16.05.2003
Russia’s Chances for a Robust Economy
№2 2003 April/June
Alexander Dynkin

Alexander Dynkin, a Member of the Russian Academy of Sciences, is director of the Institute of World Economy and International Relations (IMEMO)

The 20th century, which proved to be dramatic for Russia in
every way, has come to a close. In 1917, Russia missed a perfect
opportunity for industrializing the country – a very realistic goal
at the start of the century. Today, is it possible for Russia to
make up for the lost opportunity and bridge the structural,
institutional, technological and cultural gap between itself and
other countries? I am optimistic that this scenario can be
achieved, as the turn of the century has ushered in many of the
necessary prerequisites for a swift and historical modernization
program: a predictable political leadership which enjoys the strong
support of a majority of the population; the formation of basic
democratic and free market institutions; and the establishment of
valuable partnerships with the developed part of the world, all
built on the foundation of commonly shared values. Other favorable
factors include the development of information technologies which
make various types of knowledge available to every person in “real
time” experience.

No doubt, Russia possesses very good chances for a robust
recovery. No other country has yet made such energetic strides in
initiating a program of modernization in this global,
post-industrial period of development. Nevertheless, despite the
progress, Russia still has many problems it must resolve. In the
1990s, Russia and the rest of the world changed dramatically.
Therefore, this article will focus on the economic reforms in
Russia over the last decade, as well as the future prospects of the
Russian economy considering international trends of the early 21st
century.

Today, the Russian economy continues to grow at a healthy pace.
Since the financial crisis of August 1998, it has surged by almost
26 percent, while the annual growth rate for the year 2000 stood at
an impressive nine percent, a record high since World War II.

Yet, despite the high growth rates, Russia’s Gross Domestic
Product in 2002 amounted to only 70 percent of its 1990 level. In
order to achieve the 1990 level by the year 2010, Russia’s GDP must
annually grow by an average of 4.3 percent – a seemingly realistic
objective for the Russian economy. Understandably, the structure of
the GDP will be essentially different, consisting mostly of goods
and services from the market segment of the economy intended to
meet household, export, state and production needs. At the same
time, the percentage of defense-related production within the GDP
will be drastically reduced.

According to estimates by the Institute of the World Economy and
International Relations (IMEMO), Russia’s GDP in 2002 amounted to
2.8 percent of the world’s figure, slightly up from 2.7 percent in
2000. In the previous 40 years, this index (both in Russia and in
the former Soviet Union) continued to decrease. In 1980, the figure
stood at 11.5 percent for the entire Soviet Union, and 7 percent
for Russia (considered to be a constituent republic of the Soviet
Union at the time). A decade later, the figures stood at 9.1 and
5.5 percent, respectively.

Interestingly, Russia’s per capita GDP has traditionally
exceeded that of other countries and the world as a whole. In 1980,
it was 120 percent higher than the rest of the world’s figure. Ten
years later, it was 100 percent higher, and at the turn of the
century it was higher by only 10 percent. The growth rate for
Russia in 2002 is estimated at 20 percent. By 2015, Russia’s per
capita GDP is expected to be 15-20 percent higher than the 2000
figures recorded for Greece or Portugal, but is predicted to be
30-35 percent lower than these countries’ 2015 data.

Russia is highly involved in the world economy and international
labor markets – its export quota exceeds 40 percent of the GDP
calculated on the basis of the current exchange rate. The decline
in the growth rate of international trade, which plummeted to
practically zero in 2001-2002, was especially painful for those
countries which export mostly raw materials. The more diversified
structure of Russian exports, however, made this effect less
destructive for the Russian economy. In the first half of the
1990s, Russia missed an important opportunity for growth while the
rest of the world economy was enjoying fantastic gains. Presently,
the most rational strategy for Russia would be to restructure its
economic sectoral pattern while raising its labor productivity,
which will enable it to participate in the new cycle of economic
growth around the world.

Changes In The Sectoral Pattern

In 1990-2001, the sectoral pattern of the Russian economy
changed dramatically both in terms of the GDP (Graph 1) and
industrial production (Graph 2).

