Tag: Russia

Expected Effects of Tobacco Taxation in Five Countries of the Former Soviet Union

Posted on May 18, 2015 | Policy Brief

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Authors: Irina Denisova and Polina Kuznetsova, CEFIR.

In this policy brief, we discuss the results from a study of different dimensions of tobacco taxation policy in five former Soviet Union countries: Belarus, Kazakhstan, Kyrgyz Republic, Russia and Ukraine. We find that the increase in budget revenue from raising excises on filter cigarettes is high in all studied countries. Furthermore, due to a low elasticity of the demand for cigarettes, the increase in excise taxes needs to be substantial to lead to a noticeable improvement in public health.  

New Light on the Eastern Front – Contributions from Russia to the 70th Anniversary of the Victory in Europe in World War Two

Posted on May 4, 2015 | Policy Brief

Author: Lennart Samuelson, SITE.

Interesting results of the post-Soviet research on the Second World War are now presented in 12 imposing volumes, Velikaia Otechestvennaia Voina 1941 –1945 (Great Patriotic War 1941–45) written by specialists in military, political, international and economic history. Each chapter reflects the research frontier. Their style contrasts positively against Soviet works during the Cold War, and also against renewed anti-Russian historical campaigns in the West in recent years. Open archives, abolition of censorship, freedom of print as well as joint projects with Western scholars are the preconditions for progress in the historiography of Russia in the 20th century in general and of the Eastern Front during World War Two in particular.

A Russian Sudden Stop Still a Major Risk

Posted on April 27, 2015 | Policy Brief

Image from central Moscow with red traffic lights representing Russian sudden stop of the economy

The Russian economy is facing serious challenges in 2015 even after the currency and stock market have strengthened on the back of (expectations of even) higher oil prices. Policy makers that ignore these challenges may be in for a rude awakening when more statistics on the real economy are now coming in. It is time that actions are taken to deal with Russia’s structural problems, mend ties with its neighbors that are also important economic partners, and refocus political priorities towards generating growth and prosperity for its population. In the long run, this is what creates the respect and admiration a great nation deserves.

Recent developments

The value of Russian assets, including shares and the currency, was more or less in free fall in the second half of 2014 and into the beginning of 2015. The annexation of Crimea and continued fighting in Eastern Ukraine and the associated sanctions contributed to a general loss of confidence in Russian assets, but the fall in international oil prices was an even more decisive factor (for a detailed account of the sanctions, see PISM (2015)).

Figure 1 shows how the stock market first took a big hit at the time of the invasion of Crimea, but then recovered before the massive downturn in mid-2014 as oil prices collapsed. The ruble followed a similar path, but with less volatility than the stock market, which is not too surprising given that the Central Bank of Russia (CBR) intervenes to stabilize the currency. However, the ruble had a short time of extreme volatility in mid to end-December when the uncertainty about the impact of financial sanctions was very high.

Figure 1. Oil price, Ruble and Stocks

fig1Sources: CBR, US EIA, MICEX

Financial sanctions were particularly troubling since Russian companies, both private and state owned, have significant external debt that became increasingly hard to refinance. The magnitude of this external debt is also such that it is not a trivial matter for the government or central bank to handle despite the fact that public external debt is very low and international reserves are among the largest in the world. As a matter of fact, external debt was around $250 billion more than then the value of CBR’s international reserves at the peak, but the difference has come down somewhat to around $200 billion as external loans had to be paid back when new external funding was not available at attractive terms.

Sudden Stops

Before turning to the outlook for the Russian economy, a short discussion of sudden stops is warranted. “Sudden stops” is short for sudden stops or sharp reversals in international capital flows. Sudden stops and its effects on the real economy have been analyzed for some time now (see Calvo (1998) for an early contribution). Becker and Mauro (2006) concluded that sudden stops have been the most costly type of shock for emerging market countries in terms of lost GDP in modern history. In their study the average country that experienced a sudden stop had a cumulative loss of income of over 60 percent of its initial GDP before recovering back to its pre-crisis income level.

Sudden stops in capital flows have such large effects on the real economy because of the adverse effects reduced external funding has on imports. A first look at the accounting identity for GDP (GDP=Y=C+I+G+X-M) makes it hard to see how reduced imports can be a problem since imports (M) enter with a negative sign. This in itself suggests that reduced imports should increase GDP. However, imports are used for domestic consumption (C) or investment (I), two factors that enter the same identity with positive signs, which means that when they fall so does GDP. If this were the full story, the net effect on GDP from falling imports would be zero since the positive direct effect from imports would be exactly offset by reduced domestic consumption and investment.

Unfortunately the accounting identity does not make clear the dynamics that follow from this reduction in consumption and investment. For example, the foreign car (or machine) that is no longer imported and will not be sold, will also not require a domestic sales person, annual service, a parking space etc., so the eventual decline in consumption (or investment) will be much larger than the first round effect that is captured by a static accounting relationship. This is one reason why “improvements” in the trade balance stemming from the sudden decrease in imports is not necessarily a good thing for the economy.

