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The Russian Military Industrial Complex: An Unresolvable Discrepancy.

Posted by democratist on March 15, 2011

15th March 2011,

In our last article in our “Democracy and Innovation” series we looked at Crane and Usanov’s analyis of the relationship between Russian government policy and the main internationally competitive high-tech sectors of the Russian economy.

Among their (very measured) conclusions were that current policy to encourage growth in these industries through the creation of state-controlled agglomerates had not been effective, and that a favourable outlook was largely dependent on the extent firms were integrated with, and open to, the global economy. However, prospects for the Russian defence industry were limited in this regard, precisely because of its insularity.

In line with the “liberal” innovation model outlined by WolfDemocratist maintains that, while the Russian state is continuing to make a concerted attempt to drive innovation through increased funding and R&D, contemporary corruption, lack of competition, problems with the rule of law and government accountability have all had a demonstrable impact on the ability (and willingness) of many Russian high-tech firms to innovate, commercialize their ideas, expand, and reach their full potential.

With regard to the military-industrial complex more specifically, in an article published todayin the World Politics Review  Dr. Richard Weitz (also of the Hudson Institute) provides some additional and very relevant detail about how such problems are affecting Russia’s current proposed, decade-long $650 billion rearmament programme (supposedly set to include the procurement of 100 ships, 600 aircraft, and 1,000 helicopters).

Here’s a sample;

“….although Russian designers can still develop first-class weapons, Russian defense companies — which have yet to recover from the traumatic disintegration of the Soviet military-industrial complex — remain unable to manufacture large numbers of some advanced systems. As a result, the Russian government has made the unprecedented decision to purchase expensive Western military equipment.”

“…the record of recent SAPs [State Armaments Programs] is not encouraging. They all envisaged providing the Russian armed forces with hundreds of new weapons, but their execution was undermined by insufficient financing, the inefficient and ineffective Russian defense sector, and pervasive corruption.”

“Estimates suggest that one-third of Russia’s defense companies are bankrupt, while another third desperately need an infusion of financial and human capital to modernize their aging production lines and work force. Pending modernization, many defense firms will prove unable to design and produce sophisticated weapons without frequent cost overruns and production delays.”

“…according to some observers, corruption absorbs as much as half of all Russian defense procurement spending due to the irresistible opportunities for graft that exist behind the veil of military secrecy. Serdyukov’s surprise 2007 appointment as Russia’s first civilian defense minister reflected the Kremlin’s hope that, as an outsider, he might be more willing to tackle defense inefficiencies and corruption. Unfortunately, some bad practices have become so ingrained in Russia’s defense sector that they could take more than a decade to root out. “

From Democratist’s perspective, what is most immediately interesting about what Weitz says is that, while Russian weapons designers are apparently still coming up with the goods in terms of innovative ideas, the state of the country’s defence industry is such that it is unable to reproduce a proportion of the required systems in large numbers.

We see this inability as being at the core of the Russia’s “innovation deficit”; it isn’t that the ideas and the creativity aren’t there – they are. But the unreformed Soviet-era military-industrial complex lacks the competition, investment and flexibility that an advanced industrial economy – and an advanced defence industry require.

In our opinion, this unresolvable discrepancy between design and finished product, between planing and implementation, and subsequently in Russia’s military position in relation to the West (and therefore also the desirability of her military exports) can only become wider in the future, given the current politico-economic system.

Posted in Autocracy and Innovation, Russian Corruption, Russian Economy, Russian Military, Russian Politics, Russian Science | 3 Comments »

Policy and innovation: A more detailed view.

Posted by democratist on March 14, 2011

March 14th 2011,

So far in our “Democracy and Innovation” series, Democratist has outlined the liberal case that innovation generally requires the development of a creative and competitive culture, which must in turn be based on democratic government and the rule of law; we have briefly explored Niall Ferguson’s argument that the command economy led to Soviet economic stagnation in the 1980′s which, combined with an unsustainable levels of defense spending in order for it to be able to compete with the (more innovative and competitive) West, drew it inexorably towards collapse;  and we’ve looked at Kolesnikov’s argument that Medvedev’s Skolkovo project will not solve Russia’s underlying problems in relation to innovation, because it does not include an element of political, or systemic economic reform.

Now let’s take a closer look at Russian government policy and its relationship to the most important internationally competitive sectors of the wider Russian economy, so as to establish a more detailed picture ofthe key problems facing these sectors, and how they have been affected by the way the country is governed.

