Location: Russia

Is Cutting Russian Gas Imports Too Costly For The EU?

Posted on June 9, 2014 | Policy Brief

20140608 FREE Network Policy Brief

This brief addresses the economic costs of a potential Russian gas sanction considered by the EU. We discuss different replacement alternatives for Russian gas, and argue that complete banning is currently unrealistic. In turn, a partial reduction of Russian gas imports may lead to a loss of the EU bargaining power vis-à-vis Russia. We conclude that instead of cutting Russian gas imports, the EU should put an increasing effort towards building a unified EU-wide energy policy.

Soon after Russia stepped in Crimea, the question of whether and how the European Union could react to this event has been in the focus of political discussions. So far, the EU has mostly implemented sanctions on selected Russian and Ukrainian politicians, freezing their European assets and prohibiting their entry into the EU, but broader economic sanctions are intensively debated.

One such sanction high on the political agenda is an EU-wide ban on imports of Russian gas. Such a ban is often seen as one of the potentially most effective economic sanctions. Indeed the EU buys more than half of total Russian gas exports (BP 2013), and gas export revenues constitute around one fifth of the Russian federal budget (RossBusinessConsulting,2012 and our calculations). Thus, by banning Russian gas the EU may indeed be able to exert strong economics pressure on Russia.

However, the feasibility of such sanction is questionable. Indeed, in 2012 Russia supplied around 110 bcm of natural gas to EU-28 (Eurostat), which constitutes 22.5% of total EU gas consumption. There are a number of alternatives to replace Russian gas, such as an increase in domestic production by investing in shale gas, or switching to other energy sources, such as nuclear, coal or renewables. However, many of the above alternatives, e.g. shale gas or nuclear power, involve large and time-consuming investments, and thus cannot be used in the short run (say, within a year). Others, such as wind energy, are subject to intermittency problem, which again requires investments into a backup technology. The list of alternatives implementable within a short horizon is effectively down to replacing Russian gas by gas from other sources and/or switching to coal for electricity generation. Below, we argue that even if such a replacement is feasible, it is likely to be very costly for the EU, both economically and environmentally.

Notice that any replacement option will be automatically associated with a significant increase in economic costs. This is due to the fact that a substantial part of Russian gas exports to Europe (e.g., according to Financial Times, 2014 – up to 75%) are done under long-term “take-or-pay” contracts. These contracts assume that the customer shall pay for the gas even if it does not consume it. In other words, by switching away from Russian gas, the EU would not only incur the costs of replacing it, but also incur high financial or legal (or both) costs of terminating the existing contracts with Russia, with the latter estimated to be around USD 50 billion (Chazan and Crooks, Financial Times, 2014).

Due to this contract clause, own costs of replacement alternatives become of crucial importance. The coal alternative is currently relatively cheap. However, a massive use of coal for power generation is associated with a strong environmental damage and is definitely not in line with the EU green policy.

What about the cost of reverting to alternative sources of gas? First, in utilizing this option, the EU is bound to rely on external and potentially new gas suppliers. Indeed, the estimates of potential contribution within the EU – by its largest gas producer, the Netherlands – are in the range of additional 20 bcm (here and below see Zachmann 2014 and Economist 2014). Another 15-25 bcm can be supplied by current external gas suppliers: some 10-20 bcm from Norway, and 5 bcm from Algeria and Libya. This volume is not sufficient for replacement, and is not likely to be cheaper than Russian gas.

This implies that the majority of the missing gas would need to be replaced through purchases of Liquefied Natural Gas (LNG) on the world market, in particular, from the US. This option may first look very appealing. Indeed, the current gas price at Henry Hub, the main US natural gas distribution hub, is 4.68 USD/mmBTU (IMF Commodity Statistics, 2014). Even with the costs of liquefaction, transport and gasification – which are estimated to be around 4.7 USD/mmBTU (Henderson 2012) – this is way lower than the current price of Russian gas at the German border (10.79 USD/mmBTU, IMF).

However, this option is not going to be cheap. A substantial increase in the demand for LNG is likely to lead to an LNG price hike. Notice that, at the abovementioned prices, US LNG starts losing its competitive edge in Europe already at a 15% price increase. Just for a very rough comparison, the 2011 Fukushima disaster lead to 18% LNG price increase in Japan in one month after disaster. Some experts are expecting the price of LNG in Europe to rise as much as two times in these circumstances (Shiryaevskaya and Strzelecki, Bloomberg, 2014).

Moreover, it is not very likely that there will be sufficient supply of LNG, even at increased prices. For example, in the US, which is the main ”hope” provider of LNG replacement for Russian gas, only one out of more than 20 liquefaction projects currently has full regulatory approval for imports to the EU. This project, Cheniere Energy’s Sabine Pass LNG terminal, is planned to start export operations no earlier than in the 4th quarter of 2015 with a capacity of just above 12bcma (World LNG Report, 2013). Of course, there are other US and Canada gas liquefaction projects currently undergoing regulatory approval process, but none of them is going to be exporting in the next year or two. Another potential complication is that two thirds of the world LNG trade is covered by long-term oil-linked contracts (World LNG Report, 2014), which significantly restricts the flexibility of short-term supply reaction, contributing to a price increase. All in all, LNG is unlikely to be a magical solution for Russian gas replacement.

All of the above discussion suggests that it may be prohibitively expensive for the EU to do completely without Russian gas. Maybe the adequate solution is partial? That is, shall the EU cut down on its imports of natural gas from Russia, by, say, a half, instead of completely eliminating it?

On one hand, this may indeed lower the costs outlined above, such as part of take-or-pay contract fines, or costs associated with an LNG price increase. On the other hand, cutting down on Russian gas imports may lead to an important additional problem, loss of buyer power by the EU.

Indeed, the dependence on the gas deal is currently mutual – as outlined above, not only Russian gas is important for the EU energy portfolio; the EU also represents the largest (external) consumer of Russian gas, with its 55% share of the total Russian gas exports. In other words, the EU as a whole possesses a substantial market power in gas trade between Russia and the EU, and this buyer power could be and should be exercised to achieve certain concessions, such as advantageous terms of trade from the seller etc.

However, the ability to have buyer power and to exercise it depends crucially on whether the EU acts as a whole to exercise a credible pressure on Russia. That is, the EU Member States may be much better off by coordinating their energy policies rather than diluting the EU buyer power by diversifying gas supply away from Russia. This coordination may be a challenge given the Member States’ different energy profiles and environmental concerns. Also, such coordination requires a stronger internal energy market that will allow for better flow of the gas between the Member States. While demanding any of these measures would be double beneficial: they will improve the internal gas market’s efficiency, and at the same time reinforce the EU’s buyer power vis-à-vis Russia.

To sum up, the EU completely banning Russian gas imports does not seem a feasible option in the short run. In turn, half-measures are not necessarily better due to the loss of the EU’s buyer power. Thereby, the best short-term reaction by the EU may be to put the effort into working up a strong unified energy policy, and to place “gas at the very back end of the sanctions list” for Russia as suggested by the EU energy chief Gunther Oettinger (quoted by Shiryaevskaya and Almeida, Bloomberg, 2014).

 

References

Whither Russia’s History Thought? Trends in Historical Research, Teaching and Policy-Making

Posted on May 12, 2014 | Policy Brief

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The next Russian generation’s understanding of their country’s past may turn out to be more refined and complex than at present whether or not the current project of a single history-textbook and accompanying pedagogical materials are successful. Rather than imposing a new version of Stalin’s infamous ‘Short course’, as certain Western mass media predicts, the new history books will probably reflect even the most debated parts of Russia’s history from the 800s to the present, and in particular the turbulent 20th century.

Western mass media have a tendency to focus on Russian historical debates only when ‘spectacular’ and/or ‘scandalous’ events appear. For example, few news agencies paid any attention as to how the school textbooks on Russia’s contemporary history had changed through the 1990s. A whole year history classes were cancelled in the late glasnost period! This was because the Soviet-era teaching was recognized as totally outmoded in light of all the revelations on Stalinism. Starting in the mid-1990s, several groups of renowned historians produced new textbooks, history maps, and CD-ROM-materials for Russian general schools. In these pedagogical devices for children up to the final 11th class, few if any of the formerly ‘taboo questions’ remained unmentioned. By the early 2000s, a new historical landscape of Russia’s past – especially from the 1860s to the present – had appeared. Every history teacher had a number of handbooks to choose among. However, with time, it was obvious that not only did the basic ideological and political attitudes of the textbook writers influence how they presented a historical narrative. There was also a wide divergence in how even the basic facts on historical events were described.

History teaching in Russian schools has thus been highlighted in Western mass media only when a certain author has been criticized or a specific textbook lost its recommendation from the Russian Ministry of Education. Therefore, the understanding in the West, even in academic circles, of how the Russians in general have changed their perception of their country’s past is likely superficial. The obvious language barrier is only a first hindrance that explains this ignorance. The lack of knowledge of, and even an interest in, i) Russian professional historians, ii) popularizes and publicists in mass media, and iii) the general public as shown in social media describing epochs and events in the past, may also be related to a certain degree of Russophobia, traditionally present in the West.

Instead, the Western average reader tends to get his views on Russia’s Vergangenheitsbewältigung, that is its ‘coming to terms with the past’, from highly restricted analyses like Sherlock’s book (Sherlock 2007) or polemical surveys like Satter’s (Satter 2011). Sherlock investigates the glasnost debates, but ignores the changes in the 1990s and draws farfetched conclusions on the present Putin-period, based on statements by politicians. Satter concentrates on how certain leftist, pro-Stalinist opinions remain in the public sphere concerning history writing or history-memorialization with respect to the victims of state terror and repression. These two authors emphasize how politicians, rather than professional historians, have made statements, or sometimes suppressed commemorative actions on Russian history, thus creating a skewed image of how the past is analyzed in the historians’ community. In reality, there are few subjects, especially concerning the Stalinist period, that have not been investigated because of lack of sources and of non-access to archives. The remaining ‘white spots’ on the historical map concern matters that are likewise often state secrets in other states, such as military intelligence. Given how much was until 1991 classified in the archives, it is worthwhile pondering how much historians and archivists in Russia have already achieved.