Russia is also part of the international financial system with important capital flows both in and out of the country. As such, it is also subject to the risk that changes in sentiment and large capital outflows can affect imports and the real economy. For a time before the global financial crisis, net capital flows to Russia tended to be positive. However, this changed in 2009 and since then most quarters have been showing outflows.

Figure 2. Private Sector Capital Outflows Continue (Q1 2015 in red)

fig2Source: CBR

The speed of outflows picked up dramatically in 2014, reaching more than $150 billion for the year. The general picture of outflows has continued in the first quarter of 2015, with outflows of around $35 billion (which for comparison is twice the $17.5 billion IMF package that was agreed for Ukraine in March 2015). Although Russia still has resources to support a high level of imports, the more capital that leaves, the less money there is to spend and invest in the country.

The Outlook

Everyone knows that Russia generates most of its export revenues from natural resources in general and from oil more specifically. The fact that the health of the economy is closely related to international oil prices is no secret either and Figure 1 showed the tandem cycle of oil prices, the ruble and the stock market. But how important is oil prices as a determinant of GDP growth? This is of course a big question that requires sophisticated thinking and modeling to figure out at a more structural level. But if we are just looking for a back of the envelope estimate, a simple regression of growth of oil is potentially interesting. Perhaps somewhat surprisingly, oil price growth has very high explanatory power: regressing annual changes in GDP per capita in real dollar terms on annual changes in real oil prices (and a constant) for the period 1998 to 2014 generates an R2 of 0.64! Not bad for a one variable macro “model” of the Russian economy. The coefficient on real changes in oil prices is estimated to be 0.15 and hugely significant and the intercept, which could be interpreted as the underlying growth rate in this “model”, of 2.4%.

Using the same IMF data on the real oil price for the first three months of 2015 and comparing that to the average oil price for the full year 2014 implies a drop in the real oil price of 46 percent. Using this oil data as the forecast for all of 2015 and plugging this into the estimated equation suggests that the oil price drop in itself would be associated with a decline in income of almost 7 percent. Adding back the underlying growth rate of just over 2 percent still means a negative growth rate of almost 5 percent in 2015, without even starting to think about sanctions, capital flows or structural problems.

However, there is more data that points in the directions of the economic troubles that lay ahead in 2015, which is trade data. We just discussed the importance of sudden stops and associated drops in imports in explaining large drops in output in emerging markets. Figure 2 already showed the continued capital outflows, and Figure 3 provides a scatter plot of changes in imports and GDP growth. Over the years, Russia has displayed a strong positive correlation between import growth and GDP growth that is in line with the description of sudden stop dynamics.

Figure 3. Imports and GDP Growth (Q1 2015 in red)

fig3Source: Author’s calculations based on CBR and the Federal State Statistics Service (GKS) data

Figure 3 shows the import change in Q1 2015 (i.e., Q1 in 2015 compared to Q1 2014) as a red diamond and puts it on the linear regression line of past observations to get the implied GDP growth number for Q1 2015. First of all, the 36 percent drop in imports is at an all time high for the decade and at roughly the same level as in the worst quarter of 2009 in the global financial crisis. The implied drop in GDP is 10.5 percent (compared with a drop of 9.5 in the worst quarter of 2009). Again, this is not a formal model to generate GDP forecasts, but it is certainly a signal that suggests that the Russian economy has problems to deal with.

Concluding Remarks

The IMF (2015) just released its latest forecast for Russia together with the other countries of the world. The projection for 2015 is a decline of real GDP of 3.8 percent, which is not a great growth number by any means but less negative than what was discussed at the end of 2014. The Economist (2015) in its latest issue is also quoting a banker who says that the situation is not as bad as was previously imagined. The upward revisions have also led to statements among policy makers that seem to suggest that the problems for the Russian economy are behind the country.

Although the free fall associated with the sharp drop in oil prices is halted, recent data on capital flows and imports suggest that the problems for the Russian economy are far from over. If oil prices stay at current levels, capital outflows continue, and imports remain as suppressed as they were in the first quarter, the fall in GDP may be in the same order as in 2009. At that time GDP declined by 8 percentage points, or more than twice the recent forecasts for 2015.

Russian policy makers need to make serious structural reforms and mend ties with its important economic partners near and far to put the country on a more healthy growth trajectory. Simply praying for increasing oil prices is not enough; it is time that Russia becomes the master of its own economic faith.

