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Journal of Eurasian Studies 5 (2014) 21–38

Contents lists ava

Journal of Eurasian Studies

journal homepage: www.elsevier .com/locate/euras

The pendulum moves from Europe to Asia. Modernizing Siberia and theFar East. Economic and security issues

Silvana Malle a,*, Julian Cooper b

aCentre of International Studies at the Department of Economic Science, University of Verona, ItalybCentre for Russian and East European Studies, University of Birmingham, United Kingdom

a r t i c l e i n f o

Article history:Received 20 July 2013Accepted 1 October 2013

* Corresponding author.E-mail addresses: silvana.malle@univr.it (S. Malle), j

Peer review under responsibility of Asia-Pacific Res

Production and hosting by Elsevie

1879-3665/$ – see front matter Copyright� 2013, Ahttp://dx.doi.org/10.1016/j.euras.2013.10.004

a b s t r a c t

Under the current Presidency of Putin two main areas of concern are discernible: themodernization of defence industry and the accelerated development of Siberia and, inparticular, the Far East. To a certain extent, development programmes prioritized withinincreasingly tight budget constraints overlap, since important sections of the defence in-dustry are located beyond the Urals. In response to China’s rapidly increasing economicand military strength, there is a need both to modernise infrastructure in order to boosttrade opportunities eastward and to enhance and diversify industrial capabilities, a task inwhich the defence industry has a role to play.The article examines the policy and financial implications of the current shift eastwards.Resistance to policy changes is strong. Private investments will need strong encouragementwhile the role of the state needs to increase in the short-medium term. Nationalism andideological inclinations add to a lively policy debate oftenmarked by harsh tones. Thismajorturn in strategy needs to entail a certain degree of decentralization as specific long-termprojects are hardly manageable from Moscow. The existing structures are manifestly inad-equate. While the need for a special authority endowed with the necessary powers for co-ordination and control of branch and territorial projects is discussed, the appropriate balancebetween the representation of regional interests and federal development plans is unclear.The article argues that more could be done to stimulate the regional powers to assume theirown responsibility in selecting the most suitable projects consistent with federal priorities,offering good administrative services and, when necessary, tax incentives. While estab-lishing nation-wide economic goals, federal government should be more receptive to localdemands, while strengthening its command over security issues. Mutually supportive andrespectful interaction between regional and federal bodies would improve the ability toassess in an informed way opportunities and constraints for growth and better discriminateamong alternative projects on the basis of their respective outturn, feasibility and cost.

Copyright � 2013, Asia-Pacific Research Center, Hanyang University. Production andhosting by Elsevier Ltd. All rights reserved.

.m.cooper@bham.ac.uk (J. Cooper).

earch Center, Hanyang University.

r

sia-Pacific Research Center, Hanyang University. Production and hosting by Elsevier Ltd. All rights reserved.

mailto:silvana.malle@univr.itmailto:j.m.cooper@bham.ac.ukwww.sciencedirect.com/science/journal/18793665http://www.elsevier.com/locate/eurashttp://dx.doi.org/10.1016/j.euras.2013.10.004http://dx.doi.org/10.1016/j.euras.2013.10.004

S. Malle, J. Cooper / Journal of Eurasian Studies 5 (2014) 21–3822

1 See Malle, S., “ The Policy Challenges of Russia’s Post-Crisis Econ-omy” Post-Soviet Affairs, 2012, 28,1, pp.66–110 and “Economic modern-isation and diversification in Russia. Constraints and challenges”, Journalof Eurasian Studies, 2013, 4, pp.78–99.

2 See Connolly, R. ‘State Industrial Policy in Russia: The Nanotech-nology Industry,’ Post-Soviet Affairs, 2013, 29 (1), 1–30.

3 See http://ria.ru/skolkovo/20121217/915115274.html accessed 17December 2012.

1. Introduction

From 2008 to 2011 under President D.A. Medvedevfocus on modernization went along with economic diver-sification, a goal prompted by the unexpectedly perversefallout from the financial crisis in Russia compared to theG20 average and other large emerging economies, and thegovernment’s efforts to catch up with advanced economiesin high technology. Under the third presidential mandate ofVladimir Putin priorities seem to be changing. While theneed to shake up old structures and patterns of growth isstill there, areas and loci of modernization are shifting fromthe West to the East. Close scrutiny suggests that targetinghas been sharpened with more focus on comparatively lessdeveloped areas of the country and on the defence sector asa driver of change, though upholding the substance ofmodernization goals.

For quite awhile modernization plans have been shapedby the highest government authorities leaving privatebusiness people on the side, among the audience, ratherthan prompting them to drive the change. At the same timebusinesses – whether large, medium or small – have notclearly put forward their own claims regarding innovationand/or exploitation of competitive advantages in any sig-nificant domain. Mainstream literature is critical ofgovernment-led modernization and wasteful projectsattached to it. World, and Russian, history suggests, how-ever, that government action may be needed and shouldnot be ruled out as a matter of principle.

This article argues that modernization from above isdifficult and costly, but not impossible. For it to succeed,however, would need continuous interaction with, andfeed-back from, economic agents and society at large tominimize resistance from routine-dependent workforcesand management, and to monitor obstacles to imple-mentation. Modernization from above also needs stateassistance in terms of direct funding or state guarantees. InRussia the roomfor budget fundinghasbeen shrinking since2008 prompting calls for public-private partnerships.Whilethe federal government still indulges in elaborating far-reaching strategies, there is a need for private domestic orforeign investment to put plans in the correct perspective.

Ambitious projects will need to be prioritized accordingto regional needs but also to capacity for implementation.While the European part of Russia in principle should haveadapted faster to the need of restructuring – it is not bychance that Skolkovo, a site close toMoscow, was chosen asan experiment in technological advancement – deeperintegration into the world economy brought about bymembership of the World Trade Organization (WTO) ex-poses Russia to fierce competition from the East. Con-fronted with the rising power of China, Russia needs tobalance economic opportunities with security concerns:the authorities face difficult choices.

This article discusses the current shift in emphasis oneconomic restructuring from the West, closer to Medve-dev’s concerns, to Siberia and the Far East; focuses on thegovernment’s priorities in this context highlighting, inparticular, the capacity and potential of the defence

industry in the region; and, finally, provides a criticalassessment of the authorities’ efforts to mobilize capitaland labour resources under shrinking federal and regionalbudgets and limited capacity for central control.

2. The roadmap of modernization under PresidentMedvedev (2008–2010)

Diversifying the Russian economy out of natural re-sources and hydrocarbons, pulling it out of the Oblomov-like lack of resolve, driving it from its emerging marketstatus into the group of advanced economies that to a largeextent coincides with the OECD (Organization of EconomicCooperation and Development) grouping emerged as apriority under President D.A. Medvedev. Malle discussed indetail the development of this vision that originated before,and goes beyond, Medvedev’s presidency, together withmotivations, hopes and obstacles surrounding these pro-jects in previous articles.1 Some positive steps on theway toeconomic diversification have also been highlighted inthose articles although the four years’ timeframe of thisroute under Medvedev would hardly allow for a definitiveassessment.

Under Medvedev, the focus fell primarily on structuralreforms that in principle should have moved the economyin the right direction, such as the gradual disbanding of thehuge state corporations created in the early 2000s, thecreation of independent state companies’managers and animpressive privatization agenda. Much of this has remainedon paper possibly due to more pressing commitmentsrelated to the 2008–2009 crisis.

Efforts to create a pool of interacting experts, operatorsand agencies interested in branch-focused technologicalprogress by attracting foreign investors and their ownknow-how in research and development (R&D) were alsoput in place, namely in Skolkovo, a site placed under in-dependent (from the state) management, within a projectlargely inspired by Silicon Valley in the USA.

It is too early to assess the fortunes of such a project,although views on the chances of some sectors are alreadyemerging.2 A number of foreign investors and companieshave signed memoranda of intent, including the Massa-chusetts Institute of Technology. Work on invention andapplication of new technologies is only just starting. Someprogress has been made since its beginning in November2010. The number of resident companies has been steadilyincreasing.

By end 2012 Skolkovo already counted 750 residentsalbeit with an unimpressive combined revenue of $13million.3 By early 2013 there were 832 resident companies;

http://ria.ru/skolkovo/20121217/915115274.html

S. Malle, J. Cooper / Journal of Eurasian Studies 5 (2014) 21–38 23

grants had been assigned to 184 companies for a total of 9bn roubles; tax benefits accrued to the other companies.4

By August 2013 the number of resident companies hadreached 941 – about the 1000 target envisaged whenstarting the project.5

Creativity indicators were also satisfactory. In 2012member companies produced 131 intellectual propertyitems exceeding the expected outcome and Skolkovoaccounted for a quarter of licences registered in the RussianIT industry. Forty-nine venture funds were accreditedhelping to co-finance Skolkovo’s grants with a 40 per centshare of total funding. By these outcomes and by thenumber of applications per week – 50, of which about 10are accepted – one can gauge that the project starts havinga life of its own and chances to grow. Microsoft, for instancesigned an agreement to double its presence in the inno-vation centre by 2015.6 At the Skolkovo Centre of Scienceand Technology the first working groups with participantsfrom Russian and international companies are currentlyactive in the fields of Oil and Gas, Materials and Structures,Energy Technologies, Biomedical Technologies, and Infor-mation Technologies.7 Of the 24 existing corporate R&Dcentres most have been formed to spur IT and energy ef-ficiency. To date 143 patent applications have been sub-mitted to expert panels for consideration and 40 companieshave received grants for the implementation of their pro-jects.8 Large international companies like Intel, Cisco,Samsung and many others have invested in Skolkovopossibly also betting on the comparatively high academicbackground of Russian specialists. Some are member of theinternational board for Skolkovo together with theirRussian counterparts. By the end of 2012 some 10,000 newjobs were expected to materialize and more than 13,000did.9

The innovation centre is financed primarily from theRussian federal budget, although state funds are notimpressive and under downsizing pressure fromcompeting government agencies. In 2010 its budgetwas 3.9billion roubles. A total of c.54 bn roubles (c. $1.8 bn) for

4 Moreover some 4–5 per cent of registered companies, unable todeliver according to projects, were about to lose member status andrequired to turn all documentation including awarded grants to justicefor investigation, see http://www.vedomosti.ru/tech/news/9243301/filtr_skolkovo accessed 19 February 2013.