The Russian professional historians’ achievements in the post-Soviet period can now be grasped easily in the solid 1,500 pages long volume, edited by one of Russia’s foremost historiographers Gennadii Bordiugov (Bordiugov 2013). Bordiugov and his colleagues have held numerous conferences since the mid-1990s where practically every new research project on all aspects of Russia’s 20th century history has been analyzed. These have been updated and collected into a massive volume. Another conference was devoted to the changing character of the historical community in general, to the research and teaching conditions in Russian universities, as well as to the interaction between historians and politicians (Bordiugov 2012). To a large extent, the economic history of Russia was until the late 1980s hampered by its rigid attachment to the Marxist and Leninist schemes of ’historical materialism’. Thus, starting during the glasnost era, Russian economic historians have made serious revisions, widespread re-interpretations and new research on practically all important stages of the evolution of the Tsarist economy, in particular concerning the early industrialization, the banking system and the entrepreneurial efforts in the 19th century. These achievements are well reflected in the two-volume encyclopedia on Russia’s economic history from oldest times till 1917, under the scientific guidance of academician and head of the Institute of Russian History of the Academy of Sciences, Iurii Petrov (Petrov 2008).

A new trend in the field is the outright proclaimed and implemented ‘history policy’ (in line with a state’s economic, social and foreign policy). Politicians strive to use their country’s past, its military feats or civilian achievements for their present purposes. This has been apparent in Russia as well as in Eastern and Western Europe, first in the wake of the collapse of the communist regimes, and then as a matter of geopolitical and socio-economic confrontation. The resolutions on 20th century history by the PACE, OSCE and other forums are examples of such history policy. Without doubt Russian publicists have also been involved in dreadful ‘wars of memory’ in particular vis-à-vis the Baltic states and Ukraine (see Borgiugov 2011b). However, among both Russian historians and certain politicians there exists a better grasp of the risks involved in history policy campaigns than seems to be the case in some East European countries. This is easily explicable, given the Russian state’s complicated thousand-year legacy of multi-cultural encounters, complex forms of conquest and expansion, social conflicts and revolutions, as well as religious and ideological controversies.

Thus, a striving towards a unified version of Russian history was reflected in the proposals by a commission set up in 2013 to formulate the ‘concept for a new, single textbook for schools on Russian history’. The initiative to substitute a multitude of textbook by a single one was set out in early 2013 in a directive from president Vladimir Putin. The original idea in Putin’s directive was to eliminate internal contradictions concerning historical events, and create a solid handbook in history with presumably straightforward, undisputable ‘facts’, just like the natural sciences can be said to have ‘a single knowledge framework’. Academicians Aleksandr Chubarian, Iurii Petrov, other historians as well as scholars from other disciplines plus politicians, led the commission. This initiative from Putin has been widely interpreted as a new stage in ‘history policy’ of the Russian government with the purpose of enforcing a new kind of patriotism or even legitimizing the allegedly ever more authoritarian present regime. However, when the concept for a single textbook was published in late autumn 2013, it became apparent that the commission had formulated a new academic, rather than a politicized framework for presenting Russia’s whole history, from the 800s to the present, with merely sketched outlines for each epoch, century of crucial decade. In over thirty appendices to the concept, leading experts describe major historical controversial questions, such as Ivan IV (‘The Terrible’), Vladimir Lenin and the 1917 Revolutions. Suffice it to mention that the appendix on the Great Terror 1937-1938 is written by Russia’s leading expert on Stalinism, professor Oleg Khlevniuk (see e.g. Khlevniuk 2008).

In early summer 2014, we can expect that the official announcement on the conditions for participation in the writing of the new textbook on Russia’s history will be announced. Just as for architectural contests, the mere presentation of a master-copy of the ‘pedagogical package’, i.e. not only the textbook but also guidelines for teachers, historical atlases, working notebooks with tasks for pupils, as well as audio and video materials will demand substantial investments from the participants’ side. Although the remuneration, in case of winning the contest, may be great, it is not expected that more than a few institutions or groups of historians will find the financial resources at hand. These proposed new textbooks will then be circulated and judged in a manner that remains to be determined.

The initial reactions in 2013 by Russian politicians and Western journalists at the appearance of the concept were skeptical. Concerns, however, were often somewhat biased. For example, in an article in ‘The Moscow Times’ the opposition politician Vladimir Ryzhkov had no objections on the first one thousand years of Russia’s history outlined in the concept. Instead, Ryzhkov lamented that the last paragraphs in the concept on Putin’s presidency had not mentioned certain oligarchs and recent dissenters. (Ryzhkov 2013). The American historian and specialist on Ukrainian history Mark van Hagen expressed his fears that Putin’s textbook would try to indoctrinate the Russian masses in a manner similar to how Stalin’s infamous ‘Short Course of the Bolshevik Party’s history’, but, of course, with a presumably new authoritarian, Orthodox Christian and multicultural Russian idea (quoted in Reuters. 2013).

It remains to be seen how much of such fears turn out to be prescient, or on the contrary, wide of the mark. Already at the official presentation in January 2014 of the commission’s result to president Putin, a number of changes in the original proposal for a single textbook were apparent. A careful reading of Putin’s speeches as well as those of Sergei Naryshkin, chairman of the Russian Historical Society and speaker of the Duma, and Academician Chubarian, scientific leader of the commission, indicate that the pedagogical package (i.e. the teacher’s handbook, textbook, map and task booklets, as well as CD-ROM and video) are likely to be much more pluralistic, as to interpreting history, than what either the initiators intended originally or what their critics presumed eventually.

Although the original idea formulated by the president himself included a phrase on giving the school children just ‘one single textbook’ (Russian: edinyi uchebnik) with new narrative, free of contradictions and contested interpretations, we can already see that even the announced concept for such a ‘single history textbook’ may well turn out to be as dynamic and thought-provoking as the real historical events were. Another alternative outcome that cannot be excluded, will be that not one single, but a few new textbooks – with different pedagogical and other highlights – will be declared as winners, provided that they reflect the new, more nuanced version of Russia’s history from oldest times to the present. In either case, these new pedagogical instruments are bound to reflect, given dozens of special surveys by experts on the debates among historians added to the concept, the achievements of archivists, professional historians and teachers in the past quarter-century. Thus, in conclusion, while substantial arguments may be raised against the political request of a single textbook on Russia’s history, the presentation of this new concept and the forthcoming contest may turn out to produce a number of excellent history teaching materials that in a wider sense will reflect both the professional historians’ achievements in recent decades, the publicists’ opinions and the expectations of the broad public.

▪

 

References

  • Bordiugov, Gennadii, editor (2011a), Nauchnoe soobshchestvo istorikov Rossii: 20 let peremen, (Russia’s scientific community of historians: 20 years of changes), Moscow: AIRO-XXI.
  • Bordiugov, Gennadii (2011b), ‘Voiny pamjati’ na postsovetskom prostranstve (‘Memory wars’ in the post-Soviet spheres), Moscow: AIRO-XXI.
  • Bordiugov, Gennadii, editor (2013) Mezhdu kanunami: Isotricheskie issledovaniia v Rossii za poslednie 25 let (Between tomorrows: Historical research in Russia in the last 25 years), Moscow: AIRO-XXI.
  • Khlevniuk, Oleg (2008), Master of the House, Stalin and His Inner Circle, New Haven, CT: Yale University Press.
  • President of Russia, Meeting with designers of a new concept for a school textbook on Russian history http://eng.news.kremlin.ru/news/6536accessed 2014-05-07
  • Petrov, Iurii, chief editor (2008), Ekonomicheskaia istoriia Rossii s drevneishikh vremen to 1917. Entsiklopediia, Moscow: Rosspen).
  • Reuters. US edition Gaabriela Baczynska ‘Putin accused of Soviet tactics in drafting new history book’ 18 November 2013, http://www.reuters.com/article/2013/11/18/us-russia-history-idUSBRE9AH0JK20131118, accessed 20140507Ryzhkov, Vladimir (2013), ‘Putin’s Distorted History’, The Moscow Times, 18 November 2013.
  • Satter, David (2011) It Was a Long Time Ago, and It Never Happened Anyway: Russia and the Communist Past, New Haven. CT: Yale University Press.
  • Sherlock, Thomas (2007) Historical Narratives in the Soviet Union and Post-Soviet Russia: Destroying the Settled Past, Creating an Uncertain Future, London: Palgrave Macmillan.

Skill Structure of Demand for Migrants in Russia: Evidence from Administrative Data

Posted on May 5, 2014 | Policy Brief

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Authors: Simon Commander (IE Business School, EBRD and Altura Partners) and Irina Denisova (CEFIR, NES).

Using Russian Ministry of Labor administrative data for all legal migrant applications in 2010 and matching the migrant to the sponsoring firm, we find that there is some – albeit limited – evidence of firms using migrants to address high skill shortages. However, the overwhelming majority of migrants are skilled or unskilled workers rather than qualified professionals; a reflection of the low underlying rates of innovation and associated demand for high skill jobs.

Migration policy continues to be a priority in Russian economic policy. This is driven both by a demand for labor – given the unfavorable demographic trends of the last decades – and the easily available supply from the CIS countries. It is still not clear, however, what is the skills structure of the demand for migrants. Relatively new administrative data on demanded permissions to employ migrants sheds however some light on the issue.

In particular, we use the 2010 nationwide dataset ‘Job positions filled by migrants’ published by the Russia Federal Employment Service. The dataset gives detailed information on the applications for permits for migrants, including the 4-digit occupation, firm ID and the offered wage. The Federal Employment Service’s role is to approve or reject an application. In almost all cases documented in this dataset, approval was granted. Moreover, in 99% of the cases, the duration of the permitted contract was one year.

The data allow us to study the skill composition of demand for migrants from the legal sector, with the sizeable illegal labor migration staying beyond the scope of the study. The total number of applications for all of Russia in 2010 was just over 890,000, of which nearly 250,000 or 28% originated from firms in Moscow. The analysis below uses the permission data for the 21 most developed Russian regions (a full version of the paper is available as Commander and Denisova, 2012).