▪

References

  • Becker, T., and P. Mauro (2006), “Output drops and the shocks that matter”, IMF Working Paper, WP/06/197
  • Becker, T. (2014), “A Russian Sudden Stop or Just a Slippery Oil Slope to Stagnation?”, BSR Policy Briefing 4/2014, Centrum Balticum
  • Calvo, G. (1998), “Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops,” Journal of Applied Economics, Vol. 1, No. 1, pp. 35–54.
  • Economist, The (2015), “Russia and the West: How Vladimir Putin tries to stay strong”, April 18-24 issue
  • IMF, (2015), World Economic Outlook, April
  • PISM, (2015), “Sanctions and Russia”, Polski Instytut Spraw Międzynarodowych, (The Polish Institute of International Affairs)

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Export Costs of Visa Restrictions

Posted on March 30, 2015 | Policy Brief

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We study the role of visa restrictions in determining export flows between firms and countries, and find a significant negative impact of visa restrictions. Our results indicate that visa costs not only diminish the value of export, but also the probability of new firms to enter visa restricted foreign markets. We interpret these results as evidence that visa restrictions contribute to trade costs faced by exporting firms.

There is no doubt that policy decisions in the area of foreign relations influence economic links between countries. However, quantifying these effects is usually very difficult – not least because visa regimes are relatively stable over time, not allowing for sufficient variation to estimate the effect of a regime change. As a result, decision-making is often based on very limited quantitative grounds, and mostly driven by qualitative intuition and strong political preferences. However, these decisions might have very important redistributive effects and create unequal access to markets for producers from different countries. For example, while WTO emphasizes a nondiscrimination clause to be one of the main principles of trade policies for member countries, foreign policy might become a very important source of discrimination in international trade.

An example of such policy decisions is visa requirement for foreign visitors. The channel of the effect is rather intuitive – visa requirements on foreign nationals might affect the intensity and costs of business visits needed to establish trade relations between firms in different countries.

In Kapelko and Volchkova (2015) we test the impact of foreign visa requirements on the international trade based on the Russian case. The Russian economy represents a unique setting to study the effect of visas on trade flows. Over the first decade of 2000, there were more than 30 visa regime changes between Russia and foreign countries. Thereby, there is sufficient variation for quantifying the export costs of visa restrictions.

Evidence

Economists observe that when a pair of countries has visa restrictions – both bilateral and unilateral – their bilateral trade flows, tourist exchanges, and FDI flows are smaller compared to pairs of similar countries without these restrictions (Neumayer, 2011). The anecdotal evidence also indicates that business meetings, conferences and other interactions which involve people from different countries are often cancelled or delayed due to the failure of some participants to obtain visa stamps on time. Therefore, we can assume that costs of visas for international transactions include not only simple monetary costs associated with the visa fee but also less predictable components such as the risk of refusal, time costs, etc.

Economic research often relies on some intrinsic features of goods or industries as a way to test the hypothesis. Namely, if the extent of the studied effect depends on these features then one would compare the effects across goods or industries controlling for the features. In our case, if the effect of visas is due to risks associated with the inability of businessmen to attend meetings or negotiations, then we can expect a negative effect of visa restrictions on trade flows, which will be stronger for goods trade since it requires more interactions between the buyer and seller. For this study, we rely on Rauch’s (Rauch, 1999) definition of relation specific goods and compare the effect of visas across goods with different degrees of sensitivities to the relations.

Method

The recent developments in trade theory and empirical research provide a specification of structural relations between country-level bilateral costs of trade and firm level decision to export. The heterogeneous firms approach brought by Marc Melitz (Melitz, 2003) to the international trade framework emphasizes that fixed costs of exporting play an important role in shaping patterns of exports. The literature distinguishes between fixed and variable costs of exporting, but the empirical evidence on cost composition is very limited and very little is known so far about the fixed costs of exporting. We proxy both these costs with visa restrictions, and use heterogeneity in firms’ decisions whether to export or not, to various destinations, to estimate the effect of visas on market access and trade flows.

Data

We combine annual data on exporters, volume of export of each exporter to each destination from the Russian Customs Transaction Database with data on all bilateral visa constraints for the period 2003-2010 between Russia and 180 foreign export destinations.

First, we test whether Russian firms export less to countries which impose strict visa restrictions compared to countries with less restrictive visa regimes or visa waiver programs, other things being equal. We test these effects separately for trade in goods which are more specific to the parties involved in the transaction (relation-specific goods, such as manufactured goods, and equipment with specific technical requirements on part of buyer) and trade in goods that depend less on the parties involved in the transactions (non-relation specific goods, such as more homogeneous, standard goods) (Rauch, 1999). Then, we estimate the effects of visa restrictions on the value of trade to chosen destinations.

The obvious concern is that visa decisions are dependent on trade. Politicians might facilitate visa negotiations if the country’s economic interests expand toward some destinations. It might for example affect visa waivers between countries. To deal with this issue we use tourist flows between countries as an instrument to allow for more accurate measurement of visa effects.

Our empirical strategy is to use the two-stage least squares approach with weighing in the second step to eliminate the potential bias due to selection into exporters to particular destination (Imbens and Wooldridge (2009)).

Results

Our results indicate that visas have a strong negative effect on market access, and it is twice as high for export of relation-specific goods as for export of non-relation specific goods. Controlling for the choice of destination, visas have a significant negative effect on the value of exports of relation-specific goods as well.

