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Putin’s Third Term: “Potemkin reform”

Posted by democratist on May 2, 2012

May 2nd 2012,

In our last article, Democratist wrote about the concept of “international society as homogeneity”: The basic idea is that states become more like each other over time because of the spread of ideas or ideologies at the international level; for example, the French revolution of 1789 popularized the ideas of nationalism, democracy and a more centralized state, which then became influential throughout Europe in the following two centuries. At around the same time the rise of the British Empire underscored the importance of science for national power through the industrial revolution.

As states compete against each other they promote ideas like nationalism, mass education, investment in infrastructure, and innovation to improve their international position: In each case the elite seeks to protect itself from the ultimate threat of military defeat through modernization.  As a result, states begin to resemble each other not only because of globalization or the exchange of ideas, but because their rulers have a vested interest in becoming more “modern” in order to protect their legitimacy at home, and compete internationally.

In many countries, this process has contributed to the adoption of democracy. In Britain for example, the extension of the franchise to the working class in 1918 can be seen, at least in part, as a reaction to the 1917 revolution, and fear of its influence on soldiers returning from the trenches by the British government.

In Russia there at least two major contemporary sources of this kind of international pressure on the state. The first is the idea of democracy itself as a form of legitimation: Internationally this pressure has grown sharply over the last twenty-five years. Domestically, it remains weak, but is growing as a result of flawed elections and government intransigence.

The second major source of pressure (and one of more immediate concern to the leadership) is the need for scientific innovation, especially in terms of military applications. This is of course not new; Russia has been trying to catch up with the west since at least the time of Peter the Great. However, since 2008 we have seen a resurgence in this issue, as it has become apparent that Russia is falling further behind.

Indeed, this problem was the main driving force behind the “Russia 2020″ programme: First outlined in a speech given by Vladimir Putin in February 2008 (i.e just before the start of the Medvedev Presidency), “Russia 2020″ suggests three alternative scenarios, in terms of the potential trajectories of Russia’s economic development;

  • The ”innovation” scenario. This presupposes the development of a national innovation system, competitive human capital, and regional development centers, and requires a comprehensive reform and investment programme.  It foresees an average annual GDP growth of 6.5%.
  • The “energy and raw materials” scenario, which is based on faster development and modernization of the extractive sector, and projects an average annual growth of 5.3%.
  • The ”inertia” scenario,” which assumes no significant improvement, and therefore forecasts an average growth rate of 3.9% per year.

In our opinion, while over the course of his presidency Dimitry Medvedev has genuinely attempted to put some flesh on the bones of the proposed “innovation” scenario (tax breaks, technology parks, abolishing import duties on high-tech equipment, trying to encourage foreign investment), over the last couple of years it has shown increasing signs that it is encountering resistance from within the ruling class.

The reason for this impasse is that many in the nomenklatura are opposed both to economic reform (which threatens their privileged positions) and even more so to the implied political changes which would be the backbone of an innovative economy.

In this regard, we consider Putin’s return to the presidency on 7th May as indicative of a broader reassertion of power by these interests, and an indication that they remain eager to avoid the potentially “destabilizing” effects of the political and economic reform required to both attract increased investment, and meaningfully achieve the “innovation” scenario.

Instead, they appear to be hoping that a continued recovery in hydrocarbon prices over the next few years will allow Russia to return to a greater emphasis on the second, ”energy and raw materials” development path, with its promise of a (still robust) 5.3% average annual growth.

They may or may not achieve this goal. But while such growth rates are impressive, especially when compared with a still crisis-ridden West, the inability to modernize which this choice implies suggests serious problems for Russia’s military capabilities: In the absence of innovation from within the domestic public or private sectors or from foreign investors, and with a continuing “brain-drain”, Russia’s aging cadre of engineers and largely soviet-era industrial base are falling behind.

As Alexander Golts wrote in Yezhednevny Zhurnal on 24th April, the leadership is now worried, “that the technological revolution sweeping the world could devalue their most important legacy from the Soviet era – its nuclear arsenal.” However, as he also correctly argues, “any serious reform in education or the defense industry “will eventually run up against Putin’s unyielding power vertical”.

