'The Most Important Thing during a Time of Crisis is to Give People an Opportunity to Learn'

In an interview with RBC, Yaroslav Kuzminov, Rector of the Higher School of Economics, speaks about the problems facing Russia’s economy, the Strategy 2020, the status of higher education and about the areas worth developing.

— The first question for you, as the leader of a Russian institution of higher education focusing on economics and the co-author of the Strategy 2020: when will it be possible to expect economic growth to be restored in Russia?

— In looking at what is understood as restoration of growth, different groups perceive economic events differently. Dynamic growth might be a plus for one person, while for another stability is important.

Politicians and investors are truly oriented towards macroeconomic indicators, and even small growth in GDP is a signal to them. In this sense, in 2016, Russia will look significantly better than it does right now. For some reason, when making their ‘poor/strong’ assessments, journalists primarily follow this group in particular.

The second group is entrepreneurs – people for whom growth in GDP is not as important. For them, what is important is the extent of demand in specific markets and its indicators, such as economic expectations (mood), which are regularly measured by Rosstat and the HSE Centre for Business Tendency Studies. Since the end of last year, the business confidence index in Russia has fallen to minus 7%, which is lower than in the EU (minus 3-4%), but not comparable with the mood of crisis in 2009, when it was minus 15%. This is still a mood of stagnation rather than crisis. More important for entrepreneurs is available credit, although again, thanks to journalists, the Central Bank rate has taken on the status of a fetish of sorts. Actual borrowing conditions depend on several factors, primarily on the quality of an entrepreneur’s assets. In this respect, 2016 is unlikely to be ‘a positive turning point’ for entrepreneurs; the same is likely to be true in terms of demand as well.

The third group is the people who have savings. This is a third of our population. For them there are two reference points – the rouble exchange rate (these people travel abroad), and the rates at which banks issue consumer loans and attract deposits. In this regard, we can say that in 2016, it seems unlikely that the situation will really change; borrowed money will be more available again, but a second boom in consumer lending won’t happen. In 2016, this group of the population will be more satisfied than today, primarily due to greater stability of the rouble than was the case in 2015. But the positive here is stability rather than growth.

At the same time, there is growing anxiety with respect to incomes on the part of the ‘fourth quintile’ of the population – people who are balancing on the edge of the middle class. This is the most indebted population group. The fear of losing their jobs among ‘white collar employees’ in big cities and a noticeable reduction in wages in the commercial sector are causing these people not only to limit their consumption, but also to change their type of consumption. This may give rise to social discontent.

Finally, there is the base layer of the population that has no savings – 60% of our fellow citizens. For these people, the main indicator is the price of goods and services. In other words, consumer price inflation. If it is limited to 6-7%, the majority of Russia’s population will feel a real change for the better in comparison with 2015.

— HSE has analyzed the decrees the president issued in May from the perspective of their enforceability. You have said that there is danger in their nonfulfillment. What is the danger?

— There are two groups of problems –obvious absenteeism when it comes to the objectives that have been set, and formal fulfilment of decrees. The first group primarily concerns expenditures on science. We are lagging behind significantly, which is dangerous for Russia’s global position. And improving the quality of jobs (remember the 25 million new high-tech jobs?) – I don’t see any policy in this regard.

The second group is the key ‘social and labour’ decrees aimed at transforming the educated class into a middle class, introducing high-quality regulation of the labour market, and creating career lifts for professionals. This is the core of Putin’s programme, the core of his long-term contract with the educated segment of his electorate. The decrees issued in May involve raising salaries for professionals in science, education and health care to levels that are competitive, a so-called ‘effective contract’. This increase has already led to the growth of the middle class in non-metropolitan areas by improving the economic situation of the mass educated class.

In 2012, we calculated the cost of an effective contract for doctors, mid-level and junior medical staff, teachers, university professors, scientists and cultural workers. Experts suggested increasing spending for these purposes from 2.8% of GDP to 3.9% by 2015 and subsequently to 4.2% by 2018 – this mainly came from subsidies provided by the federal government. These calculations were presented to Putin and Medvedev. In reality, the increase in salaries was realized in completely different conditions. The Ministry of Finance managed to convince the president and the prime minister that the federal budget should only provide a third of the money needed, with another third coming from internal restructuring of institutions’ costs – let them pull from their own reserves, and a third would come from regional budgets. This was a beautiful idea.

