Russia embraces the Fourth Industrial Revolution

The year 2017 has been in economic terms a year of stabilisation in Russia.

The economy has finally put behind it the recession and high inflation it experienced following the 2014 oil shock.

That 2014 oil shock, and the sanctions the West also imposed on Russia that year, came for Russia at a difficult time, when Russia was already remodelling its economy in the aftermath of the 2008 crisis.

That crisis hit Russia especially badly, as Russia’s very high growth rate before 2008 had become increasingly dependent on a consumption led investment boom funded by heavy borrowing in the West’s financial markets.

The sudden interruption of Western credit in 2008, and the massive repatriation of funds from Russia orchestrated in the last quarter of that year by the West’s central banks, threw the economy into a tailspin from which it was only rescued by vigorous government action.

This however brought home to the Russian authorities that an economic model that depended on investment based on external borrowing backed by high oil prices was unsustainable.

Accordingly, following the recovery from the 2008 crisis, steps began to be taken – with the impetus markedly accelerating after the 2012 election – to strengthen the country’s domestic financial system so as to make Russia less reliant on foreign borrowing for its future growth.  This is what led to the priority for policy makers switching from GDP growth towards inflation targeting after 2012, with the tough monetary policy Russia has known since being initiated during this period.

The 2014 oil shock and the sanctions delayed this adjustment.  However they failed to throw it off course the measures Russia had already taken after the 2008 crisis meant that the economy had already been consciously moved away from an economic model which made it dependent on foreign borrowing and high oil prices.

With inflation now at an annual rate of 2.4%, and with prices in Russia probably having risen by less than 1% since late July, the end of the transition period which began in 2012 is now close.

President Putin made precisely this point at an investment conference on 24th October 2017, when he explained the purpose of the policy and defended the tough monetary conditions imposed by the Central Bank

……….we reached a record low inflation rate in the history of Russia. As of October 16, it was 2.7 percent in annual terms. This allows us to expect that by the end of the year inflation will be below the benchmark of 4 percent.

I know, of course, that some experts are concerned about such a low level of inflation, low for our economy, for the economy with such a structure. And some experts see in these dynamics a deflationary threat to the economy.

Here is what I would like to draw attention to. Almost all central banks, all regulators in all countries that do inflation targeting, show such excessive, at first glance, caution. I think it is to some extent justified, because there are still a lot of risks. There are still a lot of threats for an economy with a structure like ours that depends on the world’s raw materials market.

Therefore, I fully understand and generally approve of the Central Bank’s policies, which are based on caution. But at the same time I want to emphasise that price stability, no one ever denies this, plays an important role both in terms of interest rates and in general for macroeconomic stability.

Here I think we are achieving good results, including thanks to a responsible budget policy and strict line of the Central Bank, as I said.

Though these words show President Putin’s support for the actions of the Central Bank – and his awareness of the criticisms which are made of its actions – they also show that he is optimistic that Russia’s long period of high inflation is over, and that monetary policy will start to ease soon.

In the natural course falling interests should lead to higher investment, and President Putin’s words at this same investment conference shows that for the Russian authorities this is now the priority

According to preliminary estimates, investment in fixed assets of enterprises and organisations have grown by 4.2 percent over three quarters. This is twice as high as the GDP growth rate for the same period.

Such soaring rates lay the foundation for further growth.

The Russian authorities however are not solely focused on raising the rate of investment in the economy.

In meeting after meeting this autumn President Putin has made it very clear where he wants to see this investment go.  The focus is in the range of industries and products that taken together are the hallmark of what is sometimes called the “Fourth Industrial Revolution“.

This is essentially a concept of applying the enormous technological advances which have already taken place in communications, artificial intelligence, electronics, robotics, 3D printing, biology etc to create a wholly new type of economy, different from that which exists now.

In a sign of the importance the Russian leadership attaches to this concept, President Putin has been hammering away at the importance of developing exactly this sort of economy for Russia.

President Putin’s comments on this subject which have attracted the greatest amount of international attention were the ones he gave to a meeting of young students on 1st September 2017.

Inevitably the international media focused on that part of these comments which discussed the military and Great Power implications of these new technologies.

