Reform and Russia’s Future

What complicated a lot of our political and economic reforms was the existence in Russia of a very large military machine with all its plants and assets. Russia is still, in terms of its nuclear capacity, a superpower and this factor remains a very important factor for our foreign policy, and for our domestic political scene and economic reforms.

The situation in Russia after the financial crisis in August 1998 is still quite serious, from both the political and economic points of view. Primakov’s government brought substantial political stability, and we still enjoy that stability in the country. I am not quite sure for how long, but this is a very important factor, though in the area of economics we are still facing the same problems.

I can mention only some of the most important elements of this situation, like the growth of unemployment (officially, we now have 12.4 percent unemployment in the country); there is still a substantial debt problem of the government to teachers, medical doctors, the armed forces and the defense industry, personnel of the ministry of the interior, and so on; and the situation in the banking sector is still very far from satisfactory. In order to estimate where we are right now and what could be done in the short-term, mid-term, and long-term we should have a serious analysis of the results of the previous stage of the course of reforms in Russia.

The Mistakes of the Radical Reformers
It is now the overall consensus that one of the biggest mistakes of our radical reformers in Russia was that they concentrated almost exclusively on macroeconomic stabilization with a minimal role for the state. A majority of them became even greater followers of the ideas of Milton Friedman and Friedrich von Hayek than some of the followers of these distinguished economists in the United States. These radical reformers were preoccupied with this idea of minimizing control by the state and primarily using this monetary method to stabilize the economy. But they did not pay attention to the creation of a modern banking system according to international standards nor did they deal seriously with restructuring our industry, especially the most valuable part of our industry for potential economic growth—the defense industry.

In the press of radical reforms important factors of the contemporary global economy, such as human capital, were almost ignored. And this is especially tragic because we still have a pretty high level of education and we still have a substantial level of scientific activity and scientific achievement and cultural development and principles. We now have more universities than we had before the reform started—we have 427 research centers and laboratories in the Academy of Sciences—and this is one of the good signs of the reforms. But another sign, a bad sign, of the reforms is that factors such as education and the substantial technological potential of universities and research centers of the Academy of Sciences are not used in a proper way and we have not created the necessary conditions to use this human capital.

We did not have efforts on the part of the government, in spite of the insistence from some of us, to create techno-parks and incubators for small high-tech firms. We are trying to do it now, though, of course, with substantial delays and losses, losses in terms of brain drain, for example. A lot of our best scientists, including computer scientists and mathematicians, come to the West for the benefit of the American economy or the benefit of the Western European economy. This is our positive contribution, at least, to the world economy!

Practically nothing was done by the majority of Russian reformers in terms of facilitating the process of greater participation of our high-tech and mid-tech industry in the world division of labor. We are still, in my view, quite competitive in the world economy with rocket launchers, laser technologies, super high-frequency electronics, and many kinds of aircraft. And we are especially potentially competitive in areas like the production of software, which is now the most important part of economic development in the world.

As a result, the role of exports of raw materials in the Russian Federation became even more substantial than it was in the Soviet Union. It was one of the features of the collapse of the Soviet economy that oil, for example, had more and more of a role to play in our exports and foreign trade. And we saw the impact of this role recently: The substantial decline in the price of oil was one of the major reasons for the financial crisis of the Russian Federation in August 1998. The financial crisis was not just the result of concrete mismanagement of the situation by the Kiriyenko government, the pyramid of Russian treasury bonds, or mismanagement on the part of the Central Bank of Russia. It was, in many respects, a result of the mistakes in strategic decisions made in 1992 and 1993 regarding the Russian economy and Russian industry. Unfortunately, the survival of Russian high-tech industry in many respects now depends on exports of weapons. And, in my view, it is not the best solution for our country; it is bad economically and it is sometimes counterproductive politically.