A good starting point here is Crane and Usanov’s article “Role of High Technology Industries,” in Aslund, Guriev & Kuchins’ (Eds.) Russia After The Global Economic Crisis. (CSIS, 2010).

Crane and Usanov begin by noting that both Putin and Medvedev have envisioned increased output from high-technology industries as driving Russia’s future economic growth, and (thanks to the massive and unsustainable funding highlighted by Ferguson) that the USSR passed on to Russia a large cadre of well-trained scientists and engineers, and a highly developed system of national laboratories and research institutes, capable of building sophisticated machinery, such as the world’s first satellite (Sputnik), nuclear weapons, advanced fighter aircraft and intercontinental ballistic missiles.

However, the number of active research laboratories has fallen sharply since the Soviet period, and the aging Soviet-era industrial base still forms the core of Russia’s current high-tech industry: Software is the only substantial high-tech sector to have emerged in Russia since 1991.

Crane and Usanov’s article explores the current state of Russia’s software, nanotechnology, nuclear, aerospace and armaments industries in turn;

Software

Software has been a post Soviet success story, but is still operating on a small-scale (gross revenues of about $5.5 billion in 2008 compared with $60 billion in India). It benefits from its young workforce, low entry costs, absence of legacy assets and small size (as the government has not yet bothered to regulate it).

However, “…the greatest barrier to the development of the industry is thuggery and corruption that Russian entrepreneurs face from the police and other government officials. Bribing inspectors, tax collection agents, and the police places a substantial burden on companies…. This climate of intimidation and fear discourages entrepreneurs from expanding their businesses and puts a premium on moving assets outside of Russia.”

Nanotechnology

This field is considered a key technological priority by the government, and several well-funded programmes have been set up by the state to support it.  Russian scientists have been relatively productive in theoretical research, but performance has not been as strong at the commercialization stage of the innovation process. Russia has only produced 0.2% of the total of global patents related to nanotechnology (2008).

Nuclear

In 2007 the civilian and military sides of the industry were integrated into the State Atomic Energy Corporation (Rosatom – $11.7 billon of sales in 2008). Rosatom’s subsidiary Atomenergoprom is one of the world’s largest nuclear companies, and Russia has a  strong competitive position in the nuclear fuel cycle. The Russian state has continued to invest in R&D, funded construction of new plants domestically, and provided strong political support for projects abroad. Nuclear power and related industries are one of the few high-tech sectors in which Russia has a serious R&D base and can compete on the world market.

Aerospace

Russia remains a world leader in the production of space launchers, and now the US Shuttle has been retired, Russia’s Proton rocket remains the only well-tested rocket capable of ferrying people and heavy payloads into space. By contrast, Russian communications satellites have not been competitive internationally. Wider use of GLONASS, is hindered by inferior quality and the higher cost of receivers. Other satellites tend to be for military use only. Soviet aircraft were never competitive internationally, and there has been little improvement since the Soviet period (although a number of recent foreign partnerships may change this).

Armaments

During the 2000′s exports grew rapidly, especially to India and China (which accounted for about 70% of total sales). The Putin administration made a concerted effort to consolidate the industry by creating large holding companies. This trend has continued under Medvedev, and has had the negative consequence that prices have risen domestically, as a single seller makes it more difficult for the government to negotiate lower prices.

Conclusions 

One of the main conclusions of this study is that Russian government policy to encourage growth in high-tech industries through the creation of large state controlled agglomerates – especially in armaments, the nuclear industry and aerospace – has not been very effective, and such industries continued to account for only about 3% of GDP by 2008.

This is fully in line with what the liberal model of innovation would predict; while the Russian state is making a concerted attempt to drive innovation in many of these fields through increased funding and R&D programes, the evident lack of competition stemming from the creation of agglomerates, problems relating to corruption, the rule of law and government accountability, have had a demonstrable impact on the ability of many firms within Russia’s high-tech sector to innovate, commercialize their ideas, expand, and reach their full potential. This is having a gradual impact on the ability of many of these firms to compete internationally.

Crane and Usanov believe that those companies or sectors that are most integrated with, and open to the global economy have the most favourable outlooks; software, scanning probe microscopes and uranium enrichment. They suggest,  “The record of the past two decades indicates that future success in these sectors will depend on increased integration into the global, especially European economy. In aerospace, sales of rockets, aircraft components, aircraft design services, and the new Sukhoi Superjet have depended on collaborating with foreign manufacturers. Prospects for Russia’s armaments companies are dimmer because they remain much more insular than firms in other sectors.”

