In Annual Address, Putin Stresses Investment in IT, Education as Path to Prosperity But Arms Sales Still Crucial

Today Russian President Vladimir Putin gave his annual address to the Federation Council, the upper chamber of parliament, Kommersant and other Russia media reported.

In this year’s “state of the union” speech, Putin focused mainly on curing Russia’s largely self-inflicted wounds, making admissions he normally doesn’t make for the Western press. His one bone thrown to the US — in a speech minimizing foreign policy issues in keeping with tradition — was promoted for foreign propaganda and then picked up as if a breakthrough.

But it’s worth noting that, as always, Putin said that he wanted such relations to be “on the basis of equal rights and mutual profit.”

What that means is that the US can’t make demands of Russia and has to accept reality on the Kremlin’s terms, which includes its war on Ukraine, ostensibly to protect Russian separatists; its bombing of anti-Assad rebels and civilian areas, rather than ISIS, to prop up Syrian President Bashar al-Assad; its bringing of Kalibr missiles, with the capability of launching nuclear warheads, up to the border of Estonia in Kaliningrad Region; its dropping out of the plutonium agreement; and numerous other unilateral actions that are irritants if not dangers to the West.

Kommersant has produced an info-graphic on Putin’as address (which we summarize below), noting that it was 68 minutes long and 7,322  words, and not even one of his longest speeches. The most-used words were “year,” “Russia,” “must,” “development,” “country,” “people,” “decision,” “important,” “now,” and “number.” The topics that took up the most time were economics and business, social issues, and domestic policy, with international relations and the war on terrorism taking much less time, and science taking the least amount of time of all.

The United Russian People 

“Let us understand: we are a united people, we are one people, and we have one Russia,” Putin emphasized, mindful of the ethnic tensions that pull the Russian Federation apart, notably in the North Caucasus and Siberia.

While Putin has worked to create a concept of rossiyanin — “Russian citizen” — rather than “russkiy” — ethnic Russian — he also has a concept of “Russian World” (Russkiy Mir) which highlights the specifically nationalist emphasis on the Russian ethnicity, language and culture. As Paul Goble, our syndicated columnist often reports, other languages and cultures are de-funded, and religions outside of Russian Orthodoxy are curbed, particularly Islam.

High-Speed Internet and Education

Putin then made two major proposals that only underscored Russia’s previous backwardness (if there were hospitals without Internet and lack of teachers in schools):

o place high-speed Internet in all hospitals and clinics

o create 187,998 new positions for teachers in schools

The Internet addition to hospitals is to increase the capacity for remote treatment, which was outlawed until recently in Russia, a growing necessity with an aging population in remote areas where there are poor roads and increasingly less commuter trains.

Clearly, one asset Russia has, in part a function of the Soviet education system’s emphasis on math and science, are numerous trained computer programmers and the potential for a great IT sector.

But Russian programmers have gained prominence for two negative trends — hacking of Western institutions — including the Democratic National Committee before the US elections, said to be state-directed — and moving abroad to work for Western companies like Google or Facebook, because wages and conditions at home are worse.

Putin didn’t mention anything about incentives to bring ex-pats home, but he is clearly focusing on growing the digital economy and “orienting toward Russian design,” i.e. to avoid dependency on Western and Asian computer products.

He said last year, Russian IT export totaled $7 billion; tax revenue from Russian IT companies increased because of favorable tax rates, so he proposed keeping them until 2023; Kommersant reported that the ministries of labor and health have opposed an open-ended tax break for IT because of the need for revenue in state coffers. Currently, those IT companies that pass through a special accreditation with the Ministry of Communications pay 14% in taxes whereas others pay 30%. IT tax rates were planned to increase to 28% in 2019 and then to 30% as others, but the Ministry of Finance, which changed course on this issue, decided there was more good than harm by keeping IT at a reduced tax rate.

Putin called for “removing all the barriers to emerging on the high-tech markets” and also emphasized the need to “teach children to think independently” and train engineers and programmers: “competency centers” will be created at the leading universities to provide “intellectual and personnel support to projects related to forming new sectors and markets.” This is a reference to Internet business, and various innovative start-ups which have not faced a hospitable climate in Russia. He also mentioned briefly the need for long-term science investment and a special granting system.

Kommersant noted that the plan for “children’s techno-parks” i.e. to teach Internet skills was conceived back in 2012 with Putin’s “May decrees,” an ambitious program to stimulate the economy but also make good on populist pledges that got him elected. The plan also calls for at least 75% of children aged 5-18 to be placed in after-school programs to promote science and technology — a plan that Kommersant said was reminiscent of the “Pioneers’ Palaces” of the Soviet era.

Children would  be able to “try out a number of professions” and “become for a time an airplane designer, an oil worker or a biotechnologist.” So far, just five regions of Russia have 14 pilot programs of this type. One educator complained to Kommersant that the presidential directive wasn’t taking into account the fact that children currently used after-school hours to do homework and cram for exams required under new educational standards and suggested that the focus should be on promoting talented children in the regions.

Meanwhile, another graph Kommersant cited showed a decline in the actual number of educational institutions in Russia, which once led the world in literary. In this is related to lack of state funds. The minister of education puzzled people recently by saying that “2/3 of Russians don’t need a higher education” — by which she meant that rather than going to university, Russians who wanted to become computer professionals, for example, could go to trade schools.

Putin also said that no schools in “emergency conditions” should exist in Russia, by which he meant schools in a poor state of repairs. Kommersant noted that back in 2009, then-education minister Andrei Fursenko said 40% of students or 5 million children “did not have a warm toilet” in their school, i.e. they used an outhouse. Today, there is a total of 10.1 million students even as the number of schools have declined by 29%, forcing schools to run three shifts, as is done in Chechnya. Other provinces with the poorest state of schools are Ingushetia, Dagestan, Amur Region, and Yakutia — which also happen in some cases to be areas of separatist unrest or terrorism.