A breakdown of the number of requests in 2010 by skill type using the one-digit ISCO-88 classification (Managers, High-level professionals, Mid-level professionals, Service worker, Skilled agricultural workers, Craft and trades workers, Plant and machine operators, Unskilled workers) shows that over 70% of the requests were for skilled and unskilled workers. At the same time, about 17% of the total migration requests were for higher-level professionals (7%) and managers (10%). Among managers, nearly nine out of ten requests were for production or department managers with no more than 12% of managerial migration requests being for top-level executives. Among the category of high-level professionals, architects and engineers accounted for over two-fifths of requests.

Is the situation any different in the main urban labor markets? In Moscow a lower proportion – around two thirds of the migrant applications – were for skilled and unskilled workers. The starkest difference was that professionals working in IT accounted for a minute share of total high-level skill applications in Russia, but nearly 9% in Moscow. Thus, while there are some differences in the migration profile between Moscow and the rest of the country, the broad picture that emerges is one where migration policy and practice seem to be responding mainly to the apparent bottlenecks at the lower-skill end of the labor market.

Legal requests for migrants are massively dominated by requests concerning low-skill groups; and illegal migrants, as shown by anecdotal evidence, are mainly low skilled. At the same time, there is a sizeable demand for qualified migrants, managers and professionals. There are two potential motives to issuing a request for a qualified migrant: to economize on the costs of labor by substituting a local laborer with a migrant; or to fill in the gap of the scarce qualification/skills hardly available domestically. The two motives could be distinguished by looking at the wage offers associated with the posted positions and comparing them with wages paid in comparable occupations in the same region. The aim of the exercise is to see – particularly within the categories of higher-skilled applicants – whether they command any wage premium that might reflect their scarcity value.

Figures 1-2 plot the reported (relative) wage offers for two migrant skill categories: Department Managers (ISCO code=122) and Computing Professionals (ISCO code=213). The figures depict distributions of relative (to the region average) wage in logs, thus implying that the points around 0 are the wage offers at the level of regional average, above 0 means positive wage premium, and below 0 means negative wage premiums (economizing on the costs). Each figure also gives the mean search wage from the EBRD survey of recruiting agencies in 2010 (relative to the regional average).

Figure 1. Relative Wage Distribution, Production and Operation Department Managers (ISCO-88 Code: 122)
Denisova1
Source: Authors’ calculations based on Rostrud 2010

It is clear from Figure 1 that the wage offers for migrants do not identify any clear positive selection effect, in that migrants’ wages mostly fall below the survey search mean comparators. In the majority of cases, the offered wages also fall below the regional average wage thus implying that the motive is to substitute for cheaper labor.

The demand for migrants with skills of IT professionals is more complicated: there are those who offer wages below regional average, but there is also a large group of those ready to pay a wage premium to attract migrants (with log wage above zero). The search through recruiting agencies (the survey wage) would still require offering higher wages.

Figure 2. Relative Wage Distribution, IT Professionals (ISCO-88 Code: 213)
Denisova2
Source: Authors’ calculations based on Rostrud 2010

For further analysis, the migration dataset was mapped to the ORBIS (a dataset assembled by Bureau van Dijk) firm observations using the unique national tax identification code (so called INN). The ORBIS data includes information on firms’ balance sheets and simple performance data such as output per employee.

When looking only at demand from firms that lie in the top 10-20% of the productivity distribution (productivity is calculated as output per worker in the narrowly defined industry), the picture looks somewhat different: wage offers tend to lie above the average (Figure 3). It is likely that the most productive firms tend to offer wages higher than both regional average for the occupation and the survey-based search wages. This implies that the scarcity of skills on the domestic labor market is one of the more important motives behind the demand for migrants from high-productivity firms.

 
Figure 3. Relative Wage Distribution, Production and Operation Department Managers (ISCO-88 Code: 122), 10% Most Productive Firms
Denisova3
Source: Authors’ calculations based on Rostrud 2010 and Orbis-Roslana

To control for other firm characteristics, we run regressions relating the relative wage of a migrant to a set of firm and region characteristics, including measures of size and ownership, a measure of recent growth in the region, as well as the level and change in foreign direct investment in a given region since 2007. We also control for the tightness of the local labor market, using a measure of search wages raised in the EBRD survey compared to average wages in a region. The estimates are run with and without region, industry and occupation controls. The results show that relatively high wages tend to be associated with large and/or foreign-owned firms. Growth in a region or the level of FDI per capita are not systematically associated with the relative wage once controls enter the regression, suggesting that the relative wage is largely determined by firm-level features. The measure of labor market tightness enters positively but is insignificant whencontrolling for industry, region and occupation.

Overall, the data from the Russian Ministry of Labor that documents all applications for migrants to Russia in 2010 and allows matching the migrant to the sponsoring firm, show that there is very limited evidence of firms using migrants to fill high-skill jobs. In fact, the overwhelming majority of migrants, skilled or unskilled workers, were mostly originating from other states of the CIS. Furthermore, most were hired at relatively low wages in comparison to the occupation/region averages or the wages reported in the EBRD survey of recruiting firms. At the same time, there is a sizeable portion of demand for skilled migrants, which are offered wage premiums. The demand originates mostly from highly productive firms. Migration policy should acknowledge these different motives behind the demand for migrants.

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References

  • Simon Commander and Irina Denisova “Are Skills a Constraint on Firms? New Evidence from Russia”, IZA Discussion Paper No. 7041, November 2012

The crisis in Ukraine and the Georgian economy

Posted on March 17, 2014 | Policy Brief

High office buildings facing sky representing Institutions and Services Trade

We analyze how the crisis in Ukraine will likely impact the Georgian economy and distinguish between short-run and long-run effects. We argue that the short-run effects are transmitted through trade and capital flows and that they are rather negative for Georgia and can hardly be bolstered. In the long-run, however, the crisis could improve the competitiveness of the Caucasus Transit Corridor, an important trading route between Europe and Central Asia Georgia participates in. We give recommendations how political decision makers could support such a development in the wake of an impairment of the northern Ukrainian transit routes.

Introduction

When Ukrainian President Victor Yanukovich decided not to sign the association agreement with the European Union and instead opted for a Russian package of long-term economic support, many Ukrainians perceived this not to be a purely economic decision.  Rather, they feared this to be a renunciation of Western cultural and political values, and – to put it mildly – were not happy about this development.

The Russian political system, characterized by a prepotent president, constrained civil rights, and a government controlling important parts of the economy through its secret service, is not exactly the dream of young Ukrainians. Russia can offer economic carrots, but these do not count much against the soft power of Europe that comes in the form of political freedom, good governance, and economic development to the benefit of not just a small group of oligarchs.

Hence, it was all but surprising when many young Ukrainians took their anger about Yanukovich to the streets. After protests that lasted for nearly three months, President Yanukovich fled the country, a temporary government took over, and chaos broke out on the Crimean peninsula.

The dispute about the Crimea has the potential to impede the relations between Russia and the West for a long time to come, in particular if Russia enforces an annexation of the territory. Moreover, the tensions could quickly turn into a military conflict. The aircraft carrier USS George H.W. Bush was moved into an operational distance to the Crimea, accompanied by 20 smaller U.S. warships, and 12 additional fighter planes will be stationed in Poland. Yet even if there will be no direct confrontation between official Russian and U.S. forces, Ukraine could become the battleground of a proxy war, a kind of conflict that was common in the Cold War era. In this respect, one can already read the writing on the wall: the new Ukrainian government begs the U.S. for supplying arms and ammunition, and while the Obama administration is still reluctant to give in to such requests, the call is supported by hawkish U.S. congressmen who might finally prevail.

Ukraine is a country that is geographically close to Georgia and, like Georgia, has vital economic stakes in the Black Sea area. Georgia will not be unaffected by whatever happens in Kiev and Simferopol. In this policy brief, we will inform policy makers about the likely short-run and long-run economic consequences of the turmoil in Ukraine, discuss the challenges and opportunities that may arise, and derive some policy recommendations.

Short-run economic consequences

The crisis in Ukraine will almost instantaneously affect trade and capital flows between Georgia, Ukraine, and Russia. The effects will likely be negative and hit Georgia in a situation of economic recovery.

The Georgian real GDP growth rates were 6.3% in 2010, 7.2% in 2011, and 6.2% in 2012, and the real GDP per capita evolved from about 2,600 USD to about 3,500 USD in this time, but the upsurge discontinued in 2013 (if no other source is mentioned, figures presented in this policy brief (including those in the graphs) come from the Georgian statistical office GeoStat). ISET-PI, in its February 2014 report on the leading GDP indicators for Georgia, estimates the GDP in 2013 to be 2.6%, while GeoStat, the statistical office of Georgia, believes it to be 3.1%.

The unsatisfactory performance of the Georgian economy in 2013 was arguably caused by political uncertainties resulting from the government change that took place in late 2012, and as these uncertainties are largely overcome, most economists believe that Georgia will get back to its remarkable growth trajectory in 2014. The IMF, in its Economic Outlook, predicts a real GDP Growth of 6% in 2014, and the government of Georgia expects this number to be 5%. With an escalating crisis in Ukraine, it is questionable whether these rosy forecasts are still realistic.

Effects on imports

In 2013, Ukraine and Russia were the 3rd and the 4th largest importers to Georgia, respectively. Graph 1 shows the top five importers to Georgia, which together make up about 50% of total imports. The imports from Ukraine and Russia are mainly comprised of consumption goods: of all goods that were imported between 2009 and 2013 from Ukraine and Russia, about 30% were foodstuff. The ten main import goods in this time (in order of monetary volume) were cigarettes, sunflower oil, chocolate, bread, cakes, meat other than poultry, poultry, and sugar.

If the supply of these goods would be reduced through a breakdown of production and logistics, roadblocks, damaged infrastructure etc., the consequences for Georgia would not be utterly severe. From Ukraine and Russia, Georgia receives few goods that are (1) needed for investment projects and (2) cannot be produced domestically (an example of sophisticated investment goods that need to be imported would be ski lifts for tourism projects). Moreover, as Ukraine and Russia supply primarily standard goods that are produced almost everywhere, it is unlikely that a cutback in their imports would lead to sharp price rises in Georgia. Very quickly, increased imports from other countries would close any supply gaps. In addition, many imported consumption goods, like Ukrainian orange juice, are but luxury for ordinary Georgians, who buy their food in cheap domestic markets that sell almost exclusively local products.