Pressure from the international level is therefore increasingly making itself felt in Russia’s domestic politics: The opportunities for democratization, liberalization and innovation exist and all three are interconnected. However, the threat they pose to key vested interests make all equally unlikely. Instead we will more likely see “Potemkin reform”; pre-selected candidates for gubernatorial elections and a multiplicity of insignificant parties instead of democracy; promises, corruption and profligate spending instead of innovation.

But while you can ignore reality, you can’t ignore the results of ignoring reality: In the event that the Russian military were to face a humiliating defeat or serious setback over the coming years as a result of its increasing comparative backwardness, while growing demands for political change remain unanswered, the domestic political impact will be devastating.

Posted in Autocracy and Innovation, Russian Liberalization | Leave a Comment »

Americans, Liberasts and Russian Democracy.

Posted by democratist on April 4, 2012

4th April 2012,

In a previous article, I described the argument that Russia’s elections are “more or less” democratic as one of the “legitimating myths” of Putinism [designed to bolster the regime and keep the population in check]. Unsurprisingly, this claim upset some readers, and they made a number of counter-arguments.

Their main points were;

  • The current Russian government is, despite the fraud that took place in both parliamentary and presidential polls, broadly a reflection of the preferences and political goals of most Russians.
  • “Western” democracy is not a universal value; there are many different styles of democracy and the current system in Russia represents an “acceptable” variation on the democratic theme, in line with Russian history and cultural norms.
  • The “western” democratic model is not without its weaknesses and inefficiencies and does not solve problems such as corruption.
  • The “non-systemic” opposition is weak and divided, especially the “pro-western” liberals. Some of these parties may be dependent on American money (witness the $200 million dollars spent by the American government on supporting Russian NGOs since 2009, with $50 million more apparently on the way). Liberalization would only benefit hard-core leftists, nationalists and liberal “traitors”.

These are interesting arguments, but not without some elements which characterize the “mythologising” to which I was referring. I will deal with each in turn:

The first point is essentially true. Vladimir Putin is popular, and would presumably have won the presidential election without falsification (although the fact that falsification did occur makes it hard to be 100% sure; the assurances of opinion polls will never be good as the “real thing,” i.e. a fair vote). However, the position of the party of “crooks and thieves” is far less secure, and it would not have won the (reduced) representation it now has in the Duma without considerable fraud in December. The current government may also broadly reflect the preferences and goals of a majority of Russians but, as is the nature of politics, there is no guarantee that this state of affairs will continue indefinitely, and as Russian society evolves it seems likely that there will ultimately come a point when the majority of Russians find themselves actively opposed to government policy.

More fundamental is the question of whether “western” democracy is a universal value. From Democratist’s perspective, one of the main lessons to be learned from a (non-conspiratorial) analysis of the Arab Spring is that democracy, while “western” in origin, is increasingly coming to be seen as having universal applicability, and that “democracy” need not necessarily mean “Americanization” or “neo-liberalism.”  Recent events in the middle East have shown that the populations of countries such as Tunisia, Egypt, Libya, Yemen and Syria have risen up despite American hypocrisy on the issue of democratization. These people are demanding respect and representation for themselves in their own countries regardless of any “Freedom Agenda” or other rhetoric. Democratization is not simply an American plot (although the Americans, just like other major powers will doubtless seek to influence these processes), but is rather reflective of historical-social developments taking place in many countries, and so it is to be hoped that the polities which emerge from these revolutions will reflect the sovereignty, national character and priorities of their people.

Furthermore, the idea that the world is divided into incomparable moral blocs or civilizations has taken a huge blow over the last 18 months. While the cynics have sought to paint the Arab Spring as harbinger of anti-western Islamist autocracy, there have been significant historical-social trends in the region over the last 40 years which suggest that this will not be the case: The large majority of arab Islamists are not calling for the establishment of revolutionary islamic states, but rather the creation of a “civil state” [i.e one which, while not secular, has many democratic elements, including free and fair elections].

So, while the last fifteen years may have been witness to democratic stagnation or reversal in the CIS, on the global scale, the last two centuries (and especially the last seventy years) demonstrate the growing potency of democratic ideals, and the erosion of autocracy as a legitimate form of governance, even in “unexpected” places, and (more recently) regardless of American rhetoric: Democratist contends that a set of shared values is slowly emerging throughout the world, including democracy, human rights, the defence of national sovereignty and a belief in the benefits of economic development, even though this has taken place during a period in which some of these values have come under pressure in the United States: They may have originated in the West, but in responding to basic human aspirations and social change within the context of the spread of capitalism, their potential applicability is growing ever wider.