5 http://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from¼newsletter-editor-choice&utm_source¼newsletter&utm_medium¼content&utm_campaign¼editor-choice accessed 1 August 2013.

6 See ibid. and http://ria.ru/skolkovo/20121217/915115274.htmlaccessed 17 December 2012 and http://thenextweb.com/eu/2012/11/06/microsoft-is-to-double-its-presence-in-russian-skolkovo-by-2015/accessed 6 November 2012. See also http://thenextweb.com/insider/2012/12/17/skolkovos-2012-97m-in-grants-750-residents-49-venture-funds/ accessed 17 December 2012.

7 See http://www.skoltech.ru/industry.8 See http://www.sk.ru/GetInvolved/Partner.aspx.9 See http://www.telegraph.co.uk/technology/9760653/Techs-new-

territory-Skolkovos-Moscow-takes-shape-after-Munich-summit.htmlaccessed 23 December 2012. According to MED’s report to the govern-ment, the results are overall satisfactory and beyond expectations, seeAleksei Ulyukaev, http://government.ru/news/3490 accessed 1 August2013 and http://expert.ru/2013/08/1/vtoraya-zhizn-skolkovo/?n¼43561accessed 10 August 2013.

Skolkovo as a whole was projected by the Ministry ofFinance (MOF) for 2011–2013 in the expectation that pri-vate capital would gradually replace state funds.10 Statesubsidies to a total of 85 bn roubles (approximately $2.8 bn)to support Skolkovo from 2010 to 2015 were announced inAugust 2012 by the MOF,11 i.e. less than $500 mln per year.The Ministry of Economic Development (MED) hoped fortotal state funding to 2020 of 135.6 bn roubles (c. $4.52 bn),of which almost 110 bn have already been in part disbursedand in part planned for disbursement in the (2013–2015)budget according to a decreasing scale of assignment. Thissum was later trimmed down to 125.2 bn roubles (c. $4.2bn) by decision of the government.12

To the displeasure of the authorities, Russian companieswere reluctant to engage in activities in Skolkovo. Medve-dev tried to intervene by imposing on state companies arequirement to devolve 1 per cent of their own R&D bud-gets to the Skolkovo Centre.13 Reactions were immediate,ranging from open criticism to resistance with only fewcompanies apparently satisfied with the initiative. Defencecompanies represented by Deputy Premier Dmitrii Rogo-zin, who is in charge of the Military-Industrial Commissionof the government, claimed that the schemewas costly andinefficient, pressing Putin (and possibly law enforcementagencies) to intervene against it. Soon after this a federalinvestigation into c. $750,000 apparently missing from thecentre’s budget was initiated, stirring further debate onhow Skolkovo was managed.14 Interestingly, among theinnovation programmes worked out with the participationof 57 state companies figures Oboronservis, a companycreated by disgraced former Defence Minister, AnatoliiSerdiukov, to help outsource some of the Ministry’s non-profile activities, and recently subject to federal investiga-tion for misuse of funds and embezzlement.15

The 8 May 2013 abrupt resignation from the govern-ment of Vladimir Skurkov, the mastermind of the Skolkovoproject, following criticism from law enforcement struc-tures, was seen by many as a further blow to the work andfate of the innovation centre. On top of these events, Putin’s

10 See http://www.kommersant.ru/News/1482479 accessed 5 August2010. See also Postanovlenie Pravitel’stva Rossiiskoi Federatsii of 26 Iulia2010 N. 565 entering into force 12 August 2010 accessed 5 August 2010from http://www.rg.ru/printable/2010/08/04/skolkovo-dok.html.

11 See http://www.ewdn.com/2012/08/30/government-confirms-full-financing-for-skolkovo/.

12 See http://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from¼newsletter-editor-choice&utm_source¼newsletter&utm_medium¼content&utm_campaign¼editor-choice accessed 1 August 2013 and http://top.rbc.ru/economics/16/08/2013/870422.shtml accessed 16 August 2013.

13 See http://rt.com/business/news/russia-skokovo-skoltech-innovation-069/print/ accessed 21 Malle, 2012 on the then Presidential AdvisorArkady Dvorkovich’s announcement that the development fund of c. $570mn planned for 2012 would benefit from state companies’ funding, amongwhich were listed Gazprom, RZhD (railways), RusGidro and Aeroflot. Seealso http://izvestia.ru/news/546824 accessed 19 March 2013 on lowerdeduction from profit (0.5 per cent) imposed on relatively smaller com-panies and exemptions on others.

14 See http://www.reuters.com/article/2013/02/13/us-russia-skolkovo-fraud-idUSBRE91C0XC20130213 and :http://themoscownews.com/business/20130212/191231078/Investigators-deny-Skolkovo-came-clean-over-embezzlement.html accessed 13 February 2013.

15 See http://izvestia.ru/news/546824 accessed 19 March 2013.

http://www.vedomosti.ru/tech/news/9243301/filtr_skolkovohttp://www.vedomosti.ru/tech/news/9243301/filtr_skolkovohttp://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://ria.ru/skolkovo/20121217/915115274.htmlhttp://thenextweb.com/eu/2012/11/06/microsoft-is-to-double-its-presence-in-russian-skolkovo-by-2015/http://thenextweb.com/eu/2012/11/06/microsoft-is-to-double-its-presence-in-russian-skolkovo-by-2015/http://thenextweb.com/insider/2012/12/17/skolkovos-2012-97m-in-grants-750-residents-49-venture-funds/http://thenextweb.com/insider/2012/12/17/skolkovos-2012-97m-in-grants-750-residents-49-venture-funds/http://thenextweb.com/insider/2012/12/17/skolkovos-2012-97m-in-grants-750-residents-49-venture-funds/http://www.skoltech.ru/industryhttp://www.sk.ru/GetInvolved/Partner.aspxhttp://www.telegraph.co.uk/technology/9760653/Techs-new-territory-Skolkovos-Moscow-takes-shape-after-Munich-summit.htmlhttp://www.telegraph.co.uk/technology/9760653/Techs-new-territory-Skolkovos-Moscow-takes-shape-after-Munich-summit.htmlhttp://government.ru/news/3490http://expert.ru/2013/08/1/vtoraya-zhizn-skolkovo/?n=43561http://expert.ru/2013/08/1/vtoraya-zhizn-skolkovo/?n=43561http://www.kommersant.ru/News/1482479http://www.rg.ru/printable/2010/08/04/skolkovo-dok.htmlhttp://www.ewdn.com/2012/08/30/government-confirms-full-financing-for-skolkovo/http://www.ewdn.com/2012/08/30/government-confirms-full-financing-for-skolkovo/http://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://www.vedomosti.ru/politics/news/14796861/skolkovo-ostalos-pri-byudzhete?from=newsletter-editor-choice%26utm_source=newsletter%26utm_medium=content%26utm_campaign=editor-choicehttp://top.rbc.ru/economics/16/08/2013/870422.shtmlhttp://top.rbc.ru/economics/16/08/2013/870422.shtmlhttp://rt.com/business/news/russia-skokovo-skoltech-innovation-069/print/http://rt.com/business/news/russia-skokovo-skoltech-innovation-069/print/http://izvestia.ru/news/546824http://www.reuters.com/article/2013/02/13/us-russia-skolkovo-fraud-idUSBRE91C0XC20130213http://www.reuters.com/article/2013/02/13/us-russia-skolkovo-fraud-idUSBRE91C0XC20130213http://themoscownews.com/business/20130212/191231078/Investigators-deny-Skolkovo-came-clean-over-embezzlement.htmlhttp://themoscownews.com/business/20130212/191231078/Investigators-deny-Skolkovo-came-clean-over-embezzlement.htmlhttp://themoscownews.com/business/20130212/191231078/Investigators-deny-Skolkovo-came-clean-over-embezzlement.htmlhttp://izvestia.ru/news/546824

S. Malle, J. Cooper / Journal of Eurasian Studies 5 (2014) 21–3824

decision to cancel the contribution of 1 per cent of R&Dfunds by state companies was promptly interpreted as achange in priorities.16

While these developments may create insecurity amongparticipants and upset investors, one can reasonably assumethat large international companies on the score of theirmixed experience in working with EMEs (emerging marketeconomies) will not feel particularly concerned and carry onwith theirownprojects inSkolkovo,not least for fearof losinga potentially promising market in the future. Skolkovo is notan aborted project as the developments mentioned abovecould suggest. More likely, the project is to be kept in theMED’s agendaalthoughdoomed to start livinga life of its ownrather than keep draining resources from the state.17

At this point, however, the question of how robust is thelegacy on modernization left from President Medvedev toPresident Putin is unavoidable.18 Is the drive to competitivetechnical progress to stay and be developed further orshould we expect reversal of past strategies halting prog-ress achieved so far? What are the commonalities betweenthe two leaders’ vision of Russia’s future and what separatethem? How strong is the change in priorities after Putinstarted his third mandate as President in May 2012?

3. President Putin (2012–2018)

Comparing the approach to reformbefore andafter Putin’sthirdmandate does not give robust evidence of a hiatus in, ora reversal of, the process of economy-wide modernization.But a different focus and, prima facie, contrasting concernsregarding Russia’s role in a rapidly changingworld are clearlydiscernible. Whilst Medvedev appeared to be focussing onwhat could be defined as “Western” modernity in terms ofachievements and institutional change,19 Putin appears to bemore concerned with developments eastward within thecountryandat its borders, as theukazyapprovedon thedayofhis appointment to presidency clearly manifest.20 New pri-orities stem from different contingencies as well as percep-tions of foreign and domestic threats.

16 See http://www.vz.ru/news/2013/5/1/631115.html accessed May 12013, http://www.vedomosti.ru/finance/news/13415491/skolteh_bez_sredstv accessed 24 June 2013 and on foreign reactions http://www.bloomberg.com/news/2013-07-16/intel-to-ibm-feel-putin-pinch-as-medvedev-loses-hold-on-tech-hub.html accessed 16 July 2013.

