Not that you heard about it from the western mainstream - Russia president signaled a new economic course emphasizing tech and agriculture
This post first appeared on Russia Insider
On 3rd December 2015 Putin delivered his annual State of the Nation address to a joint meeting of the two houses of the Russian parliament.
As is now almost always the case with anything that Putin says, in the West his speech went almost unreported.
This was especially so because the format of the speech means it focused on domestic issues.
Despite Russia’s importance, these are of slight interest to Western commentators.
This is a serious mistake. As will become clear, Putin’s State of the Nation address charts a clear and ambitious course for Russia. If its objectives are fulfilled then this will have a major impact on the international situation.
On foreign policy, Putin focused exclusively on the Syrian campaign.
There has been some comment about the absence from the speech of any reference to Ukraine. Some appear to see this as evidence of diminishing Russian interest in Ukraine.
That is certainly wrong. Since the speech was not about foreign policy the Ukrainian conflict had no place in it. The only foreign policy issue the speech touched on was the Syrian conflict because, following the deployment of a Russian military force to Syria, that conflict is now a Russian domestic issue.
That this is so is shown by the way the speech handled the issue. It did not discuss Russia’s Syrian policy - whether political or military. There was no word about conflict resolution or the state of the diplomatic negotiations. President Assad was not mentioned at all.
The purpose of this part of the speech was (1) to praise Russian servicemen fighting in Syria; (2) to explain why they are fighting there; and (3) to condemn those countries which through their disastrous pursuit of geopolitical goals have brought about the catastrophic situation which have caused them to be sent there.
The most important part of this section of the speech was the one where Putin explained why jihadi terrorism is a threat to Russia, making Russia’s military intervention in Syria necessary.
Putin knows that whilst the Russian public broadly supports the intervention, this support is not unqualified, and many Russians are quietly uneasy about it.
Putin accordingly pointedly reminded Russians of Russia’s recent history of jihadi terrorism, showing why it is a threat to Russia:
We know what aggression of international terrorism is. Russia faced it back in the mid-1990s, when our country, our civilian population suffered from cruel attacks. We will never forget the hostage crises in Budennovsk, Beslan and Moscow, the merciless explosions in residential buildings, the Nevsky Express train derailment, the blasts in the Moscow metro and Domodedovo Airport.
It took us nearly a decade to finally break the backbone of those militants. We almost succeeded in expelling terrorists from Russia, but are still fighting the remaining terrorist underground. This evil is still out there. Two years ago, two attacks were committed in Volgograd. A civilian Russian plane was recently blown up over Sinai.”
He then explained how victory by the jihadists in Syria would bring the nightmare back:
"The militants in Syria pose a particularly high threat for Russia. Many of them are citizens of Russia and the CIS countries. They get money and weapons and build up their strength. If they get sufficiently strong to win there, they will return to their home countries to sow fear and hatred, to blow up, kill and torture people. We must fight and eliminate them there, away from home.
This is why it has been decided to launch a military operation there based on an official request from the legitimate Syrian authorities. Our military personnel are fighting in Syria for Russia, for the security of Russian citizens.”
There have been many comparisons - especially in the West - between Russia’s intervention in Syria and the USSR’s intervention in the 1980s in Afghanistan. One such was recently made by none other than Obama himself
The two interventions have however been explained by the respective Russian leaderships in completely different ways.
The Soviet leadership in the 1980s justified the Soviet intervention in Afghanistan as an act of internationalism - an expression of the USSR’s ideological duty as the leader of the world’s socialist and progressive forces to defend the Afghan Revolution from international “reaction” and “aggression”. Soviet soldiers in Afghanistan were “soldier internationalists”.
Today’s Russian leadership defends Russia’s intervention in Syria on the basis of Russian security and of Russian national interest. Russian soldiers are - in Putin’s words - “fighting in Syria for Russia, for the security of Russian citizens”.
Putin knows Russian soldiers and Russian society will support a war fought for the protection of the Russian homeland and people. He also knows they are not prepared to support a war fought to achieve vague ideological or geopolitical goals.
He has chosen his ground carefully, and - for the moment - most Russians accept the case he is making, and support the war.
The bulk of the speech was however about domestic questions.
Putin had much to say about the education and health systems, and about social security - vital issues of great concern to many Russians - but the main weight of his speech was about two other issues.
Firstly, Putin pointedly reminded everyone that Russia is due to hold parliamentary elections in 2016.
Last time such elections took place - in 2011 - Russia’s liberal opposition made hay with allegations of corruption. The liberal opposition leader Alexey Navalny even labelled the ruling party - United Russia - the “party of crooks and scoundrels” - a label that stuck and which quickly went viral.