This brings us to the question of whether the current political system in Russia is just a variation on the democratic theme; one, moreover, which is in line with Russian history and cultural norms. This is, of course ultimately a question for the Russian people to answer, rather than any outsider, and (again) American lecturing on this issue has proved remarkably counter-productive over recent years. Nonetheless, it has to be said that there are strong arguments which suggest that the current system, while popular with a majority of Russians, does not meet the basic criteria of democracy. As an example, the OSCE ODIHR (an organization of which the Russian government is both a member and occasional participant) reports the following problems with recent parliamentary and presidential elections; technical restrictions on who was able to stand, a biased electoral administration dominated by the ruling party at all levels, the partiality of most media, and ballot stuffing on election day. It is up to Russians themselves to decide whether they feel that these problems match existing Russian “cultural norms,” and if they do, the extent to which such “norms” are worth preserving, or should be changed.

As for corruption, it is certainly true to say that no political system can eliminate it completely. However, it must also be admitted that institutionalized democracy, with a firmly established rule of law and independent legal system has proved a more effective guard against corruption than the current Russian system. By many accounts Russia is the most corrupt industrialized country in the world; Vladimir Putin’s friends from his Saint Petersburg youth and the Ozero dacha collective are worth billions. Indeed the current system is so entrenched that it may prove unreformable until a change in the political or economic situation provokes a collapse.

Finally, the question of the non-systemic opposition. Yes. The opposition is weak and divided, sometimes extreme, and possibly reliant on American money (although I still require some convincing on this point). Additionally, American calls for increased funding for NGOs are helping to stoke growing government paranoia. But on the other hand, the current system (deliberately) stifles debate and does little to encourage the development of Russian NGOs. It seems unlikely that President Medvedev’s recent changes to the law on registration of parties will make much difference to this situation. And while it might be possible, with institutional safeguards in place such as an independent legal system, “fair and balanced” requirements for the media etc, to create the basis for wider debate and eventual genuine elections, on the basis of recent history we are unlikely to see these wider structures in place anytime soon.

Posted in Arab Spring, Democratization, Domestic NGOs, Russia - US Relations, Russian Liberalization | 19 Comments »

Russia 2012: Mr. Kudrin takes a (semi) stand.

Posted by democratist on April 23, 2011

23rd April 2011,

Some fascinating statements from Russian Finance Minister, Aleksey Kudrin at a meeting of the Board of the Russian Union of Industrialists and Entrepreneurs on 21st April. These have so far received limited coverage in the Russian press, but we have pieced them together from reports in Izvestia and elsewhere.

Kudrin said he considers any GDP growth below 3% as tantamount to stagnation, and 3% -4.5% as “minor, unsteady” growth, because at less than 4.5% growth companies would have no time to update their fixed assets.

He stated the Russian economy is currently growing at about 3% and that investment growth is currently 8% - compared with the 30% annual increase he believes is required for modernization.

While the price of oil has climbed about 30% so far this year to $124 per barrel (auguring a dramatic improvement of Russia’s fiscal situation) Kudrin believes that a further increase in oil prices will have a negative effect on the Russian economy through inflation, and that petrostate model of development “has failed.”

He explained that the government has prepared several hypothetical scenarios for the economy, which include various possible price levels for oil, but in all the scenarios, the growth rate remains the same. He stated,”This is confirmation of the unfortunate fact that the price of oil, which before the crisis was an impetus for growth, is no longer such.”

Kudrin’s position is rather telling when compared with Putin’s statement to the Duma the previous day. Putin stated growth would be 4.2% this year, and much of his speech seemed to consist of assurances to various sectors of society that the state would soon lavish spending on them.

The model reflected in Putin’s speech then could be characterised as “back to 2008.” It is dependent on a continued growth in oil prices (or at least a continuation of the current price), and the distribution of the resultant wealth throughout Russian society in a nation-wide divvying up of the spoils. Despite some lip-service to technocratic modernization, there is little prospect that this is going to take place, leading to both stagnation and a continued withering of Russian industry, not least the high-tech sector, including military innovation.

In this light Putin’s position appears shortsighted – and Kudrin is strongly aligning himself with a liberalising agenda, without (as yet) openly backing Medvedev.