Graph 1. Sectoral pattern of the GDP in current
prices, %

Source: Socio-Economic Status of Russia in
January-March 2002, p. 10; Rossiisky Statistichesky Yezhegodnik,
2001, pp. 279-301.

The figures in current prices demonstrate that the sectoral
pattern of the Russian economy has approached that of the United
States, Western Europe and Japan: the percentage of industrial
production sectors in the economy has decreased by 1.5 times, while
the service sector’s percentage has increased 1.6 times. However,
this headway took place not necessarily because of an accelerated
development of the service sector, but because material production
decreased more than non-material production – by 42.4 and 30
percent, respectively. Also, the service sector rates have been
increasing faster than the consumer prices – by 28,000 and 17,000
times from 1990, respectively (the denomination of the ruble not
taken into account). Dramatic changes have also occurred in the
structure of various industries (Graph 2).

Graph 2. Sectoral pattern of industrial production in
2000 prices, %

Source: Rossiisky Statistichesky Yezhegodnik, 2001,
pp. 337-372.

As follows from Graph 2, the misbalance in the sectoral pattern
in favor of industries producing capital goods (classified as
“Group A”), which emerged in Soviet times, has remained to this
day. In 1990, Group A industries accounted for 74 percent of all
production in the country, while consumer goods industries (Group
B) accounted for only 26 percent. In 2001, the figures changed only
slightly – 75 and 25 percent, respectively. The only distinction
from the former times is the percentage of machinery and other
equipment in Group A products, which in 2001 decreased to 21
percent from 42 percent in 1990. At the same time, the percentage
of raw materials, semi-finished goods and fuel/energy resources
increased from 58 to 79 percent of Group A products (in fixed
prices). In current prices (considering an accelerated increase in
capital goods prices), Group A in 2001 produced 83 percent of all
goods, of which machinery and equipment accounted for less than 20
percent.

According to employment statistics, the service sector
(especially trade) now involves an increasing number of people who
have lost their jobs in the non-competitive industrial sectors.
Over the past ten years of reforms, employment in trade has
doubled, bringing Russia’s production and employment structures
closer to those in the West.

The changes in the employment pattern in industry reflect
changes in the sectoral pattern. Characteristically, whereas
employment in Russia’s industry as a whole has decreased by 42
percent, it has increased 160 percent in the gas industry, 80
percent in the oil industry, and 20 percent in the medical
industry.

I have already mentioned the fluctuating price factor, which
brings about a considerable divergence between sectoral pattern
values calculated in current and fixed prices. Price changes have
become a major way of redistributing incomes among producers in
various industries.

Apart from the aforementioned differences between the growth
rates of goods prices and service rates, there is more than a 100
percent disparity between the growth rates of industrial product
prices (which have surged by 17,000 times) and the prices of
agricultural products (by 7,800 times). In the late 1920s, such a
huge discrepancy had provoked an agricultural crisis in the Soviet
Union. Now, this discrepancy greatly impedes Russia’s ability to
modernize the technical facilities of its agricultural sector.

Decline In Labor Productivity

By 1999, when the Russian economy started to really grow, the
GDP had decreased 40 percent, while employment had decreased by
only 15 percent. Industry’s cautious policy toward staff reduction
and redundancies helped to preserve social and political stability
throughout the country and can therefore be considered a justified
action.

Graph 3. Labor productivity in Russian economy in
2001 (% of 1990)

Source: IMEMO estimates, State Statistics Committee
data

As a result, however, labor productivity – an important index of
a country’s economic development – markedly decreased in many
sectors of the economy, thus relegating Russia to a second-class
status. Over the last decade, labor productivity has increased in
only two industries: in the coal industry it has risen 40 percent,
and in machine-building, 23 percent (Graph 3). Obviously, this
increase was caused by an accelerated staff reduction program, as
opposed to any actual growth in output.

