11/06/2012 03:58 pm ET Updated Jan 05, 2013

Investing in Russia, Issues with Education

One of the little-known skeletons in the closet of today's Russia is the growing "brain drain." The Financial Times recently reported that "68 percent of Russians with above-average income wanted their children to study and work abroad." The country's best are leaving. Why don't they want to stay? If this trend continues what are the consequences for the economy and political atmosphere in the country? And especially, what are the consequences for investors?

At least part of the reason is Russia's surprisingly mediocre public schools. The country at the moment is experiencing a situation that would be unimaginable in most places, a demographic "hole" in college admissions. That means simply that all Russia's secondary schools put together aren't able to create enough college-qualified graduates to fill the available seats in Russia's universities (a situation that may develop in America as the schools continue to deteriorate).

Are the kids dumb or are the schools inadequate?

In fact Russia's public schools at their core are still operating under the inertia of the Soviet era. The rest of the country may have changed, but Lenin-inspired stodginess continues to haunt the educational establishment. Just to get some perspective here: in America, the SAT counts for way more than the Achievement Tests. There's no need for peachy Achievement Test scores to get into an American college. If you have them so much the better, but the real measure of college worthiness in America is the SAT, and to get into an American college you simply have to have creditable SAT's or forget it. The American ideal is a broad, cultured education, the Renaissance man, not narrow Soviet-style training.

In Russian college admissions it's the opposite. The general aptitude test counts for little, what matters are the subject-specific tests. If a kid has a high score in Physics, he'll be able to get into an engineering school even if his general aptitude scores are dismal. They're not looking for Renaissance men; they're looking for good engineers who can help build the nation...just like in Khrushchev times.

Teacher pay is another Soviet-style holdout. To supplement their pay, teachers tutor students from other districts (never their own, it looks bad). This gives rise to a situation where parents who want to send their kids to college pretty much have to hire tutors or their kids won't learn enough to be able to get in. It also turns teachers into private vendors of tutoring service, for the sake of having a liveable income.

Dispelling the rumors that State Duma passed an "optimization" law stating that from September 1, 2013 all secondary education in Russia will be private, the head of Ministry of Education Dmitry Livanov said that the school may offer additional classes, classes for which the student will have to pay. Officials say the cost will apply only to additional classes beyond the normal coursework. But will teachers have any incentive to teach in their free time? Ceasing of state direct funding for most public institutions is inevitably going to affect all the extracurricular activities and shut down the few clubs that now remain free. If this kind of law passes, and given that according to official data 40% of Russia lives below the poverty line, slightly more than a third of Russians would not finish high school or go to college because these children wouldn't be able to pay tuition.

In fairness to Putin and his administration, we do hear a lot of talk about the modernization and optimization of the educational system, etc. As such in a recent interview V.V. said that the government intends to provide billions of rubles to modernize schools, and local governments will be able to use the savings to increase teacher salaries in coming years. The Valdai Discussion Club keeps this topic in its loop but so far they haven't provided any explanation of the academic mediocrity, nor a plan for remedying it.

From the little that's clear about Putin's present plans some things seem to be changing for the better. New broadening of the high school curriculum should minimize the Soviet-era overemphasis on physics, chemistry and biology. The school can choose a generic, liberal arts module, where all the liberal arts are covered, while specialized schools can focus on specific disciplines. "Personally, I think the amount of chemistry that I had was excessive. For people who are not planning to become professional scientists, it's unnecessary," said Livanov. Now schools have a fundamental choice, a change for the better.

The end result as of now is that the quality of work at most schools in Russia is low, and the average of education children now get is indeed very "average." But with the help of numerous tutors, and parents' money they still can get results acceptable by international standards. If this scenario of poor education continues Russia faces a frustrating future: lack of experts in a broad number of industries that are dependent on the "new blood" - the young upcoming professionals. Every investor realizes the importance of good management in the success of a venture. Therefore investing in Russia (as well as the other countries of the Eastern bloc) remains questionable and frustrating. Will there be good management?

The action plan for reforming the country should include (besides fighting corruption and strengthening the rule of law) a full blown educational reform that would reshape the priorities of the teachers, and hence improve the outcome on the student side.