Will he go that far? Or is this just political manoeuvring designed to have a moderating influence on Putin? Either way Kudrin is levering himself into a more influential position which will become more evident and important as we move towards Parliamentary and Presidential elections over the next few months.

Posted in Autocracy and Innovation, Democratization, Hydrocarbons, Liberalism, Russia 2012 Elections, Russian Economy, Russian Liberalization, Russian Politics | 3 Comments »

Nomenklatura has little interest in Russia’s WTO accession.

Posted by democratist on April 12, 2011

12th April 2011,

At the beginning of the year, Democratist commented on Russia’s chances of joining the WTO, following an agreement with the EU in December 2010 which had supposedly brought accession closer to reality.

At the time we said,

“…there remains a great deal of protectionist sentiment domestically within Russia. This is best exemplified by Putin’s own attempts last year to modernize domestic industry through a renewed emphasis on industrial policy (to be funded by raw materials rents). A lack of cash seems to have put paid to that strategy for the time being, but Democratist maintains that a rise in raw materials prices beyond a certain point will likely prompt a shift back towards protectionism.”

And lo and behold! With oil heading up towards the $125 per barrel mark, yesterday’s Vedmosti reports  on a recent spot of petulance from Vladimir Putin with regard to WTO (at a conference in Saint Petersburg last Friday). Apparently, “Russia is not going to meet the demands extended to WTO members before becoming a member itself…We are not going to observe anything of the sort as long as we are not members. Period.”

But as the paper ruefully notes, in relation to Russia’s (frequently diverted) path towards possible WTO membership over the last decade; “the government of Russia and Putin himself bear at least part of the blame for the state of affairs where Russia cannot make use of any WTO advantages. As happened on several occasions already, the moment Russia approached the coveted membership, Putin pulled off something unexpected that caused a delay or detour…All speculations on how Russia is kept out of the WTO are really a smoke-screen designed to conceal the lack of genuine interest in the membership. Russian businesses keep seeing the WTO as a threat. The Russian leadership has but a dim awareness of the advantages that go with the membership but know that at the very least it will require transparency of the kind Russia is not accustomed to. There is no powerful group of interests in Russia interested in the WTO membership.”

WTO membership, and the huge boost it would imply for liberalization, is not an option unless the nomenklatura decides it is serious about economic reform. But as long as the oil price remains high there is no incentive. Why risk “instability”, when you can just divvy up the spoils with your old chums from the KGB – with enough left over to keep the proles in line, until the next crisis?

It is this old guard whose opinions count, and which will still count after the Presidential elections, regardless of whether Putin or Medvedev “wins.”

Posted in Autocracy and Innovation, Elections, International Political Economy, Liberalism, Russia & the WTO, Russian Liberalization | Leave a Comment »

Policy and innovation: A more detailed view.

Posted by democratist on March 14, 2011

March 14th 2011,

So far in our “Democracy and Innovation” series, Democratist has outlined the liberal case that innovation generally requires the development of a creative and competitive culture, which must in turn be based on democratic government and the rule of law; we have briefly explored Niall Ferguson’s argument that the command economy led to Soviet economic stagnation in the 1980′s which, combined with an unsustainable levels of defense spending in order for it to be able to compete with the (more innovative and competitive) West, drew it inexorably towards collapse;  and we’ve looked at Kolesnikov’s argument that Medvedev’s Skolkovo project will not solve Russia’s underlying problems in relation to innovation, because it does not include an element of political, or systemic economic reform.

Now let’s take a closer look at Russian government policy and its relationship to the most important internationally competitive sectors of the wider Russian economy, so as to establish a more detailed picture ofthe key problems facing these sectors, and how they have been affected by the way the country is governed.

A good starting point here is Crane and Usanov’s article “Role of High Technology Industries,” in Aslund, Guriev & Kuchins’ (Eds.) Russia After The Global Economic Crisis. (CSIS, 2010).

Crane and Usanov begin by noting that both Putin and Medvedev have envisioned increased output from high-technology industries as driving Russia’s future economic growth, and (thanks to the massive and unsustainable funding highlighted by Ferguson) that the USSR passed on to Russia a large cadre of well-trained scientists and engineers, and a highly developed system of national laboratories and research institutes, capable of building sophisticated machinery, such as the world’s first satellite (Sputnik), nuclear weapons, advanced fighter aircraft and intercontinental ballistic missiles.