17 According to MED’s new Minister, Aleksei Ulyukaev, developmentsof Skolkovo will need 502 bn roubles (c. $18.7 bn) till 2020 of which thefederal budget should provide 27 per cent while 73 per cent will have tocome from non-budget sources, see http://www.rg.ru/printable/2013/08/01/skolkovo-anons.html accessed 1 August 2013. Skolkovo is indeedprojected to become part of the state programme “Economic develop-ment and innovation economy”, see http://government.ru/news/3490accessed 1 August 2013.

18 On unfolding developments and question marks after Surkov’sresignation, see, both accessed 13 May 2013, http://www.kommersant.ru/doc/2186539, and http://expert.ru/expert/2013/19/posadki-est-gde-proektyi/.

19 See his positive comments on the partnership for modernizationwith the EU in http://www.government.ru/docs/23432/ accessed 21March 2013.

20 See decrees on foreign policy and long-term state economicpolicy approved on 7 May 2012 in http://graph.document.kremlin.ru/page.aspx?1610881 and http://graph.document.kremlin.ru/page.aspx?1610883respectively both accessed 8 May 2012.

In Medvedev’s understanding, the fragility of a systembased on natural resources, hopelessly vulnerable to in-ternational price shocks and unable to withstand enhancedcompetitive pressures, called for systemic change. To Putin,who took the baton after partial recovery but with alooming world-wide economic slow-down and depressionin Europe, the immediate reaction was to turn to, andstrengthen, surviving comparative advantages in resourcesand energy. Trying to fence the country from a new roundof external shocks, the need for better linkages with Asianemerging markets from a broader Eurasian approach to thefuture of Russia started taking shape.

While unexploited trade potential with the East wasparamount in shifting priorities in the short-medium term,long-term security concerns also mattered. Worries in thiscontext had already emerged during the crisis when theRussian economy, falling evenbelow theOECDaverage, faredmuchworse than China and India. Initially blurred under theimmediate preoccupation, and policies, to avert excessivesocial damage from the crisis, security concerns emerged andbecame more pressing when, on the one hand, localizedunrest and revolutionary movements in some countries fedpremonition of possible troubles at home and, on the otherhand, China’s remarkable speed in re-armament, andexpansionary economic policies vis-à-vis Russia and CentralAsia exposed formidable challenges formerly downplayed bythe authorities.21 Karaganov’s critical description of thesefeelings is worth noting: ”. if the current economic trendspersist, it is very likely that Russia east of the Urals and laterthewhole countrywill turn into anappendageof China–firstas a warehouse of resources, and then economically andpolitically. This will happen without any ‘aggressive’ or un-friendly efforts by China, it will happen by default. Thegeopolitical implications of such developments are obvious.There will be no chances for Russia of playing the ‘Chinesecard’. Beijing will rely on Moscow, whose real sovereigntyover the eastern territories will be de facto wearing thin.”22

21 See on China’s technological advance and defence, Pavel Pomytkin,“Russia - India - China: the rearmament era” Russia and India Report, 7March 2012 from http://indrus.in/articles/2012/03/07/russia_-_india_-_china_the_rearmament_era_15075.html accessed 30 March 2013. Seealso Viktor Esin, a former chief of staff of the strategic missile forces,pointing to China’s military spending $160 bn a year – an annual 10 percent increase – in http://ria.ru/defense_safety/20130402/930576721-print.html accessed 2 April 2013. For a broader overview on theshaping of security paradigms in Russia see Bobo Lo, “The securitizationof Russian foreign policy under Putin”, in Gabriel Gorodetsky (ed.), Russiabetween East and West: Russian Foreign Policy on the Threshold of theTwenty-First Century, London and Portland, Oregon: Frank Cass, 2003,pp.12–27.

22 See Karaganov Sergey, “Russia’s Asian Strategy” in Russia in GlobalAffairs, 2 July 2012 from http://eng.globalaffairs.ru/pubcol/Russias-Asian-Strategy-15254 accessed 10 July 2012. Note that this viewpoint is notunanimously shared among experts. Vasili Mikheev of IMEMO, forinstance, rules out any danger from China pointing to the number ofRussians that cross the border to China that is three times higher than theopposite flows and minimizing the Chinese presence in the Far East up toonly 4–5 per cent of the local population, see http://www.rosbalt.ru/moscow/2013/05/06/1124338.html accessed 6 May 2013. Aleksei Mas-lov (Russian University of Friendship between Countries) also rules outany conflict with China as a matter of principle and practice (similar in-terests in stability of certain areas such as North Korea), see http://www.rosbalt.ru/main/2013/07/16/1153257.html accessed 16 July 2013.

http://www.vz.ru/news/2013/5/1/631115.htmlhttp://www.vedomosti.ru/finance/news/13415491/skolteh_bez_sredstvhttp://www.vedomosti.ru/finance/news/13415491/skolteh_bez_sredstvhttp://www.bloomberg.com/news/2013-07-16/intel-to-ibm-feel-putin-pinch-as-medvedev-loses-hold-on-tech-hub.htmlhttp://www.bloomberg.com/news/2013-07-16/intel-to-ibm-feel-putin-pinch-as-medvedev-loses-hold-on-tech-hub.htmlhttp://www.bloomberg.com/news/2013-07-16/intel-to-ibm-feel-putin-pinch-as-medvedev-loses-hold-on-tech-hub.htmlhttp://www.rg.ru/printable/2013/08/01/skolkovo-anons.htmlhttp://www.rg.ru/printable/2013/08/01/skolkovo-anons.htmlhttp://government.ru/news/3490http://www.kommersant.ru/doc/2186539http://www.kommersant.ru/doc/2186539http://expert.ru/expert/2013/19/posadki-est-gde-proektyi/http://expert.ru/expert/2013/19/posadki-est-gde-proektyi/http://www.government.ru/docs/23432/http://graph.document.kremlin.ru/page.aspx?1610881http://graph.document.kremlin.ru/page.aspx?1610881http://graph.document.kremlin.ru/page.aspx?1610883respectivelyhttp://graph.document.kremlin.ru/page.aspx?1610883respectivelyhttp://indrus.in/articles/2012/03/07/russia_-_india_-_china_the_rearmament_era_15075.htmlhttp://indrus.in/articles/2012/03/07/russia_-_india_-_china_the_rearmament_era_15075.htmlhttp://ria.ru/defense_safety/20130402/930576721-print.htmlhttp://ria.ru/defense_safety/20130402/930576721-print.htmlhttp://eng.globalaffairs.ru/pubcol/Russias-Asian-Strategy-15254http://eng.globalaffairs.ru/pubcol/Russias-Asian-Strategy-15254http://www.rosbalt.ru/moscow/2013/05/06/1124338.htmlhttp://www.rosbalt.ru/moscow/2013/05/06/1124338.htmlhttp://www.rosbalt.ru/main/2013/07/16/1153257.htmlhttp://www.rosbalt.ru/main/2013/07/16/1153257.html

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The opportunity of growing economic cooperation ininvestment and trade should not be overlooked and au-thorities on both sides are keen to stress potential ben-efits. At Harbin international trade-economic exhibitionin 2012 a Russian delegation from the Far East was pre-sent with eighty projects and Igor’ Shuvalov, first deputyprime minister, visited China soon after in the hope ofattracting Chinese investment. A joint Chinese andRussian investment fund has been created to help chan-nel foreign direct investment (FDI) to profitable areas,such as the exploitation of forest resources, which hasbeen financed, but also possibly the production of con-sumer goods and the development of tourist infrastruc-ture, where China has comparative advantages.23 On theRussian side, as discussed below, plans to strengthensupply and sources of energy to China remain pre-eminent even if they may entail reduced supply to theWest. Large investment, up to more than one trillionroubles, is envisaged in the development of new fields inthe macro-region together with liquefied natural gas(LNG) and refineries.24

However, efforts in this direction do not rule out secu-rity concerns; actually, the latter may even increase ifgrowth and development do take off according to plans(see below), making the region more attractive over areasonable horizon. Putin’s concern for the fast develop-ment of Sakhalin and transport linkages with the Kurilislands and Kamchatka as well for military exercises in thearea gives evidence of the mutual dependence of economicdevelopment and security in an area where memories ofpast conflicts is still alive.25 The decisive importance of the“foreign factor” in explaining Russia’s policy in the Far Eastall through history is well described by an insightful articleof Viktor Larin, who blames, indeed, central power for itsnarrow “securitization” approach to the whole region.26

23 See http://novostivl.ru/msg/19774.htm accessed 30 June 2013.24 See Sechin’s plans in http://polit.ru/news/2013/07/16/trillion/

accessed 16 July 2013 and the trade-off between Europe and Asia inhttp://ru.reuters.com/article/businessNews/idRUMSE96A03A20130711accessed 11 July 2013.

25 See Putin’s address to Sakhalin’s authorities in http://news.kremlin.ru/transcripts/18824/print, his focus on the importance of the Far Eastfrom a historical perspective in http://www.vz.ru/politics/2013/7/16/641454.print.html and his presence together with minister Shoigu atthe military exercises in Sakhalin reported to be the largest not only withrespect to the Far East as a whole, but also compared to Russia’scontemporary history in http://www.kommersant.ru/doc/2235002 allaccessed 16 July 2013. While the primary show of military strength wasdirected to impress the United State and Japan, Ruslan Pukhov, memberof the Public Council under the Russian Defence Ministry, notes thatChina also got the message that Russia is capable of engaging in landwarfare in Siberia and the Far East though priority is on the upgrading ofmilitary vessels and the Russian Pacific Fleet, see Ruslan Pukhov, “Militaryexercises in Eastern Russia: Initial Results”, Valdai Discussion Club, 30 July2013. For a sanguine view from nationalist circles about China, see thedescription of an imagined attack from China against the Far East, ahopeless response from Russia with no support from the West and thefinal loss to China of the whole Baikal and Far East region, see http://www.zrpress.ru/society/dalnij-vostok_18.07.2013_61754_v-internete-pojavilsja-plan-voennogo-udara-kitaja-po-dalnemu-vostoku-rossii.html?printr accessed 18 July 2013.

