22nd May 2010
Rumours abound that a new, pro-western foreign policy shift is underway in Moscow. But if Russia really wants to attract European investment and American technology for the long-term it will need to implement root and branch political and economic reforms. Are the Russians really ready to play ball?
A report on two supposedly “leaked” internal foreign ministry documents which appeared in Russkiy Newsweek on May 10th has sparked off a wave of speculation about the possible future orientation of Russian foreign policy in the local press and diplomatic circles.
These documents: “A List of Criteria for the Effectiveness of Foreign Policy” and “A Program for the Effective Exploitation of Foreign Policy Factors for the Purposes of Long-term Development” – both written over the past six months, together imply a rethinking and potential realignment of Russia’s external relations.
In line with the much-discussed (but so far largely rhetorical) trend evident since Medvedev took on Presidency in 2008, the focus of both papers is the need to modernize the Russian economy, and the use of foreign policy to achieve this goal. As such, both underline the need to attract external financial investment, as well as the technological and scientific resources required for Russia’s modernization – especially from the United States and European Union.
This renewed concern with foreign relations as a path to domestic modernisation, while clearly still a matter of internal dispute within the ruling elite (indeed the “leaking” of these documents are almost certainly a symptom of these internal discussions) nonetheless reflects two serious problems that Russia needs to address with some urgency; firstly the impact of the ongoing global financial crisis on the Russian economy, especially through the effect that this has had on global hydrocarbon and raw materials prices; and secondly, a recognition that Russia is falling behind in terms of technological innovation.
With regard to raw materials, oil, gas and mineral exports currently account for 70% of Russia’s exports, making the economy hostage to price fluctuations. Finance Minister Alexei Kudrin stated on May 14th that Russia’s 2010 federal budget, including reserve fund spending, will only be balanced if oil reaches $95 per barrel (considerably above the current price of about $71). Given recent market developments, oil prices seem likely to stall or decline over at least the short-term, and perhaps for longer. As a result, The Russian government expects its budget deficit to rise to 5% of GDP by the end of the year and external sources of funds will therefore be required. Given that overall debt stands at only 50-60% of GDP (compared with 115% for Greece), Russia had little difficulty raising $5.5 Bn from its sovereign debt sale in April (the first since 1998). Nonetheless, this pattern of borrowing looks set to grow significantly as reserve funds are drawn down.
As for technological innovation, as Dimitry Trenin, director of the Carnegie Moscow Centre noted in an article in the Moscow times on 14th May, in addition to diminishing the hubris that Russia displayed in the years of high energy prices, the current crisis has awakened the leadership to the reality that Russia is losing ground in the global pecking order by falling behind in terms of its industrial, technological and scientific capabilities.
As Trenin observes “…Russia is sorely lacking what it takes to be a major global economic and political force in the 21st century. Relative energy abundance and nuclear arsenals are simply not enough. The Kremlin …[has been]… forced to come to terms with the fact that Russia cannot modernize on its own and that it needs Western investment and strong business partnerships with the West.”
But how will this need for investment and scientific know-how be translated into policy? Is Russia really willing to make the deep domestic political and economic changes necessary to make itself an attractive place for sceptical Western companies to invest, as Trenin suggests? Western markets cannot be bargained with or cajoled in the same way that Russia strong-arms other States – they will have to want to come.
However, there are a number of compelling reasons why serious reform is unlikely:
The main argument against the probability of anything more than superficial political an economic reform in Russia over the next few years is the nature of the current regime. This is essentially a reconfigured Soviet nomeklatura – more homo Sovieticus than homo economicus. The nomenklatura sees itself as having a quasi-divine right to rule and shape the country, and sought in the early 2000’s to move precisely away the “Western” template of market economics and political freedom introduced in the 1990’s – because it considered that these reforms had failed (culminating in the national humiliation of 1998) and that additionally, as many siloviki believed, that these reforms had in any case been little more than an elaborate Western “conspiracy” aimed at weakening Russia right from the start.
This nomeklatura is distinguished by its strong nationalism and desire for Russian national resurgence (as a regional power, if no longer perhaps a “superpower”) but also additionally by three significant traits  inherited from the late Soviet period that make economic liberalization and diversification extremely difficult.
- A culture of nearly all-pervading corruption and rent-seeking.