Income Differentiation Of The Russian Population

In all of the post-communist countries of Central and Eastern
Europe, the period of transition to a free market economy was
characterized by a simultaneous and proportionate decline in
production, which corresponded with a decline in the population’s
aggregate income. Russia was a remarkable exception to this rule:
between 1990 and 2001, Russia’s GDP decreased by 30 percent,
whereas retail trade, the main income-spending channel, went down
by only 2.5 percent. The Russian population’s aggregate income in
2001 stood at 94 percent of the 1990 figure, a mere six percent
decrease. On the face of it, this figure contradicts other
statistics. For example, the average salary in 2001 stood at 60
percent of the 1990 figure, while the average pension was less than
half the 1990 size. This paradox is explained by an increased
income differentiation of the Russian population, by a growing gap
between the rich and the poor. Over the years of reform, the
aggregate income of the 10 percent of the wealthiest Russians (10th
decile) has increased by 50 percent; the income of the next 10
percent (9th decile) has remained at the pre-reform levels; whereas
the income of the other 80 percent of the population (116 million
people) has decreased 25 percent, on average. Of this amount the
income of 30 million people decreased 40 percent, and that of
another 10 million, by half.

These statistics reveal an obvious trend: until the 1998
financial crisis, the percentage of the wealthiest part (10
percent) of the population in the nation’s aggregate income
steadily and markedly increased, while all the other groups of the
population grew steadily poorer (especially Groups 1-5, i.e. 50
percent of the population). The 1998 financial default somewhat
changed the income redistribution pattern: the income of the 10th
decile markedly decreased, as did the overall percentage of this
group as a whole. Consequently, the percentage of the population
who fell between the 4th-9th deciles increased. On the whole, the
income disparity between the 1st and the 10th deciles, which was
4.65 times in 1990, increased by the year 2001 to 16 times. This is
less than the same figure in the U.S., but 50 percent higher than
in Western Europe. The absolute per capita income level in the 1st
decile (the poorest segment of the population) in Russia is about
10 times lower than it is in the United States, and approximately
seven times lower than in Western Europe.

The gap between the richest and the poorest decile groups of the
Russian regions in per capita Gross Regional Product (GRP), which
in 1990 stood at 3.1 times, had increased to 3.85 times by 2001. In
per capita GRP, regions of the richest 10th decile group have now
approached the post-communist countries of Eastern Europe such as
Poland or Slovakia, whereas the poorest, 1st decile group of
regions, remains at the level of Ecuador, Peru or Sri Lanka.

World Market: New Growth In The U.S.

In 2001-2002, the world economy went through its first serious
recession of the post-industrial period, that is, the period of
globalization. But indices at the world’s stock exchanges began to
tumble long before the autumn of 2001. The decline reflected the
classic need of a market economy to revise certain corporate trends
in development, demand and technology, as well as to reappraise the
actual value of investments. The main factors which precipitated
the decline were the completion of the longest period of economic
growth in U.S. history, together with a sharp change of
expectations in information technologies; this was disturbing
enough, given the high expectations of this major feature of the
“new economy.” The decline of the Euro markets in autumn 2001
provided further proof of a global recession.

I do not share the pessimistic views on the immediate prospects
of the world economy. In November 2001, IMEMO forecast that the
U.S. economic growth rates for 2002 would be 2 percent. In light of
our estimates, it was somewhat amusing to watch the International
Monetary Fund repeatedly revise their forecasts about U.S. economic
development: in November 2001, the IMF predicted a meager 0.7
percent growth for the following year. Then, just four months
later, it doubled that figure to 1.4 percent. Finally, it increased
the expected growth rate to 2.2 percent. According to U.S.
preliminary official statistics (March 2003), the actual economic
growth rate in 2002 was a rather respectable 2.4 percent. This
initial 200 percent margin of error of experts at the IMF, together
with their many revisions over a six-month period, causes an
appreciable amount of perplexity considering the Fund’s boundless
budget.

