OREANDA-NEWS.  January 30, 2012. “We need a new economy with competitive industries and infrastructure, a developed services sector and effective agriculture – an economy based on modern technology. We must develop an effective mechanism for modernising our economy and find and attract huge material and personnel resources needed to achieve this goal.”

We are living in a period of radical change in the global economy. Technology is being modernised faster than ever before. Much of what is routine to us today looked like science fiction 15 to 20 years ago. The struggle for global leadership has become more acute than ever before, and we see countries whose standing seemed rock solid giving way to those countries that were looked down on only yesterday. The threat of man-made catastrophes and environmental disasters is greater than ever. But human opportunities have never been greater either. And it is those who make the fullest use of these opportunities that will be the winners.

In these circumstances we must ensure sustainable progressive development of our economy and try to shield our citizens from the hardships of crises as much as possible, while at the same time consistently and rapidly modernising all economic sectors, from the material and technical base to approaches to our economic policy.

Russia’s role in the global division of labour

After the collapse of the Soviet bloc, Russia had to find a new place in the global division of labour, whose main power centres and proportions had developed without it and, worse still, in an atmosphere of confrontation with the Soviet Union. The developed economies had erected barriers around their markets to protect their own interests. Differences in technological standards were an additional problem that hindered integration into the global economy.

But we have nevertheless developed an economy that is now an integral part of the global economy. This has been achieved mostly thanks to our natural resources. Global sales of gas, oil, metals, timber and other raw materials and low value-added products account for over 25% of Russia’s GDP.

Today Russia is dependent on the global economy and has been integrated into it very strongly, stronger than the economies of most other countries.

It has become commonplace to speak about a resource-based Russian economy. The Soviet Union’s self-sufficient and self-contained economy was not designed to work in new conditions. Only the most liquid sectors, connected with the export of unprocessed raw materials and semi-finished goods, survived the largely spontaneous market transformation. In fact, there was a large-scale de-industrialisation, with a loss of quality and the structure of production becoming too simple, which explains our excessive dependence on the import of consumer goods, technology and complex products, as well as on the fluctuation of prices of our main export goods. These are factors over which we have, by and large, no control.

Having an economy that cannot guarantee us stability, sovereignty and prosperity is unacceptable for Russia. We need a new economy with a competitive industry and infrastructure, a developed services sector and effective agriculture: an economy based on modern technology. We must develop an effective mechanism for modernising our economy and attract the huge material and personnel resources needed to achieve this goal.

However, we should not rely on protectionist measures to diversify our economy, and not because we have joined the World Trade Organisation. On the contrary, we joined the WTO because our economy is highly dependent on the external market in terms of both production and consumption. Ultimately, it is people and  companies that pay high import duties. Excessive protectionism invariably leads to stagnation, low quality and high prices.

Time for technological catch-up

We need to find solutions to overcome our enfolding unilateral technological dependence.

No one is going to repeat the experience of the Soviet Union of course. I am referring to the policy of building a totally isolated technology sector as part of its stand-off with the West. As a result, most of our “original” technology, in conditions of isolation, fell behind that of our rivals; this became clear once the Iron Curtain collapsed.

The scenario we have in mind is entirely different. Russia must play a bigger part in the international division of labour, not only as a supplier of commodities and energy, but as an owner of regularly upgraded cutting-edge technology in at least some sectors. Otherwise, we are doomed to deplete our resources by constantly exchanging them for expensive foreign technology to produce consumer goods, materials and pharmaceuticals that we cannot develop ourselves. These technologies will gradually come to make up a greater share of global GDP, while the share of commodities and conventional services will shrink.

To regain technological leadership, we need to select priority sectors wisely. Candidates include the pharmaceuticals industry, high-tech chemistry, composite and non-metallic materials, aircraft manufacturing, information and communications technologies and nanotechnology. And Russia’s nuclear and aerospace industries have maintained their international leadership positions and technological advantages. This list is not closed; more industries may be added, depending on international market trends and, to a large extent, on the initiatives proposed by business owners and workers in these and other industries.

