Recipe for modernization

Recipe for modernization

RIA Novosti economics commentator Marina Selivanova

President Dmitry Medvedev devoted the first and longest part of his address before the Federal Assembly to the long-term economic prospects. His main idea is that it is no longer possible to delay structural reforms; it is necessary to start the modernization and technological re-equipment of industry without further delay. Now it is a question of Russia's survival in the modern world.

Five Priorities

In his address, Medvedev listed the five priorities for economic modernization that had been endorsed by a special presidential commission - introducing latest medical, energy, and information technologies, and the development of the space industry and telecommunication systems.

"Our nation's economy must finally re-orient itself to the needs of the population, and today these are primarily security, better health, and access to energy and information," emphasized the president.

Development of medical equipment and technology and pharmaceutics will make it possible to provide people with quality medicines at affordable prices and new technologies for preventing and curing diseases. Experts have already compiled a list of 50 major medicines that have an affect on the country's death rate and should be produced in Russia. The list includes the most expensive preparations for the treatment of cancer and cardiovascular diseases. The government has promised to purchase new preparations to support the companies that produce them. The goal is for Russian companies to produce a quarter of medicines consumed domestically in five years, and half by the year 2020.

The second priority of modernization is higher energy efficiency and the smarter use of natural resources. Meters will be manufactured and installed to enable residents to pay only for the energy and utilities they actually consume, rather than for losses due to worn-out infrastructure. A program for upgrading utilities will be launched, and a new system of payment will adjust existing rates depending on the level of consumption and family income. Energy-efficient contracts will be introduced. The use of energy-saving lighting will also help reduce electricity costs considerably.

The president demanded that mining companies should make better use of new technologies and stop burning associated gas, which is polluting the environment and wasting tens of billions of rubles. Extracting energy from biological resources, such as timber and peat, is another promising avenue.

The nuclear energy development program is ranked as the third priority in the modernization project. By 2014, Russia should have new generation of nuclear power plants and nuclear fuel. Nuclear technologies will be actively used in medicine, hydrogen fuel production, and the construction of a spacecraft for flights to other planets.

The fourth strategic priority is the development of space technologies and telecommunications. At present Russia ranks only 63rd in the world in terms communication infrastructure development. In this context, Medvedev set the following objective: "It is necessary to secure a broadband Internet access, and to switch to digital television and fourth-generation cell phones in Russia's entire territory in the next five years." He added that prices for such services should be reduced for the residents of Siberia and the Far East.

The introduction and use of space technologies, including GLONASS, will allow Russians to use modern navigation equipment in their cars, help ensure the transportation safety and the security of technologically sophisticated facilities, and enhance coordination of emergency services. By 2015, Russia should match global standards for the capabilities and active service of its communication satellites, which should be capable of "seeing" the whole world.

The fifth priority is to develop strategic and information technologies. The president said that it is essential to use the capabilities of supercomputers connected by high-speed data transfer networks to design state-of-the-art aircraft, spaceships, automobiles, and nuclear power plants. In two years, the development of electronic communications will make over 60 government services accessible to population over the Internet, including taking qualification exams, applying for driver's licenses, registering property, and accessing government archives. In the future, social welfare cards may be combined with credit or debit cards. Information technologies will also make it easier to combat corruption.

Russia should make better use of its scientific potential in order to modernize successfully. It is necessary to attract prominent Russian and foreign scientists to work in Russia. The same applies to businesspeople who have ample experience in marketing new technologies. Those who develop new technologies will receive grants, and innovation-based small companies will receive financial support from the government. 

The state to tighten its belt

In addition to the points mentioned above, the president promised to reconsider the role of the state in the economy. In particular, the list of strategic enterprises will be overhauled, and the seven state-owned corporations will be liquidated. Those of them that were supposed to exist for a specified period of time will be closed after fulfilling the purpose for which they were created. The others, which operate as commercial, competitive businesses, will be restructured as state-controlled joint stock companies. These companies overseen by the state will be subject to independent audits, and their top executives' salaries will be linked to their success in cutting costs, introducing new technologies, and boosting energy efficiency and labor productivity.

