On November 23, the Russian government launched a large-scale reform of development institutions with a declared goal of optimization for the sake of implementing the National Projects. Discussions about the inefficiency of these organizations have long become commonplace, but the parameters of the reform indicate that its real goals are the redistribution of financial flows, the destruction of the past decade’s symbols, and the political strengthening of Prime Minister Mikhail Mishustin.
Since his appointment, Prime Minister Mikhail Mishustin has been consistently strengthening his political positions. Photo: Wikimedia Commons.
At the beginning of the week, Russian Prime Minister Mikhail Mishustin announced his latest innovation. Having promised recently to drastically reduce the number of officials, he now put forward an initiative to consolidate the so-called “development institutions”—a whole range of opaque organizations that have been created in Russia since the mid-2000s and, as experts have estimated, absorbed at least 250 billion rubles ($3.3 billion) of budget funds annually for maintenance. Still, their very creation cost the country many times more. To evaluate this step and its consequences, it is necessary to say a few words about the area that is bound for reform.
Development institutions are usually defined as organizations designed to concentrate resources—usually allocated by the state—in areas where the authorities see good prospects for an economic breakthrough. Such organizations are especially in demand when the government has declared a course for accelerated modernization and defined its priorities. Recall, for example, Japan’s Ministry of Foreign Trade and Industry, which over a half century of its existence—from 1949 to 2001—turned the country into a global economic leader. This development institution had the right to determine the priority areas of modernization, regulate competition between companies in the domestic market, subsidize interest rates, finance the massive acquisition of foreign patents by selling foreign currency at an undervalued exchange rate to Japanese firms, subsidize exports, and finance retraining programs for company managers and personnel. Since 1971, its powers were reduced as Japan transitioned to a floating yen, and following the 1989 stock crash, they were limited even more, but by this time its main goals had been achieved: modernization and technological development had become self-sustaining, and the Japanese economy was envied worldwide.
Nothing of the kind is seen in Russia and never will be: modernization in a country that clings on to the past and fears progress is by definition impossible. However, since the mid-2000s (and especially after the election of Dmitry Medvedev as president), progressive rhetoric in the government has led Russia to establish a number of companies that became collectively known as “development institutions.” Their essence and direction, however, changed in the mid-2010s, when alongside industry structures, such as Rusnano or the Skolkovo Foundation, meaningless organizations in the style of “Potemkin villages,” like the Agency for Strategic Initiatives, began to sprout. The result was a strange combination of over 50 institutions, all of a different nature and function. Most of them were so blatantly ineffective that this fact was not only pointed out by liberal experts but also regularly confirmed by the far more conservative auditors of the Accounts Chamber, who estimated the total damage from the development institutions’ activities at more than 5 trillion rubles ($66 billion).
The conglomerate of these semi-state institutions, which is now heading for reform, can be broken down into several parts. First, there are companies created for specific tasks and for specific people, e.g. Rusnano (development of the nanotechnology industry, headed by former government official Anatoly Chubais) or the Skolkovo Foundation (development of innovation and advanced technologies, chaired by another government official, Arkady Dvorkovich), interest in which has been largely lost of late, and whose results look unclear at best. For instance, Rusnano’s total losses over the past five years have exceeded 16.5 billion rubles ($220 million).
Second, there are organizations designed to accelerate the development of specific regions—the Far East and Arctic Development Fund, the Far East Investment and Export Agency, the Agency for the Development of Human Capital in the Far East, the North Caucasus Development Corporation, and the North Caucasus Resorts Company—as well as numerous structures aimed at developing single-industry towns and free economic zones. Their results are also less than impressive, and their duplication of certain ministerial functions is obvious.
Third, there are organizations operating within one industry or related branches: for example, banks, such as Dom.rf and MSB, established to stimulate housing construction, the Federal Foundation for the Protection of Investors’ and Shareholders’ Rights, some leasing companies (State Transport Leasing Company, VEB-Leasing), and some entities created to “ensure accelerated technological development.”
Most of these organizations are slated for reorganization, while a number of others that, for some unknown reason, are also classified as “development institutions,” are not. Mainly sectoral monopolies—Rostec, Rosatom, Roskosmos, Russian Highways (Avtodor), and the Russian Environmental Operator—as well as de facto federal agencies, such as the Deposit Insurance Agency, will retain their former status and operational focus. However, these structures are essentially nothing more than large state-owned companies or monetary policy instruments—no Western specialist would call the Framatome (French nuclear giant), NASA or the US Federal Deposit Insurance Corporation “development institutions.”