However, the number of active research laboratories has fallen sharply since the Soviet period, and the aging Soviet-era industrial base still forms the core of Russia’s current high-tech industry: Software is the only substantial high-tech sector to have emerged in Russia since 1991.

Crane and Usanov’s article explores the current state of Russia’s software, nanotechnology, nuclear, aerospace and armaments industries in turn;

Software

Software has been a post Soviet success story, but is still operating on a small-scale (gross revenues of about $5.5 billion in 2008 compared with $60 billion in India). It benefits from its young workforce, low entry costs, absence of legacy assets and small size (as the government has not yet bothered to regulate it).

However, “…the greatest barrier to the development of the industry is thuggery and corruption that Russian entrepreneurs face from the police and other government officials. Bribing inspectors, tax collection agents, and the police places a substantial burden on companies…. This climate of intimidation and fear discourages entrepreneurs from expanding their businesses and puts a premium on moving assets outside of Russia.”

Nanotechnology

This field is considered a key technological priority by the government, and several well-funded programmes have been set up by the state to support it.  Russian scientists have been relatively productive in theoretical research, but performance has not been as strong at the commercialization stage of the innovation process. Russia has only produced 0.2% of the total of global patents related to nanotechnology (2008).

Nuclear

In 2007 the civilian and military sides of the industry were integrated into the State Atomic Energy Corporation (Rosatom – $11.7 billon of sales in 2008). Rosatom’s subsidiary Atomenergoprom is one of the world’s largest nuclear companies, and Russia has a  strong competitive position in the nuclear fuel cycle. The Russian state has continued to invest in R&D, funded construction of new plants domestically, and provided strong political support for projects abroad. Nuclear power and related industries are one of the few high-tech sectors in which Russia has a serious R&D base and can compete on the world market.

Aerospace

Russia remains a world leader in the production of space launchers, and now the US Shuttle has been retired, Russia’s Proton rocket remains the only well-tested rocket capable of ferrying people and heavy payloads into space. By contrast, Russian communications satellites have not been competitive internationally. Wider use of GLONASS, is hindered by inferior quality and the higher cost of receivers. Other satellites tend to be for military use only. Soviet aircraft were never competitive internationally, and there has been little improvement since the Soviet period (although a number of recent foreign partnerships may change this).

Armaments

During the 2000′s exports grew rapidly, especially to India and China (which accounted for about 70% of total sales). The Putin administration made a concerted effort to consolidate the industry by creating large holding companies. This trend has continued under Medvedev, and has had the negative consequence that prices have risen domestically, as a single seller makes it more difficult for the government to negotiate lower prices.

Conclusions 

One of the main conclusions of this study is that Russian government policy to encourage growth in high-tech industries through the creation of large state controlled agglomerates – especially in armaments, the nuclear industry and aerospace – has not been very effective, and such industries continued to account for only about 3% of GDP by 2008.

This is fully in line with what the liberal model of innovation would predict; while the Russian state is making a concerted attempt to drive innovation in many of these fields through increased funding and R&D programes, the evident lack of competition stemming from the creation of agglomerates, problems relating to corruption, the rule of law and government accountability, have had a demonstrable impact on the ability of many firms within Russia’s high-tech sector to innovate, commercialize their ideas, expand, and reach their full potential. This is having a gradual impact on the ability of many of these firms to compete internationally.

Crane and Usanov believe that those companies or sectors that are most integrated with, and open to the global economy have the most favourable outlooks; software, scanning probe microscopes and uranium enrichment. They suggest,  “The record of the past two decades indicates that future success in these sectors will depend on increased integration into the global, especially European economy. In aerospace, sales of rockets, aircraft components, aircraft design services, and the new Sukhoi Superjet have depended on collaborating with foreign manufacturers. Prospects for Russia’s armaments companies are dimmer because they remain much more insular than firms in other sectors.”

Posted in Autocracy and Innovation, Democratization, International Political Economy, Russian Corruption, Russian Economy, Russian Liberalization, Russian Military, Russian Science, Soviet Economy, Soviet Union | 9 Comments »

Democracy and Innovation: the Liberal Model.

Posted by democratist on March 8, 2011

March 8th 2011,

As many of our readers will be aware, Democratist is fascinated by the interrelationship between democracy, economic growth, and scientific innovation.

