State liberalism, anyone?

September 15th 2010,

Democratist has greatly enjoyed reading this extraordinarily insightful article, (“Behold! The New Russian Smartphone”) from The Russia Monitor (TRM).

TRM notes the announcement of a number of suspiciously similar recent strategic partnerships matching Russian “State Corporations” (“private” company structures, which nonetheless remain majority state-owned) with major Western companies in the form of joint ventures, and suggests they are central to Russia’s ‘modernization’ plan over the foreseeable future.

He notes, “This change in strategy is a response to the global financial crisis, which has allowed Russia to evaluate the outcomes of its previous development strategy.  The previous strategy largely consisted of taxing the hell out Russian oil companies, buying up U.S. Treasuries, reducing capital controls, and hoping for ‘rational’ loans by Western banks to Russian companies.  The result was a full-scale evacuation right after the Georgian War and a bunch of overly leveraged domestic companies in bad need of a government bailout.  And over that gangbusters period of 2004-08, Russia saw little if any ‘greenfield’ foreign direct investment in the country (i.e., no new factories, no new technology, no modern business practices implemented)….The new strategy takes a novel approach by leveraging the technology and know-how of the best Western companies that make things, not loans.  Ironically, the strategy also leverages Russia’s horrible investment climate.  How?  In exchange for establishing production facilities in Russia, Western companies presumably bypass all the corruption, red tape, and enemies that come with investing in Russia by having the best krysha or cover that money can buy: participation in a majority state-owned joint venture.”  

From Democratist’s perspective, far from heralding a new dawn of foreign investment, this tactic appears as further evidence marking a shift away from the apparent original liberal ”innovation scenario” (mentioned in the March 2008, “Russia 2020” policy document), which presupposes the development of a national innovation system, competitive human capital, regional development centers (and other liberal reforms) as a way of attracting western FDI, towards a significantly different approach that is much more in line with what we have come to expect from the way in which the Russian state has typically “done business” since 2000.

This “state liberalism” clearly possesses a number of advantages over the old-fashioned “liberal” liberalism for the nomenklatura; not least, it skirts around the need for any genuine economic or political reform. It also allows them to concentrate on the alternative “energy and raw materials” development path, whilst maintaining a thin veneer of “modernization.”

Evidently, since “state liberalism” excludes genuine economic or political reform outside the krysha of joint ventures with the state, the system will remain much as it is at present, complete with the “corruption, red tape, and enemies” mentioned above: So, while we may see the introduction of some additional FDI into Russia, “state liberalism” does not imply any wider reform or diversification of the domestic economy. Any “innovation” will be limited to a small number of joint ventures, in a small number of industries. 

However, we wonder what the full extent of take-up is likely to be, given the Yukos, BP-TNK, Renaissance Capital, and other similar cases?