Posted in Autocracy and Innovation, Democratization, International Political Economy, Russian Corruption, Russian Economy, Russian Liberalization, Russian Military, Russian Science, Soviet Economy, Soviet Union | 9 Comments »

Democracy and Innovation: the Liberal Model.

Posted by democratist on March 8, 2011

March 8th 2011,

As many of our readers will be aware, Democratist is fascinated by the interrelationship between democracy, economic growth, and scientific innovation.

We have often suggested that autocratic rule in Russia (and its attendant corruption) is having a devastating (and continuing) impact on Russian industry and technology.

Recently however, we decided to look at this question from a slightly different perspective. Instead of saying what we think is wrong with the Russian government, and the impact this is having on Russian S&T, we decided to go back to basics a little and look at what actually it takes for a country to develop an advanced industrial economy, and a flexible, creative, inventive culture.

We have found a good general explanatory model of the social, political and cultural basis of innovation in Why Globalization Works (Yale, 2004) by Financial Times chief economics commentator Martin Wolf. We will call this the “liberal model.”

Wolf writes that the historical record suggests that the really key thing you need to promote an inventive culture is a market economy, backed up by the rule of law.

As Wolf states;

“The liberating technological changes of Promethean [i.e. technological] growth did not emerge from nowhere. They reflected a new way of organizing the economic activities of society as a whole – a sophisticated market economy with secure protection of property rights. Unshackled from the constraints of tradition and driven by hope of gain, economic actors were tied by competition to the wheel of what the great Austrian economist Joseph Schumpeter called “creative destruction.” To achieve success in their battles with their competitors, businesses have been driven to exploit the ever burgeoning power of technology and science. Within a market economy the hope of gain and fear of loss drive inventors and innovators to apply new ways of doing things, or to produce new products.”

But how does democracy fit in here?

First of all, Wolf explains that democracy has the same cultural roots as the market economy: historically, protestant culture put an intrinsic value on all individuals, and moulded them to accept personal responsibility for their actions. Moreover, this was a key factor in promoting the initial development of liberal political and economic institutions in countries such as Great Britain (although evidently the post-1945 record demonstrates that their implementation is by no means restricted to protestant countries).

As Wolf explains;

“The bedrock of a liberal society is, as John Locke argued in the seventeenth century, the right of all individuals to own and use property freely, subject to well-defined, law-governed constraints. A liberal society is therefore a commercial society. But freedom to seek one’s own way in life, outside the boundaries of caste, class, community or, more recently of gender, cannot be restricted to economic activities alone. The culture of a liberal society is, for this reason, inimical to established hierarchies of power or opinion. It is no accident that commercial societies came to consider freedom of thought and expression of great value. A merchant is a practical man who must make rational judgements about the world, not least the risks he runs…The combination of practicality, rationalism and freedom of inquiry became the basis for the West’s greatest achievement – modern science. It is again, no accident that science reached its greatest flowering in a commercial West.”

If individuals are to be free, they need protection both by – and from – the state. For individuals to enter into long-term investments (which promote strong growth and innovation) they need to be able to trust each other, and the state. The condition for such confidence is normally expressed as the rule of law. This is a key driver of both economic growth and scientific innovation.

Historically, states which were both strong and beneficent emerged from a combination of forces including regulatory competition and internal representation; Regulatory competition developed from the multiplicity of competing states in medieval Europe. But;

“Regulatory reform is not enough. An absolute monarch may still seize the wealth of his subjects or default on his debts when his dynasty is threatened. Secure freedom requires governments interested in the long-term health of their countries. The best solution is a constitutional democracy with representative parliaments – government accountable to the governed. Such a democracy must be constitutional, that is law governed. It is not enough to move from the tyranny of one person to the majority.”

So democratic (or at least meaningfully representative) government an institutional prerequisite, according to the liberal model. This form of government will be accountable and therefore have a high degree of interest in the long-term health of the country it governs.  The rule of law is another sine qua non of long-term investment, the development of a market economy, and a creative competitive culture that leads to technological innovation and the emergence of an advanced industrial base and economic growth.

Posted in Autocracy and Innovation, Book Reviews, Liberalism, Russian Economy, Russian Liberalization, Russian Science | 3 Comments »

Autocracy and Innovation: Lessons from Egypt.

Posted by democratist on February 11, 2011

11th February 2011,

Regular readers of Democratist will be aware of our interest in the interrelationship between democracy and innovation, and our belief that autocratic rule in Russia (and its attendant corruption) have had a devastating (and continuing) impact on Russian science and technology (S&T), despite President Medvedev’s so-called “modernization” programme.