For the first year and a half in 2012-2013, this strategy surprisingly worked; the first stage of salary increase was successful. I even told [Finance Minister Anton] Siluanov that I had underestimated the opportunities that the Finance Ministry had proposed for consideration. Later on it became worse, because the reserves of both regional governments and the state-funded institutions had run out. And everyone had begun to feel it.

Indeed, for 2015, the roadmap for increasing the average wage is generally being fulfilled. For doctors and university professors, we have gone to 130-140% of the average wage by region, for teachers – to 99%. But at the same time, instead of the additional funding of 1% of GDP needed to increase salaries, institutions received only 0.4% of GDP. While the contribution of the federal budget in previous years was no more than one third, for the current year it is less than 20%. It is clear that there isn’t some miracle at work here; salaries are going up, but now it is due to a sharp increase in workload, and not only for doctors and teachers. We have just received the results of the annual survey of university professors from the monitoring study on the economics of education. Their workload has dramatically increased; whereas previously it was 38-40 hours per week, according to recent polls, it has now jumped to 50 hours.

The second ‘inside source’ comes from squeezing the remaining costs of institutions. In the structure of educational institutions’ budgetary financing, for example, salaries have reached 70-80%! This is a return to the situation that existed in the early 2000s.

— In his budget strategy, the Finance Minister insists on reducing state-funded places at universities allocated per 10,000 young people. Several estimates show that this will lead to a loss of approximately 100,000 state-funded places in universities over the next few years. As one of the co-authors of the education reform, what are your thoughts on this?

— I’m really of two minds about it. In theory, 15-20% of our universities are at a very low level when it comes to education. They mimic education, or are simply preparing people to go nowhere; everyone knows that. The admissions figures for higher education show that some people are accepted who received near failing grades in basic subjects. They did not learn in school; they will not learn here. The Finance Ministry was guided by this position. In terms of the efficiency of public expenditure, the Finance Ministry’s position is absolutely justified. This is one side. But today I would not advise the government to reduce state-funded places in higher education, and I don’t think it will be implemented in the end.

You know, the most important thing during a time of crisis is to give people to opportunity to learn. But we need to change the structure of higher education. Instead of training 35% of our students to be economists and lawyers, which not a single country has, we need to create universities of applied sciences and a system of applied undergraduate studies. This exists in every country except Russia. This is competitive higher education that not only gives the basics, but also a definite area of specialization: office manager, system administrator, master builder. This is what technical training schools used to provide. But applied undergraduate study retains the aura of a university, which is very important because parents refuse to send their children to technical training schools. They agree to higher education precisely because their sense is the right one, i.e., that the social environment in universities will lift their children up, but in other places it could sometimes bring them down. Therefore, reducing places is something we may not be able to survive, but we can refashion these state-funded places.

— Deputy Prime Minister for Social Affairs Olga Golodets has pointed out that due to devaluation and falling incomes, the flow of Russian citizens moving abroad is growing, especially the young and qualified. They are not giving up their citizenship, but they are looking for larger salaries and better jobs. Do you see this trend? Is this a temporary phenomenon or are we returning to the early 90s?

— No, we are certainly not going back to the early 90s. At that time people who were going abroad were prepared to wash dishes, because that provided a living standard that they could not obtain as engineers in enterprises in Russian cities. This is not what we have right now. I think an exchange in people between Russia and the West is taking place constantly. Unfortunately, we are giving more in this exchange than we are getting back. As a result of events that began in mid-2014, we have lost about 100,000 skilled foreigners, which is quite a few.

‘The issue is removing redundant elements from the state'

— If the Strategy 2020 would have taken shape in consecutive stages, would we have been able to avoid the stagnation of 2012 and 2013?

— No, of course not. Economic growth began to stall in 2012-2013, and when [Vladimir] Putin ordered us to develop a strategy, all the experts unanimously predicted the end of extensive growth. The price of oil was still growing, it reached $100-110 per barrel, but at this point it came to a standstill and remained there for such a long time, which was amazing. But the very fact that it ceased to grow meant that the old model was exhausted – a model that was designed not just on revenue from oil exports, but on the fact that this revenue would always grow. The model was strange and irrational, but it shaped the behaviour of the political and economic elite of the 2000s. Preventing it was impossible, and minimizing the negative impact in 2014 should have been done from both sides and through other means.