We have often suggested that autocratic rule in Russia (and its attendant corruption) is having a devastating (and continuing) impact on Russian industry and technology.

Recently however, we decided to look at this question from a slightly different perspective. Instead of saying what we think is wrong with the Russian government, and the impact this is having on Russian S&T, we decided to go back to basics a little and look at what actually it takes for a country to develop an advanced industrial economy, and a flexible, creative, inventive culture.

We have found a good general explanatory model of the social, political and cultural basis of innovation in Why Globalization Works (Yale, 2004) by Financial Times chief economics commentator Martin Wolf. We will call this the “liberal model.”

Wolf writes that the historical record suggests that the really key thing you need to promote an inventive culture is a market economy, backed up by the rule of law.

As Wolf states;

“The liberating technological changes of Promethean [i.e. technological] growth did not emerge from nowhere. They reflected a new way of organizing the economic activities of society as a whole – a sophisticated market economy with secure protection of property rights. Unshackled from the constraints of tradition and driven by hope of gain, economic actors were tied by competition to the wheel of what the great Austrian economist Joseph Schumpeter called “creative destruction.” To achieve success in their battles with their competitors, businesses have been driven to exploit the ever burgeoning power of technology and science. Within a market economy the hope of gain and fear of loss drive inventors and innovators to apply new ways of doing things, or to produce new products.”

But how does democracy fit in here?

First of all, Wolf explains that democracy has the same cultural roots as the market economy: historically, protestant culture put an intrinsic value on all individuals, and moulded them to accept personal responsibility for their actions. Moreover, this was a key factor in promoting the initial development of liberal political and economic institutions in countries such as Great Britain (although evidently the post-1945 record demonstrates that their implementation is by no means restricted to protestant countries).

As Wolf explains;

“The bedrock of a liberal society is, as John Locke argued in the seventeenth century, the right of all individuals to own and use property freely, subject to well-defined, law-governed constraints. A liberal society is therefore a commercial society. But freedom to seek one’s own way in life, outside the boundaries of caste, class, community or, more recently of gender, cannot be restricted to economic activities alone. The culture of a liberal society is, for this reason, inimical to established hierarchies of power or opinion. It is no accident that commercial societies came to consider freedom of thought and expression of great value. A merchant is a practical man who must make rational judgements about the world, not least the risks he runs…The combination of practicality, rationalism and freedom of inquiry became the basis for the West’s greatest achievement – modern science. It is again, no accident that science reached its greatest flowering in a commercial West.”

If individuals are to be free, they need protection both by – and from – the state. For individuals to enter into long-term investments (which promote strong growth and innovation) they need to be able to trust each other, and the state. The condition for such confidence is normally expressed as the rule of law. This is a key driver of both economic growth and scientific innovation.

Historically, states which were both strong and beneficent emerged from a combination of forces including regulatory competition and internal representation; Regulatory competition developed from the multiplicity of competing states in medieval Europe. But;

“Regulatory reform is not enough. An absolute monarch may still seize the wealth of his subjects or default on his debts when his dynasty is threatened. Secure freedom requires governments interested in the long-term health of their countries. The best solution is a constitutional democracy with representative parliaments – government accountable to the governed. Such a democracy must be constitutional, that is law governed. It is not enough to move from the tyranny of one person to the majority.”

So democratic (or at least meaningfully representative) government an institutional prerequisite, according to the liberal model. This form of government will be accountable and therefore have a high degree of interest in the long-term health of the country it governs.  The rule of law is another sine qua non of long-term investment, the development of a market economy, and a creative competitive culture that leads to technological innovation and the emergence of an advanced industrial base and economic growth.

Posted in Autocracy and Innovation, Book Reviews, Liberalism, Russian Economy, Russian Liberalization, Russian Science | 3 Comments »

The “Virtual Mafia State” Strikes Back.

Posted by democratist on February 7, 2011

7th February 2010,

When the Russian chapter of the Wikileaks “cablegate” story broke in early December last year, Democratist suggested that one of its key impacts was to highlight the claims made by Transparency International (TI) and others about the truly outrageous extent of corruption throughout the country (at all levels) in the Western press, and that this would have a significant subsequent negative impact on the flow of the much hoped-for western FDI into Russia over the coming months. We concluded that, “Russia surely now has the worst PR of any major country on earth.”