This weakness has in turn seriously damaged Russia’s status as an international economic and military player. However, rather than implementing the political reform required for the development of an innovative scientific community, the response of the Putin regime has been to place a renewed emphasis on espionage (for a concrete indication of the SVR’s interest in US tech, check out who Anna Chapman was following on Twitter before she abandoned her page last July; almost all of these are S&T-related journalists or magazines).

But regardless of the efforts of the SVR and FAPSI (Russia’s well-staffed SIGINT outfit) and the very real danger they present to Western firms, an indication of the continuing fate of the wider Russian scientific community under the nomenklatura might be gauged to a considerable extent by comparison with a similar example which has been brought to our attention thanks to BBC Radio Four’s excellent Material World science series; that of Egypt.

In this week’s programme, Material World interviews Hassan Azzazy (a Professor of chemistry at the American University in Cairo) about the way the Mubarak regime has effected Egyptian scientific research over the last 30 years. 

Azzazy’s main points were that while officially the Egyptian government was a keen promoter of S&T, in reality they had a limited understanding of the importance of research, which eventually had the effect of leaving the country lagging several decades behind other developing nations: Government interference and corruption were the key problem, with the ruling NDP party appointing university staff on the basis of loyalty rather than ability, and any kind of anti-government political activity resulting in banishment from almost any position in academia, research or government. This meant that many of Egypt’s best and brightest were forced to work abroad. 

The implications of what Azzazy says are that almost all of Egypt’s problems in relation to innovation have stemmed from a lack of democracy, openness, and accountability under Mubarak, which has in turn led to a significant inability to appoint the best staff, a huge misallocation of resources, and a lack of effective planning. Democratic openness, as well as resources, are required to cultivate research, and restore competitiveness.

And, as Azzazy says, “In the 21st Century, if you do not use science and technology, and innovation to build a strong economy, and address national needs, you are essentially outdated, and this is exactly the correct term for the current regime.”

We couldn’t have put it better ourselves.

Posted in Russian Economy, Russian Espionage, Russian Science | 3 Comments »

Planning for the “inertia scenario.”

Posted by democratist on September 8, 2010

September 8th 2010,

Introduction

As stated in previous posts, Democratist sees Russia’s pronounced and increasing national inability in the sphere of technological innovation as one of the key motivating factors behind the apparent current “modernization” drive.

As Dimitry Trenin has noted, Russia continues to fall behind in terms of its industrial, technological and scientific capabilities, and this is already starting to have serious implications for her continued status as an international political, economic and (especially) military player.

As an example, these technological limitations have already manifested themselves in Russia’s inability to produce and deploy an effective reconnaissance Unmanned Ariel Vehicle (UAV) during the 2008 war with Georgia: Related areas of concern (mentioned in a speech given by Medvedev to Russian diplomats earlier this summer) include genetics, space, IT, energy, telecommunications and nuclear power.

While superficially novel, this contemporary desire for modernization among a section of the elite reflects and echos an enduring and often overriding historical preoccupation with the importance of military competition against comparatively advanced western nations, that runs throughout modern Russian and Soviet history at least as far back as Peter the Great, and which has provided the impetus for various spurts of Russian and Soviet technological modernization.

Twentieth-century examples include Stalin’s preoccupations about the impact of economic and technological backwardness on the USSR’s military capacities as a central motivation for Soviet industrialization in the 1930′s, as well as for the development of the Soviet nuclear arsenal in the 1940′s. Military competition with the west was also a central early motivation behind the economic reforms of perestroika (“restructuring”) in the 1980′s.

Three Scenarios

With regard to the contemporary case, in The Russia Balance Sheet (2009) Anders Aslund and Andrew Kuchins note that, far from being the brainchild of Dimitry Medvedev, the Kremlin had already formulated all the main goals and strategies currently being considered in relation to medium-term Russian economic growth and modernization during the final months of the Putin Presidency.

This programme, called “Russia 2020, was outlined in a speech given by Putin in February 2008, with the Ministry of Economic Development and Trade presenting a more detailed version a month later.

Russia 2020 outlines three alternative scenarios, in terms of the potential trajectories of economic development;

  • The first is the “innovation” scenario. This presupposes the development of a national innovation system, competitive human capital, and regional development centers, and requires a comprehensive reform and investment programme.  It foresees a subsequent average annual GDP growth of 6.5%.
  • The second is the “energy and raw materials” scenario, which is based on faster development and modernization of the extractive sector, and projects a subsequent average annual growth of 5.3%.
  • The third is the “inertia” scenario,” which assumes no significant improvement, and therefore forecasts an average growth rate of 3.9% per year.

