How will Russia overcome the crisis?

03.04.2009 — Analysis

The current economic crisis could have broken out in Russia independently from the rest of the world.  This is due to Russia’s economic structure and her technological backwardness. Thus, ways out of the crisis should be sought for independently as well. It is no use waiting for the production growth from countries in the West nor from high oil prices.

Vladimir Bochko, Professor of Economics and Head of the Innovation and Investment Development Centre at the Economic Institute with the Urals Branch of the Russian Academy of Sciences, is certain of the fact that the way out for Russia is a technological breakthrough and a radical change in the population’s mentality.

Reasons for the Russian crisis. 

The prevailing opinion is that America is to blame for the global crisis. If it is indeed, then not as a country as such but as a carrier of certain economic relations in the most concentrated form. Cyclical recurrence is one of the laws of economics. In the past 200 years this law has clearly manifested itself in the form of industrial, financial, and economic crises. In the 19th century they would repeat every 8-11 years – in 1825, 1837, 1848, etc. In the 20th century, the cycle was broken due to world wars; however, the general movement from one crisis to another remained. In this case America has not shown us anything new either. However, in the case of Russia, there are several specific issues that make the global crisis different from ours.  

First, the Russian crisis is linked with the emergence and increasing imbalance between production and consumption, which has been caused by “living on loan.” We receive revenue mainly from exporting raw materials; in so doing, the population was generally oriented towards consumption. “The consumer society” is a worldwide process that began flourishing about 30-45 years ago – and when Russia joined this new “society,” it weakened her own domestic production. 

Second, the Russian crisis is connected with the general technological backwardness of the economy. In the past twenty years, the country and the population have forgotten how to work efficiently. In return, they learned how to trade speculatively. Trading is a required element of economic development. What has been produced must be sold. However, speculation as a repeated reselling is not a required element of economics. We have managed to develop an epidemic of speculation in our country. Once the people see that there is no technology and the production facilities have collapsed, they are attracted to spheres where money flows – to trading. And, once they get drawn in, everyone wants to have a slice, and they start reselling the same commodity to one another. This is the nature of the modern Russian economy.  Against a backdrop of technological backwardness, the people have developed a commodity import mentality. There is an established public opinion that believes all domestic products are bad. Russia depends on import for 50% of its food supplies; Moscow, 80%. This commodity import mentality has triumphed everywhere; combating it will be very hard but necessary.  

Third, the current Russian crisis is not that of overproduction. All past economic crises have been associated with the overproduction of goods, which is the current case in the West. They reduce prices in order for the mass of commodities to dissolve. With us, it’s just the other way around – prices are increasing. This is a sign that we don’t have a surplus of commodities but a shortage thereof. This shortage comes from backwardness and the absence of our own mass production. Therefore we don’t have a classical crisis. 

Fourthly, the Russian crisis largely depends on external factors and the exchange rate of the Ruble. The Ruble is swinging back and forth, and so are we. Everyone sees an exit from the crisis in the external environment, too. According to Russia’s highest-ranking officials, we will be the third to exit the crisis. First of all, the production in mature economies must develop. This will cause a demand for oil and energy resources. Only then, at stage three, will we start rising.

It is impossible to get out of the crisis purely by the markets.  Almost everyone has acknowledged the need for government regulation by now, although the monetarist theory of non-interference of the State in the economic activity is still strong. Several solutions to the crisis are lying on the surface. They say that, in order to get out of the crisis, demand must be encouraged in order to create consumer need. This is of course true for a commodities overproduction crisis. For a crisis when less commodities are received, as has happened to us, this is not quite true. In other words, along with encouraging the demand, domestic production must be developed. So far, our market has been developing in the following way – produce raw materials, sell it abroad, and buy there what we need. We have almost stopped buying from our own producers because we do not believe in our own commodities.

This is an interesting phenomenon – we do not want to buy what we make ourselves. However, if we continue to disregard the domestic market we will become extinct, and our country will disappear. Domestic industries must be developed accordingly. Neither capital nor business is going to do this. They are interested in what the world demands now, - raw materials. What I mean is engineering and processing manufacturing. The State itself must start developing them. Certainly, if the State simply throws money at them, it will fix the problem. There is a longer but more reliable way. It is the development of science and new technologies – organizational, industrial, and financial.  

