Russia’s Pursuit of Technological Sovereignty

Professor Glenn Diesen

The global economy, including capitalism itself, is currently being transformed by a new industrial revolution, as the digital and technological world start to merge with the physical one. Russia’s ability to remain a great power and even to survive as a state will depend on the extent to which it can develop technological sovereignty in the new age.

Technological sovereignty refers to the ability of a nation to have control over its own technological infrastructure. As digital giants increasingly transform and take over crucial parts of the economy, a state must have a solid national digital ecosystem to enjoy industrial and political sovereignty. The objective of technological sovereignty is to enhance the competitiveness of the production process, to elevate the standard of living for citizens, and to reduce dependency on foreign powers to the extent it diminishes political sovereignty.

Russia’s strength is its maturing national digital ecosystem, although its weakness is the apparent absence of a clear technological and economic strategy as it moves forward. Because of this, Russia is unlikely to take a leading innovating role in the world, although a follower strategy would be ideal.

Russia switched from a Marxist economy to a neoliberal economic model in the 1990s and has since pursued course correction towards a not clearly defined strategy policy of technological sovereignty. While Russia has made great progress in advancing technological sovereignty, one often gets the impression that Russia’s economic model is ad hoc and largely reactive in response to Western economic coercion. What appears to be missing is a wider debate and clearly formulated strategies about Russia’s technological sovereignty as the most important component of its economic and political future.

This article argues that since the Industrial Revolution and the birth of capitalism, there have been concerns over the concentration of economic power domestically, as well as concerns over excessive dependency on foreign actors. The ability of a state to resolve these issues depends on the strength of its technological sovereignty.

The Domestic Economy: The Distribution of Wealth and Competitiveness

With each new technology that increases productivity, the subsequent increased income will be concentrated in the hands of the capital owners. If left unresolved, this may eventually lead to economic hardship, societal fragmentation and political instability. This challenge posed by technological innovations were also acknowledged by liberal economists, such as David Ricardo:

“My mistake arose from the supposition, that whenever the net income of a society increased, its gross income would also increase; I now, however, see reason to be satisfied that the one fund, from which landlords and capitalists derive their revenue, may increase, while the other, that upon which the labouring class mainly depend, may diminish”.[1]

This trend is exacerbated by rent-seeking, in which actors who hold existing resources or favourable market conditions can extract wealth without adding reciprocal value to production. In the age of economic neoliberalism, it is worth remembering that liberal economists such as Adam Smith, David Ricardo and John Stuart Mill all recognised the need to limit the power of the rentier class in order for capitalism to function.

An ideal and stable capitalist system would aim to reduce the concentration of wealth, improve the standard of living for people, and increase economic competitiveness by taxing rent-seekers and use the funds to develop infrastructure. During the rise of America’s version of industrial capitalism in the 19^th century, government-funded infrastructure and education development improved the standard of living for many and made industries more competitive in international markets, which ideally could have been funded by taxing the rentier class.

Landlords, banks, and monopolies are the most common examples of rent-seekers, which lay the foundation for an oligarchic class that diminishes economic competitiveness by extracting wealth from the production process. Digital giants can fall within all three categories as digital platforms provide the “land” for digital services, they increasingly become providers of banking and financial services, and digital giants have a proclivity for monopolies.

Digital giants naturally form monopolies due to limited ability for diversification and the convenience of having one platform as a shared marketplace. Capital-intensive monopolies emerge due to high fixed costs and low variable costs of establishing and expanding digital platforms, which resembles the economic thinking that led to the creation of 19^th-century railway monopolies. The high fixed cost includes the high processing power and access to an abundance of data, while the variable cost of operating in the digital realm is minimal. Subsequently, digital monopolies emerge due to the high entry barrier for competitors and the incentivise for predatory pricing by the dominant company.

Digital giants represent the key infrastructure that can either function as a public utility to increase the standard of living and increase competitiveness, or as rent-seeking monopolies that undermine capitalism. Amazon as a digital platform made over $50 billion in sales in the EU in 2022 and paid zero tax, just like it had the year before. Similarly, Uber is a platform that connects providers (drivers) and consumers (passengers), which results in a large profit for the company that derives from the platform. Furthermore, the data that acts as the lifeblood for the development of AI, is also extracted and sent across the Atlantic.