26 Viktor Larin, “Vostochnyi povorot Kremliia” in http://vpk-news.ru/articles/16733 accessed 16 July 2013.

Evolving geopolitical concerns may explain to a largeextent Putin’s strategic re-orientation compared toMedvedev’s pro-Western inclinations. However, oneshould not exaggerate their contrasts on modernizationwhose tenets are largely shared between the two leadersand in the country as whole. There is no major differenceon the need for privatization of large state companies,while methods and timing may differ. There is no majordisagreement on the need to make state companies moreefficient preparing for the eventual sale of more or lesslarge state shareholdings depending on the mood of themarkets. Thus, Medvedev’s reforms concerning thetransformation of non-commercial state companies(goskorporatsii) into Joint Stock Companies under 100 percent state ownership, compatible with future disposal ofstate property, are a step in the right direction that foundsupport in Putin, despite his reservations regarding Ros-tekhnologii (a quasi-ministerial defence-plants holding)and Rosatom (nuclear energy), both defence-related, thatare clearly set to remain under state control. The questionof how autonomous, “independent directors” (again areform approved by Medvedev)27 set to replace govern-ment officials combining this function with that of statemanagers, can be, will remain a major issue no matterwho is going to be the President, to the extent that astructure where Parliament would be more representa-tive and less dependent on the executive is not envisagedany time soon. Finally and more importantly, theapproach to modernization from above is common toboth leaders. This approach, largely criticized by eminentRussian experts, continues to be an issue for discussionbetween liberal reform-minded economists and statistsor conservatives.28

4. State-led modernization – between policy dialogueand ruling from above

Modernization from above, the scheme pursued byRussia, has been subject to fierce criticism at home andabroad based by and large on comparative evidence andon a certain dose of theoretical assumptions, rather thanon history as such. A necessary premise is that, whileeconomic modernization is being pursued by the govern-ment, “modern” products and processes are not confinedto the government policy reservoir. On the contrary, it isknown that a number of IT – and less known – un-dertakings have acquired world status and success inde-pendently from government policies.29 Amongindependent innovators Yandex is a largely praised

27 See Medvedev urging state officials to retire from state companies’boards, in http://english.ruvr.ru/2012_03_22/69285753/ accessed 22March 2012.

28 Tellingly, for Medvedev the enemy of a conservative is not a liberalbut a reactionary, see “Martovskie tezisy Dmitriia Medvedeva” in Neza-visimaia Gazeta, 28 March 2013 from http://www.ng.ru/politics/2013-03-28/1_medvedev.html?print¼Y accessed 28 March 2013.

29 See OECD Reviews of Innovation Policy: Russian Federation, 2011 inhttp://www.oecd.org/sti/inno/oecdreviewsofinnovationpolicyrussianfederation.htm released in June2011 and http://www.oecd.org/sti/inno/48098600.pdf.

http://novostivl.ru/msg/19774.htmhttp://polit.ru/news/2013/07/16/trillion/http://ru.reuters.com/article/businessNews/idRUMSE96A03A20130711http://news.kremlin.ru/transcripts/18824/printhttp://news.kremlin.ru/transcripts/18824/printhttp://www.vz.ru/politics/2013/7/16/641454.print.htmlhttp://www.vz.ru/politics/2013/7/16/641454.print.htmlhttp://www.kommersant.ru/doc/2235002http://www.zrpress.ru/society/dalnij-vostok_18.07.2013_61754_v-internete-pojavilsja-plan-voennogo-udara-kitaja-po-dalnemu-vostoku-rossii.htmlhttp://www.zrpress.ru/society/dalnij-vostok_18.07.2013_61754_v-internete-pojavilsja-plan-voennogo-udara-kitaja-po-dalnemu-vostoku-rossii.htmlhttp://www.zrpress.ru/society/dalnij-vostok_18.07.2013_61754_v-internete-pojavilsja-plan-voennogo-udara-kitaja-po-dalnemu-vostoku-rossii.htmlhttp://vpk-news.ru/articles/16733http://vpk-news.ru/articles/16733http://english.ruvr.ru/2012_03_22/69285753/http://www.ng.ru/politics/2013-03-28/1_medvedev.html?print=Yhttp://www.ng.ru/politics/2013-03-28/1_medvedev.html?print=Yhttp://www.ng.ru/politics/2013-03-28/1_medvedev.html?print=Yhttp://www.oecd.org/sti/inno/oecdreviewsofinnovationpolicyrussianfederation.htmhttp://www.oecd.org/sti/inno/oecdreviewsofinnovationpolicyrussianfederation.htmhttp://www.oecd.org/sti/inno/48098600.pdf

S. Malle, J. Cooper / Journal of Eurasian Studies 5 (2014) 21–3826

producer of complex Internet search algorithms and abrilliant traffic jam tracker for drivers. The company isready to invest abroad.30 Abby is famous for optical testcomputing technology. Kaspersky lab is also known as aleading computer security company soon to supportInterpol in fighting cyber-attacks. Among large companies,Lukoil, Russia’s biggest privately owned oil company, ispraised for investing in R&D, on state-of-the-art technol-ogies in oil refining and petrochemicals, as well as in-vestments in clean energy and carbon-capturetechniques.31 On a more traditional front, a minor, butpossibly promising, field so far neglected is wine produc-tion, that is becoming one of the most profitable food-processing activities undertaking by wealthy privateowners in Russia’s southern regions, though competingwith world leaders in the field will take time!32

a) How to improve the business environment: policydialogue on reforms

It is, however, agreed by all, experts and government,that private investors have a hard time starting a businessand going through the red tape and bribing necessary tomake it feasible. The (WB) World Bank’s Doing BusinessReport is the obligatory source on such issues.33 Russia isnot unique within the group of named and shamed coun-tries in this field among emerging market economies, buther ambitions may be higher. Recently Putin promised tolift her ranking from 120th in 2011 to 50th in 2015 and 20thon the world scale by 2020.

On the positive side, one may note that obstacles tobusinesses are not insurmountable and the usual barriersseem to have been abating in time. The last WB Reportshows that over the period 2008–2011 the percentage ofrespondents indicating that corruption is a problem hasfallen from 40 to 21, tax administration from 51 to 24,business licensing and permits from 69 to 30, and courtsfrom 77 to 35.34 While, with a certain optimism, one mayassume that the perverse effects of the crisis and pressuresfor fast recovery may have stimulated civil servants torespond more promptly to businesses’ demands, the gov-ernment’s political will in fighting petty red tape andsloppy conducts should not be underestimated. Given thesize of the country regional policies should also beconsidered.

30 See The Moscow Times, 26 May 2011. Yandex is to build in Finland adata centre thanks to lower cost of land and electricity, the "right"northern climate that can provide cooling of the servers, and localauthority’s support, see Vedomosti, No. 52, March 27, 2013 downloadedfrom http://dlib.eastview.com/browse/doc/29050961.

31 See www.fastcompany.com on 15 March 2011 and on Kasperki’srecent developments in conjunction with Interpol http://www.polit.ru/news/2013/03/22/kasperskiy/print/ accessed 2 March 2013.

32 See some successful businesses by adventurous wealthy Russianshttp://www.lenta.ru/articles/2013/03/16/shato/ accessed 16 March 2013.

33 See http://www.doingbusiness.org/w/media/GIAWB/Doing%20Business/Documents/Subnational-Reports/DB12-Sub-Russia.pdf.

34 See Russian Economic Report. Recovery and Beyond, The Word Bank inRussia, no.29 Spring 2013, p.28, from http://www.worldbank.org/content/dam/Worldbank/document/eca/RER29-ENG.pdf accessed 26February 2013.

In this regard, a recent European Bank for Recon-struction and Development (EBRD) study highlights howregional differences may have an impact on the creationof a more or less favourable business environmentdepending, not only on capability (defined as institutions,knowledge, capital, infrastructure and technologyrequired to build and export products with a comparativeadvantage) and path dependency, but also on targetedfederal/local policies and, it can be argued, capableadministration.35 Using the regional Index of EconomicComplexity (RECI) as a quantitative measure of capability,the study identifies regions – such as Tula, Samara,Moscow, Novosibirsk and Chelyabinsk – as successful,while at the bottom of the ranking one finds the Yamal-Nenets autonomous region, Khanty-Mansi AutonomousDistrict and Ingushetia republic. A comparative analysisbetween Novosibirsk (belonging to the first tier in theranking) and Lipetsk (second tier) highlights the impor-tance of the existing economic and legal infrastructureand the room for improvement in both regions toenhance their respective RECI. Novosibirsk, in particular,is advantaged by easy access to business licensing andpermits, educated workforce and finance, whilst it sufferscomparatively more than Lipetsk from high tax and cor-ruption. Interestingly, the analysis shows that the re-quirements for each region to move further up in theranking are different and dependent on what the regionhad achieved at a certain point in time relative to itspotential. While the EBRD study does not specificallydiscuss the role of policies and politics, it is clear thatboth matter in helping the region develop one way or theother.

On the negative side, Russia has failed to support thedevelopment of small and medium enterprises (SMEs) thatin many countries are drivers of change. The number andrevenues of SMEs in Russia do not compare favourably witheither OECD countries or countries of the ex-USSR. InFebruary 2012, the Russian State Statistics Service (Rosstat)published preliminary results of the SME census conductedin 2011. The SME data are as of end of 2010. The census wasconducted among all SMEs in Russia, including individualentrepreneurs (IEs), micro-, small and medium-sizedcompanies. For the first time, the census data providedkey facts and figures on actually operating SMEs. In fact,their number turned out to be significantly lower than thenumber of officially registered SMEs. Compared with 4.6million total registered SMEs only 3.2 mn were operating.They employed 19 million people (13.3 per cent of the totalpopulation in Russia) and had a total revenue of 766 bnEuros.36

To put these figures in perspective, on may compareRussia with the Netherlands and Poland. The number ofSMEs in the Netherlands was 0.6 million and in Poland

35 See Farra F., Klos N., Schober U., Sigalova O and Zhukov A., “Improving regional performance in Russia: a capability-based approach”,EBRDWorking Paper no. 155, January 2013 downloaded from http://www.ebrd.com/downloads/research/economics/workingpapers/wp0155.pdf.