The elections were also marred by allegations of vote rigging.
The result was a series of protests immediately following the elections that caused world headlines, even if their size and importance was grossly exaggerated.
Putin has no intention of letting the same thing happen again.
On corruption Putin is not going to let the liberal opposition once again take ownership of the issue. In his speech he made that crystal clear - setting out to defuse the issue by announcing a series of steps to deal with it:
"I expect that a considerable part of the parliamentary candidates’ election programmes will be devoted to the issue of corruption, which is a major concern for society. Corruption is hindering Russia’s development.
Officials, judges, law enforcement officers and deputies at all levels are obliged to submit their income and expense declarations and declare their property and assets, including outside Russia.
From now on, state and municipal officials will also have to disclose information about the contracts they plan to sign with the companies of their relatives and friends. Situations with a possible conflict of interest will be closely monitored by the regulatory and law enforcement authorities, as well as civil society.
Just recently participants in the Russian Popular Front’s project For Fair Public Procurement told me about the instances of abuse and blatant violations they have uncovered. I ask the Prosecutor General’s Office and the law enforcement authorities to promptly react to this information.”
As for vote rigging, Putin is also clearly determined to allow no scope for claims of election fraud to gain credibility:
“The election campaign must be honest and transparent and respect the law and the electorate. At the same time, it must be conducted so as to win public trust in the election results and legitimacy.”
The most interesting part of Putin’s speech by far however was the section about the economy.
Russia has just been through a recession.
A Western leader in a pre-election address made in a Western country coming out of a recession would give an optimistic message, with words of reassurance that the worst is over and that prosperity is round the corner.
He would also congratulate himself for his success in dealing with the recession, and his “courage” in taking “the tough decisions” that were needed to end it.
Putin did say something like that, but his words were almost perfunctory:
“The current situation is complicated but, as I have said before, not critical. In fact, we can already see some positive trends. Industrial production and the national currency are generally steady. There is a slight decline in inflation. We can see a significantly lower capital flight as compared to 2014”.
In every other respect Putin however did the opposite of what in a similar situation a Western leader would do.
Firstly, he acknowledged the harsh effect on living standards of the recession:
“I know that many people are experiencing hardships today. These economic issues are affecting incomes and the general quality of life. I understand very well that people are wondering when we are going to overcome these hardships and what needs to be done in order to accomplish this.”
These words are intended to reassure Russians that Putin remains in touch with reality, and that he has a genuine knowledge and sympathy for the hardship ordinary people are experiencing.
Putin did not blur this message by making the mistake of reminding people how much better off they have become under his leadership.
He knows - even if politicians in the West too often don't - that people support leaders not for what they have done in the past, but for what they are doing now.
Secondly - and far more importantly - Putin made clear that mere recovery from the recession is not enough. Nothing less than an economic breakthrough is needed.
His words here are direct and urgent:
“This doesn’t mean that we just calm down and wait for everything to miraculously change, or that we can just sit quietly in expectation of rising oil prices. Essentially, such an approach would be unacceptable.
We must be prepared for low commodity prices and external restrictions to last much longer. By changing nothing, we will simply run out of reserves and the economic growth rates will linger around zero.”
Putin then outlined what he has in mind.
The focus is to be on improving the country’s manufacturing and agricultural sectors, with a strong emphasis on high technology and - in the case of agriculture - clean GM free food products.
The objective is to satisfy internal demand from domestic production, though Putin made clear he wants Russia to become an exporter of high-end manufacturing and food products. His focus on clean GM free foods for example seems at least in part intended to establish Russia as a niche exporter of these types of food products.
The emphasis on developing production does not signal a slackening of financial discipline.
Putin knows that the most common cause for the failure of industrial modernisation programmes, especially in Latin American countries, is the absence of financial discipline.
This causes high inflation that dissipates the effect of higher investment spending.
As it happens, the single most striking feature of Russian economic management during the Putin era has been the extraordinary level of financial discipline Russia’s government has imposed on itself.
This is to continue. In his speech Putin ruled out a budget deficit of more than 3% of GDP.
Putin did not spell out the details of his programme, save that he placed heavy emphasis on improving the country’s business climate. The only specific measure he otherwise mentioned was for a change in the administration of the tax system.
Putin did however hint at an increase in state directed investment in key sectors:
“We need to bear in mind that a number of industries are now at risk, including primarily the construction, automotive, and light industries, as well as railway engineering. To address this, the Government will need to come up with special support programmes. Financial resources for this purpose have been set aside.”
