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Strategies for Russia's Modernization

By Sergei Roy

Here's Vladimir Frolov's question/comment for this week's Russia Profile's panel of experts:

"Russia's President Dmitri Medvedev named technological innovation one of the key priorities of his presidency. A month before his election he outlined his ambitious "Four I's" agenda  which specifically called for weaning Russia away from its dependency on energy exports, a stark contrast to Putin's agenda of turning Russia into an "energy superpower".

"But just three months into his term, Medvedev saw his ambitious agenda derailed by the war with Georgia and the global financial crisis.

"But even in the midst of the crisis, Medvedev kept talking about the need to use this opportunity to retool Russia's economy with cutting edge technologies and stimulate innovation.

"The government's response to Medvedev's innovation agenda has been slow and ineffective. The policy instruments and institutions created to jump-start technological innovation in Russia - like the giant state corporation on nanotechnology or Rosnano (headed by Anatoly Chubais) or the Russian Venture Company (a government investment fund for technological start-ups) -  have so far produced little but bloated administrative budgets.

"Two weeks ago, Medvedev decided that he had to reboot his presidency by getting personally involved in resurrecting the most ambitious part of his agenda. He established the Presidential Commission on Innovation which he would personally chair every month.  The Commission comprises almost the entire Russian Government (with the conspicuous absence of Prime Minister Vladimir Putin and Deputy Prime Ministers Sergei Ivanov and Igor Sechin) and some of the best brains from academia and business.

"This is a legacy thing now for President Medvedev. It reflects his strong desire to actually do something about taking Russia off its humiliating dependency on oil and gas. Breaking the oil dependency has now become Medvedev's sense of his historic mission. He may indeed think that the economic crisis is just too good an opportunity to be wasted to achieve this strategic objective.

"Prime-Minister Vladimir Putin's absence from the Innovation Commission is both a sign of Medvedev's displeasure at the way the government has so far dealt with the problem ("all that we have created in this sphere exists only on paper...") and the first case of Putin's signing off on a major issue.

"Perhaps, Putin is signaling that this is Medvedev's baby now and history will judge him a success or failure on this quixotic endeavor. This sense is reflected in Putin's  acquiescence to lease the entire government machine to Medvedev for his Innovation Project.

"To retool Russia's economy with some of the best technologies the Kremlin has also decided to encourage major Russian companies, particularly state-owned, to make strategic acquisitions of technology-intensive foreign assets on sale now due to the global financial crisis.

"This is reflected in Sberbank's decision to acquire a controlling stake in Opel, a German automaker now on sale by its parent company GM which is facing an almost certain bankruptcy in the United States. For Sberbank and Russia this is an excellent opportunity to buy cheaply into one of the most innovative auto-makers in Europe and a chance to stimulate technology transfer to the Russian auto industry.

"Other acquisitions in Western technology companies are almost certainly planned as reflected in the Russian Government's decision to hire former Morgan Stanley's chief for Russia Natasha Tsyganova to oversee acquisitions of foreign assets by Russian companies.

"Will Medvdev succeed in his drive to make Russia an innovation-based economy? Will he be able to break Russia's heavy dependency on oil? Will the set of policy tools he has chosen to achieve this objective prove effective in Russia's specific circumstances? Will a policy to stimulate innovation require a major shift in domestic policies to make Russia a more pluralistic and democratic society? How effective could be the "innovation by acquisition strategy" of encouraging Russian companies to acquire Western technology intensive assets? Will this require a major shift towards the West in Russia's foreign policy to help smooth the technology acquisition process? And how will the West respond to such an effort by Russia?"

Sergei Roy's comment:

The current "innovation" catchword merely reflects Russia's centuries-old striving for modernization, which has mainly meant catching up with technologically advanced Europe (these days, the whole West). Several leaps in that direction have been attempted, most notably under Peter I, Catherine the Great, Alexander I, Alexander II,  Nicholas II, Stalin, Khrushchev, and, in a particularly caricature form, under Gorbachev, the guy who promised to make Russia's car industry the world's "fashion-maker."

Vested interests like the gas and oil tycoons aside, the need for modernization is clearly realized and championed by Russia's leaders and most of its elite. In this respect there is little sense in opposing Putin's position as the motive force behind the "energy superpower" ideology and Medvedev's "quest for innovation."