Graph01

Effects on exports

A small anecdote may illustrate the status of Georgian products in the Russian market. In the late 1940s and early 1950s, Stalin used to invite his comrades to his Kuntsevo dacha almost every night. At these occasions, he drank only semi-sweet Georgian red wine. His clique, usually preferring Russian vodka, adopted this habit out of fear to displease the dictator. Yet the real highlight of these nightly gatherings took place after midnight, when an opulent feast began, featuring all the delicacies of the Georgian cuisine. Through Stalin (and the fact that Georgia was a preferred destination of Soviet tourism), Georgian food obtained an excellent reputation in most countries of the former Soviet Union, and, to the dismay of Georgians, some younger Russians even do not know that Khinkali is not an originally Russian dish.

As can be seen in Graph 2, Russia and Ukraine are among the top 5 destinations for Georgian produce, together absorbing about 14% of total Georgian exports in 2013. In 2006, two Georgian products that are traditionally highly popular in Russia, namely wine and mineral water (the famous “Borjomi” brand), were banned from the Russian market. Yet in the wake of the diplomatic thaw that set in after the new government assumed power last year, this ban was lifted, and in 2013, the export of these goods regained momentum. In 2013, 68% of all wine exported from Georgia was sold in Russia and Ukraine (44 and 24 percentage points, respectively). In both countries, Georgian wines are sold at the higher end of the price range and are typically consumed by people with middle and high income. It is likely that these exports, in particular those to Ukraine, will be affected considerably by the crisis. This may happen through decreased demand for luxury foods and through a possible depreciation of the Ukrainian hryvna and the ruble vis-à-vis the Georgian lari.

Another sector that may be affected by the situation in Ukraine is the car re-export business. Georgia imports huge numbers of used cars from the U.S., Europe, and Japan, and passes them on to countries in the region. While this business hardly yields potential for real economic progress, it accounts for roughly 25% of Georgian exports! Of these 25%, about 7 percentage points go to Russia and Ukraine. Moreover, many cars are imported to Georgia on the land route from Europe through Ukraine and Russia (often driven by private, small-scale importers). If it will become more difficult to cross the border between Russia and Ukraine, this business, providing income to many low-skilled Georgians, may be at risk.

It should also be noted that Ukrainians and Russians make up an ever-increasing share of the tourists coming to Georgia (though the biggest group of tourists are Israelis). Also through this channel, an economic downturn in Ukraine and Russia will have unpleasant consequences for Georgia.

Graph02

Effects on capital flows

According to the National Bank of Georgia, in 2013 a total of 801 mln USD was flowing in from Russia (see Graph 3). Ukraine contributed 45 mln USD to the money inflows, still significant for an economy as small as Georgia’s. An economic downturn in Russia and Ukraine would hit many Georgian citizens, often pensioners and elderly people, who depend on remittances of their children and other family members sent from these countries. This may aggravate a trend that already exists: in January 2014, money inflows decreased by 4% from Russia and by 5% from Ukraine (compared to January 2013).

Graph03

Long-run economic consequences

Most of the economic dynamics Georgia experienced since 2003 was “catch up growth”. A country permeated by corruption, with a dysfunctional police and judicial system, without protection of property rights and contract enforcement, will grow almost automatically when the government restarts to fulfill its basic functions. Yet once this phase of returning to normal economic circumstances is over (Georgia probably is already in this situation), high growth rates can hardly be achieved without a strong export orientation of the economy, in particular when an economy is as small as Georgia’s. Most economists concerned with Georgia are therefore struggling to identify economic sectors where Georgia is in a good position to develop export potential. The National Competitiveness Report for Georgia, written in 2013 by the ISET Policy Institute on behalf of USAID, therefore extensively discusses the question what Georgia can deliver to the world. Though not related to export in a classical sense, the report points out that one of the advantages Georgia has is its geographical location, providing for possibilities to transform Georgia into a logistics hub.

There are three main routes to transport goods from Europe to the Central Asian countries (e.g. from Hamburg to Taraz in Kazakhstan). One route goes via the Baltic ports of Klaipeda or Riga, and then through Ukraine and Russia, and another route goes overland through Ukraine. A third one, the so called Caucasian Transit Corridor, has the Georgian port city of Poti and Turkey as its Western connection points, then goes through Georgia, Azerbaijan, and the Caspian Sea, and further east it splits up into a Kazakhstan and a Turkmenistan branch.

According to the Almaty based company Comprehensive Logistics Solutions, the fastest and cheapest route is the one through the Baltic ports. The transport from Hamburg to Taraz takes around 33 days and costs 6,220 USD per standard container. The overland transport via Ukraine takes around 34 days and costs 7,474 USD. Finally, transport through the CTC currently takes the longest time, namely around 40 days, and costs 6,896 USD.

Unlike many other economic activities, competition for transportation is more or less a zero-sum game played by nations. If transport through Ukraine and Russia will be restrained due to closed borders and political and economic instability, the total transport volume will not change substantially. Rather, instead of going through the northern routes, the goods will flow through the CTC. A similar development could be observed when the embargo against Iran was tightened and shipping goods through Iranian ports became increasingly difficult for Armenia and Azerbaijan. As a result, Azerbaijan, traditionally importing through Iran and exporting through Poti, now facilitates both its imports and exports through Poti.

This is a great chance for Georgia if it wants to become serious about transforming into a logistics hub. In our policy recommendations, we will speak about how to utilize on this opportunity.

Policy recommendations

Georgia can do little to bolster the short-run effects that are transmitted through the trade and capital flow channels. Political decision makers should be aware of problems that might arise for particularly vulnerable groups in the population, like pensioners who lose income in case remittances from Russia and Ukraine run dry, and help out with social support if necessary.

Regarding the long-run impact, Georgia should use this opportunity for gaining ground in the competition with northern transit routes. The Caucasus Transit Corridor can become much faster and cheaper if (a) a deepwater port and modern port facilities with warehouses will be built in Poti, (b) the road and train infrastructure will be improved, and (c) it will be easier to bring cargo over the Caspian Sea. Regarding the latter point, it would be important to assist Azerbaijan in improving the port management at Baku (in particular reducing corruption), and in reforming the monopolistic Azerbaijani State Caspian Sea Shipping Company.

Azerbaijan invests 775 mln USD into the Georgian part of the Baku-Tbilisi-Kars railway, proving their serious interest to upgrade CTC. Given this impressive commitment of Azerbaijan, Georgia should not stand back.

Conclusion

The crisis in Ukraine yields short-run risks and long-run opportunities for the Georgian economy. While there is little that can be done about the risks, the opportunities call for courageous steps to improve the Caucasus Transit Corridor. If the countries that hold stakes in the CTC are now further reducing the cost of transportation and make the route faster and more customer-friendly, the CTC may establish itself as the main trading route connecting Europe and Central Asia. Once critical investments have taken place, CTC’s advantage could be sustained beyond the current crisis. It is a competitive route that simply needs upgrading, which can happen now as a fallout of the conflict between Ukraine and Russia.

References

The Application of Composite Leading Indicators on the Single Economic Space Economies

Posted on February 10, 2014 | Policy Brief

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This brief is based on a CEFIR research project aimed at the short-term forecasting of socio-economic development of the member-countries of the Single Economic Space (SES), conducted for the Eurasian Economic Commission in 2013. This project focused on compiling composite leading indicators that could allow policymakers to identify phases of a business cycle and to forecast its turning points. We suggest a methodology for the selection of components of the Composite Leading Indicators (CLIs) for industrial production, and apply this methodology to predict industrial production in SES member states. Our methodology performs well for Russia and Kazakhstan, and slightly less so for Belarus.

Green Energy: A Solution For Climate Change?

Posted on February 3, 2014 | Policy Brief

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This brief discusses the economic and political problems of so called green energy, a topic discussed at the 7th Energy Day recently organized by SITE. Green energy may be the only credible and feasible way to reduce carbon dioxide emission in the near future. However, a shift to a “greener” energy mix poses economic and political challenges which may impair the needed investments. This problem is further exacerbated by free-riding mechanisms associated with green energy investment. We suggest that investing and consuming renewable energies at the local level may be a way to internalize some the costs of the green energy.

There is a pressing need to cut pollution and the emission of greenhouse gases in the face of climate change and environmental damage. Since 1950s, global greenhouse gas emissions grew more than 5 times, and per capita emissions more than doubled.

Figure 1: Global CO2 Emissions from Fossil-Fuel Burning, Cement Manufacture, and Gas Flaring.
GreenEnergy020214_figure1Source: Boden, T.A., G. Marland, and R.J. Andres. 2010. Global, Regional, and National Fossil-Fuel CO2 Emissions. Carbon Dioxide Information Analysis Center, Oak Ridge
 

A substantial part of this growth in emissions, and associated global warming, is driven by human activity. In particular, the model experiments aimed at reproducing the dynamics of temperature change fail to consistently predict the recent years of temperature increase unless anthropogenic influence on the greenhouse emissions is taken into account.

Figure 2. Separating Human and Natural Influences on Climate.
The blue band shows how global average temperatures would have changed due to natural forces only, as simulated by climate models. The red band shows model projections of the effects of human and natural forces combined. The black line shows actual observed global average temperatures. Source: Global Climate Change Impacts in the United States, T. R. Karl, J. M. Melillo, and T. C. Peterson (eds.). Cambridge University Press, 2009.
 

With this perspective, it is not surprising that in the last decades investment in environmentally friendly energy has become one of the most common ways to address this issue around the world. However a shift to a “greener” energy mix is inevitably costly. The objective of this brief is to discuss economic as well as political costs of green energy. We do so by summarizing and extending the discussion that took place during the SITE 7th Energy Day which took place in November 2013 and was devoted to the challenges of green energy.

