The Deindustrialisation of Contemporary Russia

Tahir Asghar

The USSR, over the period of its tumultuous history, had built up a massive industrial, R&D and scientific potential so as to not only build a socialist society and defend it but also to secure its economic independence and growth and the full development of intellectual and material capacities of its population. Not only did the old industrial and scientific centres like Moscow and Leningrad witness massive expansion but many new such centres were set up in all the republics.

Moscow and its surrounding region continued to be the major economic region of the USSR, where the most diverse sectors beginning from aeronautic and cosmonautic, high tech defence industries and research institutions to linen and textiles factories were situated. The process and trends of economic and technological decline of the country in the period of restoration of capitalism find their particular reflection in the decline of these former centres of industrial and scientific excellence and their transformation into service hubs. What has happened there and is continuing to take place can be considered as a typical case of the overall trend of the shift in the emphasis towards the service sector on the rather flimsy ‘scientific’ hypothesis that all advanced economies are characterised by dominance of the service sector, totally contrary to the Marxist-Leninist position of the primacy of the sector of production of means of production as the foundation not only of the national economy but also as a determining condition for the real, not just formal, independence of a nation.

In the preceding 25 years, capitalism has expanded to become a truly globalised economic system. And during this period global capitalism has experienced a number of crises in many parts of the world – the South Asian crisis of 1997, the Russian crisis of 1998, the bursting of the tech bubble and finally the crisis of 2007 in the United States of America and then the crisis in the Euro zone. However, in the 1980s capitalism was being prescribed as the only system capable of providing sustained growth not only in the advanced capitalist countries, in the countries of the so-called Third World, but also in the countries of the socialist bloc. It was argued that only a market system based on private entrepreneurship produces optimal use of resources, minimises waste and maximises economic growth.

In the late 1970s the West experienced the information revolution. The spread of computer and information technology first to the corporate (manufacturing, small and medium businesses, retail, banking) sector and then to the households for personal use led to a sharp increase in labour productivity. At the same time the USA and UK saw the rise of right-wing political forces to power – Ronald Reagan in the USA and Margaret Thatcher in UK. Using the power of the mass media, prejudices of the middle class and above all the full force of the coercive apparatus of the state, they mounted a ruthless and ferocious assault on the working class in their respective countries and succeeded to a large extent in crushing the organised working class and trade union movement, from which it has yet to fully recover. They managed to convince large sections of the population that all the problems of capitalism can be resolved on the basis of the free play of market forces only if the ‘lazy’ and ‘pampered’ working class with its permanently increasing irrational demands was shown its place and the weak State that always gave in to their demands be withdrawn from active economic participation through the public sector, which needs to be privatised. So they argued and promptly proceeded to implement maximum deregulation of the production, distribution and exchange, withdrawal of the state from direct economic activity and curtailment of the power of workers organisations and trade unions.

Subsequently, policies based on these principles were not only sought to be promoted in, but also actively forced upon the developing countries of Latin America, Asia and Africa.

At about the same time that these changes were taking place in the UK and USA, the USSR, after a prolonged period of annual growth rates ranging between 4.5 and 6 percent, began to show signs of slowing down. The distortions in the economy that were in the making for a long time and serious shortcomings in the planning process unresolved since the Liberman reforms of the late 1960s began to manifest themselves with increasing severity, leading to serious shortfalls of many essential commodities and foodstuffs and deteriorating quality of social services all over the country. Further, the country found itself bogged down in an expensive, unexpectedly protracted and seemingly endless war in Afghanistan, putting additional pressure on government expenditure. This was also a time of political indecision as the ageing politburo and the Party leadership was proving to be increasingly incapable of asserting central control. This period from the late-1970s to 1985 is now generally referred to as the “stagnation” period.

The result was that the USSR appeared to be falling behind the West in economic development and increasingly unable to provide consistent growth in the living standard of the population. After a period in which three party secretaries came to power in quick succession, it was finally Gorbachev who was appointed the general secretary of the Communist Party of the USSR.

It was under his stewardship that the policy of Perestroika and democratisation was initiated. It appears that by this time the party leadership had factually come to the conclusion that the system of centralised planning has outlived its original role and is not capable any more on its own to provide the population with a growing standard of living, and needs to be supplemented, if not totally replaced (a view that was to become the official policy in just a few years time) by a non-state sector based on market principles. And thus with the passing of the bill on cooperatives and individual businesses, the foundation for private owned enterprises was laid. The passing of another Law on Enterprises also allowed management much more autonomy and freedom in decision-making, thereby diminishing further the power and capacity of the central authorities to control the enterprises. These measures and the political instability taken together led to a precipitous drop in the growth rate of the economy and plunged the country into a full-fledged economic crisis by 1989. Finally, the unsuccessful coup against Gorbachev and subsequent events leading to the dismantling of the CPSU and the Soviet Union imposed by Yeltsin, marked the end of the socialist world system.