More specifically, our estimations indicate that:

  • the probability of the firm to export to visa-restricted destinations is below the probability of export to visa-free destinations. The probability gap is estimated to be about 36 percent for the overall sample, 40% for relationship specific transactions and 26% for non-relationship specific export.
  • the value of exports for relation specific goods is negatively affected by visa restrictions while there is no effect of visa restrictions on the export of non-relation specific goods. Our estimations indicate that the effect of visa is quite substantial so the value of relation specific export is twice as low to visa restricted as to visa free destinations.

These results emphasize the economic importance of visa restrictions and they are consistent with the assumption that visa restrictions do, in fact, contribute to the costs of market access. The negative effect of visa restrictions on the value of exports of relationship specific goods indicates that they also contribute to the variable costs of export.

Conclusions

The implications of this analysis may be very important. It demonstrates that visa regimes play a role as a non-tariff restriction or as a barrier, and can have significant effects on the development of trade relations between countries. The losses in trade due to visa restrictions are both extensive and intensive in nature: fewer firms are engaged in trade between countries with strong visa restrictions and they trade less in terms of more sophisticated goods. Therefore, we document at least two types of distortions in trade flows due to visas: visa distorts trade relations across countries with different visa requirements, and visa distorts trade flows across different types of goods to destinations with different visa requirements. Given the substantial negative effects of visas on trade relations, it is worth accounting for these economic costs when Ministries of Foreign Affairs engage in negotiations toward visa waivers.

References

  • Helpman, E., M. Melitz, and Y. Rubinstein. 2008. Estimating Trade Flows: Trading Partners and Trading Volumes. Quarterly Journal of Economics, Vol. 123 No2, 441-487.
  • Imbens, G., and J. Wooldridge . 2009. “Recent developments in the econometrics of program evaluation”. Journal of Economic Literature, 47(1) pp5-86
  • Kapelko, N., and N. Volchkova. 2015. “Export costs of visa restrictions”, CEFIR Working Paper, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2243136
  • Melitz, M. J. 2003. “The impact of trade on intra-industry reallocations and aggregate industry productivity.” Econometrica 71(6).
  • Neumayer, E. 2011. “On the Detrimental Impact of Visa Restrictions on Bilateral Trade and Foreign Direct Investment.” Applied Geography 31 (3): 901–907.
  • Rauch, J. E. 1999. “Networks Versus Markets in International Trade.” Journal of International Economics 48 (1): 7–35.

Fiscal Decentralization and Budget Discipline in Russian Regions

Posted on February 23, 2015 | Policy Brief

Authors: Michael Alexeev, Indiana University, Nikolay Avxentyev and Arseniy Mamedov, Russian Academy of National Economy and Public Administration.

We use panel data from the Russian regions for 2005-2013 to estimate the link between intraregional fiscal decentralization and regional budget deficits. Although Russian regions are not as autonomous in their fiscal policies as regions in other federal states such as Switzerland and the US, we obtain rather robust and highly statistically and economically significant results. Most importantly, we show that expenditure decentralization tends to have a positive effect on consolidated regional budget balance, while the weakness of regional tax base (relative to municipal one) is associated with significantly higher deficits. Also, as expected, the dependence of municipal budgets on transfers from the regional government leads to higher deficits of the consolidated regional budget. We conjecture that the deficit-reducing role of expenditure decentralization is due in part to better monitoring by the citizens and more efficient handling of expenditures by officials closer to the place where the funds are spent. Also, it might be easier for the regional government to pre-commit to a given level of expenditures when these expenditures are allocated to municipalities, because most municipalities in Russia appear to have harder budget constraints than the regional government.

Crisis and Trust

Posted on January 26, 2015 | Policy Brief

Authors: Maxim Ananyev and Sergei Guriev, CEFIR

Our research uses the 2008-2009-crisis experience in Russia to identify the relationship between income and trust. In 2009, Russian GDP fell an 8-percent drop in 2009. The impact of the crisis was very uneven among Russian regions because of their differences in industrial structure inherited from the Soviet times. We find that the regions that specialize in producing capital goods, as well as those depending on oil and gas, had a more substantial income decline during the crisis. The variation in the industrial structure allows creating an instrument for the change in income. After instrumenting average regional income, we find that the effect of income on generalized social trust (the share of respondents saying that most people can be trusted) is statistically and economically significant. Controlling for conventional determinants of trust, we show that a 10 percent decrease in income is associated with 5-percentage point decrease in trust. Given that the average level of trust in Russia is 25%, this magnitude is substantial. We also find that the post-crisis economic recovery did not restore the pre-crisis trust level. Trust recovered only in those regions where the 2009 decline in trust was small. In the regions with the large decline in trust during the crisis, trust in 2014 was still 10 percentage points below its pre-crisis level. This has straightforward policy implications: governments should pursue generous countercyclical policies especially in the areas that are the most vulnerable to macroeconomic shocks.