The Kaya Identity: Green energy, one of many possibilities

 A frequently used approach when analyzing drivers of emissions is the so called Kaya Identity, originally developed by energy economist Yoichi Kaya. It relates global carbon dioxide emissions (CO2) from human activity to the level of economic activity (GDP), total world population (Pop), the energy intensity of economic activity and the carbon intensity of that energy use. The relationship can be summarized as the following identity (see Bradshaw (2013) for a detailed discussion on this topic):

CO2 emission = carbon intensity (CO2/E) * energy intensity (E/GDP) *GDP per capita (GDP/Pop) * Pop

The impact of these “Kaya” factors on the world carbon dioxide emissions varies, both across factors and over time. Figure 3 gives the International Energy Agency’s estimates for the period 1990-2035.

Figure 3. Impacts of four Kaya factors on world carbon dioxide emissions, 1990-2035 (index: 2007 = 1.0).
Source: International Energy Outlook IEA 2010
 

As is evident from the Kaya identity, greener energy represents only one possible solution to tackle environmental damage. The decomposition of the different components shown in figure 3 suggests that most of the future growth of emissions is predicted to come from increased output per capita and an increasing population. But taking actions to reduce these are not on the policy agenda in most countries. The two remaining alternatives then seem to be reducing energy intensity or the carbon content of economic activity.

Reducing energy intensity is often prescribed as the key solution and it is easy to see why this would be a preferred alternative for policy makers. It suggests that we need not cut back on standard and at the same time we would not have to alter the energy mix because increased efficiency in energy use will take care the needed reductions. It does indeed seem plausible that energy efficiency will continue to develop, in particular based on technological innovation, but there are problems with relying on this solution alone. First, as can be seen in figure 3, projections already include an optimistic development for this factor. Second, reducing energy intensity requires changing consumer behavior. Research suggests both that inducing such change is surprisingly difficult and also that changed behavior has a tendency of not lasting in the longer term (see for example Hunt and Rogers, 2013).

Taken together this suggests that reducing carbon intensity, that is, investing in “green energy”, may be the most important change when trying to cut CO2 emissions in the near future. This solution may also bring additional benefits. For example, once up and running, renewable energy production would not require a supply of inputs, thereby ensuring long-term sustainability. Renewable energy would allow the countries to diversify their energy portfolio, positively contributing to their energy security. Finally, renewables are geographically more dispersed than carbon-based fuels. This could contribute to strengthening user countries’ energy security.

The multiple dimensions of the green energy costs

There are, however, various costs associated with green energy. These are direct and indirect as well as economic and political. An obvious direct cost comes from the installment of a new technology, and modification of the existing network. In addition, investing in green energy is usually considered riskier than investing in conventional energy. As a consequence, government subsidies or guaranties to attract private investors (such as a feed-in tariff for the wind energy providers) have to be (and have been) provided by the state. Another concern with many types of green energy, especially wind power, is that the power generation can be highly intermittent. As a result, such renewable power generation requires backup technologies (such as open-cycle gas generation which have high carbon emissions), to be on stand-by to real-time match demand and supply. All of this may contribute to an energy price increase for the final consumers. Another component of massive green energy promotion and subsidization by the state is that it lowers the market share of the traditional energy providers, leading to costly (and likely unpopular) reallocation of labor and capital.

All of the above suggests that costly green energy decisions are difficult to “sell” to voters who face substantial instantaneous costs of green energy transition, but do not (immediately) enjoy future benefits of cleaner environment. This, coupled with the potentially short horizon of politicians (as compared to the horizon for the green energy benefits), risks undermining the political incentives to invest in the green alternatives. Moreover, green-motivated politicians are likely to face resistance from significant counter-lobbying by affected energy-intensive industries as well as by incumbent energy providers, which further increases the direct political costs of green energy.

There are also some indirect costs, or negative externalities, associated with green energy, some of which are not immediately obvious. For example, due to electricity network interconnection across countries, the intermittency of wind power affects the energy supply security not only locally but also at the regional level. A local congestion problem may thus become a regional costly problem. Furthermore, it is not obvious that investing in greener energy in some parts of the world, such as EU, would reduce aggregate world carbon dioxide emissions. Indeed the reduced demand for “dirty” carbon energy in Europe would reduce its world price, making it more affordable for countries with weaker environmental standards, which may respond by increasing their “dirty” energy consumption. Last, but not least, adopting a green policy may also have indirect political costs at intergovernmental level. For example, recent research shows that being the first country to adopt green energy policy may weaken its position in case of a collective agreement to reduce pollution (see Harstad, 2012).

The local solution

Summing up, lowering carbon intensity seems like an important component in reducing CO2 emissions with large benefits in terms of being long-run sustainable and low cost once the initial investments have been made. But there are also clear costs to governments, especially in the short-run, and also technological constraints with integrating green alternatives into a centralized electricity grid. Some of these problems make it especially difficult to agree on governmental and intergovernmental levels.

An interesting alternative possibility comes from facilitating the introduction of green alternatives on a smaller scale and on a more local level. It may seem paradoxical but the easiest way of introducing green alternatives may be in places that for various reasons are not yet connected to a centralized system or where gradual, initially small scale, introduction is possible. There are several examples of successful projects of this type (e.g., at SITE 7th Energy Day such projects were discussed by Fredrik Svinhufvud, in case of Ukraine, and Grigory Dudarev, in case of Russia).

The main challenge seems to be how to deal with the unevenness of energy production from sources such as wind or solar. In general, development of storage capacity seems to be of crucial importance, but this does not necessarily need to rely on advancements of battery technology. There are other ingenious examples of green storage technologies that have successfully been tried out in small scale. One such solution is using excess capacity when conditions are good to pump water into an elevated basin that acts as a reserve hydro-source of energy when wind or solar do not produce enough. The extent of the impact of such local solutions on reducing CO2 emissions is yet to be investigated.

References

Putting the “I” Back in Team: The Rise of International Teams in Science

Posted on January 20, 2014 | Policy Brief

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In this policy brief, I discuss the increasing prevalence of international teams in the production of scientific knowledge.  I outline several potential factors that may explain these trends and discuss recent evidence from an original survey of coauthors on scientific papers regarding their collaboration behavior.  Finally, as a notable example of increased international collaboration, I discuss the increase in scientific collaboration between Russia and the US after the end of the Cold War.

The Increase in Collaboration and Internationalization of Teams

Teams are becoming more prevalent in science.  Both the share of papers produced by teams and the number of scientists working on scientific papers has increased in recent decades (Wuchty, Jones and Uzzi, 2007).  Economic theory suggests that scientific research is becoming increasingly collaborative since the frontier of scientific knowledge has become more complex and specialized so that more researchers are needed to combine their expertise to make advances (Jones, 2009).  Team members are also becoming more geographically dispersed: the share of papers resulting from international collaborations has increased, and within the US, scientists today are more likely to have coauthors located in a different city than before (Freeman, Ganguli and Murciano-Goroff, 2014).

These trends can be seen clearly in the graph below from the National Science Board’s Science and Engineering Indicators 2012.  It shows the share of both world papers and US papers from 1990-2010 that are coauthored, coauthored with domestic coauthors only, and coauthored with at least one international coauthor.  Collaboration in general and international collaboration have been increasing steadily since 1990 both in the world and in the US.  However, for the US, the share of domestic-only collaborations has plateaued, while it is increasing in the rest of the world.  In a recent Nature article, Adams (2013) shows that this trend similarly holds for other Western countries (United Kingdom, Germany, France, the Netherlands, Switzerland), while for emerging economies (China, India, South Korea, Brazil, Poland), domestic collaborations are also increasing.

Figure 1. World and US Trends in Scientific Collaboration, 1990-2010
fig1
Source: From National Science Board (2012)

Why has Science Become More International?

There are many potential reasons for the recent increases in international collaboration.  An important factor has likely been the spread of the scientific workforce and R&D activities throughout the world (Freeman, 2010). The growing number of science and engineering PhDs in developing countries, some of whom are international students and post-docs returning to their home countries has expanded the supply of potential collaborators around the world (Scellato, Franzoni, and Stephan, 2012).  Another factor is funding that has shifted scientific production towards international teams, as increased government and industry R&D spending in developing countries and grant policies by the European Union and other countries have supported international cooperation.

The lower cost of travel and communication in recent decades has also reduced the cost of collaborating with people in different locations.  For example, Agrawal and Goldfarb (2008) show how the expansion of Bitnet, the precursor to the Internet, led to increased collaboration between institutions within the US.  Finally, the location of scientific equipment and materials, such as the CERN Large Hadron Collider, telescopes, or climatological data available only in certain parts of the world, have increased international collaboration, and in some fields, has made international collaboration a necessity.

Survey Evidence on Scientific Collaborations

In a recent paper, my coauthors and I present the results of an original survey we conducted of scientists regarding collaboration (Freeman, Ganguli and Murciano-Goroff, 2014).  In August 2012 we conducted a web-based survey of the corresponding authors of scientific papers with at least one US coauthor published in 2004, 2007, and 2010 in the fields of Nanotechnology, Biotechnology, and Particle Physics.

We customized each survey to ask the corresponding author about the collaboration and individual team members.  The survey questions asked about how the team formed, how it communicated and interacted during the collaboration, the contribution of each coauthor, types of research funding, and the advantages and disadvantages of working with the team.  We received 3,925 responses, so that our response rate was approximately 20%.

The survey also asked the respondent which country each coauthor was “primarily based in during the research and writing” of the article. This gives us a more accurate measure of whether teams are international than can be typically gleaned from publication data, which are based on author affiliations at the time of publication.  Defining international teams from author affiliations alone can produce errors if affiliations change between the time the research was undertaken and the time of publication, or because some people have affiliations from more than one country.

Our analysis of the survey data uses the respondents’ information to define US collocated, US non-collocated and international teams. One of our key results is that face-to-face meetings continue to play an indispensible role in collaborations: most collaborators first met while working in the same institution.  Teams also reported that while carrying out the research, they communicated often through face-to-face meetings, even with coauthors from distant locations.

Figure 2 below displays how the corresponding author responded about how they first met their team members.  It shows that former colleagues play a very important role in the formation of international teams, followed by former students, conferences and institution visits, which equally contribute.  The graph also shows the similarity between international teams and US non-collocated teams in how coauthors met.  For other survey questions, our analysis also shows similarities between international teams and US non-collocated teams, suggesting that the salient issues are more about geography in general rather than necessarily about national borders.

