Russia’s Untapped Potential: Beyond Hacking

Russia is not an education superpower.  What if it were? This may not be an idle question as the country seeks to bolster its international position–no less under a Trump Administration–and to counteract the perception of either being a state-sponsored hacker or geopolitical bully.

Domestically, Russia’s persistent de-population trend over the past quarter century coincides with a global shift to renewable energy and a structural shift in commodities demand which injects long-term economic pressure on its growth trajectory, regional relationships and social stability.  But there is an opening for the Kremlin to revive foreign investment activities, scientific innovation and elevate Russia’s “soft power” status:  move toward a more open, privately-funded and globally engaged education sector.

Post-Soviet Education Measures

It has been 25 years since the fall of the U.S.S.R.  Based on a 1989 census the former Soviet Union had a literacy rate of nearly 100 per cent in urban areas with 60% of children over 15 years competing secondary school and 8 per cent completing higher education with a degree.  According to the OECD, nearly 52% of high school graduates were enrolled in tertiary education by 1992.  This placed Russia well above OECD averages at the time.  Since then, the introduction of private education models for professional training and K12 schools, and a partial opening to the West following glasnost, has improved Russia’s educational performance further.

Figure 1 summarizes this comparison over the past two decades.

Notably, certain measures–such as adult literacy, primary class sizes, secondary enrollment rates–have not changed much over the past 25 years given their already advanced levels. But other trends–affordability, completion of higher education (rocketing from 8% to 54% among 25-64 year age group between 1992 and 2015) and the number of foreign students at Russian universities (213,347 enrolled, placing Russia as the 6th largest higher education system for international students)–all increased markedly.

Figure 1: Selected Education Measures in Soviet-Era and Modern Russia: 1992 v. 2015

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As a result, Russia is today among the most highly educated countries in the OECD.  Despite a recession beginning in 2015 and Western sanctions following its Crimea adventure, Russia’s economic competitiveness as measured by  the World Economic Forum Global Competitiveness Index improved to 45th position this year and the IMF is forecasting a return to growth in 2017 on the back of increased domestic demand.  Yet ask anyone if they can name any Russian companies with global influence outside of Gazprom and there is likely to be a blank stare.

This translates to education investment and activities as well.  Data compiled in the Global Edunomic Index ranks Russia as 16th out of 49 countries across emerging and frontier economies, which seems far below its potential. This is because the GEI’s latest reading has Russia scoring comparatively high on most education measures but falling behind from a foreign opportunity, policy and risk perspective.

Figure 2 sets out these comparative rankings against affordability (eg. GDP on a purchasing power parity basis) where Russia is highlighted (in yellow) behind Poland, Estonia and the Czech Republic, and has roughly the same ranking as much poorer (but rapidly educated) Vietnam.

Figure 2: GDP Per Capita PPP and Global Edunomic Index (GEI) Rankings

screenshot-2016-12-30-10-18-16                                      Source: 3/1 Global Research

 

Privatization and Investment

Lest there be any doubt, Vladimir Putin does recognize the need for education innovation, private sector solutions and the critical role of education to Russia’s future.  In 2012, Russia’s May decrees focused on raising the standards of living across Russia’s interior regions and highlighted the role educational disparities and the need to improve both the global rankings of universities and students in the provinces. But with a reduction in the current education budget for 2016-17 by 11.5%, falling university enrollments and the impact from Western sanctions, there are already calls to suspend the “privatization” of higher education.

Foreign collaboration and investment can fill the gap.  But how?

I recently completed some work on Russia that looked at potential growth areas using a small sampling (see Figure 3) of where Russia’s own investors and education entrepreneurs are moving.

They include:

In short, private education solutions directed at the professional employment market, more efficient tools to manage schools and students, online test preparation (with angles for Russians studying abroad), and edtech startup support is taking shape in Russia.  Moreover, these education ventures lie primarily outside the state sector and are focused on increasing efficiencies, student access and international collaboration.  Several emerging technology platforms such as Dnevnik.ru are exportable.

Figure 3. Selected Education and Edtech Investments in the Russian Federation

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In higher education, Russia is already the 6th largest market for international students with roughly the size of Australia’s international student enrollments.  But more aggressive moves to globalize its universities through joint or branch campuses at home and deeper online collaboration with online providers could bring benefits. Coursera, which currently runs five university partnerships in the country, offers a early test case.