Well, looks like the “virtual mafia state” tag has really struck home. Why else would the FSB (directed from the top, no doubt) have chosen to expel Luke Harding, the Guardian journalist who authored the story (and many others) under his own name, when he finally attempted to return to Russia earlier today, other than because the subsequent bad press has not only had a negative impact on Russia’s image (which wasn’t in great shape anyway), but also significantly contributed to a fall in investment into Russia?

It appears that we were correct in our suggestion that Russia’s superficially dynamic image of a few years back has become so toxic that many major western companies are seeking to avoid the country like the plague, fearing an unending nightmare of kickbacks and extortion, and that Harding’s role in publicizing Russia’s failings was an important element in his final expulsion.

It remains to be seen what effect the economic trends implied by these most recent moves will have on the long-term health of Medvedev’s “liberalization” project; they could either spur it on, or encourage a return to the “petrostate” model of development Russia followed prior to 2008 if the oil price continues to rise.

It will be interesting to see what the next batch of official FDI figures reveal (and whether they match up with independent estimates).

Posted in Russian Corruption, Russian Economy, Russian Liberalization | 6 Comments »

Russia and the WTO: Not so fast, Seymour.

Posted by democratist on January 12, 2011

12th January 2011,

Last December’s agreement between Russia and the EU, and the subsequent speculation about potential accession to the WTO at some point in 2011, has prompted Democratist to cogitate upon the likely impact of international economic integration on Russia over the next few years.

While the agreement with the Europeans may have brought accession further towards reality, there remains a great deal of protectionist sentiment domestically within Russia. This is best exemplified by Putin’s own attempts last year to modernize domestic industry through a renewed emphasis on industrial policy (to be funded by raw materials rents). A lack of cash seems to have put paid to that strategy for the time being, but Democratist maintains that a rise in raw materials prices beyond a certain point will likely prompt a shift back towards protectionism.

However, while we cannot yet be fully sure that it will finally happen, the prospect of accession looks like being one of the Kremlin’s key trump cards for 2011. In the face of western investor scepticism, anger over the second Khordokovsky trial and the imprisonment of Boris Nemtsov, Medvedev will doubtless find it convenient to offer up the prospect of Russia’s eventual WTO accession as an indicator that the country is basically on the right, liberal path.

This will play well with many Western leaders as it appears to accord with liberal political theory. According to this perspective (often attributed in origin to Seymour Lipset’s 1959 classic Some Social Requisites of Democracy), WTO accession will act as an anchor for long-term reform and increase economic growth, leading to the consolidation of a democratically minded middle class. Seen in this light, the privatization program that began in Russia last year promises a lengthy pull-back by the state, and continuing rapprochement with the West as Russia seeks support for modernization.

But we might wish to refrain from opening the champagne for a second; Democratist has long argued that whether Putin or Medvedev wins the Presidential election in 2012, any liberalization in Russia will remain tightly constrained by the interests of the nomenklatura. The current government has demonstrated comprehensively over the past decade that the manipulation of public opinion is one of the few things they genuinely do well. In this regard, in contrast to the rosier expectations of some of our liberal friends, Democratist suspects it may take several decades for economic development to provide a basis for the promotion of the rule of law and a broader liberalization.

Additionally, WTO membership seems unlikely to do much to promote the diversification of the Russian economy away from reliance on raw materials without a concerted effort to tackle corruption. Given that the current regime has itself acted as an important facilitator and beneficiary of corruption since 2000, Democratist is of the opinion that change in this area will take a long time to emerge, and will face many serious setbacks. If parts of Russia’s backward (and still largely state-controlled) industrial sector start to lose out after the country joins the WTO, causing unemployment and unrest, this may also prompt a return to a greater reliance on industrial policy, or back to protectionism. 

As is so often the case, much depends on the price of hydrocarbons; Russia requires deep and potentially unpopular reforms to diversify its economy, but many among the elite seem to believe that, despite the apparent lessons of the Soviet period, the economy can be developed effectively (and painlessly) through state-led industrial policy. If the money becomes available again, this would presumably be the prefered option. However, if prices stagnate or decrease over the coming year or two, the prospects for economic reform within the context of WTO accession will be somewhat better (although they will still face resistance from elements within the elite).