It is often argued that Russia does not need an industrial policy, since the government often selects the wrong priorities and gives preference to the wrong sectors, supports ineffective and inefficient producers, and hinders innovations which would have emerged naturally in a free market environment. It is difficult to argue with these statements, but they are only true with all other conditions being equal. Russia has gone through deindustrialization, which significantly damaged its economic structure. Large private capital is not flowing into innovative sectors because investors are reluctant to take the high risk. We will certainly use tax and customs incentives to encourage investment in innovative sectors. But it will take years for this to have an effect, and it may not have any effect at all if more attractive investment opportunities open up elsewhere in the world. Capital knows no borders. Are we ready to risk Russia’s future for the sake of pure economic theory?

Our decisions to establish large state corporations and vertically integrated holding companies were in fact dictated by the industrial policy priorities: Russian Technologies, Rosatom, United Aircraft Corporation and United Shipbuilding Corporation, and other conglomerates. The idea was to discourage the decline of the more intellectual sectors of national industry, to preserve its research and production potential through consolidation of resources and centralised management. This goal has definitely been achieved.

We had to consolidate those assets, that were officially government-owned but managed disjointedly, and which had often lost all links with their respective research and design centres.

The strategies of the large industrial holding companies were aimed at creating internationally competitive corporations, with high market capitalisation and stable or expanding niches on the global market. It is these corporations, engaged in versatile activities from the most advanced research and product design to manufacturing, supply and maintenance of their high-tech products, that control the global markets for aircraft, ships, computers, pharmaceuticals, medical equipment and other products. They provide the orders for small innovation companies and are taking over successful start-up businesses.

Most integrated companies have so far failed to become globally competitive or highly capitalised, nor are they consistently profitable. We are not going to abandon our projects halfway through. In some areas, like the aviation sector, we have only just managed to complete the difficult assets consolidation process. Clearly the viability of each such project needs to be evaluated. Right now, they need top managers with expertise in the innovative business sphere.

I want to stress that government efforts were focused on restoring Russia’s ability to compete in those sectors which involved only a few players on the global market. This did not mean there was any attempt to suppress private initiative, because there was no such initiative in these sectors. It would be erroneous to draw conclusions about the expansion of state capitalism on the basis of our work to accumulate and restructure assets and get them ready for sale.

We have compiled a plan for the reorganisation of each company and their subsequent entry into the market. Some of them will become public liability companies and their shares will be subsequently sold off. These include the Russian Technologies, the non-military assets of the Rosatom and some other state corporations. It will be impossible to accomplish this objective overnight, but we cannot delay its implementation indefinitely. I think it will be possible to reduce the level of state involvement in some commodity companies by 2016 and to complete the withdrawal from the capital of major non-commodity companies which are not connected to the natural monopolies or the defence sector.

We are expecting Russian capital to take an active part in the privatisation process and the subsequent development of high-tech assets. At the same time, we need to look for customers among global investors who would be willing to invest in the research production base, as well as bring their connections and their position on the major international markets to the table.

The successful experience of economic modernisation in countries like Korea and China shows that a push in the right direction from the government is necessary, and that the outcome from such a push outweighs the risk of making a mistake. It will be hard to implement diversification without a concerted effort. Understanding all the risks of selectivity, we must have a fully transparent policy of choosing priorities and of state support, open to assessment and discussion by competing companies and professional communities.

Competition lies at the heart of the modern economy and it is founded on companies, who develop and own advanced technologies, striving to prevent the users of these technologies from using the so-called technological core. This means the entire technology servicing cycle, not just research and development projects. This is highlighted by the example of Russian companies attempting to buy foreign assets during the crisis. Our Western partners promptly called a halt to proceedings, as soon as talk switched to the purchase of facilities with a complete production cycle (including even in car manufacture).

As a rule, the supplying company usually seeks to retain control over any complicated aspects of servicing equipment and production processes when selling state-of-the-art technologies. Consequently, customers become dependent on the supplier not only in terms of the technology, but economically as well. A country will incur long-term economic losses if it falls behind in advanced technological solutions. This will happen even if the assembly plants are located on its territory. The lion’s share of profits goes to where the head offices, laboratories and design bureaus are located.

That is why developed economies work on the principle of technology cooperation. Their mutual dependence strengthens economic and political stability.