Yeltsin and his group of advisers, all erstwhile high level functionaries of the CPSU, helped by their new found well-wishing ‘experts’ from the IMF and other financial institutions of the West, began, with all the zeal of the newly converted, to dismantle the whole structure and intricate network of the centrally planned economic system and replace it with an economy based on market mechanism and private property, i.e. capitalism. With this in mind a policy of stabilisation, liberalisation, privatisation and free foreign trade, already tried out in many other countries with disastrous consequences for most of them, nevertheless began to be carried out immediately in Russia. This policy came to be known as “shock therapy”. It was the beginning of the restoration of capitalism in Russia by Khrushchev’s ideological progenies.

The consequences in Russia of this transition to capitalism have been really shocking, especially in terms of its social costs. It still continues to exact its price – economic, social and (geo) political.

From a superpower, the country has been reduced to the status of a middle-order nation along with countries like India. From the second most powerful economy, just behind the United States, the country has been reduced to the status where it now stands alongside developing countries like Brazil and India. On many indicators of social development the country is now ranked alongside the least developed countries of the world.

The two books under review give a fairly complete and comprehensive picture of the decline of a country that was once one of the only two military and economic superpowers in the world and adequately describe the process and government policies resulting in this rather sorry state of affairs for a country endowed with all the wealth – intellectual and material – that no other country, with the exception of USA, can boast of.

The most striking feature of economic decline of the Russian Federation since 1991 has been the ‘de-industrialisation’ of the country accompanied by loss of its R&D and scientific leadership.

The book ‘Moscow City from an Industrial and Scientific Centre to a Collection of Shops and Offices’, by G.V. Krainev (Moscow, 2009), is a testimony to this process. It is a collection of articles describing and analysing the policy of reforms undertaken in the city of Moscow which has led to the destruction of the most organised and self-conscious section of the Moscow proletariat as the author says of both physical and intellectual labour. The book is divided into a number of themes which look at different aspects of the policy of capitalist reforms.

The ruling class of Russia, having concentrated in its hands unrestricted power following the dissolution of the CPSU, began to systematically undermine the very base of socialist production – large scale industrial production and its R&D and scientific support consisting of hundreds of scientific organisations and institutes employing hundreds of thousands of highly qualified personnel. This was done deliberately as part of the policy of converting socialist enterprises into capitalist undertakings of various forms. The industrial enterprises were first deprived of preferential access to financing their operations, by devaluing their assets, both old and new, through hyper-inflation and devaluation of the currency, by pushing these enterprises deep into debt and then letting them face international competition without any state support, and all this in the wake of disruption, following the collapse of the USSR, of the traditional ties with the other enterprises of the country that were suppliers of inputs or consumers for their products, by depriving the enterprises of new entrants of qualified and trained workers from the professional schools that were being hurriedly closed down and converted into play areas or shops and beauty salons, and lastly, declaring these enterprises insolvent, which then was used to demonstrate the ‘uncompetitiveness’ of the majority of enterprises built in the Soviet era.

It is also worth noting that these large-scale industrial enterprises were being carved up into innumerable small and medium joint stock and private companies, which appropriate from a fine-tuned production cycle the most valuable assets and resort to selling or liquidating the rest. The state also started to sell these enterprises to foreign buyers under the pretext of the need to increase the effectiveness of these enterprises. Such reorganisations, liquidations and bankruptcies of enterprises and factories have with time assumed massive proportions. In Moscow alone by the beginning of 2002 about 7000 were already liquidated and another 8000 were in the line (Krainev, p. 7). Thus already by 1999, as a consequence of the market reforms, the socio-economic structure of Moscow underwent a radical change. Moscow became centre of finance, business, trade and administration and the significance of industries as a factor of urban development has diminished drastically (Krainev, p. 8).

Industries are also increasingly becoming victims of speculation in land and real estate. The new Land Code of the country allows the owner of the factory to buy the land on which the factory is situated. This law has set in motion speculative activity related to land. The wealthier ‘entrepreneurs’ went on the offensive, buying out the workers’ shares of so-called unprofitable factories so as to take over the land, then close down the factories and build on this land offices, casinos, markets or malls and other such modern commercial units. Subsequently, this has become an epidemic affecting not only unproductive enterprises but also efficiently functioning and profitable ones (Krainev, p. 14).