36 See data from http://www.rcsme.ru/eng/common/totals.aspcompiled from Rosstat statistics; accessed 20 March 2013.

http://dlib.eastview.com/browse/doc/29050961http://www.fastcompany.comhttp://www.polit.ru/news/2013/03/22/kasperskiy/print/http://www.polit.ru/news/2013/03/22/kasperskiy/print/http://www.lenta.ru/articles/2013/03/16/shato/http://www.doingbusiness.org/%7E/media/GIAWB/Doing%20Business/Documents/Subnational-Reports/DB12-Sub-Russia.pdfhttp://www.doingbusiness.org/%7E/media/GIAWB/Doing%20Business/Documents/Subnational-Reports/DB12-Sub-Russia.pdfhttp://www.doingbusiness.org/%7E/media/GIAWB/Doing%20Business/Documents/Subnational-Reports/DB12-Sub-Russia.pdfhttp://www.worldbank.org/content/dam/Worldbank/document/eca/RER29-ENG.pdfhttp://www.worldbank.org/content/dam/Worldbank/document/eca/RER29-ENG.pdfhttp://www.ebrd.com/downloads/research/economics/workingpapers/wp0155.pdfhttp://www.ebrd.com/downloads/research/economics/workingpapers/wp0155.pdfhttp://www.rcsme.ru/eng/common/totals.asp

38 See Dani Rodrik (2008), One Economics, Many Recipes: Globalisation,Institutions and Economic Growth, Princeton University Press and Maria

S. Malle, J. Cooper / Journal of Eurasian Studies 5 (2014) 21–38 27

1.6 million with revenue of 0.8 trillion and 0.5 trillionEuros and employment of 3.6 million and 5.9 millionrespectively, giving evidence of much higher productivityin both countries compared to Russia.37 The EBRD study,cited above, estimated that the total EconomicComplexity Index (ECI) for the country, after beingbroadly stable until 2002 dropped sharply from 2007 duenot only to the impact of lack of demand because of thefinancial crisis, but also to competition from othercountries, in particular from China, whose ECI keptincreasing rapidly. While for China the revealedcomparative advantages (RCA) in 312 products increasedby 51 products from 2002 to 2010, over the same periodit fell from 129 to 91 products in Russia. Summing up, inRussia the resource and energy-based economy devel-oped faster than other sectors, increasing the country’sdependence on international commodity prices.

These developments should be kept in mind whendiscussing the character of modernization policies inRussia, the type of institutions set up by the government toassist private entrepreneurs, and the selection of govern-mentmeasures as preferable to the “wait and see” nature ofprivate investment decisions that would be needed toaccelerate modernization.

The development of Skolkovo under President Med-vedev has been discussed above. Other policies and in-stitutions also deserve mention. In efforts to adopt andimplement market-friendly institutions capable ofattracting domestic and foreign investment the govern-ment set up a number of committees and organisationsthat in theory should help highlight the sectors whereinnovation should be a priority, gather opinions on howto make the business environment more friendly to in-vestors, stimulate credit institutions to assist new busi-nesses, and provide for businesses’ feed-backs togovernment policy implementation. Government policyand institutions for modernization include the Commis-sion for Modernization set up by Medvedev during hismandate, the Agency for Strategic Initiative set up byPutin in 2011, the institution of regional ombudsmenunder the aegis of Boris Titov, a successful businessman(in the wine trade) to deal with the petitions of businessagainst unjustified decisions by the administration andjustice; a number of Special Economic Zones (SEZ) for thedevelopment of industry, tourism and technologicalparks, as well as the so-called Open Government createdby Medvedev after becoming Premier in 2012 to allow forpolicy debate with independent experts and lobbying foror against legislation on the business environment.

One should also add that Russia’s accession to theWorld Trade Organization (WTO) in August 2012 carriesobligations to comply with a number of requirements,many of which concern institutional changes that thecountry signed up to in order to gain the status ofmember. Along similar lines Russia must also approveinstitutions needed for membership of the OECD:although the number of OECD conventions to be

37 See http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performance-review/index_en.htm#h2-3.

approved by Russia is minimal, changes needed tocomply with them, such as the Anti-Bribery Convention,entail the approval of a significant number of laws andregulations meant to ensure implementation. In this re-gard, the institutional aspect of modernization mustnecessarily be worked out and enforced from above; aprocess that started soon after Putin was elected Presi-dent for the third time.

b) The role of the state: virtue out of necessity?

Mainstream literature points to the higher comparativeefficiency of individual initiative and private undertakings:the paradigms of a market economy. Cross-country studiesdescribing and/or underscoring the role of the state infostering large-scale and long-horizon innovations allthrough history are rare, though by no means irrelevant toEMEs’ policy options and developments, as well as to aless conformist view on the engines for change in moderneconomies that do include the role of the state.38 Russiahas a long tradition of modernization from above.39 Infavour of this model there are a growing number ofeconomists and other experts attached to more or lessinfluential groupings of Russian conservatives that flatlydiscard the idea that, if left on their own with no inter-ference from state administration and guidelines, privatebusinesses will spread, investments will grow and effi-ciency will improve.

Among these figures there are economists like RuslanGrinberg, the Director of the Institute of Economics of theRussian Academy of Science and a member of InSOR, theInstitute of Contemporary Development, as well as of theExpert Council of the MED, and Sergei Glaz’ev, a formerDeputy Minister of Trade and the first Secretary of theEurasian Customs Union (that should evolve into anEurasian Economic Union in 2015) and now Putin’s adviseron Eurasian economic integration, whose influence inshaping mindsets more than policies – at least to date –should not be underestimated. Surely, the hyperactivity ofWestern governments in trying to rescue enterprises andbanks during the 2008–2009 financial crisis gave a boost tothis school of thought.

According to Grinberg, Russia should adopt a form ofstate planning. This should not be mandatory or dirigiste,but indicative, based on incentives, not on orders. Evenwith an ideal business investment climate, progress wouldnot be achieved by private initiative given the polarizationof Russian society where the middle class represents nomore than 20 per cent of the population. Rejecting both thesupply side (liberalism) and the demand side (Keynes-ianism) approach to economic policy, Grinberg calls forhuman capitalism or human socialism as an alternative tomarket economy as such. Citing Italy’s records, Grinberg

Mazzucato (2013), The Entrepreneurial State. Debunking Public vs PrivateSector Myths, Anthem Press.

39 Discussed in Silvana Malle (2013) “Economic modernisation anddiversification in Russia. Constraints and challenges”, Journal of EurasianStudies, 2013, 4, pp.78–99.

http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performance-review/index_en.htm#h2-3http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performance-review/index_en.htm#h2-3

S. Malle, J. Cooper / Journal of Eurasian Studies 5 (2014) 21–3828

dismisses bribery as a strong obstacle to growth.40 In hismind there is no alternative to state investment in Russiasince large projects in infrastructure and industry wouldnot take off otherwise. It does “not matter how corrupted,stealing, weak and non-professional the people” in chargewould be: it is “ a luxury to wait until purification takesplace...Waiting for honest professionals is nonsense”.41

Grinberg may sound cynical or realistic depending onone’s sensitivity. What matters analytically is that thisoutlook is hardly isolated.

Glaz’ev’s and Fetisov’s sentiments are similar if notstronger for their anti-market emphasis. They are critical offree capital movements, with their corollary of capitalmoving offshore and nested in tax havens; advocate themobilisation of specific national comparative advantages;blame the government for a short-time approach to eco-nomic policy; criticize as non-ambitious the Government’sdevelopment concept for limiting the share of spending onR&D to 2–3% of GDP, and claim that investment to GDP ratioshould go up to 35–40%, concentrating on breakthroughsectors of the economy to accelerate growth and techno-logical innovation. Critical of the Central Bank’s policy, Gla-z’ev and Fetisov maintain that the market cannot providecapital accumulation high enough to ensure the moderni-zation of the economy. In the absence of strategic planningand management on the part of the state, the Russianeconomy will turn into a donor of capital to the US whilestarving from lack of investment. Thus a Break-throughStrategy is needed, the elaboration and realization of whichmust be the priority task of the highest government au-thorities.42 With current worries about the slowdown of theeconomy in 2013 and beyond, the state mantra could findincreasing support in society.43 Interesting in this respect isalso the Minister of Education’s promise to reform theglorious but hopelessly outdated Russian Academy of Sci-ences. Despite the hysteria caused by the announcement andthe stop- and-go on the nature of reforms, this is clearly anarea where badly needed changes cannot be postponed andthe only authority to lead them is the state.44

40 See http://www.rg.ru/printable/2013/02/25/eco-congress.htmlaccessed 25 February 2013.

41 See http://www.rosbalt.ru/business/2013/02/16/1094816.htmaccessed 16 February 2013.

42 See S. Glaz’ev and G. Fetisov, “ Novyi kurs: Strategiya proryva”downloadable from http://www.glebfetisov.ru/lib/economy/index.php?ELEMENT_ID¼1250/ accessed 14 November 2012.

43 See on the latest projections in http://www.ng.ru/economics/2013-04-30/4_course.html accessed 30 March 2013 and the EBRD 2013outlook projecting for Russia 1.8 per cent GDP growth in 2013 down-loadable from http://www.ebrd.com/pages/news/press/2013/130510a.shtml.

44 See Dmitrii Livanov’s interview as reported in http://www.utro.ru/articles/2013/03/24/1108876.shtml accessed 24 March 2013 and http://www.itar-tass.com/c9/693181.html, accessed 2 April 2013, reporting theformation of a council of 22 including respected scholars and scientists tolead the changes. See also for comparative views on RAN http://www.ng.ru/blogs/leorad/drugaya-nauka.php?print¼Y; on pros and cons of pro-posed changes, http://www.vedomosti.ru/politics/news/13915151/nobelevskij-laureat-reformu-ran-nado-provodit-ostorozhno and http://lenta.ru/articles/2013/07/01/ran/ and finally Putin’s accommodating butdetermined standing on the need for reform in http://www.vz.ru/news/2013/7/3/639759.html.

While it is difficult to assess the extent of supportamong the population and within the government for amodernizing industrial policy driven by the state, signs offaltering economic growth in the last quarter of 2012 andthe first quarter of 2013, discussed with concern by theexperts, may trigger a new round of heavy state inter-vention to pre-empt the worst effects of the crisis. At thesame time, lower revenues to the budget are likely to forcethe re-orientation and adjustment of economic strate-gies.45 It is in this context that this article discusses plansfor the accelerated development of Siberia and the FarEast.

