As Ukraine conflict continues, Russia's government grabs the chance to modernise economy

No, Russia does not want to “withstand the sanctions” as in getting the economy back to where it was in early 2022, when the war in Ukraine started. Instead, Russia has seized the chance to radically change its economy, prodding it into a leap forward. Some of the results have been instant, producing a surprising effect.

That’s the general takeaway from a series of high-level sessions in Moscow, ended yesterday with the President Vladimir Putin’s meeting with the full government. Probably the key phrase from that meeting is about “a new model of growth of economy on our own technological base”.

The process started a week ago, when the Prime Minister Mikhail Mishustin made his regular report to the lower chamber of the Parliament. Then the MP’s questions came along, the procedure lasting for several days. And, of course, the media has its field day. The general picture is surprising. Mr. Mishustin, after all these surprises, is becoming a very popular personality in Russian politics.

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It is not always about general figures, as in GNP. One example is civil aviation. Several of the Russian airlines and leasing companies have been criticized for years for preferring Boeings and Airbuses, while the orders for local medium-range domestic planes like MC-21 or Sukhoi Superjet were simply not coming. And then, there were several laboratories producing local models of smaller planes, mostly for agriculture, that were complaining of nor getting credits and orders. Now they all have wakened up to life, fighting each other for supremacy.

Then there are turbines, for power stations and gas pipelines. Everybody knew that Russians cannot produce such things. Now we know it’s not so, the TV tells us some of the new composite materials for these machines are better than the German ones.

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Since you cannot escape figures, this is one of them. The Russian IT has suddenly made a 22 per cent leap in 2022. The reason is simple, Russian nerds have always had solutions for problems like a sudden breakup with American soft. Now that work has found buyers. Same with civilian shipbuilding and many other things.

A two-digit raise has been also registered in tourism (we always need rest in turbulent times), but especially in all kind of construction. 240 kindergartens, 250 schools, 270 hospitals, 103 million square meters of residential buildings within a year – these are the facts from Mr. Mishustin’s report in the Parliament.

Some novelties are not exactly about the economy as such. An example is the education system. Today the government has reluctantly admitted a possibility of cancelling the universally hated system of the Western-style testing after schools. So, now even that fortress began to crumble. The general idea of the critics (and parents) is that the old Soviet system was evaluating the whole bulk of pupil’s knowledge, not subjecting the youth to the lottery of dumb testing. And it was that Soviet system that has produced generations of highly-educated citizens, while the Western one has dropped knowledge to the bottom.

So, how did it happen that a huge nation was stagnating in the years of peace, with hordes of experts accusing the government of driving the economy into a dead end, while the same nation suddenly revived its economy in the times of war? Surely it had to be the reverse.

You just watch the dismay of people who were too sure that Russia was supposed to crumble down under the Western sanctions. “ Don’t Trust Russia’s Numbers”, says an American expert in the Foreign Policy magazine. Moscow (and China) have made economic statistics a central part of their information war, he says. The International Monetary Fund estimates that the Russian economy contracted by only 2.2 per cent in 2022, while at the start of the war, same IMF had forecasted a recession of 8.5 per cent? All lies. You wait a bit, maybe the figures will be quietly revised to a figure closer to 3 per cent or even 4 per cent.

What’s funny, plenty of Russian economists agree that the figures are wrong, but their estimate is, that things are much better than the government is saying. In fact, Vladimir Putin, in the mentioned speech yesterday, noted that the economy began to grow ever since July last year, and it was the first 6 months that dragged the overall figures down.

So how is it possible to revive the economy that was supposed to die? There are several answers to that. First is the wrong previous model of economic partnership with the outside world. Several years of stagnation was based on the model of exporting oil and gas while importing the rest, which doomed the local hi-tech to secondary roles.

And the second reason is, of course, the money. Some of the money of 2022 came from outside. It so happened, that in 2022 Russia suddenly, for the first time in history, rushed into the top 10 of the world’s exporters, jumping up by two positions. So now it’s next after China, the US, Germany, Netherlands, Japan, South Korea, Italy, France, and Canada. And, incidentally, Russia had become, also for the first time in history, one of India’s top 5 trading partners.

That was relatively simple. The reason was anti-Russian sanctions, raising energy prices to the roof on global scale. What’s not simple at all, was a defeat of Russia’s own monetarists, keeping credit tight for years, if not decades. Money-starved economy lead to weak domestic demand and to the general feeling of loss of direction. The opposition was cursing the monetarists, who fought back with the labels of “commies” and “China stooges”.

In any case, the current powerful infusion of money into the economy looks safe. You need not fear inflation with a 2.3 per cent budget deficit and a 15 per cent level of State debt, if in doubt, ask the Americans (or the Chinese).

But, even with a low risk, that jump-start of Russia’s economy only has meaning in case we get a new and hi-tech model of that economy in a matter of several years.

The author is a columnist for the Russian State agency website ria.ru, as well as for other publications. Views are personal.  

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