How Transport Links Help Market Integration: the Case of Moscow Office Rental Market

Posted on October 13, 2014 | Policy Brief

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This brief is based on a research project on the Moscow office real estate (Ignatenko & Mikhailova, 2014). We study the market for office space rentals in Moscow. Our main interest regards spatial competition: when an object is rented, does the rental rate respond to the behavior of competing objects in a geographical vicinity? What is the geographical extent of the market, and how do urban transportation links help integrate local markets and extend the geographical scope of competition?  We find that urban transportation “shortens” the effective distances and intensifies competition between geographically differentiated objects. The effects are modest but statistically significant.

We analyze a unique dataset on office space rental deals in Moscow in 2001-2010. The dataset was collected by an analyst team at Cushman & Wakefield Russia and includes all the deals on office spaces that were publicly advertised, with detailed and verified information on the object characteristics, rental prices, and the contract dates.  We also have information on the object’s location – precise geographical coordinates – and thus we are able to study this market at a very detailed level of geographical aggregation.

Moscow Office Rental Market in 2001-2010, an Overview

The market for office space in Moscow went through a stage of rapid growth through 1990s and 2000s. Economic development drove the demand for all types of offices at all price ranges. The demand was met by a conversion of residential and industrial spaces into offices, as well as by new construction.  In our sample, the top year in terms of the number of transactions was 2005, with a slight decline in the years after, and a somewhat sharper drop in 2009 after the global financial crisis. The composition of different types of offices and their characteristics have changed toward slightly higher quality through that decade:  the share of transactions with class A and B+ offices was steadily rising (see Figure 1).

Figure 1. Number of Office Rental Transactions by Year and Class of Office

FREE_brief_Mos_offices1

Source: Authors’ own calculations.

Up until the third quarter of 2008, the rental rates were constantly increasing. Average office rental prices in Moscow grew more than two-fold during 2001-2008, but fell almost to the initial level after the global financial crisis and the subsequent crush of the market. Figure 2 illustrates the quarterly index of simple average office rental rates and the corresponding hedonic price index. A hedonic index is constructed using a regression of the objects’ prices onto the observed characteristics of the objects and a set of time period indicators. Thus, the regression decomposes the overall price into the contributions of object quality and time period. The estimated time effects give the hedonic index, cleaning the time series of prices from all of the effects of changes in quality. Interestingly enough, the value of the hedonic index at the beginning of 2010 was exactly at the same level as in 2001. Thus, although the average price level was higher in 2010, all the price gains can be attributed to an increase of the average object’s quality.

Figure 2. Average Price and Hedonic Price Index of Moscow Office Rentals, 2001-2010

FREE_brief_Mos_offices2

Source: Authors’ own calculations.

In Moscow we observe a typical behavior of the real estate market during booms and busts. While prices rise, tenants switch to lower quality objects to fit the budget, and the hedonic index rises faster than the average price.  When prices fall, tenants support the higher end of market, looking for high-quality bargains, and the hedonic index falls faster than the average price.  Overall, Moscow real estate market fits the basic stylized facts.

A hedonic analysis reveals the value of the object’s characteristics in the eyes of the consumer. The presence of transport infrastructure creates direct benefits. Consumers value an accessible transport infrastructure: offices lose 9% of rental price for each 10 minutes of walking distance to the nearest subway station. It is easy to calculate the surplus from a new subway line: it would increase the value of the land and real estate objects in the area of service. Because land and real estate are supplied inelastically, the bulk of this benefit goes to the owner. Consumers (in our case, tenants) receive the benefit of shorter commuting time, but in exchange for higher rental prices.

In addition to these direct benefits, transport links also tend to promote market integration by making objects that are near and objects that are far away, more substitutable in the eyes of the consumer. Transport links lower the degree of product differentiation in the geographical dimension. And, as with any kind of product differentiation, this should limit seller’s market power and reduce prices.  The benefits of increased competition (if any) go directly to consumers. We analyze competition between the offices for rent in the context of geographical distance to determine whether transport links indeed make competition stronger.

Spatial Competition and Transport Infrastructure

We use the dataset to study price competition between real estate objects.  Real estate objects are best thought of as differentiated goods. Each object possesses a set of characteristics and a fixed location, i.e. objects are differentiated by consumer characteristics and by geography. Each object is essentially unique, but the owners’ market power is limited by competition. Competition between objects is stronger if objects are closer in consumer characteristics and in location, so that potential tenants view them as closer substitutes. An owner of an object reacts to the behavior of their competitors, i.e. sets the price reacting to the prices set by similar objects in the neighborhood. We study how the strength of price reaction depends on geographical distance between objects by estimating the slope of the reaction function of the owners in a price competition game.

Our estimates show that price reactions of competition from the neighboring objects are very modest. Hypothetically, if  two offices of similar size in the same location are for rent, and one of them cuts a price by 10%, the other responds on average by cutting price by only 1.7%. Even at a zero geographical distance between competing objects, there is substantial market power, presumably because of strong differentiation in the other product characteristics. The response is weaker if competing objects are located further away from each other, and at 1.8 kilometers is statistically indistinguishable from zero, i.e. such objects practically do not compete.

