Kremlin Dreams Sometimes Come True

This April, Michael Bohm, editor at the Moscow Times, published the article New Kremlin Dreamers, which questioned Russia’s stated intention of becoming an advanced industrial nation by 2020. I wasn’t much impressed by its pessimistic assertions – for instance, regarding Russia’s hopes of becoming the world’s fifth largest economy by 2020, he falls into the frequent Kremlinologist fallacy of applying standard GDP growth rates to nominal GDP (as opposed to purchasing-power parity GDP, which corrects for exchange rate fluctuations). He similarly passes over that countries in the process of economic catch-up typically grow much faster than the leader nations, because they have greater returns to investment. Soon after Yevgeny Kiselyov wrote Dreaming of Modernization and Innovation on a similar theme.

I disagree with them on two fundamental points. First, I don’t share in their pessimism and I believe that on purely objective factors, Russia – and much of the rest of East-Central Europe for that matter – is well set to converge to Western living standards by 2020 (which will by then probably be stagnating in light of peak oil and intensifying competition for energy resources from other emerging-markets). This is a point I made a long time back in Towards a New Russian Century? and Education as the Elixir of Growth. Second, even if that were not the case there is still a lot to be said of the power and utility of positive, optimistic thinking – ambition is no sin in my eyes, and in the case of government a moral duty to their citizens. Hence this rebuttal. 😉

Two recent articles in the Moscow Times took issue with the “Kremlin dreamers” for their rose-tinted views of Russia’s destiny, alleging that the main goals of “Strategy 2020”, like becoming the world’s fifth largest economy or doubling GDP per capita, are nothing more than utopian pipe-dreams. Yet an objective look at key current trends – in educational attainment, economic growth, resource depletion and climate change – suggests that these “fairy tales” have the potential to become reality.

First, Russia’s educational profile resembles that of a First World country, unlike most of its emerging-market competitors. Around 70% of Russians go into higher education, compared with just 20-25% of Brazilians or Chinese. The quality of its primary education is substantially higher than in developing nations, as attested to by the results of international student assessments like PISA or TIMSS. For instance, in the 2006 PISA science assessment, only 15.2% of Brazilians possessed skills beyond those needed for purely linear problem-solving, compared with 47.6% of Russian and 51.3% of American students. A country needs to have sizable cadres of skilled workers to move into added-value manufacturing or complex services. Brainier nations will also assimilate technology more easily and thus their economic “rate of convergence” to developed-world status will be that much faster. In this respect, Russia and east-central Europe are in a different league from East Asia, let alone Latin America or the Middle East.

Second, while there’s no denying Russia is plagued by corruption, to suggest it is endemic like in a failed state, as suggested by Transparency International’s Corruption Perceptions Index, is ludicrous – and would frankly be obvious to anyone who has visited both Russia and some of its neighbors on the list. Its problem is that it’s a survey of outsider businesspeople and their subjective perception of the situation, which differs markedly from the experiences of ordinary people. When asked, only 17% of Russians admitted to paying a bribe to obtain a service in 2007, according to TI’s Global Corruption Barometer – putting them in the same quintile as Turkey or the Czech Republics, i.e. slap bang in the middle of world corruption, not the end. The effects of corruption must also be set in context against a panoply of other, equally important growth factors. Goldman Sachs compiled an index called the Growth Environment Score, which aggregates a wide range of stats on macroeconomic, institutional, educational and technological conditions to assess a nation’s potential for economic “catch-up”. In 2007, Russia came in at 66^th out of 181 countries, tied with China and ahead of Brazil and India.

Third, to fulfill one of the main goals of “Strategy 2020” – to become the world’s fifth largest economy, all Russia has to do is surpass Germany in purchasing-power parity GDP. Since according to the IMF Russia’s GDP was 2.26bn $ and Germany’s was 2.91bn $ in 2008, this can be achieved merely by maintaining an average growth rate of 2% points higher than Germany to 2020 – which seems entirely feasible considering that from 1999-2008 this difference was more than 4%. Doubling the GDP per capita over the next 11 years is trickier and requires continuing the average 1999-2008 growth rate of 6%. Though complicated by the current economic crisis, coming close is still entirely possible.

Fourth, Russia’s economy is not overly dependent on natural resource exports – they have stagnated since 2003 and the bulk of growth came from retail, construction and manufacturing. They are however crucial to replenishing government coffers, allowing the Kremlin to spend lavishly on things like military modernization, infrastructure expansion and prospective sunrise industries like nanotechnology – thus turbo-charging its plans for an “innovation economy”. (Granted, some is wasted like the 1bn $ project on the bridge to Russki Island, i.e. to nowhere). Fortunately for Russia, there’s no reason to believe oil prices will remain low. Even now, in the depth of the biggest global economic crisis since the Great Depression, prices never fell below $40 a barrel and have now rebounded to over $60. With oil production close to or already past its peak and Chinese voraciousness unquenched, a second oil price spike is only a few years away.

Finally, according to researcher Trausti Valsson, further in the future global warming will unfreeze remote energy resources in the Far North to exploitation, open up the Arctic to shipping, bolster Russian crop yields and increase the carrying capacity of Siberia and the Far North. Russia could literally end up on top of the world.

Wells may have ridiculed Lenin as a “Kremlin dreamer” in 1920, yet precisely a decade or so later the Soviet Union began to produce aircraft, tanks, trucks, machine tools and chemicals, boasting growth rates far higher than that of any other industrial nation. And though the USSR did set over-ambitious goals for the Five Year Plans, the achievements were impressive nonetheless.

By 2020, Russia will experience increasing problems due to adverse demographic trends, slowing growth due to (paradoxically) successful “catch-up”, and perhaps waning European demand for its natural gas and dissatisfaction with an increasingly atrophied and unresponsive descendant of the “Putin system”. As such, far from being a fairy tale, the “Kremlin dream” is a strategy for maintaining Russia’s geopolitical relevance well into a troubled 21^st century.