Outside of its borders, Russia already has fair amount of engagement through international branch campuses in Central Asia –according to C-BERT, Russia has 18 international branch campuses of which nine are in Central Asia and one in China but no campuses in Western Europe, the US, Africa or South America–and manages numerous dual degree programs in China based on a history of collaboration beginning with the Chinese Communist Party under Mao Zedong.  But its presence in the US and Europe continues to be limited, and its home universities attract a pittance of Western students.  While China, India and Saudi Arabia accounted for over half of international students studying in the US in 2015, Russia didn’t make the top 25 source countries.

Certain collaborations have already hit self-inflicted problems. Skulkova Moscow School of Management, a private and globally-oriented business school, has created a useful template for international cooperation yet its incubation project with MIT, after a terrific start, was beset by corruption and other issues.  There has been continued collaboration between US and Russian universities despite the past few years of bilateral tensions but also moves to crackdown on “foreign funding” and influence. Perhaps the most benign segment is the K12 level, where international private schools are thriving in large cities such as Moscow and St Petersburg.  As of 2016, there were 28 International Baccalaureate “World Schools” but the increasing demand for students to be “internationally tracked” to pursue higher education studies abroad (including to the US) will most likely reach far beyond this number no matter what the government does (to find a recent comparison, look to China’s recent international K12 policies).

Caveats

There are, of course, important reasons that most foreign investors don’t know or care about Russian opportunities in the education and related technology industries: they fear the IP theft, political risk, anti-foreign bias and corruption that might come with it.  One could do worse than to read Hermitage CEO Bill Browder’s hair-raising memoir Red Notice to see why such fears can be more than justified, even by the most savvy foreign investors in Russia.  As someone who has worked across the most challenging markets for my entire career, I’m not naive to that.  Yet changes are afoot.

I would submit that ventures lying far from the security-state apparatus or strategic industries (energy, telecommunications, defense, banks) could potentially provide an opening for foreign investors if the current pendulum swings and Russia seeks to engage more deeply–economically, financially and culturally–with the rest of the world. A more confident but economically challenged Russia, with renewed US engagement from the private sector, could open the door.

International education and and related technology would be the most obvious place to start.

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Central Asia’s New Silk Road: Game Changers

“No need to listen for the fall. This is the World’s end.” — Rudyard Kipling, Kim

During a long, cold flight to Almaty in the late 1990s I sat sleepless reading Peter Hopkirk’s landmark history of the region, “The Great Game: The Struggle for Empire in Central Asia.”  My colleagues and I were about to spend the week meeting with Kazakhstan’s Ministry of Energy as well as its largest companies, all heavily armed by private security guards touting AK-47s while discussing their IPO plans in London. That alone was an eye-opener even Hopkirk would have missed. But what was unique about this trip was our informal mission, backed by the Chinese government, of introducing the idea of a vast pipeline in Kazakhstan that would reach from China’s far western Xinjiang region to the Caspian Sea. The Kazakhs at the time, fearing rather engaging China, were having none of it.

Fast forward to China’s “One Belt, One Road” initiative launched amidst much fanfare this year and not coincidentally in tandem with its sponsorship of the Asian Infrastructure Investment Bank (AIIB).   If successful, these two moves promise to have a geo-economic impact on par with China’s immensely ambitious development policy toward Africa. However unlike Africa, China’s focus on driving a renewed “New Silk Road” through Central Asia faces an already crowded field of post-colonial (and post-Soviet) military interests, natural resource competition, a resurgent and irredentist Russia, and a potential threat of IS terrorism in the region.

What is more, despite its natural wealth and historical location as a crossroads, Central Asia remains stunted by income inequality and lack of advanced educational attainment–two areas, I would argue, which hold the key to the Great Game.  This is because the success of any New Silk Road will likely require far more than the odd gas pipeline or wad of investment dollars but rather a level of development that enhances economic inclusion and can foster political and social stability, open borders, and diversified economic growth. In this sense, a single aspect of Central Asia which has been largely discounted must now be confronted: the education of its people.

