A renewed focus on technology can lift Russia's economy

If Russia is to remain a globally relevant power in the 21st century, it will have to win one of two bets on technology - or possibly both.

The first was identified by President Vladimir Putin in a recent talk with students in which he discussed how artificial intelligence was creating big opportunities and threats. "Whoever becomes the leader in this sphere will be the ruler of the world," he said.
There is no doubt about Russia's periodic ability to compete at the leading edge of technology. Think Sputnik. The country still churns out world-class mathematicians and engineers with a reputation for ingenuity.
Martin Reeves, director of the BCG Henderson Institute, who has been mapping the geography of digital power, says Europe is "stone, cold dead" in several areas of technology but boasts some real expertise in AI.
"This is a highly leveraged bet for Russia. You are betting on the quality of your human resources," he says.
But in spite of Russia's undoubted human potential in this area, it is not clear that the country will realise it. Many of the best Russian experts in AI are now working in San Francisco, Tel Aviv or London. In terms of scientific citations or patents for AI technologies, Russia scarcely registers.
US tech companies appear leagues ahead of their Russian counterparts in AI research. China, whose economy is eight times bigger than Russia's, is also moving far further and faster in this field. Some Chinese technologists point to the triumphs of AlphaGo, Google DeepMind's AI programme, at the ancient game of Go as something of a Sputnik moment for China. AI has become a national strategic priority.

Oil technology important

As ever, Mr Putin's comments are hard to interpret and may simply have been intended as a provocation. Or he may have been alluding to the possible military uses of AI. In asymmetric warfare, it is near impossible to tell how AI is being used. Some experts speculate that AI programmes may even have been deployed during Moscow's meddling in last year's US presidential election.
Moscow's second big bet is on oil technology. In a recent lecture at Chatham House in London, Professor Thane Gustafson of Georgetown University, one of the leading foreign experts on the Russian oil industry, highlighted three challenges facing the industry.
First, the shale gas revolution in the US has turned the country into the world's swing oil producer. The industry's mastery of technologies, such as horizontal drilling, multi-stage fracturing and seismic imaging, as well as extremely flexible production operations have enabled it to cut its break-even price from $90 a barrel to $40.
Second, Russia is rapidly exhausting its low-cost sources of "brown" oil in Western Siberia and will increasingly rely on higher-cost "green" oil from new fields in Eastern Siberia and possibly "blue" oil from the Arctic Ocean.
Third, the accelerating global shift towards electric cars and battery technology will reduce dependence on the combustion engine and demand for oil. In such a world, with only the lowest cost producers able to compete, Russia would struggle.
Mr Gustafson said the only way Russia could escape this vicious circle would be to launch its own US-style shale gas revolution to boost productivity and profitability."Something has to widen those margins and that something can only be technology," he said.

More small business

While Russia understood the underlying technology, it did not have the managerial flexibility and knowledge to use it effectively, in Mr Gustafson's view. That would require a massive change in the Russian oil industry's structure and culture, reducing the dominance of state-owned groups and encouraging smaller, nimbler operators.
In other words, Russia's decades-old obsession with hardware has restricted its ability to develop the human software needed to compete in the modern economy. After all, the benefits of technology result not so much from inventing stuff as deploying it adroitly. Russia needs to give more scope to the creativity and initiative of its people than the Kremlin has traditionally allowed.
One London-based Russian entrepreneur, who left because of the insecurity of property rights and the difficulty of running a small business, is hoping his home country wins the first bet and loses the second. Only then will Russia ever be able to realise its full human potential.
"Capital and hard power is not relevant any more. It's all about the places that can create the most intelligent algorithms," he says. "Russia will finally have the chance to build its economy based on brains."
Copyright The Financial Times Limited 2017

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