Main competitive advantages of Russia

From the outside, we have the obvious risk of major spill over from the Middle East crisis (Syria, Iran), which could lead to a destabilization of Russia or worse could drag the country into a war. This is why it is important to stabilize the whole region and avoid pouring oil on the fire. 

There is also a distinct risk, if the Republican candidate in the USA is to be elected, that we will enter a new time of confrontation and polarization. In the long run Russia will be faced too by a long recession time in Europe – its main customer for raw-materials goods. This is raising important issues for its own development.

From the inside, of course we have the constant risk of religious fundamentalism and of ethnical conflicts. But for me the main risk is a polarization of the Russian society and uncontrolled aspiration of the pretending to be middle-class. Let me sum up the problem. There is no middle-class in Russia from a sociological point of view. We have segments of the urban population who are aspiring to live as a western middle-class, but these segments still don’t constitute a middle-class per se. Development of Russia will still be focused on lifting the main majority from the poverty trap. The problem is that these so-called (and self-called) middle-class segments could become instruments in the hands of people of the upper stratum of the society whose interests are clearly threatened by the emergence form poverty of the majority of the population. The contradiction is that the government of course needs the competency of these segments to develop the country but if he listens too carefully to their demand he runs the risk to become captive of interests clearly conflicting with what I perceive as its main task.

This question is pretty strange for two reasons. The first one is that the Russian government has no means to really influence hydrocarbon (and generally speaking raw-materials) prices. The second one is that low and high prices have both advantages and disadvantages. Neither can be seen as a malediction.

We know problems created by high raw-material export prices: an inflow of money destabilizing the exchange rate (over-valuation of the currency), pushing-up wages in various sectors faster than the growth of productivity allows and creating a false sentiment of wealth. You know the saying: easy comes, easy goes. But that doesn’t mean that we have to overlook advantages created by such a situation. The inflow of money can be captured and recycled to foster investments (both public and private) and will enable to balance the budget without increasing too much the burden of taxes on enterprises and the population.

When raw-material prices are low, they can’t contribute to the budget and the burden on enterprises and the population shoulders is much heavier, there is less room for investment, but there is no sentiment of wealth and then less incentive to misspend.

Prices are for now pretty high. Then, the real question lies in the development of a policy consistently and effectively aiming at balancing negative effects of high raw-material prices. Such a policy is to have three main points. The first one is to foster the productivity growth to counter-balance the progressive rise of the exchange rate. Actually Russia had since 2002 a 6% yearly rate of growth in the manufacturing industry, when in most developed countries the yearly average is between 2,5% and 3,5%. It is important to maintain this gap of around 3% a year. The second one is to foster the use of raw materials by the Russian industry to increase the value-added content of its production. The third one is to exert some pressure and surveillance on financial markets to avoid any process of massive speculation and keep the re-evaluation trend under control.

To some extent we are seeing right now part of these policies implemented in Russia. What is lacking is a some kind of institution to promote a coherent way of organizing these policies and to make sure they are pursued with the necessary consistency.

Actually, it depends of the situation. If you are expecting a major crash in following years, there is a strong argument to save. The same applies if you are expecting the extinction of your raw-materials resources.

However the necessity of developing investment will be felt whatever the scenario, and in normal time this is to become the number one priority. If we look to the present Russia’s situation it is obviously clear that investments are to be a high priority for three reasons.

The first one is the situation of decay of a large number of infrastructures. It is raising the risk of major industrial or technological accidents. A major budgetary effort is needed to cope with such a situation.

The second reason is the necessity to improve the education system in Russia. Economic development is asking for higher and higher levels of knowledge, competency and skill. Education is to receive large investments, not just in its higher end, universities, but also in the primary and secondary education where the situation is still problematic. Research also is to be largely funded with a balance to be found between fundamental research and applied research. Japan is spending more than 3,5% of its GDP in research and development, Germany slightly less than 3%. As Russia needs to catch up in this field you could figure out the level of investment needed.

The third reason is the need to develop high value-added and high technology sectors in the industry. These sectors are to need a sustained demand to develop, and only the government during the initial phase could provide for such a demand.

The question is badly coined as institutional development is a perquisite of social stability. To a large extent, and one could go back to John Commons works or even to François Guizot to find good and strong arguments on this point, institutions are developing because you have important social conflicts in a given society. Institutions are the unintentional by-product of social conflicts resolution.

Now, you have too in the Russian tradition a confusion developing between institution and reform. The tradition of "top-down” reform, from Peter the Great to the 1990’s has frequently created huge social conflicts and destroyed (and not improved) the institutional system. In this last meaning, we could see of course an opposition between some kind of reform and social stability.

The main problem with the top-down authoritarian reform tradition comes from people believing that they know better than the society what the society needs. This is the shortest way to Tyranny and ensuing social disorders and troubles, something Russia would be better-off without.

In the short term, main competitive advantages of Russia are a large reserve of raw-materials, low internal energy prices, and a relatively well educated work force. For the next 10 to 15 years, it is important that Russia develop its competitive advantage in work force, both by improving its educational system and by developing skills and competence. These competitive advantages are making a strong case in favour of the development of a large manufacturing industry in Russia. But this task would imply controlling the exchange rate to avoid over-valuation and some protections from imports to provide incentives for foreign companies to produce in Russia what they could not any more export toward Russia.

The Russian leadership seems to me up to its task. That does not mean there are no mistakes or that everything is perfect. There are certainly a lot of things in due need of a fix in Russia. But there is a pragmatic process of corrections and adjustments. And there is certainly what we could call a "vision” of Russian future. Now if we look at a world level the picture is much less rosy. Not that some leaders are not intelligent and clever men and women. Nobody dispute that Mrs. Angela Merkel or MM. Hollande and Obama are intelligent, well educated and have a good knowledge of the outside world. But either we have someone who is much too inclined to deal with short-term issues and consequently is losing the global picture (Mrs. Merkel) or who is prisoner of very powerful interest groups (Mr. Obama) or who sees all too well problems and risks linked with various decisions and is consequently unable to make any (Mr. Hollande). We have people with all the needed qualities to be good advisers of a leader but none to lead themselves. The same can be said of the Italian Prime-Minister, Mr. Monti, a good economist and a good bureaucrat but not a man with a vision or the charisma necessary to pull Italy out of the stagnation the country knows for nearly 10 years. The situation is even worse with leaders of EU institutions. Mr. Barroso, for example, has a pretty limited understanding of the situation.