as a partner than to mock and ridicule everything it does, thereby encouraging them to position themselves as an enemy. The West has a great deal more experience at gaining advantage while appearing to be merely pursuing friendly mutual interests, and there’s no reason the West could not prevail here also if they work smarter instead of harder.

          • You are well-intentioned Mark. But you are naive. Russia is an enemy of the West, plain and clear, or at least its current regime is. Russians proclaim they don’t need Western democracy or freedom. To me, that’s all we need to know.

            Russian public does not appear concerned that they live under a dictatorship, perhaps a milder kind compared to what they were used to, but a dictatorship nonetheless. They overwhelmingly approve it and they don’t want anything else (of course there are dissenters as always).

            So, if their paramount leader tells the oligarchs to effectively serve as agents of the state, how is it different from outright nationalization? Perhaps, different in form but not in substance.

            How under these circumstance are they going to develop anything, let alone a high technology industry? Some smart oligarchs will flee and take their cash with them. They are not going to wait and see if their fate is going to be the same as Khodorkovski’s.

            Some other moneybags will fade into background. Very few will risk their money and perhaps liberty or even life trying to develop new industries. They now know if they try and fail, the consequences to them may be very severe, even deadly. Do you think there are enough brave men who would like to find out what those consequences may be?

            It will be up to the foreign investors or to the state, then, to develop new industries. I don’t see many foreign investors lining up, and we know from the lessons of the past that their state cannot make anything, other than weapons and space programs.

            • Oh, I don’t know….I’ve been around awhile, and have seen a good bit of the world in 30-odd years of professional travel. I think I’m more cynical than naive.

              Forgive me, but isn’t it a trifle narrow-minded to proclaim an entire country your enemy simply because they will not accept your style of government? Perhaps they have all the democracy and freedom they want. Forgive me once again, but while it is certainly noble to come to the aid of a country who begs for help in becoming democratic, it’s just a trifle bigheaded to assume on the part of the populace that democracy is just what they need, whether they want it or not. Doesn’t the United States’ own Declaration of Independence hold that “all men….have certain inherent rights….namely, the enjoyment of life and liberty …and obtaining happiness and safety”? That means all men, not just all Americans. Perhaps the Russians are quite happy with their lot in life. On the face of it they have a democratic government – while higher office might be obtained by coercion and intimidation, the same conditions prevail in Iraq, and the United States is not only proud to recognize Iraq as a democracy, the United States is prepared to give them as long as they need (apparently under some degree of foreign military occupation) to get it right.

              Whatever you choose to call the Russian style of government, it is markedly an improvement on Communism, because the goal of Communism is world domination. That’s apparently the goal of democracy, too, but we have more benign feelings about that, because it’s our system.

              I’m afraid I can’t see a parallel at all between forcing the nation’s richest citizens to reinvest some of their profit nationally, and nationalization. The two are different in form, substance and in every other imaginable respect. In the former case it proscribes apportionment of private wealth to benefit the many, while the latter proscribes government takeover of an entity so that it falls under government ownership, usually financed with taxpayer funds and benefiting the few. If you force the president of GAZPROM, for example, to reinvest some of his profits nationally, everybody benefits to some degree. If GAZPROM were a private company (it’s not, the controlling interest is held by the Russian government) and the government nationalized it, the taxpayer would have to assume all the company’s debts and associated risks. Putin’s method is better, because only profit has to be reinvested – the government accepts none of the risks associated with speculating and making money.

              The incentive to develop new technologies remains, because the more profit you make, the more you get to keep. As I pointed out in an earlier post, Russia remains a world leader in oil-industry technology and medical procedures. They had the fastest fighter plane in the world (the MiG-25 FOXBAT) when they were still putting airplanes together with rivets. Their current generation of straight-running torpedo, the Skhval, blows its own exhaust out the nose and drives through the resultant curtain of bubbles, and is thus able to achieve cruise-missile speeds underwater, when torpedo technology had hit a wall and the speed barrier just could not be pushed further. Granted, that’s military technology, but it serves to illustrate a pure leap of thought.

              Igor Sikorsky designed the first successful helicopter, on which all further design was based. Nikolai Bernardos is the co-inventor of the modern welding apparatus. Vladimir Zworkyin invented the iconoscope, an early television tube (contrary to popular legend, Russia did not claim to have invented the television, only this component part, which was patented as a “television system”). The plaster cast was developed by Nikolai Pirogv.

              I also wouldn’t characterize the oligarchs as “brave men”. Usually they were just greedy opportunists who took advantage of the confusion caused by the breakup of the Soviet Union to cut themselves a nice big slice of the pie. Rich beyond belief, many of them have no talent at all as leaders or businessmen, they just saw an opportunity to make a lot of money, took it and are absolutely ruthless about keeping it. An ordinary leader wouldn’t be able to get a dime out of them. But they fear Putin.

              • Your message is so long, I don’t even know where to start. But I think you have some emotional attachment to Russia if you don’t see what’s going on.

                That they don’t want democracy is clear, and it is certainly their right to choose whatever system they want. They unquestionably have a dictatorship. No free elections, no free press or speech, no independent judiciary, one party system based on personal loyalty to the paramount leader, no respect for human rights — am I right about all of these? A formal appearance of democracy is not enough, you know that — even Iran and Iraq that you mentioned are on their face democracies, but we know what they really are. Russia is in the same group.

                OK, so they don’t have and don’t want freedom and democracy, fine, as I said it’s their right. I agree with you on that. And they are definitely happy to live under the iron yoke.

                So, if we agree that their situation is as I described, they should stop lying that they live in a free and democratic country equal to yours or mine. And they stop demanding international respect or that other countries ask their permission what international relations and with who they may have. Russia simply has to know its place among moderately developed third world countries, but she does not want to. Russia is akin to Mexico or Turkey or Thailand or maybe Malaysia, but did you ever hear those countries make demands that the world listen to them. They know their place and Russia should too.

                And finally, I don’t agree that what they have “is markedly an improvement on Communism, because the goal of Communism is world domination.”

                That’s exactly their goal — to achieve such a domination. Perhaps, they postponed it and perhaps they wear a different mask. They have just a different form of totalitarianism. How else do you explain their associations with Venezuela and Iran and Nicaragua and Hamas? What a great group of friends indeed? How do you explain their aggressiveness towards Georgia and Ukraine, or their gas blackmail of Western Europe. How do you explain all those chauvinistic statements coming from the Kremlin, to say nothing of violent racism? Combined with a Mussolini-like system, they represent a great danger in my view.

              • Now, as to your other points, I think Sikorski was an ethnic Ukrainian not Russian. But whatever he was, I think he lived in the U.S. when he developed his helicopter. Anyway, nobody denies his or Zworykin’s achievements but that was about 80 years ago. And while I never heard of Nikolai Pirogov, the invention of the plaster cast sounds like something from the 18th or 19th century. What have Russians invented lately?

                As to those oligarchs, I have no sympathy to them, in my mind they are criminals and thieves (and I include the imprisoned Mr. Khodorkovski in these group of criminals).

                However, Russia cannot have it both ways. Either declare them criminals, confiscate their money, and try to devise a better process for privatization. Or, as seems to be the case, agree that they can keep their money, but if so, that’s THEIR money, not Putin’s. Normal market economies do not direct people how to invest their money, forcing compliance by threats, intimidation or worse.

    • Good reading!

  3. This is what Belayev had to work with in the beginning. While his brother died in prison.

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