Thus we have seen articles with colourful titles such as this one: ‘Putin says the nation that leads in AI ‘will be the ruler of the world’’ 

However Russia’s Presidential website shows that President Putin’s actual comments were far more interesting and much more nuanced, and that his primary focus was not on the military and Great Power implications of these new technologies (though he obviously touched on them) but on the sort of economy and society Russia should want to become

Look at how the world is developing. There are countries which are incomparably larger than our country in terms of population. There are countries where technology and modern administrative tools are much more effective than ours…..

You, who are now entering active life, need to bear this in mind, be aware of it and not just do better than previous generations, but do better on a new level, and not only in comparison with what was done in our country, but in comparison with our competitors all over the world. I am not talking about enemies of every stripe. Now is not the time to talk about sad things. I am referring to competitors, and the competition is always strong.

We have another overused phrase about how we did no worse than someone else. We should always do better precisely because of the circumstances that I just mentioned. There are countries with larger populations and with more advanced technology and administrative tools. For us to be able to maintain our sovereignty, and to make the lives of our people and future generations, your children and grandchildren, better than today, it is imperative to make qualitatively new advances…..

They include space exploration, innovative energy sources, transport, biology, and cognitive science. They are about the synergy of various areas of knowledge and technology that produce the maximum effect, nature-like technologies, and so on. Medicine and education, too, by the way.

(bold italics added)

Just three weeks after making these comments President Putin visited the company office of the Yandex IT company, which operates Russia’s primary search engine and which is Russia rough equivalent to Google.  There we learn from Russia’s Presidential website that he was briefed on

…..the main areas of the company’s operation, such as Yandex.Search, the most popular search engine in Russia, artificial intelligence projects and the company’s online services in telemedicine, education, business and transportation.

One of the company’s latest projects is voice assistant called Alice, which provides weather updates and answers questions about city routes. You can use voice commands or type in your questions. Alice is a unique device: unlike other voice assistants, it can simply chat. Alice is not based on the keyword recognition principle but analyses large volumes of information before providing an answer. Alice will be available on October 10.

Vladimir Putin was also shown a working prototype of a driverless car that uses Yandex software. The President watched the car drive in the company’s yard.

The day after – having seen Yandex’s prototype of Russia’s first driverless car – President Putin chaired a State Council Presidium meeting in Ulyanovsk to discuss passenger transportation during which he said the following

……we need common, systemic approaches to the comprehensive development of regional passenger transport, so that each village and every residential area in a region can be linked by permanent routes. We know that there are a lot of problems so far, and you can see this, as you tour your regions and understand what I am talking about……

We need to create modern, convenient infrastructure and remove bottlenecks that have existed for decades We certainly need a strategic vision of how passenger transport in our country should develop – for the medium and longer term. We need to know the trends – including global trends – emerging in this industry, which will determine the development of public transport for the next 10–15 years. First of all, I mean the development of more environmentally friendly and economically viable technologies, the use of new energy sources and the spread of driverless vehicles.

Today we have seen very good models; we certainly need more, so that they could be commercialised and people could use them.

I also suggest discussing the prospects for the development of so-called multimodal transport, where a passenger could buy one ticket using non-cash payment and reach the destination using two or more types of transport. I must say, this practice was widespread even in Soviet times ‒ I remember, I actually travelled this way. But with modern facilities and technologies, this could be done more efficiently, more conveniently for people.

It is extremely important here that connections are as convenient as possible, or, as experts say, “seamless,” within special interchange hubs. These innovative hubs should also be among the priorities for passenger transportation development. Relevant regulations need to be adopted, at the legislative level, as well as technical arrangements with the use of modern automated systems.

On the whole, digital technology should be more widely used in passenger transportation record keeping, planning, and operations oversight, in settling accounts with carriers and cracking down on illegal businesses that seriously damage this sector of the economy.

I would also like to note that modern technology makes it possible to conduct medical monitoring of drivers and technical monitoring of vehicles remotely.

Yesterday I visited Yandex (once again, congratulations on their anniversary). Their developers are working on very efficient modern software to operate unmanned vehicles and to monitor drivers’ physical condition.

Three weeks later, at a meeting in Sochi, President Putin was discussing the use of digital technologies in Russia’s banking industry again.  Once more it was his comments about cryptocurrencies which attracted international and media attention, but it is clear from the report on Russia’s Presidential website that the discussion went much further.