Central Asia by the Numbers

To the uninitiated, the traditional concept of Central Asia is comprised of the five countries of Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan and Turkmenistan.  I’ve included Afghanistan in our analysis since it borders on three Central Asian republics and injects its own development challenges onto the region, whether they like it or not. As a failed education state, Afghanistan also serves as warning to the region about what an alternative path might look like.

Table 1 summarizes aggregate economic and education data for the Central Asian republics, centered on long-term indicators:

  • Total population of approximately 66 million people (and close to 100 million if we include Afghanistan)
  • A sizable 52.6 million people projected to be of working age (15-64 years) by 2030
  • FDI inflows of US$14.8 billion in 2013 or about half of India’s $35 billion FDI in 2014.
  • Relatively high per capita GDP (in PPP measures) of US$10,307 ($8,914 if we include Afghanistan)
  • Gini coefficients reflecting income inequality at moderate to high levels, ranging from a low of 29 for Kazakhstan to a high of  36.7 for Uzbekistan (but still lower than US levels of 40).
  • Wide variation of educational attainment and labor skills, ranging from OECD levels to rates far below India and China, but overall, lagging.

Figure 2: Comparative Economic and Education Data:  Central Asia and Afghanistan

OMore recently, and to add further urgency to what is a region in transition to emerging market status, Central Asia has fallen victim to collapsing oil prices, aborted resource investments, and economic weakness in Russia (which provides remittances and is the main export market for the region).  Under these conditions, it would be folly to believe that massive hydrocarbon projects alone will galvanize economic development without a level of education that acts as both an economic stabilizer and a key to social change, not least, to root out corruption based on resource extraction and control.

Where, then, is Central Asia heading in terms of educating its populations and what are the challenges ahead?

Early Success at Primary School Levels

Central Asia’s republics are relatively well educated at early ages. Universal primary school completion—a key indicator of future educational attainment—was reached or exceeded in most countries by 2012 and many were closing in on this goal in 2000 (see Figure 2). By comparison, Afghanistan is a failed education state with a paltry 34 and 38 per cent of children competing primary school in 2000 and 2012, respectively, not least due to the exclusion of girls.  According to one wide-ranging report on Afghanistan’s educational system in the 20th century, the number of students enrolled in 2000 barely exceeded levels achieved in 1978 and, even more distressing, remained far below the enrollments levels in the country during the more peaceful 1960s and 1970s.  Beyond Afghanistan, Pakistan and Bangladesh also face deep challenges, where only 72 and 75 per cent of children finished primary school in 2012.

In comparative terms, this illustrates that Central Asia is not the educational wasteland often thought of in popular imagination and should provide some solace to future policymakers and investors.

Figure 2: Primary Education Completion Rates by Country, 2000 v 2012

Declining Fertility Rates Put Less Pressure on Educational Systems

Supporting this early age education trend is a sharp decline in fertility rates. As I have noted in previous research, it is axiomatic that declining population pressures and less stress on educational systems can improve educational outcomes.  One study by the British Council has underscored the correlation between standardized test scores and falling birth rates in East Asia, a finding that can apply to other regions as well.

In Central Asia, Kazakhstan has maintained a consistently low fertility rate (as measured by birthrates per woman) of 2.7 times since 1990 which contributes to the fact that its educational outcomes are the highest in the region. More important are its “high-birth” neighbors which have reduced average births dramatically:  Uzbekistan, showing a declining fertility rate from 4.1 in 1990 to 2.5 in 2012; Tajikistan falling from 5.2 to 3.8, and Turkmenistan from 4.3 to to 2.4 births per woman. Contrast this with Afghanistan, which had 7.7 births per woman in 1990, reducing to an improved but still high 5.1 by 2012 (see Figure 3).

Directionally, the five Central Asian republics are primed for positive education outcomes for the simple reason that fewer children to educate equates to more potential support per child–financial, pedagogic or otherwise–and higher potential attainment beyond primary levels.

Figure 3: Total Fertility Rates: Birthrates per Woman by Country, 1990 v. 2012

Gradual Moves to Higher Education Attainment, But Uneven Success

With higher numbers of primary school graduates and lower stress on the student pipeline through moderating population size, we can expect a trend toward longer student engagement cycles and higher educational attainment through University if both capacity and affordability are sufficient.