When we consider competition inside a more narrowly defined class of offices (grouping A and B+ offices vs B- and C offices), the results change slightly. We find that offices compete mainly within their own class. The reaction to the prices of another class is not different from zero, even in the immediate geographical vicinity. For the offices within the same class the geographical range of competition extends from 1.8 km to 2.1 km, and the reaction to neighbor’s prices is slightly stronger, with an elasticity of 0.2.

As a next step, we include transport links into our measure of distance. Consider offices that are located on the same subway line, i.e. where a passenger can travel between locations without changing the line. Price response to such competing objects is not much stronger: about 22% of the shock, but it stays above zero at longer distances. Price responses become indistinguishable from zero only at a distance of about 4.7 km. Figure 3 compares the two estimated price response functions: for all offices and for offices of the same class and on the same subway line.

Figure 3. Price Response as a Function of Geographical Distance when Objects are Connected by a Direct Subway Line

FREE_brief_Mos_offices3

Source: Authors’ own calculations.

To summarize, our findings confirm the old stylized fact: the real estate market is very “local”. It is local not only in a geographical sense, but also in a product space sense: objects compete only with similar objects and mainly in the immediate geographical neighborhood.  Direct transportation links (subway) promote market integration: it “shortens” the effective distance and makes the geographical boundaries of a market much wider. In the case of office real estate, the effect on the price level is very modest. The price reaction is weak even in the immediate vicinity, and it decays quickly with the distance. Yet our research underscores that the effects of transportation links on market integration and competition are real and measureable, and should be considered in cost-benefit analysis of transportation projects.

References

Ignatenko, Anna and Tatiana Mikhailova “Spatial Competition and Transport Infrastructure: The Case of Moscow Office Rental Market”, mimeo, 2014

Governance Quality as a Determinant of FDI: the Case of Russian Regions

Posted on June 26, 2014 | Policy Brief

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This brief highlights the results of a study of the effect of poor governance quality on foreign direct investment in Russia. Using a survey of businesses across forty administrative districts, we find that a higher frequency of using illegal payments and a higher pressure from regulatory agencies, enforcement authorities, and criminals, negatively affect foreign direct investment (FDI). We find that moving from average to top governance quality across Russian regions more than doubles the FDI stock.

What are the reasons for the large heterogeneity in investment across cities, regions, and countries? Why do some of them prosper while others struggle in attracting investors and developing in the long term? This brief summarizes a study (Kuzmina et al, 2014) where we explore how quality of governance affects a specific type of investment – foreign direct investment (FDI). FDI is a very important source of economic growth, especially for developing countries. It allows them to overcome the local deficiencies in capital, technologies, and expertise, and has strong and long-lasting effects on growth – through both direct and spillover channels. Analysis of the determinants of FDI is popular among academic researchers, however, the existing empirical research, especially the one based on cross-country variation in governance quality, is not entirely convincing.

FDI Inflows in Russian Regions

During the first decade of transition in 1990s, the inflow of FDI to Russia was low compared to the Eastern European countries and other emerging economies. However, this changed dramatically around 2003. As oil prices surged FDI flows into Russia increased ten-fold within just a few years. As Figure 1 shows, a maximum of $74.8 billion was achieved in 2008 (corresponding to 4.5% of the country’s GDP), and Russia became one of the top countries in the world for inward FDI. By 2006, FDI inflows to Russia in per capita terms had surpassed FDI into China.

Figure 1. Foreign Direct Investment in Russia 1992-2012
CEFIR_June24_fig1
Notes: This figure plots the evolution of FDI in Russia in 1992-2012. The blue line measures net inflows in current US$ billions (the scale corresponds to the left axis), and the red line measures net inflows as the percentage of GDP (the scale corresponds to the right axis). The data come from the World Bank(http://databank.worldbank.org/).
 

Nevertheless, the stock of FDI in Russia has remained substantially lower than in some comparable middle-income countries. The accumulated stock of FDI as a share of GDP (PPP) in Russia was 21% in 2013. This is only slightly more than in Ukraine (18%), and significantly less than the 28% in Brazil and the 30% in Poland. The stock of FDI in 2012 was distributed mainly between manufacturing (32%), real estate (15%), mining and quarrying (15%), and financial services (13%). Given the diversity of Russian regions in terms of natural, economic and institutional conditions, we also observe a substantial heterogeneity of FDI across Russian regions. The accumulated stock of FDI per capita is only $0.32 in the Republic of Karachaevo-Cherkessia, while it reaches a substantial $30,371 in the Sakhalin region. The average regional accumulated stock is just above $1,000 per capita. In terms of total stock, Moscow City is the leader with more than $39 billion of accumulated FDI.

An important feature of FDI in Russia is a significant share of so-called round-tripping investments. In 2012, $7.5 billion out of $18.5 billion of inward FDI in Russia came from offshore financial centers, with the most important OFC being Cyprus that delivered around 80% of total offshore investments. On overall, about half of total inward FDI stock in Russia comes from offshore countries.