Posted in Russia 2012 Elections, Russian Corruption, Russian Economy, Russian Foreign Policy, Russian Liberalization, Russian Middle Class, Russian Politics | Leave a Comment »

Russia: Counter Espionage as Foreign Policy

Posted by democratist on December 29, 2010

December 29th 2010,

Some of our readers may remember that back in September Democratist suggested the strong likelihood that Russia would need to place an increasing emphasis on military and industrial espionage over the coming years in order to compensate for a lack of domestic innovation and FDI.

We argued that such a trend is more or less inevitable, given the country’s extraordinary corruption, very little foreign investment, and historical precedence.

Democratist readers may not therefore be too surprised to hear that, in an Itar-Tass article published on 28th December, SVR Chief Mikhail Fradkov is reported as having stated,

“In the foreseeable future, the SVR’s workload will not be diminishing…the SVR provides active assistance to the task to modernize our country…the intelligence service is making a palpable contribution to the development of the national science, technological and defence potential.”

Evidently Fradkov is doing his best to pander to the expectations of both Putin and Medvedev (who is, despite his “liberal” image a keen advocate and supporter of Vorsprung durch Spionage).

Since the US-Russia spy exchange in July, Democratist has become more sceptical about the SVR’s abilities. It appears a mere shadow of the KGB’s “First Directorate” (Первое Главное Управление), has evidently been penetrated by the CIA several times in recent years, suffers from seriously lax personnel security (stemming from corruption), and is likely to face similar problems in the future.

Nonetheless, we feel that the West should do everything in its power to exploit Russia’s evident weakness in the sphere of innovation; while the opportunities to reverse-engineer Western military gadgets may be limited given Russia’s industrial backwardness, the more apparent national military-industrial weakness becomes to the nomenklatura over the next decade, the more likely we are to see calls for genuine political and economic reform (as opposed to the current sham). Additionally, a militarily weak Russia is preferable for the West, given the potential for the current regime to take on a more nationalistic and revanchist hue.

In this regard counter-espionage in relation to Russia needs to be seen not just as a function of Western national security, but also of foreign policy, and deserves a commensurate increase in attention and resources.

Posted in Russian Espionage, Russian Liberalization, Western Foreign Policy | 3 Comments »

Belarus 2010: An “internal matter.”

Posted by democratist on December 20, 2010

December 21st 2010.

Democratist is disappointed and upset, but not especially surprised to learn of the results and fallout of yesterday’s presidential election in Belarus.

Since the signing of a series of economic agreements earlier this month, the Russians appear to have decided, in the words of Prime Minister Putin that “the Belarusian leadership has taken a clear course towards integration with Russia,” and suitably mollified, their desire for Lukashenko’s ouster has fallen by the wayside - for the moment at least.

Subsequently, reading between the lines of the OSCE’s sensibly diplomatic preliminary statement (which nonetheless provoked the ire of the newly confident Lukashenko), it appears that it was business as usual for the Belarusian electoral administration over the last few days, and the incumbent has been returned to office with just under 80% of the vote, according to the highly questionable official results.

Subsequently, seven of the nine opposition candidates that stood against Lukashenko have been arrested (including one who was dragged from his hospital bed after a police beating) along with 600 of the several thousand protestors brave enough to demonstrate against this charade of an election in Minsk last night.

While the Belarusian authorities have behaved abominably in both their conduct of the election, and the violent crackdown that has followed it, the reaction of the Russian government has served to underline their own extraordinary cynicism, and more specifically, Dimitry Medvedev’s real attitude towards the democratic process to which he paid so much rhetorical homage earlier this year.

According to Reuters, when asked, Medvedev described the Belarusian elections as an “internal matter,” and did not comment on the police crackdown.  He is quoted as saying, “I hope that as a result of these elections, Belarus will continue on the path of creating a modern state based on democracy and friendship with its neighbours.”

And for all its “strong condemnation” of the fraud and violence, and demands that the opposition candidates be freed, the West is left looking weak and ineffectual, with Lukashenko and the Russians the only game in town.

For the time being then, it seems that Belarus will only change when Russia changes its mind about Lukashenko. However, real support for democratization in Belarus (or indeed Russia) in Moscow is lacking, and will continue to be so, regardless of whether Putin or Medvedev wins in 2012.

Posted in Belarus, Elections, Electoral Fraud, Human Rights, OSCE, Russia 2012 Elections, Russian Foreign Policy, Russian Liberalization | 5 Comments »

 
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