Considering the cyclical nature of the market economy’s general
development, one should expect a slowdown in the U.S. economy after
its unprecedented rise through the 1990s (by 34 percent, i.e. by an
average of three percent a year, which is higher than the average
growth rate of 2.5 percent). Yet, even considering the shock from
the terrorist attacks of September 11th, the continuing growth in
U.S. family income, together with the ongoing demand for consumer
goods, services and housing, provides solid grounds for a two
percent growth rate in 2003; a rather moderate figure by recent
standards. Fundamental factors of supply in the U.S. economy
(innovative research, an adequate institutional environment, and
dynamic labor market and investment attractiveness) remain highly
competitive. Nevertheless, the slowdown of the U.S. economy is
expected to hurt the future prospects of the West European and
Japanese economies which are closely linked with economic
indicators in the U.S.

West European countries will most likely develop slower than one
could expect, considering the past decade of relatively low
economic growth rates (by 20 percent over the whole of the 1990s,
i.e. by an average of 1.9 percent a year). In 2002, this figure is
expected to be 1.1 percent (Graph 4).

Japan’s economy will develop in much more difficult conditions
as its national economic model is going through a systemic crisis
(after the stagnation of the 1990s, when the economy grew by only 8
percent over the decade, the GDP in 2002 increased by a mere 0.7
percent). Japan lacks the institutional and innovational stimuli
and capabilities to make the transition from an industrial to a
post-industrial economy.

In the developing world, the GDP will grow at a high rate,
primarily due to the two largest Asian states: China (7.2 percent
in 2002) and India (4.8 percent). Considering the scale of their
economies, these countries – plus Russia – could become this year,
for the first time, the real “locomotives” of the global economy.
The world economy is now characterized by the balancing of the
production volumes in the three major centers of economic
development: the United States, the European Community, as well as
in China, India and Russia (Graph 5).

Graph 4. Forecast for world economic development in
2003 (U.S. $, prices and purchasing power parity of 2000, GDP
growth rate)

Source: IMEMO forecast, Finansoviye Izvestia,
December 27, 2002, p. 3.

In two large Latin American countries that went through a deep
financial crisis in the late 1990s, Brazil and Mexico, the GDP will
grow somewhat slower: in 2002 it is expected to be 3.5 percent. The
growth rate of the aggregate GDP of developing countries is
estimated at 4.6 percent.

Graph 5. Aggregate GDP (U.S. $billion, prices and
purchasing power parity of 2000)

Per capita GDP (U.S. $, prices and purchasing power
parity of 2000)

Source: The World at the Turn of the Millennium
(Forecast for World Economic Development in the Period Until 2015),
V. Martynov, A. Dynkin, G. Machavariani, ed. Moscow: Novy Vek
Publishing House, 2001, pp. 540-544; World Economic Outlook, April
2002, p. 212.

Economic Discussions And Real Opportunities

Inside Russia’s economic circles there is an ongoing discussion
over the best strategies for further development.

Proponents of dirigisme (government control in the
economy), who are concerned about the decline in economic growth
rates which has been continuing since the autumn of 2001, propose
giving up the liberalization program, first enacted under Yevgeny
Primakov (e.g. equal competition terms, balanced budget, low taxes,
abandonment of foreign loans, the strengthening of legislation and
its application). These individuals propose collecting taxes from
export-oriented sectors of the economy and redistributing resources
in a centralized way. This program would favor manufacturing
industries, machine-building, the aircraft industry, the automotive
industry, and others.

But the adherents of the liberalization school say the slowdown
in growth rates should not give grounds for panic. They explain the
present problems with the economy as a result of the current
recession in the world economy, ineffective and excessive meddling
in enterprise (especially at the regional level), and the presence
of sectors which are counterproductive to a free market economy and
thereby not transparent. They propose instead to continue
developing the institutional environment, pursuing judicial,
administrative and military reforms, and reducing the scale of
certain sectors within the economy that do not conform to free
market principles. Furthermore, they suggest reforming the natural
monopolies, developing the financial system, supporting small and
medium-scale businesses, enhancing the effectiveness of budget
spending to reduce the load on the budget, and preventing an
increase between budget spending and the GDP. This policy can and
must keep the GDP growth rate at 4-5 percent – with natural cyclic
fluctuations. After the phenomenally rapid post-crisis revival of
the Russian economy, each percent of the GDP growth rate is
acquiring special importance.