In addition to those sectors Putin listed, we know Russia is planning to rebuild its aerospace, shipbuilding and machine tool industries, whilst a curious meeting between Putin and Sergei Chemezov, the chief executive of RosTec, highlights Putin’s interest in and support for high technology industries.
A state directed investment programme drawing on state funds in conditions of strict financial discipline in a market economy will need careful planning.
Putin has in fact been talking about bringing back state planning for some time. Here is what he said during a meeting with industrialists in St. Petersburg back in June:
“I have already heard from some liberally minded people of the need to reinstate state planning.
This is no joke. Obviously, it is impossible to revive the old, Soviet model in modern conditions.
However, we should consider some elements of planning, primarily in developing the infrastructure.
If we consider the tasks facing the state, there should be some strategic elements pertaining to providing certain benefits to specific territories – and we have some priority development areas that have been granted certain preferences, as well as free economic zones.
We need to consider all of this and discuss it, bearing in mind (as we keep saying over and over again) mandatory compliance with macroeconomic parameters and maintaining a balanced budget policy.”
What is being discussed here is not a recreation of the USSR’s Gosplan system.
Rather it is the sort of long range industrial planning used very successfully in the past by the Asian industrial giants - Japan and South Korea - and used by China today.
To that end the government has recently been soliciting opinions from supporters of state planning like the economist Sergey Glazyev, even if in Glazyev’s case what he proposed - capital controls and the end of convertibility for the rouble - go far further than what Putin and the government are prepared to contemplate.
The programme Putin is working towards has been in gestation for a long time as he and the government gradually free themselves from the free market dogmas of the Kudrin era.
Far from being complacently content to float on the rents of high oil prices, Putin has in fact always hankered for a productive technology based economy. His election programme during the 2012 Presidential election reflects that fact.
What has changed is that Putin and the government have now finally come round to accepting the fact that it is not enough simply to create the necessary macroeconomic conditions for an industrial take-off to take place. The government itself has to lead the process.
The crisis of 2014, with the collapse of oil prices, the halving of the rouble’s value, and the freezing out of Russian companies from Western financial markets, has accelerated a process that was already underway.
The economy’s recovery of competitiveness and the choking off of imports caused by the rouble’s devaluation and the ban on food imports from the EU has made the process both more urgent and easier.
It has also made it easier to rally both public and elite opinion behind it.
This is important because one side-effect of directing investment into the productive economy will be that there is less money available for social programmes.
That the government intends to tighten spending on social programmes as its focus increasingly shifts towards manufacturing and agriculture is in fact clearly signalled by Putin in his speech. Henceforth, in place of blanket provision, social spending will become more targeted:
“It is imperative to support low-income households and socially vulnerable groups of citizens, and finally adopt fair principles of providing social assistance that is made available to those who really need it. In particular, it is necessary to take into account the individual needs of people with disabilities, and focus on their training and employment.”
In considering Putin's programm it is impossible for the historically minded to avoid comparisons with the last occasion when a Russian leader committed the country to a major programme of industrial and agricultural modernisation. That of course was in the 1930s under Stalin.
Even the urgency in some of the language is similar.
Compare Stalin in February 1931:
“We are fifty or a hundred years behind the advanced countries. We must make good this distance in ten years. Either we do it, or they will crush us”
With Putin in December 2015
“Russia has no right to be vulnerable. We must have a strong economy, excel in technology and advance our professional skills. We must fully use our current advantages, as there are no guarantees that we will have them tomorrow.”
The parallel should not be pressed too far. Though there is something of the same urgency, Russia’s situation today is very different from what it was in the 1930s.
Not only is the country immeasurably richer but - in contrast to the isolated and beleaguered Russia of the 1930s - today’s Russia is fully integrated in the world economy and is firmly anchored in a powerful and actively developing Eurasian system that is becoming stronger by the year.
The result is that for all the talk of a return to planning, the road being taken is completely different. Where in the 1930s there was massively intensified repression, today the emphasis on the contrary is on improving the business climate and the rule of law.
For the moment the Russian government’s immediate priority has to be navigating the end of the recession. However, as I recently wrote, as the recession draws to an end, economic conditions increasingly point to a boom.
Putin is not only determined this boom should take place. He is also determined that it should lead to higher investment in the productive side of the economy, and not just to a further increase in consumption.
It is an austere vision - trading short term increases in living standards for economic gains over the longer term.
However it is also a farsighted one. Time will show how successful it will be.
This post first appeared on Russia Insider
Anyone is free to republish, copy, and redistribute the text in this content (but not the images or videos) in any medium or format, with the right to remix, transform, and build upon it, even commercially, as long as they provide a backlink and credit to Russia Insider. It is not necessary to notify Russia Insider. Licensed Creative Commons