As a result, we arrive at a conclusion that is characteristic for getting out of any crisis during the past 200 years.  Namely, we must transition to a new technological level. This was the way that countries have always got out of crises, in the 19th and 20th century. The development of equipment and technologies increases labour efficiency. This makes commodities cheaper and improves their quality. The demand for them grows, and so does the need; new workers are hired, production increases, and the crisis ends. The basis for all technological structures is energy - saving and preserving it. As soon as more energy-saving production facilities appeared, a new stage of economic development began.

They sometimes say that America exited the Great Depression due to the organization of public works. It encouraged demand, etc. On the surface this is true. In reality, America pulled herself out of the crisis because more modern technologies appeared, which actually advanced production. Then, in its own way, the Second World War helped.  Likewise, Russia also needs to move to a new technological structure.  The fashionable nanotechnologies can be looked upon as a part of this process. In general, however, the new structure must be connected with energy and energy saving issues. Let us look at the automotive industry that engages hundreds of parts suppliers. If the technological renovation process starts here, it will affect the other links in the chain. As soon as we achieve energy saving we obtain cost reduction. If the process develops in a normal manner and there is no speculation as we mentioned above, we achieve a relative cheapening of commodities.

The new economy will be the economy of thriftiness that we are already entering, whether we want it or not. This thriftiness will be caused by the crisis across all strata of the population.  There are various methods for the transition to this economy. The first one is a moderate protectionism. This is the way that all countries operate, though they deny its presence in all ways possible. Protectionism will ensure protection for local manufacturers. The protection must be provided by means of assistance in the development of technology and fostering scientific research. These must be clearly formulated. Money must be provided on condition its usage is strictly controlled.  Also, the country must promote a principled position - the domestic circulation of only one currency – the Ruble. The next point that could soon take center stage in the public discussion is the use of land rent in mining industries. As long as land rent remains in private hands it will not be to the advantage of science, industrial development, and the economy as a whole.  

Finally, I believe we must return to the idea of cooperation. I am not speaking of collective farms but of the cooperative movement that unites people at the level of production. A farmer is the most vivid example. They used to say that he will feed the country. He didn’t! He had to live in the conditions of labour division; however, he was forced into these conditions when he alone was the one to perform many a functions. He plowed the soil, purchased diesel fuel, was the maintenance man and a trader, and had to know things about finances. When the cooperative system is in place, many a problems are removed. This is an extremely promising direction that can be used in housing construction, consumer goods manufacturing, - literally everywhere.  

Beacons in the night. 

The way out of the crisis will consist of a general technological development of the State. It is impossible to get out of today's pit if the country has no clear scientific and technical policy, relevant money, and development terms and stimuli that are agreed upon. Why did the USSR develop so powerfully and finally launch into space in 1960’s? Even before the Second World War, and ideology of education was adopted. After the war, lots of money was thrown into science.  

The movement partially begins in regions. For example, a gas chemistry forum was recently been held in Ugra, the region that decided to establish a gas chemistry cluster of its own. They will produce plastics and paints based on the associated gas that is currently being burned. In Novouralsk, in the Sverdlovsk Oblast, a medical cluster has been established, and the production of insulin started. Now it is the time to expand the production of other medicines –importing is now 30-40% more expensive; the main thing is quality control. Innovations may be rolled out in the engineering industry.  An attempt has been made to start building “Titanium Valley” in Verkhnyaya Salda (the Sverdlovsk Oblast). In short, the necessary decisions can be made at the regional level.

When the crisis ends.

The crisis will end on 29 May 2009. This is a joke, of course, but not completely. It seems to me that we will see the last downturn in the end of May and reach the bottom by the end of the summer. Then - and this is what many people are saying - the exit from the crisis will begin as a very smooth curve. A sharp fall will be replaced by horizontal movement for 1-1.5 years. It is difficult to say how much time it will take us to get back to the pre-crisis level. I don’t know how fast we are going to go, and which economic development option we will select. For example, it took the Sverdlovsk Oblast construction industry almost 20 years to get over the post-Soviet crisis and rise to the 1990 level, not taking into consideration the current collapse. The time frames were almost the same in other sectors of industry and agriculture.