In Democratist’s opinion, while over the last two years Medvedev has genuinely attempted to put some flesh on the bones of the proposed “innovation” scenario (introducing tax breaks, promoting technology parks, abolishing import duties on high technology equipment and encouraging foreign investment), over the past few months the “innovation” strategy has started to show signs that it is encountering increasing resistance from within the elite.

The reason for this emerging impasse is that many in the nomenklatura, grown rich under Putin on the proceeds of  corruption, are implacably opposed both to reform itself (which threatens their privileged position) and even more so to the implied political reforms which would be the backbone of an innovative economy, and which Medvedev tentatively began to promulgate over the summer.

In this regard, we consider Putin’s hints at the Valdai club meeting in Sochi on September 6th that he intends to make a return to the Presidency in 2012 as indicative of a broader reassertion of power by these interests, and an indication that the nomenklatura remains eager to avoid the potentially “destabilizing” effects of the political reform required to both attract increased western investment, and achieve the “innovation” scenario.

Instead, the elite appears to be hoping that a recovery in hydrocarbon prices over the next few years will allow them to return to a greater emphasis on the second, “energy and raw materials” development path, with its promise of a (still robust) 5.3% average annual growth.

This does not necessarily imply that the “innovation” scenario or its rhetoric is to be abandoned wholesale, or that Russia will instantly return to an openly confrontational and anti-Western foreign policy stance, but rather it seems more plausible that, over the next few years, where the needs of meaningful innovation come into conflict with intrenched elite interests (including in relation to  encouraging foreign investment), innovation will have to give way.

However, Democratist suspects, in contrast to the nomenklatura’s apparently rosy expectations, that Russia’s extraordinary and increasing corruption (which stems from the top, has become an integral part of how the country has been ruled especially since 2000, and which has been almost completely unaffected by supposed recent clean-up campaigns) will, in addition to putting firm limits on the “innovation” scenario, also put a considerable brake on  the development of the extractive sector.

Indeed, it does not seem implausible to suggest that, in the absence of serious political reform, within a few years Russia may be looking at growth rates closer to those of the “inertia” scenario than of the other two, as the system slowly begins to seize up.

Additionally, a second (and more certain) effect of this reassertion of power by the nomenklatura over the next few years is that, in the absence of innovation from within the domestic Russian public or private sectors, or from foreign investors (and with a continuing “brain-drain,” as many of Russia’s most talented people leave to pursue careers abroad) the corporatist Russian State will seek the innovation it has historically seen as essential in order for it to remain militarily competitive, and additionally for many other industrial sectors (including hydrocarbons and arms), through a greatly enhanced reliance on a tried and tested method employed extensively during the Soviet period, namely espionage.

Conclusion - Planning for the “inertia scenario.”

Whereas the conviction and subsequent swap of 10 Russia Foreign Intelligence Service (SVR) officers on July 9th in Vienna will doubtless have caused acute embarrassment to many in the nomenklatura, given the likely continued lack of domestic sources of innovation, and of foreign investment, while Russian foreign policy in general may remain less confrontational than that witnessed over the last few years for some time to come, Russian intelligence operations in the west are very likely to become considerably more extensive and aggressive over the next few years, with a greatly increased focus from both SVR and GRU on industrial and military espionage.

With this in mind, it is imperative that those same western companies that Medvedev and his backers have been trying to entice into committing to invest in Russia, as well as many others in the areas mentioned above, understand this increasingly virulent threat to their commercial interests, and therefore redouble their efforts with regard to both personnel and IT security.

Additionally, those western agencies tasked with dealing with this problem, might well wish to reconsider whether counter-espionage is not deserving of more than, say 3% of their budgets (as is apparently currently the case for the British Security Service – MI5).   

Indeed, in as far as the effects of a return to relative economic stagnation, coupled with an increasingly obviously technologically inferior military over the next few years are likely to strengthen eventual calls for a return to the “innovation” path, and for political reform, both from within concerned sections of the nomenklatura and the Russian public, western governments might start to consider counter-espionage activities, in relation to Russia at least, as an important aspect of their foreign, as much as security policies, and therefore provide them with a commensurate increase in funding.

Posted in Russia Foreign Policy, Russian Corruption, Russian Economy, Russian Espionage, Russian Liberalization, Russian Politics, Russian Science, US - Russia | 16 Comments »

 
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