Thus far we can see gradual improvements in Central Asia together with other, more depressing trends in tertiary enrollment rates. As Figure 4 indicates, Kazakhstan grew enrollments rapidly from 2001 to 2006 (at peak close to 790,000 students), but declined through 2010.  The country’s tertiary gross enrollment rate (GER) of 48.5 per cent in 2013 is largely in line with OECD averages and far higher than China and India, although its population size is vastly different.  Kyrgyzstan and Tajikistan are two other countries that have registered some moderate growth in tertiary enrollments. Kyrgistan is a particularly high GER of 47.2 per cent, with Tajikistan with a much lower (tough still relatively impressive) 25.4 per cent.

Uzbekistan and Turkmenistan are more problematic, with low GERs (8.9 and an estimated 8.0 per cent, respectively) and declining tertiary enrollments in the case of Uzbekistan (note that Turkmenistan does not report tertiary enrollments–never a good sign).  Moreover, Uzbekistan reported high secondary enrollment completion suggesting that a lack of capacity may be severely limiting student attainment in the country.

Figure 4: Tertiary Enrollments by Country, 2001-2012

International Mobility and Engagement Is Plugging the Capacity Gap

As in many other parts of Asia, the lack of domestic higher education capacity coupled with higher attainment levels, greater affordability and increased savings has traditionally propelled the movement of students abroad to destinations such as the UK, Australia and the US, and this is happening for Central Asian students as well, although most end up in Russia or non-Western University systems.

As Figure 5 illustrates, several Central Asian countries have increased the size of their tertiary student cohorts overseas.  Three countries are worth mentioning: Kazakhstan, which almost doubled its student abroad cohort to reach almost 44,000 annually by 2012; Tajikistan, with international students rising from 1,337 in 2001 to 9,128 in 2012; and Turkmenistan, which since 2007 has rocketed to a level of 27,959 students by 2012.

In 2014, a combined 3,203 students from Central Asia were studying at US colleges and Universities, a level however which is comparatively low and far less than even Nepal, which sent 8,155 students. Kazakhstan sent 2,102 students to the US in 2014 out of an estimated total of 44,000 students (using its 2012 data), or a mere 4.8 per cent of total.

Clearly US higher education is only a bit player in Central Asia–compared with Russia and to an increasing extent China–with significant scope for growth and engagement. Consider that out of thirteen international branch campuses in the region, all but two are hosted by Russian Universities; in Kazakhstan, all international branch campuses are Russian.  The US is seeking to remedy this strategic deficit–most recently through the launch of the American University of Central Asia and other government-led initiatives–but far more educational engagement is needed to build the level of educational capacity, and quality, that can serves the region’s future interests.

Figure 5: International Mobile (Offshore) Enrollments by Country, 2001-2012

Education Spending to Accelerate with Regional Growth

Finally, there is no reason to believe that Central Asian households will act any differently from the rest of Asia as their wealth increases and opportunities for educating their children unfold. The propensity for emerging Asia, including its poorest regions of South Asia and Myanmar, to spend a significant proportion of household income on supplemental education is well established, and an area I previously analyzed in the case of both poor and rich students in emerging economies.  

At present, two countries–Kazakhstan and Turkmenistan–are posting significant increases in GDP per capita (as measured in PPP) and at levels far above averages within Developing Asia. However the remaining populations of Uzbekistan, Kyrgyzstan, and Tajikistan lie beneath the $4,000 to 5,000 PPP “middle class” threshold and are growing from a much lower base. Differing levels of affordability will demand a more nuanced approach to the region as a whole.

Figure 6 illustrates these changes in affordability through the relative strong economic cycle ending 2013.

                 Figure 6: GDP Per Capita at PPP (Current International Dollars), 2001-13

In sum, educational and economic progress within Central Asia will not be easy but the region has a decent foundation base from primary school levels.  Country profiles differ widely, with Kazakhstan leading across many statistical indicators, including access to higher education and affordability.  The region’s reliance on Russia is unstable, if not problematic, in terms of educational needs and priorities.  Chinese investment may help to galvanize a region in need but not if it relies solely on large scale infrastructure projects.

The clock is ticking on economic and social stability in a region propped up by resources rather than human capital. Investors and policymakers who plan to travel along this New Silk Road should take note.