Oil Prices Rising 

“Putin wants the deal. Full stop. Russian companies will have to cut production,” said a Russian energy source briefed on the discussions.

Removing Red Tape

Mindful of Russia’s centuries-long tradition of bureaucratic suppression of economic activity, Putin is urging a removal of numerous inspections of business and other red tape — a pledge made before, but which seldom materializes because of the incentive not only of bribery for officials but the tendency of the state not to allow initiatives that make people less dependent on it — and then threaten it politically.

Putin’s call to lessen restrictions on regional banks seemed odd, given all the corrupt or failing banks that have had their licenses withdrawn in past years. Kommersant noted that that “the Bank of Russia has continued to actively purge the banking system” closing 78 credit organizations this year, only slightly less than last year (84), which had a total of 960 billion rubles.

Along with this is the battle against corruption — here Putin mentioned all the high-profile cases of the year by name, from the Investigative Committee’s internal security deputies to Nikita Belykh, the governor of Kirov Region and recently Aleksei Ulyukayev, the Minister for Economic Re-Development allegedly arrested in the act of accepting a suitcase with cash for fixing the sale of Bashneft to Rosneft. Putin said Ulyukayev’s case “was not pre-determined” and a court will try his case, but his invocation of all these figures in a context of describing a crackdown on corruption lets us know he views them as guilty as charged, and the justice system’s handling of their cases will be mere theater.

Ulyukayev’s case is not only about bribery; it’s also about the “liberal” economists who said Russia faced long-term stagnation unless it increased its growth potential. Putin disagrees, and has defined a more conservative growth rate (5% by 2020, rumored even to be lowered to 4$; currently Morgan Stanley has forecast Russia’s actual growth for 2017 at 1.2%)

A double-edged comment was Putin’s call for “clearly defining the legal status of self-employed citizens, to give them the opportunity to normally work in peace.” This is a reference to cracking down on the black economy in goods and services which thrives especially in a climate of Russia’s boycott of Western products, in response to Western sanctions over the annexation of Crimea, but also encompasses numerous jobs from drivers of buses to remote areas to tutors to construction which are unregulated — and for some, thus affordable and functional. It’s not clear what the net effect of this move to “enable citizens to work normally in peace,” as the peace of quite a few is likely to be disturbed along the way.

Kommersant noted that the topic of reducing prosecution of business has been discussed for years and recently Aleksandr Bastrykin of the Investigative Committee proposed the increased use of house arrest and bail for economic crimes. Five different labor, tax, safety and consumer state agencies that control business are supposed to move to a “risk-oriented approach” by 2024, assessing companies by categories of risk to determine the number of inspections they need, but are likely to take two or three more years to agree on the criteria, says Kommersant.

As for the promise to “legalize” the self-employed, no doubt the Kremlin took note of unhappiness in the business community with the sharp reduction of the types of self-employed, who were offered tax-free status for two years in exchange for voluntary legalization; the State Duma law included only household help, tutors and nannies, although the Ministry of Finance said it may expand the list after 2017.

Kommersant noted that last year’s program to help small businesses by enabling state companies to make purchases from them did not produce much improvement, and in the last year, such businesses faced tighter credit. The Ministry of Economics has proposed enabled foreign investment in small and medium businesses while retaining their state support.

As for Russia’s other pride outside of oil and arms sales — sports — Putin in his speech today referenced “attempts of outside pressure,” but didn’t discount the issue and said the “so-called doping scandal I’m sure will enable us to create in Russia the most advanced system of combating this evil.”

A graph published by Kommersant and a comment Putin made about the need to “increase civilian production in the defense sector from 16% to 50% let us know the Kremlin’s plan for economic improvement still rests on its role as one of the largest arms dealers in the world.

This graph shows the trend for the volume of military production in Russia — dropping drastically before the war with Georgia, then increasing and dropping again before Putin’s second term, where it shot up, dropped against in 2013, then rose again with the war in Ukraine.

Yet Putin made the claim that “agricultural produce export gives Russia more than sale of armaments.”  Kommersant commented that the statement about agricultural exports exceeding armaments “is a forecast for the time being,” but with great likelihood, it will be secured in the year-end results through a growth in export above all of grain, but not the stabilization of export of arms. 

Egypt, which is the world’s largest wheat buyer, had resumed purchase of grain from Russia, causing US wheat futures to dip, but halted it again after finding ergot in a Russian shipment of 33,000 tons in July, following a new policy of zero tolerance for contamination. Russia may retaliate with a ban on Egyptian citrus fruits.

100th Anniversary of the Russian Revolution

As next year will be the 100th anniversary of the Bolshevik revolution in 1917, Putin made a plea for calm, referencing the 19th-century reformist Pyotor Stolypin’s famous phrase in debates with revolutionaries, “You need great upheavals; we want a great Russia.”

Putin is both a Leninist as a creature of a Soviet upbringing and a former KGB officer, but also doesn’t want anyone to get any revolutionary ideas today — like Maidan in Ukraine. As Kommersant pointed out, Putin urged people “not to drag in the schism of anger and hurt to our life today” and “not take advantage of” the anniversary.

The Russian Security Council already made a statement reported by Kommersant on October 31 expressing concern that the 100th anniversary may be exploited “on the part of foreign state agencies in conducting anti-Russian policy to deliberately distort this period.”

Ultimately, Putin sees Russia’s path to prosperity to be one of isolation rather than cooperation. Western sanctions and the countermeasures of boycotts, which have indeed taken a toll on Russia’s economy, but “trials have made us even stronger,” says Putin. 

“We want and will independently dispose of our fate, build our future without any outside prompting and unsolicited advice.”