It was possible to implement two things. The first was budgetary manipulation by 4% of GDP. We suggested redistributing 1% of GDP to science and education, 1% to health care, and 1-2% (there was a long discussion) to transport infrastructure, mainly roads. This wasn’t done. Moreover, the money from the budget fully went to those sectors from which we actually suggested taking money – to the security services and state administration. Of course, the budget manipulation was impossible to implement in several years; in reality, it would have taken the entire term of Putin's presidency up to 2018. But the vector of economic restructuring would have been set.

The second thing that was not accepted by the leadership was pension reform. Had it been started in 2012 rather than be postponed until 2018 like it is now, we would have been able to carry it out in much softer economic conditions. This is not only about raising the retirement age; rather, it’s primarily about creating a normal system of pension savings whereby people set aside money themselves. We suggested creating a state fund, likely through the Reserve Fund or the National Welfare Fund, which would guarantee the investments of each person and would make them fireproof. We proposed creating a mechanism of co-financing private money from the state. It is clear that carrying out pension reform in 2018 is not possible; we simply don’t have 1.5% of GDP. We will have to do it in a much harsher social and political situation, which of course is a waste.

— What could be a significant point of growth in the coming years?

— Natural points of growth, of course, are not just industries in which imports have become expensive and less competitive. First of all, they are areas where our businesses can expand market share without large capital expenditures. It is clear that manufacturing technology has grown more expensive, just as the Euro has. A large number of Russian business owners are afraid to make long-term investments in technology. I understand them. We can expect natural points of growth in agriculture and in the food industry. In my view, we can expect it to a much lesser extent in light industry, because we have virtually lost it; we would have to re-purchase the machines and train workers. Furthermore, we are competing with Asia in the large-scale segment, which easily beats us on the price of labour.

Growth can be expected in construction and related industries, first of all in housing, if the government can continue to keep mortgage rates below 12%. These three points of growth will probably be complemented by high-tech enterprises in the defence sector, where there will be stable demand for decades to come.

It is often said that we should cut the arms programme in half. Doing this now is impossible, because the money of an entire generation would be thrown out. This is extremely important not only for our independence, but also to preserve Russia's high-tech sector. Today, such manufacturing serves as a source of regenerating technological potential for our economy. It is forming new engineers, new technology, and new skilled workers.

— Can import substitution become a global point of growth?

— The import substitution that they are talking about on television is related to ideology. This is something quite different from what is actually happening. Import substitution is a chance for a specific entrepreneur. I assure you that he feels it much more than journalists and public officials. Import substitution is possible in all the sectors that I began to talk about. To what extent is it possible in the field of investment engineering? Well, to the extent that our companies begin showing demand. If we have sustainable development of the construction sector, agriculture, the processing industry, and these related sectors – from agrochemicals to packaging – it can begin developing as early as 2016. Entrepreneurs can grow when they don’t feel attempts to persuade them from above, but rather the actual processes that they observe.

— In your opinion, how appropriate was Russia’s introduction of counter-sanctions last year?

— It was definitely appropriate. But tactically, I would have done it differently. I would have stated that if sanctions against Russia were not lifted, we would have had to introduce counter-sanctions against certain sectors of the economy in the EU. Let's say, after six months. That way, we would have killed two birds with one stone. First, we would have mobilized the very politically active farming sector of the EU to fight for the lifting of sanctions. It's one thing when everything has already happened, and quite another when you can avoid it. Secondly, I would have given domestic wholesalers and retail chains time to prepare, to switch from the EU to South America, for example. There would have been less of a price shock for Russian consumers.

— The old model has exhausted itself, but there is a feeling that no one can offer a new one. What it could be?

— A new model has been discussed repeatedly. It is an economy that invests in human capital and receives increasing returns. Our wage levels are too high to claim a niche as the world’s factory. And our population is too educated – two-thirds, if not three-quarters of young Russians are not willing to work with their hands.          

In 10 and 20 years will obtain a significant portion of GDP from natural resources, but they can be diversified – not oil and gas, but clean water, for example. By 2030-2035, half of Russia’s GDP will come from intellectual products and the experience economy, from education, science and culture. There is nothing exclusive about this; it's just the path that developed countries are taking in the 21st century.