- An authoritarian concept of the State (in which the elite maintains a decisive and guiding – albeit sometimes informal – control over key aspects of the economy).
- An instrumental “end justifies the means” attitude towards ethics.
In terms of corruption and the authoritarian concept of the state, the “transition” as it has taken place in Russia since 2000 has clearly not been to democracy or liberal capitalism but to a repressive political system based on a “corporatist” economic model – with the state retaining decisive influence over key companies as a lever of both economic and political power. This includes, as the most prominent example, Russia’s largest company, Gazprom, which supplies about 17% of the world’s gas and on its own, and has at times accounted for 10% of Russia’s GDP. Gazprom has at least four cabinet ministers on its board of directors, and was chaired from 2002 until 2008 by none other than Dimitry Medvedev – who owed that position (much as he now owes the Presidency) to his relationship with Vladimir Putin. Any statements from the “liberal” Medvedev (or those surrounding him) regarding economic diversification or political reform need to be considered in this light. The recently “leaked” foreign policy documents also need to be considered in this context.
The “corporatist” or “petro-state” model, with its heavy reliance on hydrocarbons and raw materials, fits this authoritarian conception of the State neatly because it allows for an easy source of rents, which can be distributed on the basis of loyalty, and equally because it provides the State with the tools of the energy-based foreign policy we have seen deployed on numerous occasions in Eastern and Central Europe, especially since the Orange revolution in Ukraine in late 2004. While the need for reform is likely to be invoked in order to attempt to drum up foreign investment, any resurgence in the oil price above (say) $100 per barrel will initiate a fairly rapid return “business as usual” so long as the current nomenklatura remains in power.
And it is very likely to remain in th driving seat for many years to come, because the Putin regime is additionally the inheritor of the KGB’s “ethical instrumentalism” and is unlikely to cede power to anyone else anytime soon: Despite a sophisticated propaganda offensive of denial (suggesting such claims are little more than conspiracy theory, comparable to those surrounding the 9/11 attacks in the US), there is little doubt that the current regime achieved power through the mass-murder of hundreds of its own citizens by the FSB in September 1999, as well as through the subsequent resumption of hostilities in Chechnya as a platform to generate support for Putin in the 2000 Presidential elections. Such a regime is unlikely to encourage its own marginalization by the introduction of genuine democratic reforms.
Indeed, over the last ten years, progressive presidential, parliamentary and (most recently) local elections have been marked by a worsening tendency towards fraud. As a result, the key political institutions required for meaningful economic liberalization and the attraction of Foreign Direct Investment – free elections and a free press (to fight Russia’s truly monstrous corruption), the rule of law, and the guarantee of property rights – are largely absent in the contemporary Russian case. The Kremlin has instead assumed (despite the apparent lessons of the Soviet experience) that it is able to manage the social and economic development of the country from above without any requirement for these constraints. So far, the economic crisis has only resulted in a tightening of already severe domestic restrictions – as was evident from the extraordinary level of outright falsification in the 10th October 2009 local elections.
Instead, the instincts of the siloviki are almost always to maintain and extend power and control as far as possible in both political and economic spheres. The history of the regime since 2000 has been one of continual centralization of both polity and economy. In fact, there has been no meaningful diversification of the economy since 1998, despite repeated promises that it would take place, and the period since 2003 has seen the re-nationalization of much of the raw materials and other “strategic” sectors.
While recently the Kremlin may have appeared to be considering the possibility of a fresh round of (vaguely defined) “reform” - with a diplomatic charm offensive (purporting to show how Russia has “changed”) due to take place over the summer, allowing genuine liberalization would potentially allow the development of alternative centers of power to the corporatist state. This raises the specter of, (for example) a revival of independent-minded oligarchs operating outside of the current structures (the “Yukos” effect), or the growth of a critical mass media, or of genuinely reformist political parties gaining seats in the Duma in an un-rigged parlaimentary election in late 2011. Therefore, real reform is most unlikely. Instead, the nomenklatura, is more likely to decide that the best available current strategy is the superficial invocation of the need for change through the offices of the “liberal” President. This will hopefully drum up some additional investment from the more gullible sections of an overly eager West while they wait for a resurgence in commodity prices.
 This section draws on work by the late Professor Fred Halliday of the LSE http://www.opendemocracy.org/article/what-was-communism