Naturally, I give preference to the second approach: Russia’s
recent history knew very many notorious government projects.

At the same time, it must be admitted that the architects of the
economic policy of the 1990s did not set themselves the vital goal
of bridging the technological gap between Russia and the developed
(and even some developing) countries. Nor did they rescue Russia
from its dependence on oil and gas exports, which began way back in
the 1970s.

Since then, the world has made tremendous headway into new
markets. Ireland and India have achieved phenomenal success in
software export, while in recent years Mexico, Thailand and
Malaysia have become net exporters of information technologies.
However, it seems that the “economic planning” inside Russia is
tossing about in the “Bermuda triangle” of trade in chicken, steel
and second-hand foreign-made cars. It must be recognized that by
1997, world trade in information technologies and equipment already
exceeded the world’s trade in motor vehicles, rolled steel and food
as a whole.

The difference in living standards between the rich and poor
countries today stems from high technologies which are indicative
of the competitiveness of socio-political systems, public
institutions, national economies, businesses and industries. The
start of the 21st century is witnessing the emergence of a new
paradigm of technological development. It consists of the growing
interdependence between capital markets and new technologies; the
swift development of what is now called the “knowledge-based
economy” or “new economy;” a stronger social orientation of new
technologies; and the global nature of the creation and employment
of new knowledge, technologies, products and services.

Several circumstances may help boost innovative activity.
Demographic restraints, and the need to spend more and more funds
to support an aging population, have confronted the developed
countries with the problem of manpower resources; this is an
especially vital consideration when viewed in the context of
inevitable limitations on migration. Other acute problems facing
the world include improving the quality of the environment,
overcoming dangerous climatic changes, developing the public health
and educational systems, and ensuring safe labor and living
conditions. In the face of these daunting challenges, it becomes
more obvious that innovative activity is a necessary factor for
developing the economic prospects of a country.

The Corporate Sector: Avoiding Institutional And Structural
Traps

An analysis of proportional changes in the economy involving
various sectors will not be sufficient if it fails to cover certain
peculiarities of big business development in Russia. The formation
of this major public institution became one of the few positive
events over the decade of reforms. The author of this article,
together with A. Sokolov, made an extensive study of Russia’s
corporate sector [1]; this study was original in
that it made rather unorthodox use of the corporate statistics
developed by the authors. I will cite here some of the conclusions
and new results of the ongoing survey. It focused on eight Russian
corporations now leading domestic businesses in sales: LUKoil,
Yukos, Alfa-Group – Renova, Bazovy Element – Sibneft, Interros,
Severstal-Group, Sistema, and Surgutneftegaz. Their economic
indices are given in Graph 6.

Historically, the establishment of large diversified holding
companies or integrated business groups was a result of the
combined effects of many factors. These include the domination of
large enterprises in the planned economy; peculiarities of the
national models of privatization chosen in the 1990s (spontaneous
and mass voucher privatization, and privatization through
documentary pledge auctions) and, as a result, the predominance of
the governmental-private form of ownership in the economy (almost
two-thirds of all assets in Russian industries belong to this form
of ownership, imperfect from the viewpoint of corporate control)
and the rather unique bankruptcy procedures.

Graph 6. Economic indices of integrated business
groups

Source: Estimates made by the author and A. Sokolov
on the basis of the companies’ annual financial reports.

