“Innovations originate in the provinces”

Prof. Dr. Klaus Mangold, among the best connoisseurs of the Russian economy, has been present for years with current Eastern Europe topics at Hannover Messe

At a macroeconomic level, Russia is once again heading in the right direction after several tough years and is striving to achieve growth in excess of 3 percent – Prof. Dr. Klaus Mangold

Prof. Mangold, how do you like being labelled either “Mr. Russia” or “Friend of Putin”?

I can live with that, no problem. Devoting one’s eforts to bringing Russia back into the fold of European dialogue in the long-term interests of the German economy is nothing to be ashamed of. I know that many colleagues in the German and European economies agree with me on that objective. My standing point also includes critical positions that I advocate with respect to the future viability of this huge country. I communicate those explicitly to Russia’s political leadership and above to its economic and business elite. Sometimes even very publically. But to appreciate that, you would need to alter the preconceived stereotype of Klaus Mangold that exists.

Do you accept the often discussed “primacy of politics” that exists in Russia…?

Yes, I do – all companies comply with the political and legal parameters. But that does not in any way mean that businesses and their industry associations should not get actively involved in a democratic foreign and economic policy decision-making process. Incidentally German companies trading with the East have had a history of disregarding self-imposed thought and dialogue controls since the 1960s. Politicians and the media would be well-advised to draw on the immense wealth of knowledge about Russia’s economy and society that many committed German and European businesspeople have acquired locally and in personal conversations over the course of many years.

Who is actually sufering under the sanctions?

The Russians are sufering less than is sometimes reported in the media. There is import substitution, at least as far as the agribusiness, food and pharmaceuticals sectors are concerned. After three years there are signs of genuine attempts to establish new national value chains. In traditional industries imports from the West are being compensated by equivalents from Asia. In procurement terms Russian companies regard machinery as well as plant and equipment from China or a very committed South Korea as acceptable
“stopgap technologies” until the anticipated normalisation of relations with the EU occurs. In the automotive industry the Russian strategy of increased “local content” does not mean that new Russian subcontractors are now about to emerge. These are international businesses that are currently extending their degree of vertical integration in Russia.

In procurement terms, Russian companies regard machinery as well as plant and equipment from China or South Korea as acceptable “stopgap technologies” until the anticipated normalisation of relations with the EU occurs

Is that then the “modernisation partnership with Russia” that has been discussed for many years?

That is a programmatic term that Frank-Walter Steinmeier once coined and that also accentuated Russia’s first Partner Country appearance at Hannover Messe. The term is now a bit outdated. Desire and reality are too far apart. We need to be realistic and think historically. The procurement and application of state-of-the-art technologies from the West won’t be enough to help Russia advance to become an industrialised nation. A new entrepreneurial spirit, which is not discernible in the current reality of large state-owned enterprises, is needed. Size matters there above all else.

If you factor out the defence industry, Russia’s industrial sector as a proportion of gross value added is, I think, smaller than the 20 to 25 percent threshold that you would apply to a genuinely industrialised nation. Russia lacks to a large extent a new middle class with dynamic family-run industrial companies, which are mushrooming in China or India, for example. Our German medium-sized companies therefore don’t have partners that can be regarded as being on an equal footing. They can barely get a handle on the structures that they are faced with at the larger state-owned conglomerates. Added to that are the to some extent very high rate-of-return expectations of potential Russian partners.

Russia lacks to a large extent a new middle class with dynamic family-run industrial companies, which are mushrooming in China or India, for example. Our German medium-sized companies therefore don’t have partners that can be regarded as being on an equal footing

And how could that be changed?

An industrial masterplan that also envisages the privatisation of competitive parts of these large state owned enterprises would provide a real perspective. A feasible frst step would be to draw up a list of fve to ten candidates, for which a search for international technology partners would need to be conducted and for which a later stock market listing could be an option. More recently established Russian companies, which are already successful in the pharmaceuticals, food and above all the IT industries, need to play more of a role in the country.

After all, President Putin already made a very bold public statement in Sochi about the proportion of medium-sized companies that he wanted to see getting involved in Russia’s drive for industrialisation. What needs to be done now is to make the 40 percent mentioned a reality, accompanied by timetables and industrial policy measures to achieve that objective. That, of course, also requires the administration to take a dynamic approach.

That sounds like disillusionment…

Please, don’t misunderstand me. Russia remains a huge and exciting market, a fascinating country. It is an integral part of the large Eurasian economic zone, which is gaining global importance. At a macroeconomic level, Russia is once again heading in the right direction after several tough years and is striving to achieve growth in excess of 3 percent. It will also manage that if the price of oil stabilises at a level between 60 and 70 dollars a barrel. We will also be dependent on Russian gas in future – as a source of energy that can ofset fuctuations in renewable energy generation. Incidentally, that is not unilateral dependence. In the last few years, the Russians have perceived dependence on energy prices to be a far greater impairment.

At a macroeconomic level, Russia is once again heading in the right direction after several tough years and is striving to achieve growth in excess of 3 percent

Does that engender a greater willingness to diversify and innovate in industry?

Some interesting and sometimes unexpected approaches are being taken. At Hannover Messe in 2017 I discussed Industry 4.0 perspectives with Eberhard Veit, Michael Kleinemeier and Russian partners. At IAA we talked about electromobility in Russia. We saw fully operational electric vehicles during a visit to Kamaz. Large test tracks for interlinked and autonomous driving would not be a problem in Russia; the interlinking of diferent modes of transport for logistics purposes along the Silk Road could also be a major issue for Russia.

Large test tracks for interlinked and autonomous driving would not be a problem in Russia

There really are a number of approaches being taken. But we tend to see these being actioned in the long underestimated provinces, like Lipetsk, where a very canny governor attracted companies like Betterman or Viessmann or US pharmaceutical companies to locate their businesses in a very competitive industrial zone. Those initiatives in Russia deserve our attention and companies bold enough to support and promote them.

What role does the research partnership play in this regard?

It is a very important and here unfortunately a sometimes politically underrated contribution to maintaining dialogue. Surprisingly, Russia is heavily involved in funding research in Germany. The figure of around 700 million Euros indicates how great Russia’s interest in knowledge and innovation is. But I also sense this interest from the high level of participation in the discussion forums that the Helmholtz Association organises in Russia. Russia’s strength is in basic research. But technology transfer, marketable products and methods are what matter. As I said before, that requires entrepreneurial spirit. Unfortunately that is not yet one of the core subjects taught at Russia’s many excellent universities.

Russia’s strength is in basic research. But technology transfer, marketable products and methods are what matter. As I said before, that requires entrepreneurial spirit

Prof. Dr. Klaus Mangold is one of the best connoisseurs of the Russian economy. He has been present for years with current Eastern Europe topics at the Hannover Messe. In the Global Business Magazine 2018, he talks about his relationship with Russia.