Shortly after President Putin attended a major education conference also in Sochi under the theme Youth 2030 in which he again returned to these same themes whilst however emphasising in a way that is typical of him the importance of avoiding bad investments by keeping tight control of costs, and the ethical dimensions involved in the new genetic research.

Possibly the most interesting meeting of all was however one which President Putin had on 23rd September 2017 with Economics Minister Oreshkin and Industry Minister Manturov, the two ministers most concerned with developing Russia’s civilian manufacturing base.

During this meeting President Putin spoke of using the lessons learnt in  Russia’s Military Industrial Complex to raise productivity and the technological level in Russia’s civilian industries

Recently at a meeting of the Military-Industrial Commission we said that military industrial complex enterprises show remarkable labour productivity growth, which is certainly a positive development. But we also have another task – to diversify that part of our economy. We have to ensure that labour productivity does not grow through military goods output alone, but also during transition to civilian produce. I would like to hear about what is being done in this area.

Overall, as we all know, no qualitative breakthrough in labour productivity growth has occurred, unfortunately. I know that the Government has drafted a programme on labour productivity growth. I would like to hear from Mr Oreshkin how this work will be organised, since it is basically your job, to a considerable degree, at any rate.

Next, to boost high technology development, a decision was made to establish investment-technology partnerships. To do that, it was agreed to radically upgrade the special capital investment contract (SPIC). I would like you to report as what specific agreements have been reached.

I hope that both ministries, as you work in close contact, will also keep giving the necessary attention to the support of high-tech exports. We have set up relevant mechanisms but I know that there is occasionally a lack of financial backup, so let us discuss this topic as well today.

Drawing on the experience of the Military Industrial Complex in order to upgrade the country’s civilian manufacturing base makes a great deal of sense given the extent to which many of the new technologies which taken together make up the Fourth Industrial Revolution originate in military industries in which Russia is an acknowledged leader.

Here it should be said that what President Putin is talking about is something completely different from the misconceived programme to convert military industries to civilian production which was a hallmark of the Gorbachev era.

Rather what President Putin wants is the technological and management practices of the Military Industrial Complex to be disseminated to the country’s civilian industries so as to bring them up to the same level of productivity.

In summary, though President Putin did not to my knowledge use the expression “Fourth Industrial Revolution” in any of his comments this autumn, it is abundantly clear from his comments and from the sort of people he has been choosing to meet (who include the newly elected President of Russia’s Academy of Sciences) that this is the direction he wants Russia to take.

The heavy emphasis on President Putin in this article is somewhat misleading since it may give the impression that embracing the Fourth Industrial Revolution is his personal priority rather than that of the whole Russian government.

That view would however be wrong.  On the contrary, with the long period of economic stabilisation and restructuring of the Russian financial system which began in the years after the 2008 crisis drawing to a close, and as the hard work carried out during this period starts to bear fruit, it is clear that embracing the set of technologies which taken together make up the Fourth Industrial Revolution and building up Russia’s future economy around them is now the priority of the whole government.

By way of example, the economic plan which former Finance Minister Alexey Kudrin recently presented to President Putin is known to put heavy emphasis on education and health spending and developing Russia’s infrastructure, precisely the areas which need to be upgraded in order to make Russia’s society and economy better adapted for the wider introduction of the new technologies which are to come.

Behind this heavy focus on the Fourth Industrial Revolution one senses two factors.

Firstly, there is a strong awareness that Russia needs to embrace this Revolution if it is to maximise both the well-being of its people and retain relevance in the twenty first century as a world power.

However there also appears to be a sense that the various elements which taken together make up the Fourth Industrial Revolution play strongly to Russia’s traditional strengths.

After all the country has experience in precisely the sort of industries which generate the technologies which are being spoken about, whilst the country’s acknowledged mathematical skills  and the depth of its education and science base along with its relatively administrative system and its unrivalled experience in long range inter-sectoral planning ought to make it perfectly suited to developing a new economy in this way.

Indeed one gets the sense that Russia’s leaders believe that Russia ought not only to succeed in creating this sort of society and economy, but that it is well within its capabilities to be a world leader in it.

That doubtless explains both the optimism and the urgency which can be clearly heard in President Putin’s words when he discusses these questions.