Large Russian businesses, investing their own capital,
successfully carry out intensive restructuring of their facilities.
This process does not correspond with the standard methods for a
post-communist transformation. Old state enterprises are
restructured and made into profitable ventures operating on the
competitive free market without the heavy financial support of
foreign investors, and without new big construction projects.
Today, in the new Russia, the role of integrated business groups in
adapting large, centralized industries to the market economy is
difficult to overestimate. In former times, a large enterprise was
basically an entity geared toward pure production. Economic,
financial and personnel considerations, not to mention such issues
as the structure of output, the cost-effectiveness ratio, and the
search for new markets, were all solved “from the outside.” Today,
enterprises which are supported by integrated business groups
overcome their transformation shocks with fewer difficulties than
enterprises which are not. This is due to the fact that they now
have investment and marketing partners, and are provided services
for strategic planning, personnel recruitment, public relations,
etc. The specific nature of this institutional environment results
in the establishment by an integrated business group of its own
economic and financial structures: a bank, a marketing
organization, an insurance company, as well as a non-state pension
fund. Such “self-sufficiency” was typical of large conglomerates in
the U.S. in the first half of the 20th century, and of West
European companies in the 1950s. It is also very reminiscent of
Japanese companies in the 1950s-1960s, and South Korean
chebol companies of the present.

Russia’s industry is now marked by what could be termed
’hyperconcentration’: in 2001, eight companies produced 35.6
percent of all industrial output in the country. In the United
States, the ten largest companies account for 27.4 percent of
industrial output, and in Germany this figure stands at 15
percent.

On the whole, the establishment of integrated business groups in
the formation of the corporate sector in the developing economies
seems to be a historically consistent pattern of development. Yet,
some experts are beginning to express fear over Russia’s
“chebolization.” Their negative expectations stem from an obvious
threat to the freedom of competition and resultant inefficiency of
inter-sectoral redistribution of resources, from state interference
in the “selection” of “national champions” and, finally, from the
limitations which could be unwittingly imposed on political
democracy. Theoretically, such expectations have legitimate
grounds, and South Korea’s lessons have confirmed these fears in
practice. It is also widely believed that the expansion of
integrated business groups impedes the development of small and
medium-scale businesses.

This is all true, but the reality shows that in the next ten
years, due to historical inertia, Russia will simply have no choice
but to confront the situation. Among businesses that survived the
acute financial and economic crisis of August 1998, diversified
groups proved to be the only institutional structures which did not
reduce their personnel during that difficult period. At the same
time, the banking reform has produced no marked success over the
four years that have passed since the crisis. Non-state pension
funds, according to numerous expert estimates, will not be able to
perform the function of financial intermediaries for another seven
to eight years. The role of the insurance company as a potential
investor will remain questionable for the foreseeable future. The
capitalization value of the entire Russian stock market now equals
the market value of one corporation from the middle of the Fortune
Global-500 list of the world’s largest companies.

So for the next few years, large integrated business groups will
remain the only institution capable of making large investment.
Simultaneously, these groups replace standard institutional and
financial structures which are lacking in Russia like in other
developing markets, but which effectively function in the developed
countries. According to various estimates, the establishment of
such structures may take another 10 to 30 years.

It is important and possible for Russia to borrow time-tested
legislative standards from other countries. However, their
application will always acquire specific national features, while
improving judicial applications will take much time, as it will
require upgrading specific skills and changing many semi-feudal
stereotypes and traditions marked by high level of inertia. The
prolonged problems associated with the introduction of
international bookkeeping standards in this country goes far to
confirm this argument.

The illusions about Russia’s investment attractiveness have
proven to be false. At the previous stages of transformation, the
government lost a chance to attract foreign investment into the
country. Without elaborating on the reasons for that missed
opportunity, I will point out that business-to-business ties will
now play a decisive role in attracting foreign capital. It is
integrated business groups that have a real capability for
attracting foreign capital by selling them blocks of shares,
inviting them to participate in joint financial or business
projects, and by establishing other kinds of strategic alliances
with them; this would also include the high-tech sectors of the
Russian market. The deal concluded by British Petroleum and
Russia’s TNK Oil Company, predicted in advance by analysts, offers
a practical example of such a tendency.

Many integrated business groups have recently been moving
capital between different sectors of the economy, giving preference
to industries with an increasing added value.

Importantly, integrated business groups in Russia have branches
and production facilities in various regions of the country. This
process of regional expansion keeps growing. Whereas in 1993 LUKoil
operated in five Russian regions, in 2001 this figure increased to
27. Between 1993-2001, the respective increase of operations for
Interros are 1 and 25, and for Alfa-Group, 2 and 46. So integrated
business groups are objectively interested in consolidating the
single economic space and unifying the legislative environment.
These interests help enhance the manageability and stability of the
economy and remove economic factors that give rise to separatist
trends.