Digital giants have become the largest companies in the world, with an immense concentration of wealth as there is no need for a large workforce. Furthermore, programming jobs are often outsourced to a global pool of freelancers or replaced with temporary and contract jobs. The “gig economy” is ushering in an era of neo-feudalism in which today’s labourers become the new serfs. As new technology intensifies the concentration of wealth, some national control over the tech giants is becoming much needed. All the largest digital platforms in Europe are American, which is why Europe’s economic future and ambitions for political autonomy will deteriorate over the next few years.

Tech giants will adopt even greater monopolistic tendencies and subsequent rent-seeking abilities due to their economic scope; leadership in one industry provide a competitive advantage in seemingly unrelated industries. Ricardo’s principle of comparative advantage is turned on its head as it becomes a competitive advantage to do everything in today’s day and age. Digital giants are more capable of using shared technological infrastructure, common development and design processes, complementary data analytics, and overall synergy effects. A new economy is emerging in which digital companies begin to absorb entire industries. Case in point, in both China and Russia: domestic digital companies have launched self-driving cars, taken over large parts of the taxi industry, food delivery and even launched their own payment systems.

In the Fourth Industrial Revolution, digital giants are becoming even more powerful rent-seekers. The Fourth Industrial Revolution can largely be defined by the digital world manipulating the physical world with self-driving cars, automation, robotics, the Internet of Things, Virtual Reality, additive manufacturing, drones, smart cities, smart infrastructure, blockchain, digital farming, biotechnology and digital health solutions. With artificial intelligence, every aspect of the economy and society will be revolutionised, and the failure to establish a domestic digital ecosystem will result in technological colonisation by foreign powers.

The International Economy: Technological Sovereignty and Political Independence

Industrial capitalism of the 19^th century linked industrialisation to nation-building as excessive dependence on foreign technology and manufactured goods undermined political sovereignty. Economic interdependence is required to increase economic efficiency and prosperity, yet the political consequence of interdependence is some loss of autonomy and some gain of political influence. States subsequently seek to manipulate the symmetry of interdependence by reducing one’s own dependence on others and increasing the reliance of others on one’s own economy.

Geoeconomics is largely about manipulating the symmetry of economic interdependence as it enables a state to increase both its autonomy and influence. Advanced technology is at the core of strategic industries, given the reduced ability to diversify, which implies higher revenue and dependence. Friedrich List aptly argued that the logic of economic liberalism for market efficiency must be balanced by the political realism of the world being divided into sovereign states: “As long as the division of the human race into independent nations exists, the political economy will as often be at variance with cosmopolitan principles”.[2]

Britain’s hegemonic strategy of the 19^th century was, to a larger extent, dependent on a monopolistic position in manufacturing, which produced high revenues and political influence. Barriers to entry, intellectual property rights protection, and anti-competitive practices can be considered rent-seeking activities in which the technological hegemon’s activities result in income. Furthermore, technological hegemony creates asymmetrical interdependence in which access to vital technology can be converted into political influence.

Britain repealed its Corn Laws in 1846, as free trade was instrumental in cementing technological and industrial leadership. Under free trade, Britain’s mature industries (high quality, low cost) could outcompete the infant industries (low quality, high cost) of other countries. Free trade was thus seen as a policy to saturate foreign markets with its manufactured goods and thus obstruct their industrialisation. As argued in the British parliament, with free trade “foreign nations would become valuable Colonies to us, without imposing on us the responsibility of governing them”.[3] David Ricardo’s concept of comparative advantage similarly envisioned that the technological competency of manufacturing would be concentrated in Britain, while the rest of the world could compete for the export of agricultural produce: “It is this principle [comparative advantage] which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England”.[4]

Alexander Hamilton’s Report on Manufacturers laid the foundation for the American System in which the government used protectionist means to industrialise as excessive dependence on Britain would undermine America’s political independence. The lessons learned from the American system were also found in Germany, largely through the work of Friedrich List, who warned against becoming Britain’s technological colony by failing to industrialise: “The mother nation supplies the colonies with manufactured goods and obtains in return their surplus produce of agricultural products and raw materials.[5]