The scale of support and direct help from the West for Russian reconstruction was, in my view, not adequate to the tasks which we announced in 1991 and 1992. As I said before, we tried to substantially change the political system—the whole of our history for several centuries and maybe for a thousand years—and simultaneously to create quickly a market economy in a country which never experienced it on a large scale, maybe excepting a couple of decades before the October Revolution. We needed much larger help, comparable to the aid from the United States to Western European countries after World War II through the Marshall Plan. The aid from the West to the Russian Federation and to other CIS countries, according to some Western estimates, is several hundred times less than the aid provided by the United States to the Western European countries through the Marshall Plan. And mostly the aid from the West came in terms of loans which are now the cause of big debt problems for both us and the West.

Another very important factor is that a majority of radical reformers ignored traditional values of the Russian population, like patriotism. As a result, the idea of patriotism started to be exploited, and quite successfully, by communists and radical nationalists. The reformers were also unable to create a strong enough law enforcement system, which was badly needed during this period. In the Security Council, I was in charge of coordination of many of our law enforcement agencies fighting corruption, terrorism, illegal transactions of military technologies, etc., so I know how difficult it was to use these law enforcement agencies after their substantial weakening and fragmentation during the first phase of reforms.

The Next Phase of Reform
And now, taking into account these long-term and mid-term problems which we face after the first phase of reform, I think that the most important and the most urgent tasks for us to continue these reforms are the following:

• First of all, we should combine the ideas of political democracy, human rights, and market economy with ideas of traditional Russian patriotism. If we don’t do this we will leave patriotic sentiment entirely in the hands of those who are entirely against these reforms.
• Second, we should formulate a clear-cut national industrial-technological policy based on the wide use of our human capital and the creation of market economy mechanisms to utilize this human capital for the benefit of Russia’s economy and integration into the world economy and for the benefit of global growth.
• Third, we should restructure our high-tech industry and, first of all, our defense industry. We should create large industrial corporations according to the standards existing in the West—we are now looking for the best models for our corporations through my newly created organization, the Confederation of Industrial Corporations of Russia—and, at the same time, we should create small and medium-size companies, including in high-tech areas.

Part of this task is entering the world market not with raw materials or steel—we don’t want more situations like we had recently with the steel workers of the United States objecting heavily to our cheap steel coming to the United States market—but with high-tech and mid-tech products through active cooperation and strategic partnerships with Japanese, Western European, and American companies. Fortunately, we have some examples for these kinds of cooperation—good examples and some cases of success. We should now develop the right model for the role of the state in the economy in scientific technological development. And in this respect there is a growing understanding and even consensus in Russia that we should borrow more from Western Europe and Japan, even taking into account the current problems in the Japanese economy, rather than from the United States, and maybe even from Israel. There have been very good and interesting recent developments in the high-tech industry in Israel, which has about one million Russian-speaking people now.

Cooperation in a Changed Strategic Landscape
We had very substantial changes which occurred in political and military affairs in 1998. First of all was the appearance of two new official nuclear states, India and Pakistan; in the same context there are tests of rockets-one successful, one unsuccessful—in Iran and North Korea; and there are other developments not very well-known to the general public. All of these developments are significant enough to make the conclusion that the world will have a substantially different strategic landscape in the 21st century from what was seen by the majority of analysts right after the Cold War and the collapse of the Soviet Union. Trilateral countries and Russia should devote substantial intellectual efforts to understand the nature of this new strategic landscape. We need joint work in this area. There is no military answer to these issues; no theater nor strategic ballistic missile defense could cope with these kinds of threats, that is for sure.

One should take into account that Russia is still one of the most important factors in all of these geopolitical equations, especially in the nuclear field. I should also point out that there is a very serious issue in connection with non-proliferation of weapons of mass destruction and rocket technologies. We should work together—Trilateral countries, Russia, and other CIS countries—to have more sophisticated export control systems. My personal experience shows that existing export control systems not just in Russia, but in the West as well, are not sufficient. This issue should also be a serious topic for the work for Trilateral countries with the Russian Federation and other CIS countries.

In conclusion, I think that we are facing new problems, new challenges, and new opportunities. Russia suffered a lot before and during the reforms, but is ready to proceed anyway with both political and economic reforms, and is ready to become a real member of the international community of developed countries.