Figure 2. How Coauthors First Met
fig2
Source: From Freeman, Ganguli and Murciano-Goroff (2014)

 

Another key finding from our survey is that the main reason for most collaborations, whether domestic or international, is to combine the specialized knowledge and skills of coauthors. We also asked the corresponding authors their views of the advantages and challenges of their collaboration.  The most often cited advantage for all types of collaborations was “Complementing our knowledge, expertise and capabilities” and “learning from each other”.  For the challenges, US non-collocated and international teams tended to agree more that there was “Insufficient time for communication”, “Problems coordinating with team members’ schedules”, and “Insufficient time to use a critical instrument, facility or infrastructure”, but international teams did not report these problems more often than US non-collocated teams. Where international teams differed is that these teams were the most likely to agree that their “research reached a wider audience”.

International Collaboration After the End of the USSR

A small but significant part of the increase in international collaboration since the 1990s can be attributed to the end of the Cold War.  In “Russian-American Scientific Collaboration” (Ganguli, 2012), I examine trends in international collaboration by Russian and US scientists since the end of the USSR.  Given the nature of the Cold War and restrictions on travel and communication with the West, I show that there was a dramatic increase in the number of publications with at least one Russian and a US coauthor from 1985 to 2005.

In addition to the lifting of travel and communication restrictions, there are several factors that contributed to the surge in collaborations between American and Russian scientists after the end of the USSR.  First, at the level of the Russian government, there was a switch to a more open and collaborative approach to science. Part of this effort included establishing international centers for research in Russia aimed at integrating Russia into the global science community. Another important factor facilitating collaborations with Western researchers were foreign grant programs. The large increase in the emigration of Russian scientists in the 1990s to the West also contributed to international collaboration.  After emigrating, many Russian scientists maintained close links to their colleagues in Russia, and coauthored papers with their former colleagues, which are counted as internationally coauthored publications.

While many of these factors have aided international cooperation after the end of the USSR, there have also been significant challenges that made cooperation difficult.  Some of these challenges in the early 1990s included the political instability, organizational turnover making long-term funding agreements difficult to implement, difficulty transferring funds due to the underdeveloped banking system, high taxation and customs duties, lack of effective intellectual property rights, poor infrastructure, lack of a shared language (both linguistic and cultural), and external regulations (see further discussion in OECD, 1994).  However, many of these challenges have now been overcome, leading to the continued increase in international collaboration between Russian and US scientists.

My analysis in Ganguli (2012) shows that the increase in Russian-American collaboration was more pronounced in some fields of science versus others, particularly in Physics.  Figure 3 shows that the bulk of the articles published with Russian and American coauthors were Physics articles, with a sharp increase occurring immediately after 1991.

Figure 3. Russia-United States Publications By Field, 1985-2005
fig3
Source: From Ganguli (2012)

 

While some of the differences across the fields can be attributed to the number of scientists active in these fields, there are also other potential contributing factors.  For example, it may be that there was greater emigration of scientists from certain fields abroad, and links between emigrants and those who remained in Russia persisted. Graham and Dezhina (2008: 24) suggest that over 50 percent of emigrants were physicists and mathematicians. Another reason may be that international collaboration was more important in some fields due to the knowledge or resources needed to conduct research during the economic crisis of the 1990s.  As Wagner Brahmakulam, Peterson, Staheli, and Wong (2002) point out, physics research received significant amounts of US government funding for international collaboration, partly because expensive equipment that is needed and through collaboration, countries could share costs.  Also, physicists from many countries often meet and work together at international research centers like CERN.  Moreover, in some fields, the US and Russian governments shared priorities in funding international cooperation, like biomedical and health sciences, energy, physics, while there were gaps in some areas where Russia devoted resources and the US did not, like chemistry (Wagner et al. 2002: 24).  Graham and Dezhina (2008: 141) also discuss how Western colleagues benefited from working with Russians especially in fields like zoology, botany and the earth sciences, since the Russian colleagues provided access to data from unique regions not available previously.

Support for International Teams?

This policy brief has discussed some reasons for the increase in international scientific collaboration and related empirical evidence, including insights from collaboration after the end of the USSR.  The growth in collaboration and the geographic dispersion of teams is likely to continue; the frontier of scientific knowledge will become more complex and specialized, so that an even greater numbers of researchers will be needed to combine their expertise, and they are likely to be spread across increasingly distant locations.

These trends raise many complex issues for policymakers.  For some countries, international collaboration may be the only way to sustain the science sector as the frontier of knowledge becomes more complex and resource-intensive.  For some, international collaborations may increase the emigration of home-grown talent to wealthier countries.  To what extent international collaboration should be supported, and how, will be important policy questions going forward. Typically, funding for international projects has been the main policy lever, and the Russian experience suggests that grant programs did play a critical role in that case.  As our survey evidence in Freeman, Ganguli and Murciano-Goroff (2014) suggests, face-to-face meetings are especially important in forming and sustaining international collaborations.  Thus, funding mechanisms that include provisions for research stays and face-to-face meetings may be the most effective means for fostering international collaborations.

▪

References

  • Adams, J. (2013). “Collaborations: The Fourth Age of Research.” Nature, 497(7451), 557-560.
  • Agrawal A, Goldfarb A (2008). “Restructuring Research: Communication Costs and the
  • Democratization of University Innovation,” American Economic Review, 98(4):1578-1590.
  • Freeman, Richard B. (2010). “Globalization of Scientific And Engineering Talent: International Mobility of Students, Workers, and Ideas and The World Economy.” Economics Of Innovation And New Technology, Volume 19, issue 5, 201 pp. 393-406.
  • Freeman, Richard B., Ina Ganguli and Raviv Murciano-Goroff (2014).  “Why and Wherefore of Increased Scientific Collaboration,” NBER Working Paper No. 19819, Issued in January 2014.
  • Ganguli, Ina (2012).  “Russian-American Scientific Collaboration” in Y.P. Tretyakov (ed), Russian-Аmerican Links: Leaps Forward and Backward in Academic Cooperation. St. Petersburg, Russia: Nestor-Historia, pp. 120-135.
  • Graham, Loren and Irina Dezhina (2008).  Science in the New Russia: Crisis, Aid, Reform. Bloomington and Indianapolis: Indiana University Press, 2008.
  • Jones, Ben (2009). “The Burden of Knowledge and the ‘Death of the Renaissance Man’: Is
  • Innovation Getting Harder?” Review of Economic Studies, 76:283-317.
  • National Science Board (2012). Science and Engineering Indicators 2012. Arlington VA: National Science Foundation (NSB 12-01).
  • National Science Board (2006). Science and Engineering Indicators 2006. Arlington VA: National Science Foundation (NSB 06-01).
  • OECD (1994).  Science, Technology, and Innovation Policies. Federation of Russia. Paris: Organisation for Economic Co-operation and Development, 1994.
  • Scellato, G., Franzoni, C., & Stephan, P. (2012). “Mobile Scientists and International Networks,” NBER Working Paper 18613.
  • Wagner, Caroline, Irene Brahmakulam, D.J. Peterson, Linda Staheli, and Anny
  • Wong (2002).  U.S. Government Funding for Science and Technology Cooperation with Russia.
  • Santa Monica, CA: RAND Corporation, 2002.
  • Wuchty, S., Jones, B. F., & Uzzi, B. (2007). “The Increasing Dominance Of Teams In Production Of Knowledge.” Science, 316(5827), 1036-1039.

Tajikistan Joining the Customs Union of Russia, Belarus and Kazakhstan: Pros and Cons

Posted on December 23, 2013 | Policy Brief

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Authors: I.A. Densiova, A.M. Malokostov, and N.A. Turdyeva, CEFIR

In this brief we summarize the results obtained in a CEFIR research project on the economic impact of Tajikistan joining the Customs Union of Russia, Belarus and Kazakhstan conducted for the Eurasian Development Bank in 2013 (EBD, 2013). We argue that integration has to be comprehensive to be mutually beneficial: indeed, trade effects are marginal, and the highest stakes are at migration regulation in the CU member-countries and the investment opportunities in Tajikistan.

Integration Formations in the Monetary Sphere: the Possibility and the Necessity for Monetary Integration in the Post-Soviet Region

Posted on November 25, 2013 | Policy Brief

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This policy brief addresses the possibility of monetary integration in the post-Soviet region. It provides a short overview of the literature devoted to the formation and development of the monetary unions, and argues that, based on this literature and real-world experiences, monetary integration can be of substantial value for the CIS states. However, such monetary union is not feasible in the near future due to weak economic integration of the national economies of the CIS countries, significant difference in their development level, and imbalances in allocation of bargaining power between the states. This policy brief suggests that a first step towards monetary integration could be an adoption of a supranational unit of account on the territory of the Customs Union between Russia, Belarus and Kazakhstan.

The modern world has observed formation of a number of economic and monetary integration communities. Their performance varies greatly: some of them are developing successfully, others, on the contrary, are stagnating. Questions concerning the possibility of economic and monetary integration in the post-Soviet space are constantly addressed both by policymakers and by academic economists. Taking into account theoretical concepts and international experience, this brief addresses the possibility and desirability of the integration of the monetary sphere of the post-Soviet region. Based on Luzgina (2013a,b), this brief proposes a form of representation of monetary integration on the early stages of its development. In this case, an early form of monetary integration may be achieved via adoption of a single supranational unit of account on the territory of (a subset of) countries; the national currencies would continue to coexist with the new supranational currency. This approach to integration would allow preserving the independence of economic policy for the involved member states. At the same time, countries would benefit from a reduction in transaction costs and increasing convergence of national economies.