However, in order to enjoy high profits in the economy of the 21st century, as a country we should be open and should focus on global markets. Russia now depends on international trade more than the U.S. and the EU, which is a consequence of our export orientation against relatively low domestic demand. We can reduce this dependency without restricting external contacts, but rather by providing income growth and sustainability for our businesses.

Another condition is construction of modern transport and information infrastructure. We now have a very unfavourable and unattractive environment around cities. We need investment in infrastructure to prepare land around major cities. In our budget manipulation we allocate to a single infrastructure – transport, but there is also gas, electricity and so on. Where does our economic activity end? It stops 20 kilometres away from any major city. Where does it stop in Europe? It never ends; there is simply no periphery. In the United States and Canada, it is some 80 kilometres from a big city. You can live outside the city, but drive into the city to work, take products to market, and be included in the economic realm of ​​the city economy. Few people talk about expanding the economic radius around our cities. Economists generally don’t have spatial thinking.

Another direction is certainly easing the role of the state [in the economy]. What I mean here is the bloated unit that is associated with control and supervisory functions. We have an excessive number of people in uniform. The people in uniform should be those who stand for the protection of the homeland and risk their lives.

A fourth element is modifying the social system of the state. If we look at developed countries, we see that a significant portion of social assistance passes through NGOs (including churches), simply because community oriented professionals better understand the needs of the people. We all understand that there are socially oriented NGOs that we are trying to maintain; they are not meeting any opposition in our government or the presidential administration. It is very good that they survive thanks to presidential grants, but they do not operate as efficiently as they could if we were to channel at least 15% of the money for social programmes through them.

— Will these positions be included in the Strategy 2030? It does not appear that the government is ready to give up the extra uniforms.

— I am certain that they will be; nobody is going to object to these positions. I assure you that the people who are in uniform, and rather big ones, are no less turned off by people in pseudo uniforms than you and I are. Every state needs security services, an army, and a prosecutor's office. The issue is removing redundant elements from the state where they originated. We have now simply become poor. But poor people are more inclined to treat their opportunities judiciously. The Ministry of Internal Affairs, by the way, is already reducing redundant functions, such as private security.

— This time, at least formally, officials have expressed a desire to write the Strategy 2030 without the involvement of outside experts. Will HSE and RANEPA (Russian Presidential Academy of National Economy and Public Administration) participate in this process?

— From the beginning, this issue was discussed with the expert council, which includes [Vladimir] Mau, Rector of RANEPA, and myself. [Alexander] Auzan, Dean of Faculty of Economics at Moscow State University, wrote the report. Of course, all the experts will participate. This is the question we put forward as to why high-level officials absolutely must participate in preparing the strategy. You know, there are just a few sectors where the Strategy 2020 is being implemented well. One of the main ones is education. Because [Dmitry] Livanov, Minister of Education and Science, took part before he was a minister. In all the other cases, it simply got into the hands of conscientious people who think differently and who read the text differently.

— Is HSE preparing for budget cuts somehow?

—  It has already happened. Like other public institutions, we experienced a budget sequestration this year. 10-11% of expenditures were sequestered – important ones such as science, repair costs, commissioning buildings, and scholarships; they fell into the section ‘other costs’. We hope that there won’t be a sequestration next year and that we will manage to convince the Finance Ministry not to cut education spending. Nominally, expenditures are now planned at the same level they were in 2015 – without the sequestration. I am very happy that Anton Siluanov has publicly agreed several times with the authors of Strategy 2020 and has announced virtually the same budget priorities that we discussed in 2012 – education, health care, and the country’s transport infrastructure. In the draft budget that the Ministry of Finance has now presented a second time, these things will be less subject to reduction. Education is preserved, and health care financing is even being increased by 2.5%. Although this is below the inflation rate, spending on health care is rising against a backdrop of hard spending cuts in other areas.

— The budget sequestration anticipates not such strong indexation of social payments and reduction in payments to civil servants. Is this a movement in the right direction?