There are several reasons behind the significant role of offshores in external Russian transactions. The traditional cause for using offshore financial centers (OFC) in developed countries is tax avoidance. While profit concerns are relevant for Russian law-abiding entrepreneurs, there are also other important reasons that force them to use offshore shells for their Russian-based enterprises. The possibility to get cheaper international financing and some other financial services for large Russian companies is important for large companies. On the other hand, underdeveloped institutions and poor property right protection are often referred to as the main driving forces for small and medium sized companies to go offshore (Ledyaeva et al., 2013; Kheyfets, 2013).

Given the importance of round-tripping investments in the Russian economy and the differences in incentives behind regular FDI and the one from offshores, we need to distinguish between these two types of investments when studying their determinants. On the one hand, poor regulatory governance might be a reason for the higher volumes of round tripping investments, but on the other hand, they might be a reason for the low attractiveness for true foreign investments.

Diversity of Quality of Governance across Russian Regions

The stable macroeconomic environment in Russia over the last decade has benefited Russian regions in attracting FDI. The diversity of Russian regions in various institutional aspects is, however, recognized in many studies. Yakovlev and Zhuravskaya (2007) report substantial differences in the speed of regulatory reform in twenty Russian regions over 2002-2005. A recent subnational survey of firms in 37 Russian regions by the World Bank indicates significant differences in the list of the most severe obstacles for firms’ performance across regions (World Bank, 2013).

The governance quality data in our study come from the Index of Support (“Index Opory”) survey conducted in 2011. This is a survey of directors of small and medium Russian firms that was collected by the Eurasia Competitiveness Institute (a not-for-profit think tank) and Opora Rossii (a non-for-profit organization that supports small business). It includes about 6000 firms and is designed to be a random sample of small businesses, stratified by size, location (urban or rural), and industry (with about two thirds from agriculture and manufacturing industries, and the rest from infrastructure and services).

Our data cover 40 regions. The surveyed regions are the most developed ones and their economic weight corresponds to 84% of total FDI stock and 83% of GDP in 2011.

All respondents of the survey were asked to answer a set of questions related to regional infrastructure, availability of labor, capital, and intermediate goods, and the absence of administrative pressures. Their answers were then aggregated within regions and all regions were ranked according to each criterion. We use the data coming from the administrative pressure section of the survey. The surveyed regions are ranked according to the average answers on questions reagrding the frequency of firms in the region using illegal payments to officials (Bribes to Officials), the frequency of firms facing abuse on the side of inspection authorities (Inspection Agencies Pressure), the side of enforcement authorities (Police Pressure), and the criminal community (Criminal Pressure).

To give a few examples, the top regions in terms of governance quality are Belgorod and Astrakhan Regions, as well as Stavropol and Krasnodar Territories. For example, the Belgorod region is ranked first in terms of police pressure, second in terms of bribes to officials and criminal pressure, and sixth in terms of inspection agencies pressure. This makes it the top region overall. The Kaluga region, which is commonly viewed as one of the best regions to invest in, in Russia, is ranked fifth overall, achieving some of the best positions in all indicators except for bribes to officials where it is somewhere in the middle (ranked 16th). To give a comparison, Moscow City ranks 27th overall. Leningrad, Irkutsk, Voronezh, Ryazan, and Rostov Regions take the bottom five places.

Worker Strikes in 1895-1914 and Why They Matter for Today

The common problem in this type of research is the reverse causality between the main variable of interest – quality of governance – and FDI. The effect of foreign investors might go through the better practices they bring to the host country or through the legal restrictions imposed on their business by the domestic jurisdiction in any country in which they decide to invest. To deal with the reversed causality problem in our study, we rely on an instrumental variable approach. As an instrument for governance quality in Russian regions, we choose the intensity of worker strikes in Russian provinces 1895-1914. We assume that the intensity of strikes in this period can be used as a proxy for the trust between the local businesses and the political elites, on the one hand, and ordinary people, on the other.

The choice of this period is not accidental. First, this was a period of unprecedentedly high growth of Russian industries. In 1887-1900, the production of many industrial goods and fuels in Russia increased by factor 3 to 5 in real terms; around five thousand kilometers of railroads were put in operations annually. Not surprisingly, the conflicts between workers, on the one hand, and management and owners, on the other, intensified in the 1890s. The police was an important instrument that managers and owners relied upon to keep control over the workers. The important link between local authorities and industrialists was formed to ensure the alignment between the interests of police and business owners. The formation of enforcement agencies was strongly influenced by this alignment, and this alignment in turn defines the level of trust between the elites and enforcement agencies, and the population.

Second, before 1897 no law regulated the duration of working hours in Russia. It was in discretion of the factory owners to establish the norms. On June 2, 1897 the first law governing working hours at a level well below the pre-existing level in Russian factories was signed into force. This law was an important first step towards improving the living conditions of Russian workers. With this law, workers could now claim their rights against the factory management. The factory inspections that were launched earlier, around 1882, were supposed to control the enforcement of labor regulation in general and the new labor law in particular. However, as conflicts between workers and capital owners and management dramatically intensified, these regulatory agencies were used to control workers and their organizations (Kupriyanova, 2000).

