Higher oil prices are not a panacea for Russia. Instead, the country needs a new economic development model that re-thinks and reformulates key institutions without relying too much on centralized state resources.

A view on the Moscow Kremlin. Photo: RIA Novosti

The past couple of weeks have brought some long forgotten optimism to the commodity markets, with oil prices rising above $40 per barrel and some metals like iron and copper having an impressive surge. For Russia, these market turbulences seem to have a special meaning. They are much about solving the nation’s current strategic dilemma. Can Russia count on a return to price levels that would put the country back into the comfort zone? The bigger question is, even if Moscow can – should it?

Russia’s new development strategy

The possible reversal of market trends has coincided with debates over the launch of the process of development of the Strategy 2030 for Russia. A recent economic forum in Krasnoyarsk primarily dealt with discussions and brainstorming on the problem. Some skeptics pointed out that classic strategic planning should be done by a narrow circle of disciplined experts rather than come as a result of an open public event. However, as Vice Prime Minister Arkady Dvorkovitch argues, it is society, not the state, which needs the strategy and thus it is for society, not just the ministries, to take the lead in the process.

 This statement might be a very important shift in the self-understanding of the Russian authorities. In addition, the idea of openly brainstorming elements of strategy at a public event starts to make strong sense.

From state capitalism to “state-as-a-service”?

What makes such an approach so revolutionary? In fact, it is the turn from the idea of “Russia as a state-owned corporation” (inspired by the catchy description of “Singapore, Inc.” in the 1980s) towards the vision of the state as a “service platform” which is open and supportive towards any independent and relatively equal players without interference into their operations.

But what lies behind such a shift in thinking? On the one hand, the state could feel the sharp reduction in resources. On the other hand, it starts understanding that the ever growing direct involvement into the economy through endless creation of corporations and commissions to supervise them is ineffective. Whatever the reason, the effect might be a totally new contract of responsibilities and risks between the state and society in the sphere of the economy.

Up to the current moment, all the attempts to overcome the recession tended to rely on centralization of efforts and had a certain structural focus, the search for new and more effective ways of investing the state-controlled resources into certain industries weighed against the opportunities of the world markets.

The approach of state-as-a-service (or platform) would mean the shift of emphasis towards the institutional aspects of development, reformation and re-creation of the roles, rules and limitations: What should certain stakeholders do and, most importantly, what should they not do?

However, can one seriously count on institutions as drivers of economic growth in Russia? After all, the institutional weakness of the country became a sort of common media obsession in the past few years.

Does Russia have an institutional base?

Despite a great deal of talk about Russia’s institutional ineffectiveness, different international rankings present a more favorable outlook, which seems to be counterintuitive for observers. Indeed, Russia improved its record in a number of international rankings between 2013 and 2015 – 12 points up in the Global Innovation Index, Global Competitiveness Index (+11), Ease of Doing Business Index (+30), Human capital Index (+25).

It is the best performance in comparison with Russia’s peers from the BRICS club that, generally, had the opposite dynamics.  For example, China lost 21 positions in Human Capital Index between 2013 and 2015. So did India (-22), Brazil (-21) and South Africa (-6). Regarding other rankings, neither China nor other BRICS members demonstrated such record as Russia: six points up in Ease of Doing Business Index and Global Innovation Index in the case of China, eight and five points down in the same rankings, respectively, in the case of India.   

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Improvement in the rankings looks like a sign of closing the gap with advanced economies. It is how the EU or the Organization for Economic Cooperation and Development (OECD) countries collectively look like in comparative research: Hitting the top 25 percent or 30 percent on all the dimensions. On contrary, a typical emerging market would have peaks and troughs. China is an example with its 29th place in innovation and the 90th position in ease of doing business.

It was precisely how Russia was moving in the ratings in 2013-2015: not just progressing, but also leveling the profile. Even the acknowledged research on innovations – a recognized weakness of the country’s economy – like Global Innovativeness Index, Bloomberg Innovations Index, EY Fintech Adoption Index all put the country into quite a complimentary surrounding.

Surely, the indices have a certain time lag, usually two years. Thus, the progress we see comes more from the dynamics of 2011 - 2013 than from the past year. Theoretically, the set of ratings, which will be out in the end of 2016, can bring a reverse trend reflecting the dramatic international events of 2014.

Yet even if we assume the certain loss of position the country overall looks a solid mid-range player, not an outsider. It is important that the ratings measure largely the institutions, their existence and their effects. At the moment of the re-setting of the strategic goals it is good to find out that the starting institutional positions are much better than intuitively expected.

How Russia views its own institutions

The domestic Russian discourse draws a largely different picture. While Russia gets many “points” in international research for the penetration of tertiary education and the share of qualified specialists in workforce, inside the country the quality of universities and their graduates is seen with increasing skepticism.

Russia’s innovation indices grow, but they are more accustomed to the stories of successful high-tech entrepreneurs taking business out of the country, while Russian venture capitalists prefer to fund international “unicorns” like Uber rather than home-grown startups.

More examples can be easily brought up, and it seems that there is something bigger than just the media distortion of the picture. There is an underlying fundamental reality, a gap between the quality of the instruments and the results of their application.

If one imagines the economy as a Lego construction, it appears that one has better blocks but fail to assemble them into something stable and useful.

This recognition should not bring pessimism towards the efforts in institutional development. Moreover, it should not lead to the denial of the idea of the state moving into service platform mode.

There is plainly no reasonable alternative, since further attempts to solve the long-term structural misbalances with state corporations and ministries are probably doomed to fail.

With regard to the commodities market optimism of the recent week, the trend up is very slight compared to the distance to the comfort zone required for the “Russia, Inc.” model to work somehow.

The country can only overcome the present recession precisely through re-building of the relations of state and society with the new approach towards the use of the existing resources.

A new perestroika?

Research in economic history shows that the success of the long-term development of any country can not be based on the avoidance of crises caused by external market shocks. These shocks can not be realistically avoided, what matters is how you react to them. The countries that had achieved high growth rates across long-term periods of 30-40 years – like Turkey or Korea or Indonesia – effectively used the externally induced crises as an opportunity to review and restructure the major social contracts.

Such approaches helped to initiate and fulfill the major programs of economic transformation that align the internal possibilities and opportunities to the new international context. An effective transformation of this kind starts with national consensus over the goals of economic development and realistic ways towards them.

What is indispensable now is the firm rejection by the whole of Russian society of the illusion that it is possible to wait for the return to the “good times” and high oil prices. Without this rejection any attempts to restructure and develop will be effectively blocked by public opinion.

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Hopefully, Russia will indeed see the beginning of the creation of the new national economic paradigm. This would not be a painless process for any of the participants, if one remembers the recent opinion poll, which showed 52 percent supporting the planned economy as the effective model.

Yet the world history of the past decades has seen more dramatic economic events than the current Russian recession. The true challenge is not the adverse context of the international markets, but the desire and skill for working within it.

When it comes to Russia, one can get the reasons both for cautious optimism (those listed above) and for deep skepticism. When choosing between the two it is useful to remember that there was hardly a case of successful construction of the future by a society of skeptics.

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.