Such processes on a national scale have brought about a radical change in the structure of the economy of the country as whole. Now, contrary to the situation earlier, the largest share in the growth of GDP is contributed by the export of fuel and energy resources and raw material and also because of high prices of these commodities on the international market. Only 2% of the growth in GDP can be attributed to the genuinely competitive sectors that have managed to counter imports and increase their own production. This has led to the degradation of critical sectors like manufacturing and agriculture, and over a period of15-20 years turn Russia from a producer country to an importer country especially of machines, equipment and food products and a country living off revenues largely from its oil exports. This is also reflected in the structure  imports that shows growing rates of import of machines and equipment between the years 2000 and 2006. Their share in the total imports grew from 31.1% in 2000 to 47.7% in 2006 (Krainev, p. 76). If in the period of market reforms and the spread and growth of capitalism in Russia, the industrial sector as a whole was the biggest victim; the situation of the manufacturing sector, especially that of machine building and engineering sectors, producing means of production can be described as disastrous.

This situation finds its reflection as in a mirror in the economic structure of Moscow. Since 1991 the structure of industrial production in Moscow has witnessed similar and significant change. Once the hub of production of modern machinery and engineering equipment, of sectors at the forefront industrial development, today the picture can only be termed as dismal. The leading industrial sector in the city is the food processing industry, both in terms of rates of growth and scale of production. The enterprises of the food industry account for a third of all the realised produce of the city, between 28 and 32% in monetary terms. During the reforms of the industrial sector of the city, the machine-building and metal-working industries have completely lost their former leading positions and now occupy a subordinate position, constituting only about 25% in total volume of industrial production. Thus even according to official statistics the real fact is that the these two sectors of industry, the very core of industrial production, now together constitute only 2% of the Gross Regional Product of Moscow (Krainev, p. 82). “Machine building industry, which forms the technological foundation of all industry, and which under the Soviet Union effectively satisfied the requirements of all the branches of heavy, light and other industries, the requirement of the colossal national economy of the USSR, has been liquidated for all practical purposes” (Krainev, p. 92). Only the production of consumer goods and control systems is increasing and the production of the means of production is significantly on a decline. In this way a slow ticking bomb is being placed under the ground of national industries that will ensure dependence on supplies of technology from abroad for many years to come (Krainev, p. 93).

The Gross Regional Product also depends on the scale of investments in the economy of the region. The data of the Russian Statistical Committee differentiates between investments in fixed capital and foreign investments. Though investment in fixed capital shows growth in absolute terms in roubles, its share in the Gross Regional Product of Moscow has stagnated at around 11% and only towards the mid-2000s began to outstrip inflation. According to official data, one third of the investments is directed to overhauling of machines, equipment and means of transport. However, reports in the media suggest that not more than 6% of fixed equipment, much less than the required 8%, does not even ensure simple reproduction. In many enterprises equipment that was installed during the Stalin period is still in use. If we look at the sector-wise structure of investments, the largest share of investments flows into the transport and housing sectors (26% and 25% respectively) while only slightly more than 7% flows into the industrial sector, even less than in communications which stands at about 11%. These facts show that renewal of fixed capital in the industrial sector is not a priority for the authorities (Krainev, pp. 95-96).

The volume of foreign investments has been rising consistently since 2000. If in 2000 it was around US $4 billion then in 2006 it was approximately US $24 billion. According to the city authorities the most attractive areas of foreign investments in the economy of Moscow are trade, hotels, eateries and restaurant business, transport and reconstruction of large buildings. According to official statistics foreign investment in the industrial sector of the city is just a meagre part of the overall flows with a major part going into trade and food services (Krainev, pp. 98-99). Retail trade (malls, showrooms, boutiques), wholesale trade, production of beer, hotel business, all those areas that bring in quick and relatively high returns, have turned out to be the most attractive destinations for foreign direct investments. It is widely commented that sectors like machine building and the engineering industry, high technology, processing industry have not been able to attract any significant amount of foreign investments. Both Russian and foreign investors so far have shown interest primarily in areas that ensure high profits in the short term with a minimum of risks.

All these factors find their reflection in official economic data for Moscow: growth has been significant in production of electrical and optical equipment, means of transport, production of rubber and plastic goods, wood processing and wooden items and leather goods. Growth rates have declined in production of chemicals, metallurgy and metal items, machines and equipment (heavy and light), textiles and garments. The last two have seen in significant and consistent decline (Krainev, p. 111).

These radical changes in the structure of the national economy as exemplified by the experience of the erstwhile most powerful economic, scientific and R&D hub of the country – the city and region of Moscow – have negatively affected the technology and technical institutions, scientific research institutes and R&D organisations in the city and, consequently, the status and conditions of living of hundreds of thousands of workers and highly qualified scientists and technicians.