The Russian model of a market economy, which took shape at the
turn of the century, has two fundamental limitations (or traps):
institutional and structural. The system of state and
market-economy institutions has entered a relatively stable
transitional state. Many informal, black-economy ties, which
initially were a major resource for the economic transformation
which helped to cushion the transitional crisis shock, eventually
turned into a constant element of the socio-economic structure.
Formal institutions, although steadily developing, are yet unable
to operate in the automatic mode. The above factors result in the
segmentation of markets, on the one hand, and in the narrowing of
the time frame for economic decision-making. In other words,
economic ties characterized by low transaction costs are possible
only between enterprises included in a network of relationships
which are built on trust. Large Russian corporations or integrated
business groups represent one type of such networks.

Structural limitation of the Russian economic model stems from
the survival of a large non-market segment in the Russian economy,
as well as from Russia’s lop-sided involvement in the world
economy. Actually, it is only products of the energy, extracting
and defense industries that can compete on the world markets. In
the service sector, high competitiveness is demonstrated by retail
trade and the consulting and advertising companies, as distinct
from banks and insurance companies. The situation may improve only
if the integrated business groups shift the focus of their business
activity from fuel and other raw material commodities toward
products of high processing sectors with an increasing added
value.

This process is already evolving at a fast pace. A favorable
and, I believe, realistic scenario for the development of large
Russian corporations includes the transformation of the integrated
business groups into public, highly diversified and transparent
industrial corporations which will supply a wide range of products
and services to the market. Gradually, as standard corporate
control procedures are established, owners will depart from direct
participation in the management process and focus more on
investment. This optimistic scenario requires that the state
actively strengthen its procedures for protecting property
(including intellectual property) and contracts, and guarantee the
competitiveness of the country’s leading companies. With the
formation of the institutional environment and a system of
financial intermediaries, more sophisticated businesses (related to
machine-building and high technologies) will become its core, while
the oil-extracting and metal-producing businesses which began as
the state’s “cash cows” will develop into full-fledged independent
corporations. Integrated business groups such as Yukos, Bazovy
Element, Interros and Severstal-Group are already developing
according to this scenario.

To overcome institutional and structural limitations, the
interests of two main agents of modernization – the state and big
business – must be brought into line. In my view, standard market
processes and institutions typical of the European Union will not
allow the Russian economy to make up for the time lost in the 20th
century. Rather, a resource-and-investment strategy would be more
rational for the new decade. On the one hand, it would provide for
a more liberal economic policy than that pursued by European
states, and on the other hand, it would provide for the formation
of a simple yet rigid system of institutional signals sent by
instruments of the tax, credit, customs, license, regional and
sometimes administrative policies. These signals must encourage
private investment in the high-tech sphere, their borrowing, and
investment in the human capital, that is, they must be aimed at
enhancing national competitiveness, and forming structures and
regional groupings of the post-industrial economy.

The redistribution capabilities of the federal and regional
budgets should be concentrated on the development of education,
fundamental sciences, public health, and the infrastructure of the
post-industrial economy.

Russia’s chances in the world economy for the next few decades
will depend on how fast it will be able to eradicate the stubborn
socialist features of the national innovation system which has for
decades been unable to solve the notorious “introduction” problem.
Russia must cure its chronic “diseases,” such as the lack of large
science-intensive corporations which are capable of taking
financial and technological risks involved in the commercialization
of innovations. This also requires that innovative concepts and
ideas conform to the logic of science and technology development,
while almost completely ignoring social needs and solvent
demand.

1. A. Dynkin, A. Sokolov.
Integrated Business Groups as a Breakthrough to the Country’s
Modernization. Moscow. 2001, p. 93; A. Dynkin, A. Sokolov.
Integrated Business Groups in the Russian Economy. Voprosy
Ekonomiki, No. 4/2002, pp. 78-95.