The very idea of reorganizing Russian development institutions does not evoke unequivocal acceptance or rejection. There is no doubt that most of the aforementioned structures were created according to purely bureaucratic logic. Sectoral ministers and/or deputy prime ministers sought, on the one hand, to establish them to emphasize their lines of work, and, on the other, to create entities that would facilitate the “cutting” of budget funds and the employment of “the right people” for civil service positions that were not subject to salary restrictions. At the same time, it is obvious that in some cases—a classic example here is the declared intention to unite the Russian Science Foundation and the Russian Foundation for Basic Research, which has already caused a great stir in the scientific community—the consolidation process is aimed not so much at real optimization of functions and tasks as at purely formal steps, which often destroys the existing competition. This trend, I note, is inherent to the Putin state with its proclivity to “enlargement,” as can be exampled by Rostec, an umbrella organization originally set up to manage state-owned arms companies, which very quickly started to absorb civilian industry assets as well, killing competition as a result.
Evaluating the government’s plans, given that its motivation is clear overall, I see two big flaws. First, most of the structures slated for merger and reorganization are not needed at all. Leasing companies can be sold to state banks (e.g. general service companies to Sberbank, and specialized ones, such as Rosagroleasing, the leader in the agricultural equipment leasing sector, to the Russian Agricultural Bank). Various development agencies could delegate their powers to the relevant ministries, such as the Ministry for the Development of the Russian Far East and Arctic, since such strange entities exist within the federal government. Banks, like Dom.rf, whose share of the Russian mortgage market is only 2.5 percent, can also be sold to Sberbank or VTB, and subsidies for soft loans can be distributed directly. The proposed reorganization, if both the state status and commercial essence of the new offices are maintained, will not change anything.
Second, it is surprising that a significant portion of the agencies heading for reorganization (8 out of 20) will be transferred under the jurisdiction of the most ineffective institution in Russia—Vnesheconombank (VEB), which has declared losses of 613 billion rubles ($8.1 billion) over the past five years. Moreover, VEB is now headed by Igor Shuvalov, a target of numerous investigations into corrupt Russian officials, which fact immediately provoked fervent discussion in the expert community. I may be wrong, but the “bank of bad debts” (which is VEB’s role in today’s Russia) has never been perceived anywhere in the world as a “development institution.” Both of these circumstances suggest that in the coming months we will see an active bureaucratic struggle for positions in the consolidated structures and long-term paralysis of the development institutions’ work in the meantime. One group of favorites will replace another, cash flows will follow the adjusted channels, but fundamentally nothing will change in the current system.
I see the primary purpose of the reform in the following: Prime Minister Mishustin has recently been turning into a relatively independent political figure and is trying to create loyal institutions around him. I have already discussed elsewhere a much publicized work on creating a new federal information holding, which will be fully controlled by the head of government. Mishustin’s undoubted organizational talent is clearly pushing against the senseless duplication of functions by regional “investment” agencies, but many structures that currently receive budget funding are headed by “people from the past”—Anatoly Chubais (Rusnano), Arkady Dvorkovich (Skolkovo Foundation)—and look increasingly like tasty morsels for the prime minister’s inner circle.
I am convinced that the reform will result in the emergence of structures that will be, albeit on the surface, much more transparent and manageable, but hardly more effective. Reports will certainly be produced hailing budget savings and staff cuts, but their objectivity, in my opinion, might be questionable. Still, the main goal of the reform is to symbolically destroy the most famous sinecures of the past decades (which will undoubtedly give the prime minister additional political points) and to prepare a development “superinstitution” (or, more precisely, double bookkeeping) on the VEB’s basis. In the future, VEB may be transferred under the control of one of Mishustin’s close associates, since Shuvalov, who looks more at home surrounded by cute Corgis somewhere in London, is no less alien to the prime minister’s entourage than the rest of Medvedev’s team.
Can the reorganization somehow boost the real development of the Russian economy? In my opinion, it cannot—and not even for tactical, but for strategic reasons. Today, the country’s political leadership has no development goals. Its main purpose (which no one even bothers to hide) is to “stabilize” the situation and maintain control over financial flows and property. The modern world economy’s most significant trends—informatization, biotech revolution, transition to renewable energy, financial policy changes—are entirely ignored by the Russian authorities. If you look at their strategic goals, they are not being achieved and are either removed from the agenda, postponed to more distant terms (beyond the responsibility of the current elites), or simply forgotten.
What kind of strategic planning can there be in a country where for almost two decades the results of any sectoral development program have never been even analyzed before a new program has been adopted? Russia today is a country of opportunities, but not of development. It is possible to implement individual private projects, but unrealistic to achieve consistent progress in any significant industry. There are success stories, for example, in cosmonautics, passenger aircraft construction, the road industry, and even waste disposal—all areas that fall under the direct responsibility of development institutions. This incongruity is not a flaw in the system currently existing in Russia, rather its very core.
* Vladislav Inozemtsev holds a PhD in economics and is the director of the Centre for Research on Post-Industrial Societies.