Background: Theoretical Concepts and World Experience of Monetary Integration

Ideally, the monetary union should have the form of an optimum currency area (OCA), a territory of one-currency domination with high level of integration and unification in different economic spheres. Modern economic science provides two main approaches considering the possibility of constructing an optimal currency zone on the territory of several states. The first suggests that optimality should be determined on the basis of implementing a specific group of criteria by countries. Among the main criteria, freedom of goods movement, labor and capital, openness and diversification of the economy, the synchronization inflation rates as well as integration in the financial sector can be mentioned. The second approach is based on a comparison of the benefits and costs in terms of the monetary union formation of the country with the highest economic potential. In practice, when studying the effectiveness of monetary integration, a synthesized approach is used. It includes evaluating by criteria, as well as taking into account costs and benefits that a country accrues in case of entering a particular monetary group. The main benefits of a monetary union include a reduction of transaction costs, trade relations enlargement, improving the discipline in the monetary sphere, and a reduction of the rate of international reserve sufficiency for every country-member. At the same time, there are some negative aspects of deep integration, such as loss of monetary policy independence, economic imbalances in case of weak convergence of national economies, loss of (part of) seigniorage income, and a possible negative public reaction to the adoption of a single currency.

When discussing the concept of monetary integration, it is important to understand the distinction between a monetary union and an optimum currency area. A monetary union is one of the most developed forms of a currency area, which implies a rigid anchor of national currencies to each other with a possible further transformation into the currency of the leading country, or to a single supranational currency (as in the case of the European Union). In this case, a monetary union can be formed of asymmetrical economies. Instead, the optimum currency area requires mandatory implementation of the main convergence criteria, and thereby, more symmetry/alignment among the members. Thus, a monetary union does not necessarily have to be an optimum currency area, while the optimum currency area has every opportunity to be transformed into a full-fledged monetary union [1].

Historically, there have been several examples of monetary union formations. The Italian monetary union (1862-1905), which was formed through the merger of disparate Italian lands, is among them. We can also identify the Scandinavian Monetary Union, which united Norway, Denmark and Sweden (1875-1917). The Austro-Hungarian monetary union existed in the period from 1867 to 1914. Currently, we observe formations of monetary unions in Africa, Latin America and the Arab states.

Despite the implementation of a number of integration projects within the various groups of countries over the past century, only the European states were able to achieve the highest form of monetary integration. It took them more than 50 years to do this, and the integration processes in the economic and monetary fields are continuing with new Member States joining the European Union. However, despite the detailed development plans for the implementation of a monetary union, the Eurozone countries face a number of difficulties and obstacles on the path of economic development. European monetary integration brings not only benefits, but also some costs. For example, the loss of independence of monetary policy creates obstacles in regulations of economic processes.

This discussion suggests that an assessment of the potential formation of a monetary union – that is, of desirability, feasibility and level of monetary integration within a particular group of countries – should be based on relating theoretical concepts and features of the countries in question, as well as a in-depth research of the experience of other currency unions.

Integration Processes in the Post-Soviet Space

At the territory of the former Soviet Union, integration projects have been implemented for more than 20 years. After the collapse of the Soviet Union, such integration formations as the Commonwealth of Independent States and the Eurasian Economic Community were created. Belarus, Kazakhstan and Russia have built a Customs Union (CU) and a Common Economic Space (CES). There is also a possibility of making a transition to the highest form of integration – a monetary union. However, this raises a number of questions: which CIS countries should join a monetary union, when should this be done, and what is the optimal form of monetary union for integrating countries.

Luzgina (2013b) shows that, within the framework of the CIS countries, that there are significant differences in many of the macroeconomic indicators. Countries differ in terms of GDP and the growth rates of investment and prices. For example, Belarus has the highest inflation in the post-Soviet region. The source of growth also differs: for example, a number of countries, such as Azerbaijan, Russia and Kazakhstan, owe a significant part of their economic growth to the availability of natural resources, but this is not universally true within the CIS. Dynamics of population income is also significantly different among the countries. Here, Russia occupies the leading position with its average wage at the beginning of 2012 reaching 780 USD. At the same time, in Tajikistan, the average wage amounts to only 110 USD.

Another concern is that the formation of an economic and monetary union implies free movement of labor and capital. However, at this stage of development, it can lead to some negative consequences. Free movement of labor could involve a massive flow of labor from depressed areas to regions where incomes are much higher. This may create pressure on health and social services in the latter regions. In turn, free movement of capital may cause speculative attacks on the financial markets. At the same time, the CIS countries, except Russia, Kazakhstan and Ukraine, do not have large gold reserves. Therefore, the free movement of capital flows without additional support may cause a crisis within the national financial systems. Out of all the gold reserves of the CIS countries, more than 85% of the total volume is owned by Russia. In the case of an abolition of restrictions on capital flows, countries that are exposed to speculative attacks are likely to ask Russia for help. Such a situation would require Russia to use its own financial resources, which would create an additional pressure on its international reserves.

Table 1. International reserves in the CIS countries, (million US dollars)

Country

2008

2010

2012

Azerbaijan

6467,2

6409,1

11277,3

Armenia

1406,8

1865,8

1799,4

Belarus

3063,2

5025,4

8095

Kazakhstan

19883,1

28264,7

28299,4

Kirgizstan

1225,1

1720,4

2066,7

Moldova

1672,4

1717,7

2515

Russia

426278,8

479222,3

537816,4

Tajikistan

163,5

403,1

630,7

Ukraine

31543,3

34571,3

24552,8
Note: The author’s own calculation based on data from the World Bank

Russia is leading among the CIS countries in terms of population and territory, with other countries lagging substantially behind. For example, Belarus owns less than 1% of the total territory of the CIS countries and less than 4% of the population.

Relying on the above quantitative indicators it is natural to expect that in case of a formation of a monetary union with a single emission center, the distribution of votes in the decision-making of the development and implementation of monetary policy is likely to be unequal. The leading role would likely belong to Russia, which has the largest economic potential. However, other countries in this case may be in a less advantageous position as Russia’s decisions may lead to undesirable consequences for the economies of other countries, given the lack of a sufficient degree of synchronization of national economic systems.

Thus, a weak degree of economic integration of the national economies of the CIS countries, different levels of development, as well as the superiority of the economic potential of Russia over the other states gives reason to argue for a non-feasibility of monetary integration within the CIS countries in the short term.

On the other hand, it may be reasonable to consider the possibility of integration in the monetary sphere on the basis of the most economically integrated countries, namely Russia, Belarus and Kazakhstan. These countries have created a Customs Union and are implementing a project of forming a Common Economic Space. There are plans of creating the Eurasian Economic Union. In addition, based on the experience of European countries, it might be easier to start the integration within a limited number of participants, which satisfy the required convergence criteria. Later, more countries may enter the monetary union.

Prospects for Monetary Integration of Belarus, Kazakhstan and Russia

Taking into account the experience of the European Union, we note the need for close trade and technological relations, as well as a market type of economy, and unification of the legislation in the economic sphere. Some of these elements of monetary integration are observed within the CU. After the collapse of the Soviet Union, economies of the former Soviet states switched to paths of market reforms. In addition, the CU countries have rather close trade relations; they have restored the old and created new means of communication. At the same time, there is a weak degree of diversification of exports and imports. A large part of export and import are represented by raw materials.

The second important point of the monetary integration is the comparability by size of the emerging economies. In the framework of the Customs Union, Russia is the only leader. Harmonization of relations between the alliance partners would be easier in the case of smaller countries coordinating their efforts, which would allow them to defend their interests along with the large member-states.

Finally, obligatory condition of monetary integration is the fulfillment of convergence indicators (certain values of macroeconomic indicators) by all association members. In Luzgina (2013b), we compare a range of such indicators, as based on the experience of the European Union. We use indicators such as the inflation rate, public debt, budget deficit, and the dynamics of exchange rates for comparison. The study reveals that the main differences lie in the monetary indicators, namely the rate of inflation and exchange rate. In addition, there are certain differences in the structure of the economy and the share of private ownership in GDP.

Figure 1. Exchange Rate (average for a year), as % of the previous year
Slide1
Figure 2. Industrial Producer Price Index (average for a year), as % of the previous year
Slide2
Source: Data of the Interstate Statistical Committee of the Commonwealth of the Independent State

The persistence of significant differences in the values of convergence indicators at the macro level makes a full-fledged monetary union highly unlikely in the short term, even within the framework of the three most economically integrated states. At the same time, it is appropriate to consider the option of monetary integration in its mild form, i.e. in the form of monetary integration on the basis of a single unit of account. A single unit of account is usually calculated on the basis of the basket of national currencies, and is mostly used for international payments and credits.

The attractiveness of monetary integration in the form of monetary union on the basis of a supranational unit of account is motivated; first of all, by the preservation of the economic sovereignty of all countries. Circulation of the unit of account would take place in parallel with national currencies. Member states would retain the possibility of implementation of independent monetary and fiscal policies. Furthermore, the unit of account may fulfill the role of a training tool. The supranational payment unit can be used on the national level. Using this unit of account, legal entities may carry out transactions and individuals may hold their savings. It can also be actively implemented in the inter-state calculations. A part of gold and forex reserves of member countries can be held in the supranational unit of account. Inter-state loans can be issued in this unit as well. This type of monetary union would reveal the feasibility of further deepening of integration in the monetary sphere and determine the timing of the formation of a full-fledged monetary union. In case of serious problems, the dismantling of the currency union will not cause major adverse changes in national economies, unlike in the case of a collapse of a monetary union with a single currency. In addition, the operation of a single unit of account allows for the anticipation of potential problems associated with the functioning of economies under a single monetary system, and a solution before the introduction of a supranational currency.

Last, but not least, this form of integration seems to be a relatively feasible option as the process of convergence on the territory of the CU countries in the monetary sphere has already begun. There is an increased use of national currencies in bilateral trade, harmonization of national legislation is taking place in the monetary sphere, and international agreements in the monetary sphere are ratified. These activities are gradually building a base for the realization of the monetary integration project of the union countries.

Conclusions

Economic and monetary integration allows the countries to get the maximum benefit from mutual cooperation. However, the deepening of the integration process is usually accompanied by certain difficulties. Convergence of economic systems requires transformation of economic institutions, changes in legislation and principles of management, all of which are costly to achieve. The better the preliminary harmonization is performed, the easier the process of adaptation of national economies to function within a particular economic and monetary union will be.

The post-Soviet countries are implementing several projects of economic integration. However, their economies have major differences according to a number of macroeconomic indicators. The greatest degree of convergence is reached only by three CIS states, namely Belarus, Russia and Kazakhstan. Rather high level of economic integration, as well as a continuation of the process of unification and harmonization of national economies allows us to study the feasibility of realizing the lightweight form of a monetary integration based on a single supranational unit of account on the territories of Belarus, Kazakhstan and Russia.