5. Revising down economic projections and re-directing state funding to the east

At the beginning of his third term as President Putinannounced with eleven orders (ukazy) his guidelines foreconomic development and modernization.46 Goals wereambitious as based on a projected annual average GDPgrowth of at least 5–6 per cent.47 But economic de-velopments then turned sour. Contrary to hopes and pro-jections, GDP increased by only 3.4 per cent in 2012.48

Economic slowdown became visible in the second half of2012 and further on in 2013. MED’s top officials, finally,admitted that growth in 2013 could fall below 3–2.5 percent and even stagnate.49

While the technocratic side of the government urgescaution, the leadership presses for growth-orientated pol-icies and does not appear to be willing to retreat onmedium-term goals, though priorities are becoming morefocused as discussed below. Three scenarios for growth to2030 based on Putin’s desiderata have recently beenapproved by the government. The scenarios range fromconservative to more dynamic and finally to a bolder andoptimistic outlook depending on different assumptions onmodernization, financial constraints and demographic

45 On the need to raise more budget revenues, see Medvedev’sintroduction to the government meeting on 12 March 2013 andSiluanov’s subsequent press conference, http://government.ru/docs/23243/. See also Deputy Minister A. Klepach’s gloomy economic fore-cast, http://www.ng.ru/economics/2013-07-22/1_vvp.html?print¼Yand the rather cautious budget plan projections for 2013–2018,http://www1.minfin.ru/common/img/uploaded/library/2013/06/Plan_Minfina_2013-1018.pdf.

46 Among which there was creation and modernization of 25million highly productive workplaces by 2020; raising the share ofinvestment to 25 per cent of GDP by 2015 and 27 per cent by 2018;raising the share of technologically advanced branches of the econ-omy by 30 per cent and the productivity of labour by 50 per cent by2018 compared to 2011. Average real wages would increase by 50 percent by 2018. For an overview see http://www.vz.ru/politics/2012/5/8/577872.print.html accessed 8 May 103. The precise texts can befound in http://www.kremlin.ru/acts?date¼7þMayþ2012, 7 May2013.

47 See for an appraisal of comments by experts http://www.ng.ru/economics/2013-02-19/1_vvp.html accessed 19 February 2013.

48 See official statistics, http://www.gks.ru/ accessed 11 March 2013.49 See Klepach’s comment, http://russmedia.wordpress.com/ accessed

2 April 2013 and fear of stagnation http://www.rbc.ru/rbcfreenews/20131016140153.shtml accessed 16 October 2013.

http://www.rg.ru/printable/2013/02/25/eco-congress.htmlhttp://www.rosbalt.ru/business/2013/02/16/1094816.htmhttp://www.glebfetisov.ru/lib/economy/index.php?ELEMENT_ID=1250/http://www.glebfetisov.ru/lib/economy/index.php?ELEMENT_ID=1250/http://www.glebfetisov.ru/lib/economy/index.php?ELEMENT_ID=1250/http://www.ng.ru/economics/2013-04-30/4_course.htmlhttp://www.ng.ru/economics/2013-04-30/4_course.htmlhttp://www.ebrd.com/pages/news/press/2013/130510a.shtmlhttp://www.ebrd.com/pages/news/press/2013/130510a.shtmlhttp://www.utro.ru/articles/2013/03/24/1108876.shtmlhttp://www.utro.ru/articles/2013/03/24/1108876.shtmlhttp://www.itar-tass.com/c9/693181.htmlhttp://www.itar-tass.com/c9/693181.htmlhttp://www.ng.ru/blogs/leorad/drugaya-nauka.php?print=Yhttp://www.ng.ru/blogs/leorad/drugaya-nauka.php?print=Yhttp://www.ng.ru/blogs/leorad/drugaya-nauka.php?print=Yhttp://www.vedomosti.ru/politics/news/13915151/nobelevskij-laureat-reformu-ran-nado-provodit-ostorozhnohttp://www.vedomosti.ru/politics/news/13915151/nobelevskij-laureat-reformu-ran-nado-provodit-ostorozhnohttp://lenta.ru/articles/2013/07/01/ran/http://lenta.ru/articles/2013/07/01/ran/http://www.vz.ru/news/2013/7/3/639759.htmlhttp://www.vz.ru/news/2013/7/3/639759.htmlhttp://government.ru/docs/23243/http://government.ru/docs/23243/http://www.ng.ru/economics/2013-07-22/1_vvp.html?print=Yhttp://www.ng.ru/economics/2013-07-22/1_vvp.html?print=Yhttp://www1.minfin.ru/common/img/uploaded/library/2013/06/Plan_Minfina_2013-1018.pdfhttp://www1.minfin.ru/common/img/uploaded/library/2013/06/Plan_Minfina_2013-1018.pdfhttp://www.vz.ru/politics/2012/5/8/577872.print.htmlhttp://www.vz.ru/politics/2012/5/8/577872.print.htmlhttp://www.kremlin.ru/acts?date=7+May+2012http://www.kremlin.ru/acts?date=7+May+2012http://www.kremlin.ru/acts?date=7+May+2012http://www.kremlin.ru/acts?date=7+May+2012http://www.ng.ru/economics/2013-02-19/1_vvp.htmlhttp://www.ng.ru/economics/2013-02-19/1_vvp.htmlhttp://www.gks.ru/http://russmedia.wordpress.com/

S. Malle, J. Cooper / Journal of Eurasian Studies 5 (2014) 21–38 29

developments.50 None of these scenarios realisticallyconform to Putin’s earlier plans and projections. Top gov-ernment experts are much more cautious when formu-lating their own projections; none believes that 5 per centgrowth might be attained.51 The economic slow-down isputting pressure on the selection of non-negotiable goals.Twomajor areas are clearly prioritized and likely to remaindecisive in shaping medium to long term policies:modernization of defence and improved infrastructure forbusinesses in the Eastern regions. The following sectiondiscusses in detail key aspects of defence structures andproblems related to their modernization in the under-standing that improved defence capabilities are not only apriority per se but also, hopefully for the authorities, adriver of development of the whole macro-region east ofthe Urals and, in particular, of the so far neglected Far East.

a) Prioritising security eastward

Since the brief war with Georgia in the autumn of 2008militarymodernization has been a top priority of the Russiangovernment. In December 2010 Medvedev, as President,signed off an extremely ambitious state armaments pro-gramme to 2020 providing for spending new armaments,the repair and modernization of existing equipment, andmilitary R&D of 20 trillion roubles (c. $650 billion at theexchange rate of the time). Notwithstanding the uncertainperformance of the economy since it was adopted, the pro-gramme has been implemented as scheduled, although ithas been imposingmounting pressure on the federal budget.As a result, spending on the budget chapter ’nationaldefence’ has risen from 2.5 per cent of GDP in 2006–2008 to2.9 per cent in 2012 and is set to reach 3.8 per cent by 2015–2016 unless there is a change of policy.52 This increased

50 In the conservative scenario,growthwill average3.0–3.2per centonthehypothesis thatmodernizationwillfirst occur in the fuel and resource sectorsthanks to import of technology and knowledge. In the intermediate scenariogrowth would average 4.0–4.2 per cent thanks to a higher share of invest-ment in fixed assets, modern transport infrastructure and high tech inno-vation primarily in energy, but also spreading to other industries. Theoptimistic, forced, scenario is based on a mix of market and state-drivenpolicies including, on the one side, measures to improve the businessclimate, and on the other side, higher government spending on socialdevelopment, energy and infrastructure, aswell as the creation of large scalenon-oil export sectors thanks to a better utilizationof national savings, largerlending to corporations and higher inflows of foreign investment; averageannualGDPgrowthwill attain5.0–5.4percent. Fora summaryseehttp://top.rbc.ru/economics/25/03/2013/850649.shtml?print and http://government.ru/docs/23518/ both accessed 25 March 2013.

51 Distinguished economist and fiscal expert Evsei Gurvich notes thateven the conservative scenario could be jeopardized by oil prices fallingbelow $90 per barrel that would entail a fall in average annual GDP growthto 2.0–2.5%, see http://www.opec.ru/1468475.html accessed 25 March2013. Interestingly, Ksenia Yudaeva, Putin’s Sherpa for international eco-nomic issues, is also prudent on the potential for growth that she rates at3.5–4.0% provided that business climate and investments improve andthere are no major international price shocks, see http://1prime.ru/MACROECONOMICS/20130307/761628981.html accessed 7 March 2013.

52 The budget chapter ‘national defence’ includes most but not allspending by the Ministry of Defence. With account of other military-related spending, the total GDP share devoted to defence increases byapproximately 1 per cent, giving 4.8 per cent by 2015, the same as theUSA in 2010. Author’s calculations based on data of MOF and Rosstat.

spending on military modernization enjoys considerablesupport across Russia’s political elite and in the Parliamentmaking a policy adjustment unlikely unless there is a seriousslowdown in economic growth threatening budget stability.

In considering the developmental priority of the Far Eastand Siberia for the Russian leadership issues of securitycannot be ignored. With its extensive land border with Asia,the rising military potential of China and other Asian states,and concern to safeguard the contested sovereignty of theKuril Islands, the Russian government has little choice but tomaintain a strong military presence beyond the Urals. Inaddition, since the 1930s the Asian territory of the countryhas been the location of important facilities of the defenceindustry, including some of leading enterprises engaged inthe manufacture of armaments. This section of the article isdevoted to a review of the role of the Far East and Siberia inRussia’s military-industrial potential and consideration ofthe contribution of the local defence industry to the econ-omy of the region and its developmental prospects.