We interpret the intensity of strikes at the regional level as a measure of the revealed conflict between the state and the owners of existing businesses, or the local elite, on one hand, and the population on the other. In these conflicts, the enforcement and first regulatory agencies were used to secure the interests of small groups of local elites against interests of the broad population. In this way, we may rely on the intensity of strikes as an inverse proxy for the trust between population and local elites.

Modern research recognizes the importance of history for economic development. Nunn (2009) indicates several mechanisms that justify the projection of history onto modern life. For our study, two of these mechanisms are especially relevant. One is the historical root of modern formal institutions. The second is the effect of history on social and cultural norms. Aghion et al. (2010) suggest a mechanism of possible coevolution of trust and regulation: people in low-trust environments want more government interventions even though they are aware of the low quality of governance. For our study, the prediction of the study by Ahgion et al. (2010) – about the link between the trust and the quality of governance and their coevolution – is especially relevant.

One important issue about using our instrument is whether we can reasonably assume the preservation of some institutions or social norms through the two later dramatic changes in the Russian political regime. While there is evidence of institutional persistency, some aspects of institutions do change often. Acemoglu and Robinson (2006) address this question of whether changes in certain dimensions of institutions are consistent with overall institutional persistence. One of the results of their study is the possible persistence of the institutions that are essential for the allocation of resources in the economy despite the changes in the political regime. The essential condition for institutional persistence is the persistence of the incentives of those in power to distort the economic system for their own benefit. Therefore, as long as the incentives are preserved, the institutions may survive changes in the regime.

A number of empirical studies support this conclusion. To cite just one relevant study in the Russian context, Dower and Markevich (2014) show that the measure of conflict brought by the Stolypin land reform in Russian farmer’s communities about a hundred years ago explains current attitudes toward the privatization outcomes of the 1990s.

Results: Good Governance Matters for Non-Offshore FDI

Putting together data on the FDI stock in Russian regions, the level of governance quality in regions as of 2011, and some other controls, our results indicate that a higher administrative burden, a higher pressure of enforcement and regulatory agencies, a poor criminal situation and a higher level of corruption reported by the businesses in Russian regions contribute to a lower level of investments of foreign residents. Using the instrumental variable, which proxies the conflict between elites and people at the time when the regulatory agencies were formed a century ago, we can find the causal effect of governance quality on foreign investment. As an additional test, we study the effect of governance on offshore-related direct investments. We show that the sensitivity of offshore investments on governance quality is positive and non-significant. These results confirm our assumption that poor quality of governance decreases the reward of investments and is an important determinant of economic activity.

There is a straightforward policy application of our result. The improvement of governance quality alone, better compliance of regulatory agencies with existing legislation, is an important source of increases in the attractiveness of the regions for foreign investors. In particular, moving from average governance quality to the top increases FDI by 158%. This suggests that there are large returns to improving the quality of governance at the regional level, and this policy does not require a lot of budget spending which is especially important in modern Russia.

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References

  • Acemoglu, D., and Robinson, J. (2006) “De Facto Political Power and Institutional Persistence”. American Economic Association Papers and Proceedings 96(2), pp. 325-330.
  • Aghion, P., Y. Algan, P. Cahuc and A. Shleifer (2010) “Regulation and Distrust,” The Quarterly Journal of Economics, vol. 125(3), pp. 1015-1049
  • Becker, S., Boeckh, K., Hainz, Ch. And L. Woessmann, (2011) “The Empire Is Dead, Long Live the Empire! Long-Run Persistence of Trust and Corruption in the Bureaucracy”, IZA Discussion Paper No. 5584
  • Dower, P., and A. Markevich, (2014) “On the Historical Origins of Resistance to Privatization in the Former Soviet Union”, Journal of Comparative Economics, forthcoming
  • Kheyfets, B. (2013) “De-offshorization of Economy: International Experience and Russian Specifics”, Voprosy Economiki, Issue 7 (in Russian)
  • Kupriyanova, L., (2000) The “labor problem” in Russia in the second half of XIX – early XX century. History of entrepreneurship in Russia. Book 2. Moscow (in Russian)
  • Ledyaeva, S., Karhunen, P., And J. Whalley. (2013) “Offshore Jurisdictions, (Including Cyprus), Corruption Money Laundering and Russian Round-Trip Investment”, NBER WP 19019
  • Nunn, N., (2009) “The Importance of History for Economic Development.” Annual Review of Economics, 1(1), pp. 65-92
  • Yakovlev, E., and E. Zhuravskaya, (2013). “The Unequal Enforcement of Liberalization: Evidence from Russia’s Reform of Business Regulation,” Journal of European Economic Association, 11(4), pp. 808–838.

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.

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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.