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Managed Competition in Health Insurance Systems in Central and Eastern Europe

Posted on October 28, 2013 | Policy Brief

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This policy brief summarizes common trends in the development of health care systems in the Czech Republic, Slovakia, and Russia in late 1990s–early 2000s. These countries focused on regulated competition between multiple health insurance companies. However, excessive regulation led to various deficiencies of the model. In particular, improvements in such quality indicators of the three health care systems as infant and under-five mortality are unrelated to the presence of multiple insurers or insurer competition.

A number of transition countries in Central and Eastern Europe and the former Soviet Union introduced health care systems with compulsory enrollment, obligatory insurance contributions unrelated to need and coverage according to a specified package of medical services. This so-called social health insurance (SHI) model (Culyer, 2005) is regarded as a means for achieving universal coverage, stable financial revenues, and consumer equity  (Balabanova et al. 2012; Gordeev et al., 2011; Zweifel and Breyer, 2006; Preker et al., 2002). While most transition countries chose to only have a single health insurance provider on the market, the Czech Republic, Slovakia, and Russia allowed competitive (and often private) insurers in the new system. However, the evidence from the three countries shows excessive regulation of health insurers and limited instruments for insurer competition within indebted post-reform health care systems (Naigovzina and Filatov, 2010; Besstremyannaya, 2009; Medved et al., 2005). Consequently, the three countries may have been over-enthusiastic in putting large emphasis on market forces in the reorganization of health care systems in economies with a legacy of central planning (Diamond, 2002).

This brief addresses the results of Besstremyannaya (2010), which assesses the impact of private health insurance companies on the quality of health care system. While various performance measures reflect different goals of national and regional health care systems (Joumard et al., 2010; Propper and Wilson, 2006; OECD, 2004; WHO, 2000), aggregate health outcomes directly related to the quality of health care are commonly infant and under-five mortality (Lawson et al., 2012; Gottret and Schieber, 2006; Wagstaff and Claeson, 2004; Filmer and Pritchett, 1999). Consequently, Besstremyannaya’s (2010) analysis regards mortality indicators as variables reflecting the overall quality of health care system.

The estimations employ data on Russian regions in 2000-2006. The results indicate that regions with only private health insurers have lower infant and under-five mortality. However, given the low degree of competition on the social health insurance market in Russia, we hypothesize that this effect is mostly driven by positive institutional reforms in those regions. Indeed, incorporating the effect of institutional financial environment, we find that the impact of private health insurers becomes insignificant.

Development of a Social Health Insurance Model in the Czech Republic, Slovakia, and Russia

At the beginning of their economic transition, the Czech Republic, Slovakia, and Russia established a model for universal coverage of citizens by mandatory health insurance (Balabanova et al., 2012; Medved et al., 2005; Sheiman, 1991). The revenues of the new SHI system came from a special payroll tax and from government payments for health care provision to the non-working population. The main reason for combining certain features of taxation-based and insurance-based systems was the desire to establish mandatory health insurance as a reliable source of financing in an environment with unstable budgetary revenues (Lawson and Nemec, 2003; Preker et al., 2002; Sheiman, 1994). The insurance systems instituted in the three transition countries correspond to the major SHI principles implemented in Western Europe: contributions by beneficiaries according to their ability to pay; transparency in the flow of funds; and free access to care based on clinical need (Jacobs and Goddard, 2002).

The Czech Republic, Slovakia, and Russia placed emphasis on regulated competition, decreeing that SHI should be offered by multiple private insurance companies with a free choice of the insurer by consumers. Managers of private insurance companies were assumed to perform better than government executives (Lawson and Nemec, 2003; Sinuraya, 2000; Curtis et al., 1995), so an intermediary role for private insurance companies was seen as a key instrument for introducing market incentives and improving the quality of the health care system (Sheiman, 1991).

However, the activity of health insurance companies in the three countries was heavily regulated, since the content of benefit packages, size of subscriber contributions, and the methods of provider reimbursement were decided by government, and tariffs for health care were frequently revised (Lawson et al., 2012; Rokosova et al., 2005; Zaborovskaya et al., 2005; Praznovcova et al., 2003; Hussey and Anderson, 2003). In particular, Russian health care authorities enforced rigid assignments of areas, whose residents were to be served by a particular health insurance company (Twigg, 1999) and imposed informal agreements with health insurance companies to finance providers regardless of the quality and quantity of the health care (Blam and Kovalev, 2006). As a result, the three countries experienced an initial emergence of a large number of health insurance companies, followed by mergers between them, resulting in high market concentration (Sergeeva, 2006; Zaborovskaya et al., 2005; Medved et al., 2005).

In Russia, the Health Insurance Law (1991) specified that until private insurers appeared in a region, the regional SHI fund or its branches could play the role of insurance companies. Therefore, several types of SHI systems emerged in Russian regions in the 1990s and early 2000s: the regional SHI fund might be the only agent on the SHI market; the regional SHI fund might have branches, acting as insurance companies; SHI might be offered exclusively by private insurance companies; or SHI might be offered by both private insurance companies and branches of the regional SHI fund (Figure 1). The variety of SHI systems reflects the fact that many regions opposed market entry by private insurance companies (Twigg, 1999). Indeed, the boards of directors of regional SHI funds usually included regional government officials (Tompson, 2007; Tragakes and Lessof, 2003) who were reluctant to reduce government control over SHI financing sources (Blam and Kovalev, 2006; Twigg, 2001). The controversy with health insurance legislation created a substantial confusion at the regional and the municipal level (Danishevski et al., 2006).

Figure 1. Health insurance agents in Russia in 2000-2006, (number of regions)

 Slide1

This context suggests that Russian regions provide an interesting study field to address the impact of private health insurance companies on the quality of health care system. In particular, the wide variety of SHI systems across Russian regions, as well as the gradual introduction of the health insurance model in Russia provide a sufficient degree of variation in practices and outcomes to allow for a well-specified empirical analysis.

Data and Results

In our analysis we use data on Russian regional economies between 2000 and 2006 (as based on data availability). Our measures of health outcomes are given by the pooled regional data on infant and under-five mortality. Our key explanatory variable is the presence of only private health insurers in the region. Arguably, the coexistence of public and private health insurance companies does not enable effective functioning of private health insurers owing to their discrimination by the territorial health insurance fund. Therefore, in the empirical estimations we focus on the presence of only private health insurers in the region, regarding it as a measure of effective health insurance model.    The analysis also employs a variety of important socio-economic and geographic variables influencing health outcomes (per capita gross regional product (GRP), share of private and public health care expenditure in gross regional product, share of urban population, average temperature in January).

The results of the first set of our empirical estimations demonstrate that the presence of only private health insurers in a region leads to lower infant and under-five mortality. Furthermore, an increase in the share of private health care expenditure in GRP leads to a decrease in both mortality indicators. The result is consistent with numerous findings about the association between personal income and health status in Russia (Balabanova et al., 2012; Sparling, 2008).

Prospective reimbursement of health care providers is associated with a decrease in infant and under-five mortality. The finding suggests the existence of a quasi-insurance mechanism in the Russian SHI market. Operating in an institutional environment where provider reimbursement is based on prospective payment, private insurance companies in effect shift a part of their risk to providers (Glied, 2000; Sheiman, 1997; Chernichovsky et al., 1996).

Table 1. Factors leading to decreased infant and under-five mortality in Russia

Slide1

Notes: * indicates that the coefficient is statistically significant in a parametric regression

Although our analysis shows that the presence of only private health insurers is statistically associated with improvements in infant and under-five mortality, we believe that the influence is indirect. Namely, the overall positive institutional environment in the region may result in both a decrease of mortality indicators and a lower coercion of regional authorities towards the presence of private health insurance companies.

To test this hypothesis, we use financial risk in a region as a measure of institutional environment and incorporate it in the analysis through an instrumental variable approach. (We measure financial risk by an expertly determined rank ordered variable by RA expert rating agency; this variable reflects the balance of the budgets of enterprises and governments in the region, with lower ranks corresponding to smaller risk.)

In line with our hypothesis, the results suggest that the presence of private health insurance companies now becomes insignificant in explaining infant and under-five mortality.

Discussion

The existing literature suggests that the improvement in infant and under-five mortality in the Czech Republic, Slovakia, and Russia can be attributed primarily to an increase of health care spending (Gordeev et al. 2011; Besstremyannaya, 2009; Lawson and Nemec, 2003) rather than being an effect of the social health insurance model with multiple competing insurers. It should be noted that insufficient government payments for the non-working population and a decline of the gross domestic product in the early transition years left SHI systems in the three countries indebted (Naigovzina and Filatov, 2010; Sheiman, 2006; Medved et al., 2005), which undermined the development of the managed competition in the health care provision.

In Russia (and also in the Czech Republic and Slovakia) there is little competition between insurers, and surveys show that the main factors causing consumers to change their health insurance company are change of work or residence, and not dissatisfaction with the insurer (Baranov and Sklyar, 2009). The fact that law suits on defense of SHI patient rights are rarely submitted to courts through health insurers (Federal Mandatory Health Insurance Fund, 2005) may also be evidence of the failure of Russian health insurance companies to win customers on the basis of their competitive strengths.

Summary and Policy Implications

The above findings as well as the other mentioned literature suggest that improvements of infant and under-five mortality in the Czech Republic, Slovakia, and Russia are not associated with the positive role of managed competition in the social health insurance system. In particular, in Russia the decrease in infant and under-five mortality is likely to be related to financial environment, rather than the existence of insurance mechanisms or competition between health insurance companies. One possible explanation of this absence of effect may come from the excessive regulation of the private insurance markets, as well as the insufficient competition between insurers. Importantly, the health insurance reform, implemented in Russia in 2010, both addressed underfinancing (by raising payroll tax rates) and took a step towards fostering provider competition, by allowing private providers to enter the social health insurance market (Besstremyannaya 2013). However, insurance companies are still not endowed with effective instruments for encouraging quality by providers, which may greatly undermine their efficiency.

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