In the Far Eastern federal okrug two regions have asizeable defence industry presence, Khabarovsk krai andPrimorskii krai. In both two industries predominate, avia-tion and shipbuilding. What is now known as the ’filial ofthe ’Sukhoi aviation holding company "Komsomol’sk-na-Amure aviation factory imeni Yu A Gagarina’"’ is the largestplane building enterprise of the United Aviation Corpora-tion (OAK – ob"edinnenaya aviastroitel’naya korporatsiya),the state-owned structure responsible for almost alldevelopment and manufacture of fixed wing aircraft inRussia. Established in the 1930s, the factory now builds theSu-27, Su-30MKs and Su-35S combat aircraft and the T-50fifth generation fighter now under development. But is alsomanufactures the principal civil passenger plane now beingbuilt in the country, the Sukhoi Superject-100, an aircraftwith a quite substantial foreign technology input.53 Withover 12,000 workers, this is the largest employer of Kom-somol’sk-na-Amure. In 2011 output amounted to over 23billion roubles.54 The enterprise has a sizeable exportbusiness, supplying Sukhoi combat planes to a number ofcountries, although China, formerly a major customer, is nolonger a buyer. As a major supplier to the air force, thefactory is receiving substantial investment for moderniza-tion, over 15 billion roubles to 2020.55

The town of Arsen’ev in Primorksii krai is home to amajor enterprise of the Russian helicopter industry, the’Arsen’ev aviation company "Progress" imeni N I Sazykina’,part of the ’Vertolety Rossii’ company of the defence group’Oboronprom’, part of the vast state corporation ’RussianTechnologies’ headed by Sergei Chemezov. ’Progress’ buildsKamov combat helicopters, above all the Ka-52 ’Alligator’,now being procured in increasing number under the statearmaments programme. It also makes the light multiroleMi-34S helicopter and the Yak-54 light sports plane. Formany years it has manufactured cruise missiles for the

53 From the factory’s website, http://www.knaapo.ru/rus/index.wbp.54 Godovoi otchet 2011, p.4.55 http://vpk.name/i93454.html, ““Sukhoi” do 2020g, vlozhit 15 milrd

rub v modernizatsiyu zavoda v Komsomol’sk-na-Amure.”

http://top.rbc.ru/economics/25/03/2013/850649.shtml?printhttp://top.rbc.ru/economics/25/03/2013/850649.shtml?printhttp://government.ru/docs/23518/http://government.ru/docs/23518/http://www.opec.ru/1468475.htmlhttp://1prime.ru/MACROECONOMICS/20130307/761628981.htmlhttp://1prime.ru/MACROECONOMICS/20130307/761628981.htmlhttp://www.knaapo.ru/rus/index.wbphttp://vpk.name/i93454.html

59 http://www.roscosmos.ru/main.php?id¼2&nid¼20210&hl¼%E2%EE%F1%F2%EE%F7%ED%FB%E9, 13 July 2013; http://www.roscosmos.ru/main.php?id¼2&nid¼20022&hl¼%E2%EE%F1%F2%EE%F7%ED%FB%E9, 12 April

S. Malle, J. Cooper / Journal of Eurasian Studies 5 (2014) 21–3830

navy, notably the anti-ship ’Moskit’ system. Employment isapproximately 6000.56

Primorksii krai is the main base of the Russian PacificFleet and, not surprisingly, shipbuilding and ship repairworks occupy a prominent role in the local economy. Thetwo most important are the ’Dal’nevostochnyi zavod"Zvezda"’ at Bol’shoi Kamen’ 90 km east of Vladivostok andthe ’Amurskii sudostroitel’nyi zavod’ of Komsomol’sk-na-Amure. The former is the centre for the repair, moderni-zation and decommissioning of the nuclear submarines ofthe Pacific Fleet and, as such, is located in a so-called closedadministrative territorial formation (ZATO – zakrytoeadministrativno-territorial’noe obrazovanie), a secure zonewith limited access but also special earmarked federalbudget support. The latter shipyard formerly built newnuclear submarines, but now is engaged in the moderni-zation of vessels of the existing fleet and the building ofsome surface ships for the navy and other customers. Theseand other shipyards in Khabarovsk krai are now enterprisesof the United Shipbuilding Corporation (OSK – ob"edinne-naya sudostroitel’naya korporatsiya), the large state-ownedgrouping, based in Moscow, that now controls most ofthe Russian shipbuilding industry. Similarly, in Primorskiikrai ’Zvezda’ is also part of OSK, together with the ’Dal’za-vod’ holding company of Vladivostok, and two former navalshipyards, no.92 of Vladivostok and no.30 at Dunai, inanother ZATO, that of Fokino. All these shipbuilding en-terprises of the Far East in 2009 were grouped to form the’Far Eastern centre of shipbuilding and ship repair’ of OSK.

In the Far Eastern okrug other branches of the defenceindustry are not strongly represented. In Khabarovsk kraithere are two enterprises of the conventional arms industryconcerned with producing equipment and supplies for theground forces, the ’Amurskii patronnyi zavod "Vympel’’ inAmursk, making cartridges, and the Khabarovsk radio-tekhnicheskii zavod, the precise product of which has notbeen identified. In the Amurskii region of the krai there isalso a large facility of the munitions and special chemicalsindustry, ’Voskhod’ of El’ban. In Primorskii krai the radioindustry is represented by the ’Vostochnoe oboronnoepredpriyatie "Granit" of Vladivostok, making and servicingair defence and radio systems, including those of the sub-marine fleet of the PF. In 2002 the Vladivostok enterprisebecame part of the large Kontsern PVO ’Almaz-Antei’,Russia’s leading developer and builder of air defence sys-tems and one of the country’s major arms exporter.57 Apartfrom the facilities of the two krai so far considered, thereare hardly any other defence enterprises of note in theokrug. In Kamchatka oblast’ there is another ship repairyard formerly of the navy (no.48), but now the ’Severo-Vostochnyi repair centre’ of OSK. This is located in Vilyu-chinsk, another ZATO, sixty km to the south ofPetropavlovsk-Kamchatka. The factory repairs submarinesand other vessels of the PF, plus equipment of the airdefence system and the ground forces.58 Finally, in Amurskoblast there is one of the oldest enterprises of the entire

56 From the factory’s website, http://progressaviation.ru.57 http://vopgranit.ru; http://www.almaz-antey.ru/enterprises.58 http://www.apxi.kap.ru.

region, Blagoveshchensk ’Sudostroitel’nyi zavod im.Oktyabr’skoi revolyutsii’. This builds auxiliary ships for thenavy but is also a large producer for the fishing fleet.

Reference has already been made to the existence ofZATO in the Far Easter okrug. In recent years their numberhas been reduced, partly by the opening up of some facil-ities, partly by their merger. Currently there are four ZATO –the above-mentioned Bol’shoi Kamen’, Fokino and Vilyu-chinsk, but also Uglegorsk in Amursk oblast, the location ofthe Svobodnyi state test facility for missiles, now beingdeveloped as the ’Vostochnyi’ space centre, a new launchsite for space vehicles, offering an alternative to Baikonur inKazakhstan. The space centre is scheduled to be built for afirst launch at the end of 2015 and is to have an eventualpopulation of the related science city of Tsiolkovskii of40,000.59 In time, this centre could become a new locus ofeconomic development for the region.

Having established the main features of the defenceindustry of the Far East, it is necessary to explore its role inthe wider national context of the Russian Federation andalso its role in the economy of the region. Unfortunately,analysis of these questions is to some extent frustrated bydata limitations. Recent data on regional defence industryemployment region are not available. However, for 2000there is detailed information by subject of the federationalthough this excludes the nuclear industry.60 In the FarEastern okrug the total defence industry workforce was51,800, 8 per cent of the industrial labour force as a wholebut nearer 15 per cent of employment in manufacturingindustry. In Khabarovsk krai, 32,000were employed, 23 percent of the total, and in Primorksii krai 19,100, accountingfor 11 per cent of all industrial employment. Since 2000 theindustrial workforce of the Far East has steadily contractedbut with large orders the defence sector labour force hasprobably held steady, giving a growing share of the total.

What role does the Far East play in the production ofarmaments? This can best be judged by the share of thefederal okrug in the total annual state defence order for theMOD, known in Russia as the GOZ (gosudarstvennyi obor-onnyi zakaz), in effect the implementation of the arma-ments programme on an annual basis. In 2010 the FarEastern federal okrug accounted for 6.7 per cent of the totalvolume of the MOD GOZ, rising to 7.1 per cent in 2011. Thisis more than the Urals okrug, which accounted for 5.1 and6.1 per cent respectively, but similar to the Siberian okrug,7.3 and 5.7 per cent for the same years.61 Looking at indi-vidual regions of the Far East, in 2011 Khabarovsk kraiaccounted for 3.4 per cent of the MOD GOZ and Primorksiikrai 3.3 per cent, leaving only O.4 per cent for other regions.But in the same year, the city of Moscow accounted for 46per cent of the total, Moscow oblast 13.7 per cent and St

2013, visit of Vladimir Putin to the Vostochnyi ’cosmodrome’.60 http://ts.vpk.ru/corporate/region/fed_4.htm, accessed 9 April 2003.

Note, the data are no longer available on the TS VPK website.61 Data of the defence industry information agency TS VPK (http://

www.vpk.ru/). Note this is a restricted access site, the data availableonly to registered users.

http://progressaviation.ruhttp://vopgranit.ru/http://www.almaz-antey.ru/enterpriseshttp://www.apxi.kap.ru/http://www.roscosmos.ru/main.php?id=2%26nid=20210%26hl=%E2%EE%F1%F2%EE%F7%ED%FB%E9http://www.roscosmos.ru/main.php?id=2%26nid=20210%26hl=%E2%EE%F1%F2%EE%F7%ED%FB%E9http://www.roscosmos.ru/main.php?id=2%26nid=20210%26hl=%E2%EE%F1%F2%EE%F7%ED%FB%E9http://www.roscosmos.ru/main.php?id=2%26nid=20210%26hl=%E2%EE%F1%F2%EE%F7%ED%FB%E9http://www.roscosmos.ru/main.php?id=2%26nid=20210%26hl=%E2%EE%F1%F2%EE%F7%ED%FB%E9http://www.roscosmos.ru/main.php?id=2%26nid=20022%26hl=%E2%EE%F1%F2%EE%F7%ED%FB%E9http://www.roscosmos.ru/main.php?id=2%26nid=20022%26hl=%E2%EE%F1%F2%EE%F7%ED%FB%E9http://www.roscosmos.ru/main.php?id=2%26nid=20022%26hl=%E2%EE%F1%F2%EE%F7%ED%FB%E9http://www.roscosmos.ru/main.php?id=2%26nid=20022%26hl=%E2%EE%F1%F2%EE%F7%ED%FB%E9http://www.roscosmos.ru/main.php?id=2%26nid=20022%26hl=%E2%EE%F1%F2%EE%F7%ED%FB%E9http://ts.vpk.ru/corporate/region/fed_4.htmhttp://www.vpk.ru/http://www.vpk.ru/

65 See Kommersant Daily, 22 May 2013, p.1, Egor Popov, ’Prezident

S. Malle, J. Cooper / Journal of Eurasian Studies 5 (2014) 21–38 31

Petersburg 8.2 per cent. This Moscow dominance probablyarises from the simple fact that the headquarters of manydefence corporations are located in the capital and manyorders undertaken by enterprises far from Moscow areattributed to the lead company.