— You know, it's the wrong direction, and we have never hidden our opinion; this is the total sequestration of 10% that the Finance Ministry resorted to earlier in the year. This is absolutely not constructive. If you sequester 10%, then you are rejecting reforms and confirming that you have no priorities. Doing that once was possible – the Ministry of Finance did it and managed to save – but, in my opinion, the effect was negative. Imagine that there are a number of construction projects with contracts where they take away 10% – how will they be completed? The government is now working through a lot of complaints about it. You build some some kind of frame and then, bam, you chop off 300 million roubles. But the contract includes this 300 million. Where will the ministry or someone else will find this 300 million now?

— But based on the indicators, your university managed to get around the crisis. Do you have fewer government contracts?

— Orders from state agencies for analysis and for applied development work stopped growing in 2013, and now they are decreasing because the agencies under sequestration cut primarily research and development. That has been the easiest thing to do. But we foresaw this situation and four years ago we began reorienting our applied research to other markets – large cities, regions and corporations. In recent years, a fairly substantial market has developed for university development programmes designed to implement certain instruments that exist at HSE in order train their teams of administrators and teachers. So far we have been able to maintain our revenue from applied development at the level of 1.5-1.7 billion roubles per year.

In terms of revenue, we have three other markets where we operate. First, there is paid higher education; this is in demand, and it’s one of the most expensive in Russia. Our educational programmes cost between 250,000 and 600,000 roubles per year, which is comparable to European universities. Second, there is continuing education and various business schools. Third, there is a system of pre-university education. In total, we make about 4.5-5 billion roubles per year, which is 40% of our budget.

— Your university is included in the 5-100 programme to improve the competitiveness of Russian universities. One of Putin's decrees in May stated that five Russian universities in 2020 should enter the top 100 in international rankings. Participating universities should recruit foreigners to work for them. Recently, there was the loud firing of the investor Kendrick White from the post of Nizhny Novgorod University vice rector. Do you view this as a signal to higher education?

— The regulations of the 5-100 programme oblige participating universities to give at least two senior positions to qualified foreigners. When mud was thrown at Mr. White on TV for his insufficient love for Russian chemistry and he was then fired, I asked people I knew in the security services whether something was going on there, perhaps he had hired someone. Three days later they called me and said that they had spoken to their colleagues in Nizhniy Novgorod and that there had been no claims against Mr White. He has long been naturalized here and is married to a Russian; nobody understood why this hit the TV. So it’s only a signal that there are a lot of zealots out there.

— It has been said that the departure of Konstantin Sonin from the post of HSE vice-rector is related to his desire to teach at American universities and his candid stance on political issues.

— When Konstantin Sonin came here, he warned us that, most likely, in two years he will have a contract in the United States. We agreed to this from the beginning. I think very highly of Sonin; he is doing a lot for HSE. But this is an absolutely normal career for a strong economist. The Harris School of Public Policy in Chicago is the dream of an economist, especially for ones like Sonin who study political economy. People move where it is more interesting for them and where the academic environment is stronger. This is that rare case when Sonin agreed with Dmitry Peskov: academics migrate between universities rather than between countries. It’s a pity that we often lose in this process and continue to lose.

On the other hand, in a bad year, 35 scholars come to HSE from other countries on full three-year contracts. It is a pity that Sonin will only be at HSE on a part-time basis.

— Have the counter-sanctions and the foreign policy situation somehow affected the desire of foreign professors to work with us, and have they affected relations with foreign universities?

— No, there’s hardly been any effect. There are cases of abnegation due to politics, but these are isolated cases out of the thousands of our contacts. More common are the economic cases; because our contracts are denominated in roubles, they have become less attractive on the global market. But this only applies to the hiring of new teachers. There has been no impact on joint research.

— Will you appoint foreigners to leadership positions at HSE, as prescribed by 5-100?

— From the beginning, we have guided by the fact that a foreigner cannot lead a Russian university. This is fictitious. To do this, one has to know a multitude of behavioural and administrative routines and regulations. That said, Mr White could easily be vice-rector, as he was naturalized here. Martin Gilman [Professor Emeritus at HSE and Advisor to Kuzminov], former director of the International Monetary Fund, has been working here for a long time. He is a very strong international official. But his Russian is not very good, so he simply could not be vice-rector. He is head and shoulders above half of my colleagues here, but he cannot do it. We never need to simulate things. We have a lot of laboratories where we hire foreigners because these types of professionals don’t exist in Russia. And we will continue to do so.