O.A. Mazur’s book ‘Development of the Workforce of Contemporary Russia’, (St. Petersburg University Publication, St. Petersburg, 2009) analyses the factors behind the Russian Federation’s relative social and technological backwardness and attempts to identify the contradictions in the development of social capital. He too highlights the decline of the industrial sector in Russia in general and of manufacturing in particular which now employs significantly fewer employees than during the Soviet period. There has been a 36% decline in the number of employees in industries (38.2% in machine-building sector) and a simultaneous ‘catastrophic’ decline in the number employed in science and R&D – 50%. Trade and finance sectors witnessed a high growth in the number of employees. According to him, industry continues to remain in a state of stagnation and only the best part of it has regained the levels of the late 1980s, a period that itself was one of negative growth (p. 42). Within industry too regressive shifts can be observed in the structure of employment – increase in the share of extracting industries accompanied by a decreasing share of employment in machine-building and light industries, i.e. exactly those industries that together account for the largest share in value addition.

These shifts are ultimately responsible for the terrible conditions that have resulted in extremely grim social development indicators: high rates of mortality in the working age group of the population and fall in the educational and skill levels of the workforce, food consumption and living conditions. Mortality in Russia is almost double that of the USA, France and Netherlands. The average life span for the whole population is 67 years, while it is 72 years for women and only 56 for men. This is about 10-15 years lower than in the West. Only 58% of the young men of the age of16 presently are expected to live until 60 years. The number of deaths in the working age group is catastrophically high and exceeds the levels in advanced countries by a factor of 1.5 – 2. Diseases related to the blood circulatory system are the main causes of this decline in the average life span of men and unnatural deaths among women, pointing towards deterioration of social conditions. Consumption of tobacco, generously supplied by the multinationals, along with alcohol consumption is also among the leading factors of high mortality rates in Russia (Mazur, p. 31).

According to this author no fewer than 25% of men in the working age group are either totally or partially unfit to work. These and other factors of high mortality and incapacity to work in the Russian Federation have yet to be overcome, but now exert a cumulative affect (Mazur, p. 32). A comparison of the same indicators of health in the Russian Federation and UK shows that if in 1965 they had a broadly similar level of mortality due to curable diseases then by the end of 1990s in Russia it was about 3 times more than in UK. Mortality due to diseases related to blood circulatory system and infectious diseases in the Russian Federation is 3-4 times higher than in the USA, Norway and France.

The trend of decreasing employment in the industrial sector of Moscow observed by Krainev is also characteristic of the country as a whole, as shown by Mazur. In the 1990s according to Mazur the sectoral structure of the Russian economy changed dramatically and looked more like the structure of a pre-industrial economy. Since then not much change has occurred. The tendencies of the 1990s continue to dominate. The industrial sector has witnessed a 36% fall in the number of employed, agriculture – 20%, and construction – 23%, while there has been an 103% increase in the number of employed in the finance sector, in trade – 85%, and in State administration – 85%. Maximum loss of employment has occurred among the less-skilled workers of industry and construction sectors.

Regressive shifts can also be observed within the industrial structure of employment. There has been an increase in the share of employed in the extracting industries (from 12.5% in 1990 to 24% in 2005) while the share of machine-building and engineering sector in the total number of employed in industry declined from 38.2% to 26.4%, and of light industry from 11% to 6% over the same period of time (Mazur, p. 43). The changes thus have occurred in sectors that have the potential to add maximum value and in the case of machine-building and engineering sector, in addition, the ability to provide technological progress.

Thus, looking at the decline of the sectors that form the very basis of technological progress, it is hard to imagine how Russia can regain its position as a world leader in production and science and R&D. Manufacturing sector of industry, and more particularly machine-building and engineering sectors (Department A in Soviet terminology) are the crucial sectors that produce means of production for production of means of production and constitute the backbone, the basis of its security, independence, power and the future of scientific and technological development. Ignoring this fact would lead to colossal material and territorial losses, lagging behind in the development of the productive forces of the country and would give rise to serious problems in maintaining the military- defensive capabilities of the state.

Machine-building and engineering are foundational branches of industry and determine the course and nature of future industrial development, as it is in this sector that almost all the breakthrough discoveries and innovations take place. Having lost our own industries we lose everything: science, a highly-skilled work force, modern defence production, war-ready army and in the final count our economic and political independence.

It is clear that the real economic and political sovereignty of the state is determined by whether or not the state is capable of independently producing the crucial means of production for all other type of production. To put it simply, whether or not the state can produce in sufficient quantity machines and equipment needed for the core branches of the industry. From this perspective, the future of sovereignty of the Russian Federation is quite bleak (Mazur, p. 112).