Following the destruction of China in the Opium Wars, Japan also realized that technological sovereignty and industrialisation were required conditions for political independence. Erasmus Peshine Smith, a second-generation economic nationalist supporting the American system, served as an advisor to the Japanese Emperor in the 1870s following the Meiji restoration to assist with the development of a Japanese version of the American system to preserve Japan’s sovereignty.[6]

Russia learned a similar lesson after its defeat in the Crimean War in 1856, largely due to its lack of industrialisation. The subsequent Great Reforms starting in the 1860s eventually led to the industrial policies of Sergey Witte in the 1890s that were inspired by Friedrich List. The lessons of the past were seemingly forgotten as Russia succumbed to neoliberal economic practices in the 1990s. Under Ricardo’s principle of comparative advantage, Russia de-industrialised by exporting its natural resources and importing industrial goods. Making matters worse, the revenue fuelled a rent-seeking oligarchic class that reflected growing corruption within the country, which could be cultivated by foreign powers.

Russia gradually began to rediscover economic statecraft and reverse the energy curse by instead using its revenue from energy to temporarily subsidize infant industries until they became competitive in international markets. However, many of these policies were a response to economic sanctions and its increasingly problematic relationship with the West.

A Russian Strategy of Technological Preparedness

Russia should not embrace a policy of economic and technological autarchy that would render its industries uncompetitive, yet it should also avoid excessive dependence on foreign technologies. The overarching goal must be to balance technological sovereignty with economic liberalism.

Russia’s leading digital platforms are already Russian, and the objective should be to pursue technological preparedness. While Russia can pursue innovative leadership in certain areas, Russia should pursue a follower strategy of “technological preparedness” in other areas. Technological preparedness entails the capability to replicate and adapt foreign innovations rapidly into its domestic digital ecosystem and control its own data. Imitation is essential because it is unnecessary for every company and country to reinvent the wheel. Technological preparedness requires the technological know-how, domestic technological ecosystems, skilled workforce, and government support required to rapidly adopt new technologies and implement spin-offs.

A follower strategy has certain advantages as more resources can be devoted to implementation. A technological hegemon will seek to slow down technological diffusion and extend the first-mover advantage, while technological followers will seek to encourage faster technology proliferation. The emergence of a multipolar international system subsequently improves Russia’s position.

The guiding objective should be to develop a domestic digital ecosystem in which Russia controls a majority share of the dominant platforms. China is evidently the most important partner for Russia, although technological partnerships with other rising powers such as India would enable Russia to diversify and thus avoid excessive dependence on a more powerful actor. Case in point, Russian digital giants such as Yandex developed a partnership with foreign partners such as Uber in the self-driving car and taxi industry, which even enabled Yandex to eventually buy out Uber’s share.

Throughout history, states have sought to establish a certain degree of national control over strategic industries such as shipping, energy and agriculture due to national security. National control over digital giants is evidently an issue of national security as they transform all areas of the economy and society, concentrate wealth, and create dependencies at an unprecedented level. China is building its superpower status based on technological sovereignty, while Europe discusses digital industrial policies and nationalising AI due to its disruptive impact. The prevailing argument in Washington is that what is good for Silicon Valley must be good for America. Russia should formulate a similar policy to strengthen technological sovereignty.

This article is an edited version of my article: “Russia’s Future Depends on Technological Sovereignty” in Russian International Affairs Council (RIAC) - https://russiancouncil.ru/en/analytics-and-comments/columns/cybercolumn/russia-s-future-depends-on-technological-sovereignty/

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[1] Ricardo, D., 1821. On the Principles of Political Economy and Taxation. John Murray, London, p.469.

[2] List, F. 1827. Outlines of American Political Economy. Samuel Parker, Philadelphia, p.30.

[3] Semmel, B., 1970. The Rise of Free Trade Imperialism. Cambridge University Press, p.8.

[4] Ricardo, D., 1821. On the Principles of Political Economy and Taxation. John Murray, London, p.139.

[5] List, F., 1841. The National System of Political Economy. Longmans, Green & Company, London, p.269.

[6] Hudson, M., 2010. America's protectionist takeoff, 1815-1914: the neglected American school of political economy. Islet.