There are currently seven state-owned corporations in Russia, specifically the Deposit Insurance Agency, Vnesheconombank, Rusnano, Rosatom, Russian Technologies, the Housing and Utilities Reform Fund and Olimpstroy. The United Aircraft Building Corporation, the United Shipbuilding Corporation, and the Federal Road Agency (Rosavtodor) have functions similar to those of state corporations.

Prosecutor General Yury Chaika reported to President Medvedev on November 10 that over the past two years, state-owned corporations have used only ten billion rubles of the 130 billion rubles allocated to them, and half of that sum has gone to pay for recurring expenses. Mr. Chaika added that audits of state-owned corporations revealed cases of improper use of funds and property, as well as violations of the process of placing state orders and holding auctions. Twenty-two court cases have been initiated based on the results of these audits.

The president promised that all government expenses will be strictly monitored to maximize their efficiency, and that the quality of government services will be increased. Tough control over expenditures inspires hope that economic stability will persist and that budget parameters will remain unchanged for the foreseeable future, says Anton Struchenevsky, senior economist at the Troika Dialog investment bank.

"Should budget revenues fall, for example due to a decrease in raw materials prices, one cannot exclude the possibility that funds will be borrowed from state-owned corporations to avoid printing more money and borrowing domestically and internationally," Mr. Struchenevsky told RIA Novosti.

The president offered a plan for improving the situation in communities dominated by a single industry. There are over 400 such one-industry towns in Russia, which are home to 16 million people. The president's main objective is to prevent a precipitous deterioration of living standards in these towns. In the next six months the government will adopt a program to assist the development of these communities. Thus, either conditions must be created to apply the abilities of local residents in different economic sectors and attract private investment for the purpose, or the people should be assisted in moving to more promising areas.

"On the whole, the economic focus of the address is on development after the crisis. The president didn't say a word about ways to overcome the economic crisis," concluded Yaroslav Lissovolik, chief economist of Deutsche Bank in Russia, adding that the president should have covered in more detail plans to improve state expenditures, since this is a key factor in implementing the modernization program.

The issues the president avoided

Businesses were frustrated to hear the president's confession that the government is not ready to invest in infrastructure, although infrastructure is currently underfinanced.

"As far as there is no order in this industry, and the costs of construction are hugely overstated, I consider it impermissible luxury to spend more funds for these purposes," said the president. In order to reduce thefts, the president charged the government with phasing in online government auctions in 2010 and bringing the construction costs of roads and other infrastructure in line with international standards.

The state's abandonment of heavy investment in infrastructure has discouraged businesses. "One cannot carry out modernization on the basis of obsolete infrastructure," Boris Titov, the leader of the Delovaya Rossiya public organization, told RIA Novosti. "We are in the stone age stage in terms of infrastructure development. There are modern highways in Africa, and here in Russia one can hardly drive from Moscow to St Petersburg without breaking a wheel," Mr. Titov said.

According to him, the transition to a "smart" economy requires an effective strategy that must contain practical measures to attract investment, carry out tax reform, etc.

Taxes indeed were given too little attention in the address. The Government has been charged with drawing up a fiscal draft law in the first quarter of the next year to create favorable conditions for the development of high-tech businesses. Such companies will be obliged to pay insurance premiums after a five-year transitional period. For other companies, this insurance premium rate will be raised from 26% to 34% in 2011.

The president warned non-high-tech businesses that the tax reform is not over yet, although he did not unveil any actual plans.

"The crisis has certainly made it difficult for us to ease the tax burden, and discussion of these issues will be resumed in the near future," stated President Medvedev.

"It is necessary to shift the tax burden from producers to consumers to make production profitable," Mr. Titov insists, pointing to the necessity of reducing the VAT and the Unified Social Tax.

Charitable and non-profit organizations were the only entities to which the president promised tax cuts. Non-profit organizations' services to provide support and care to patients, the disabled, the elderly and orphans will be exempt from VAT. Also, no profit tax will be paid from grants to develop healthcare and mass sports.

The opinions expressed in this article are the author's and do not necessarily represent those of Trend

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