This raises a significant issue relating to the defence in-dustry of the Far East. While it possesses some of the largestand technologically most advanced enterprises of the entireregion, the ultimate control of these major facilities isexercised in Moscow. At the same time, these relativelyadvanced companies play a significant role in the localeconomy as employers and contributors to local budgets.

Regardless of the powers and influence of local regionalleaders in relation to the enterprises of the defence industryin their regions, it is clear that some of these centres ofadvanced machine building are playing a notable role inpromoting future development. A good example is the’Zvezda’ shipbuilding and repair works of Bol’shoi Kamen’.This long-established naval centre has become the locationof a new project to create a shipyard able to build oil tankers,transporters of liquefied natural gas and other large surfacevessels. This is a joint venturewithDaewoo Shipbuilding andMarine Engineering (DSME) of Korea, although becausevarious problems and delays have arisen Daewoo is notcurrently active. The project, ’Zvezda-DSME’, is to complete ashipyard able to build vessels of up to 300,000 tonnes by2020. Clearly, this is of great interest to Rosneft’ and Gaz-prom and it may be significant that at the time when thedeal with Daewoo was struck in 2009 the board of OSK, towhich ’Zvezda’ is affiliated, was chaired by Igor’ Sechin, nowCEO of ’Rosneft’’. In this role, Sechin has maintained his in-terest in the shipbuilding industry, determined that OSKwillprioritize not onlywork for the navy, but also shipbuilding inthe interests of the energy sector.

With the prospect of an expanding trade in oil with Chinaand other Asian countries, the Far East is a natural locationfor new capacity to meet the energy sector’s demands. Thisalso applies to off-shore drilling rigs for the oil and gas in-dustry. Not far from Bol’shoi Kamen’ there is a secondenergy-related project, this time a joint venture with theSingapore company Raffles, to create a new yard to builddrilling rigs. The ’Vostok-Raffles’ company, based in Vladi-vostok, is 75 per cent owned by the Far Eastern shipbuildingand repair company of OSK and 25 per cent by Singaporecompany ’Raffles-Offshore’.62 The yardwill have the capacityto construct drilling platforms of up to 30,000–40,000tonnes.63 There have been doubts about whether the projectwill go ahead and its completion date is uncertain but inJanuary 2013 deputy prime minister and chair of theMilitary-Industrial Commission, Dmitrii Rogozin, confirmedthat the new shipyard would indeed be built.64

These projects based on facilities of the defence industryraise somedifficultpolicy issuesand it is clear that theydonotenjoy unanimous support inMoscow. The ’Zvezda’ project in

62 See http://vostokraffles.ru/, the company website.63 http://vostokraffles.ru/proekty/stroitelstvo-verfi/.64 http://interfaxenergy.com/natural-gas-news-analysis/russia-and-

the-caspian/vostok-raffles-shipyard-back-on-deputy-pm/, 29 January2013.

particular is behind schedule, partly it appears because theOSK leadership has reservations, shared by the Ministry forIndustry. The Russian shipbuilding industry is centred on StPetersburg and there is a rival project there to build a newshipyard serving the energy sector.65 Rogozin has overall re-sponsibility for the defence industry but his first priority isarmaments production, not the energy sector. He is alsowaryof the involvement of foreign companies in the defence in-dustry, unlike the Ministry of Industry or Chemezov, head of’Russian Technologies’. The needs of the energy sector arebacked in a vigorous manner by Igor Sechin, CEO of Rosneftand known for his close ties to Putin, and also the leadershipof Gazprom. Sechin also appears open to foreign investment.However, the ’Zvezda’ project now has the backing of thePresident and there is an understanding that it must havepriority. Funding is still uncertain, however, and it is likelythat Gazprombank will play a major role prompting specu-lation that the new shipyardmay even break away from OSKas an independent company.66

As discussed above, the Komsomol’sk-na-Amure aviationplant has become the leading centre in Russia for buildingnew passenger planes and is the forefront of technology inthe development of the new fifth generation fighter. Ac-cording to the acting governor of the krai, Vyacheslav Shport,the value of the state defence order for the region hasincreased fivefold over the last four years and the defencesector is a significant driver of the local economy, boostinglocal budget revenues.67 Similarly, in Primorskii krai theArsen’ev ’Progress’ plays a major role and there has beendiscussion locally of creating a Far Eastern equivalent ofSkolkovo on its basis.68 But this factory is part of the ’RussianTechnologies’ state corporation, the Russian equivalent ofFinmeccanica, the powerful defence-related machine build-ing state conglomerate once the main pillar of the Italian IRI(Institute for Industrial Reconstruction) discussedbelow, andhas limited autonomy in decision making. Whether ’Prog-ress’ will play a leading role in development will depend onthe stance of the corporation’s leader, Sergei Chemezov.

Turning briefly to Siberia, similar issues are encounteredbut with the significant difference that its defence indus-trial base is much more diversified and there are significantactors absent in the Far East, namely the Rosatom statecorporation, headed by Sergei Kirienko, a former primeminister of the country, and Roskosmos the Federal SpaceAgency which leads the missile-space industry. In addition,’Russian Technologies’ has a much larger presence withalmost thirty enterprises and organisations compared withonly one in the Far East. The region plays a larger role in theRussian defence industry, adding weight to the policy voiceof deputy prime minister, Dmitrii Rogozin. On the otherhand, the Shipbuilding industry is weakly represented and

postavil verfi na mesto.’ and http://www.kommersant.ru/doc/2250107/, 8August 2013,Egor Popov, ’OSK riskuet vyronit’ "Zvezdu".’

66 Kommersant Daily, 5 July 2013, p.7, Egor Popov, Mikhail Serov,’"Rosneft’" nashli svoyu "Zvezdu".’

67 http://news.kremlin.ru/news/19013, 8 August 2013, meeting of VShport with President Putin.

68 Nezavisimaya Gazeta, 22 May 2012, p.13 Tat’yana Dvoinova,’Soveshchatel’naya modernizatsiya Primor’ya.’

http://vostokraffles.ru/http://vostokraffles.ru/proekty/stroitelstvo-verfi/http://interfaxenergy.com/natural-gas-news-analysis/russia-and-the-caspian/vostok-raffles-shipyard-back-on-deputy-pm/http://interfaxenergy.com/natural-gas-news-analysis/russia-and-the-caspian/vostok-raffles-shipyard-back-on-deputy-pm/http://www.kommersant.ru/doc/2250107/http://news.kremlin.ru/news/19013

70 See Andrei Belousov, then Minister of Economic Development,pressing for the utilization of the Fund of National Welfare in http://1prime.ru/Finance/20130402/762294892.html 2 April 2013.

71 See government debate and resolutions, http://government.ru/docs/23680/, 2 April 2013. See also http://www.interfax.ru/print.asp?

S. Malle, J. Cooper / Journal of Eurasian Studies 5 (2014) 21–3832

in general the defence sector’s involvement with the en-ergy sector is much weaker, meaning that Igor’ Sechin has aless obvious engagement.

The defence industry of Siberia is much larger than thatof the Far East and has a very different structure. Firstly, thenuclear industry is strongly represented in a number ofregions with major facilities of the nuclear fuel cycle in theclosed cities (ZATO) of Zheleznogorsk (formerlyKrasnoyarsk-26) and Seversk (formerly Tomsk-7) in thepast both were centrally involved in the nuclear weaponsprogramme, but today probably to a lesser extent. Novo-sibirsk also has two important nuclear industry organisa-tions considered to form part of the defence industry.Another sector not represented in the Far East is themissile-space industry, which has a major defencecontractor, Krasnoyarsk machine building works (Kras-mash), in Soviet times the leading producer of strategicnuclear missiles for submarines. Today it builds the ’Sineva’SLBM, being supplied to the existing fleet, but not the new’Bulava’missile now being built at Votkinsk in the Urals forthe latest new Borei class strategic submarines. Also in thekrai, located in the Zheleznogorsk ZATO, is Russia’s leadingorganization for building space satellites, ’Informatsionnyesputnikovye sistemy im.akademika M F Reshetneva’.

The aviation industry is represented in Irkutsk oblast bythe ’Irkut’ corporation, part of the Sukhoi company, and likethe Komsomol’sk-na-Amure factory one of the country’slargest producers, and exporters, of Sukhoi combat aircraft. Itis also engaged in a programme to build a new passengerplane, the ’MS-21’. In the Buryat republic is the Ulan-Udeaviation factory of ’Vertolety Rossii’ (building Mil helicop-ters) of ’Russian Technologies’. Novosibirsk oblast hasanother branch of the Sukhoi company, Novosibirsk aviationworks im.VPChkalova, andOmskoblast amajor aero-engineplant, the oldest in Russia, since 2007 a branch of theMoscow-based corporation of gas turbine building ’Salyut’,one of the country’s leading producers of aero-engines.69

Siberia, unlike the Far East, has a significant number ofenterprises engaged in the manufacture of armaments forthe ground force and the production of munitions andspecial chemicals. The principal centres are Barnaul andBiisk in Altai krai and Novosibirsk, which has a large con-centration of enterprises of the munitions industry, manyunder ’Russian Technologies’. In addition, there are centresof the electronics, radio and communications equipmentindustries, notably in Novosibirsk, Omsk and Tomsk. Again,many of these enterprises are under ’Russian Technologies,giving it a substantial presence in the Siberian okrug.

In the Siberian okrug in 2000 there were 159,300employed in the defence industry, again 8 per cent of thetotal labour force and approximately 12 per cent ofmanufacturing employment. But in the okrug almost halfdefence industry employment was concentrated in twooblasti which in the year 2000 accounted for 56 per cent ofall defence industry enterprises, Novosibirsk with 42,000,22 per cent of the industrial