At the time the "energy superpower" phrase was coined, I called it gobbledygook in several articles of mine stressing Russia's obvious need to wean itself from its dependence on raw materials exports. There is no gainsaying the fact, though, that energy resources were at that time the handiest weapon in Putin's drive to put Russsia back on the world map. Which he did. The other option - going in for innovation as a means of achieving that goal - would at best be a repeat of Gorbachev's long-forgotten "acceleration" campaign: buying lots of up-to-date, and not so up-to-date, Western machinery to be left rusting in the backyards of antediluvian Soviet plants.

Now that the "energy superpower" status has been achieved, for what it is worth, this country can and should go all out for technological modernization. This call comes from virtually all quarters of Russia's society. The all-important question is, How is that goal to be reached? What specific steps are to be taken, and what forces to be brought into play?

Historical analogies will not help much in formulating the necessary strategy. Peter the Great and Stalin, the two most successful modernizers, had what is known as the "subsystems of fear" and the virtually unlimited slave labor resources at their disposal. Khrushchev and Brezhnev resorted to a mobilization mode that led to certain advances in weaponology and a closely related area, space technology, but  left the populace at large practically destitute, by Western standards. Gorbachev, having failed at the aforementioned technological innovation campaign (just as he had previously failed at agriculture), proceeded to political innovations, with all too well known results - the destruction of the country he had inherited.

Putting more money into industries where technological advances are most needed is one way. Keenly aware - like everyone else - that the country's dependence on exports of natural resources leaves it overly susceptible to sudden drops in world commodities prices, Premier Putin stated in a speech at the end of May that despite budget cuts, Russia would spend over 300 billion rubles ($9.6 bln) in 2009 to support high-tech sectors like aviation, atomic energy, space and electronics.

The key question in this regard is where the money is to be invested. So far, the indications are that the goal is access to Western technology - the thinking, say, behind the purchase of stock in the Opel company. However important and necessary such moves might be, they still leave Russia in the habitual "catching-up" mode of development while doing nothing to encourage "native" innovations - which, in my view, is the only strategy for breaking out of the centuries-old rut.

Another method of dealing with the innovation problem is setting up administrative or, more plainly, bureaucratic structures to initiate and regulate high-tech progress. Both the premier and the president have indulged in this exercise, the latest move being the setting up of a Presidential Commission on Innovation. To anyone who has witnessed the failure of Gorbachev's super-ministries like Gosagroprom, or ventures like gospriyomka, these moves are intrinsically suspect. Any bureaucracy works primarily as a self-perpetuation machine, while progress toward declared goals is but a byproduct.

To formulate an effective strategy for furthering innovation, one must look into the all too obvious causes of the sorry plight of innovations and innovators in this country. The question to be answered above all is, Why do innovators continually flee this country for more favorable climes?

Point one: Russia's economy does not need innovation; it rejects innovation because it is monopoly-ridden. That was the situation in the Soviet economy and it has persisted to the present day. Soviet monopolies were state-owned and the present ones, privately owned, and that's all the difference there is. A monopoly does not need innovations as a means of beating the competition - because there is no competition. Setting up more major monopolies like the state corporations (goskorporatsii) is but another move in consolidating the existing, innovation-unfriendly structure of the economy.

Second, innovation is something that primarily occurs in the real economy, whereas Russia's economy is tilted towards the financial sector. As a species, financiers deal with the assets that already exist, not those that may emerge through innovation, especially considering the specific nature of financial activities in this country. Innovation can hardly thrive in a climate where, say, reyderstvo, illegally or semi-legally seizing and selling assets, brings incomparably greater profit than technological innovation could ever promise.

Third and perhaps most important, there is the pervasive bureaucracy that exacts the so-called "administrative rent" from anything that moves, inventions included. Beating bureaucracy with bureaucratic methods has been attempted time and again in this country - with results that make the very discussion of the subject nigh ludicrous.

There is a lot of verbiage spouted on creating an atmosphere in which invention would flourish. "In the business sphere, the status of the innovator and the inventor must be raised.... A culture of innovation needs to be created," Putin said recently, and I am sure Dmitry Medvedev has also declared something in that vein, on more than one occasion. In this highly desirable culture, innovation will be needed and wanted, not just benevolently encouraged in well-meaning speeches.

To create such a culture, though, the evils indicated above must be dealt with aggressively, and that is a long-term, massive task. Setting up yet another commission as a means of coping with this mission is hopeless - whoever might head it once a month or at whatever frequency.