December 26, 2008

Russia Profile Weekly Experts Panel: Russia in The Year 2008

Introduced by Vladimir Frolov

Russia Profile

http://www.russiaprofile.org/page.php?pageid=Experts'%20Panel&articleid=a1230319163

Contibutors: Stephen Blank, Ethan S. Burger, Eugene Kolesnikov, Andrei Tsygankov

2008 started well for Russia. It began with a seamless transfer of power, a new young president talking of liberalization and the rule of law, and an economic boom backed by record oil prices. Russia was an “island of stability” against the U.S. sub-prime mortgage crisis, and the Government announced the most ambitious infrastructure programs seen in decades. But things have changed. A war in Georgia in August changed relations with the West, oil prices and the stock market have both tumbled, and the economy has been battered by the global economic crisis. Our experts look at what this tumultuous year meant for Russia – and where it is going in 2009.

As the year 2008 draws to a close, it is logical for our Experts Panel to look back on the developments of 2008 and the way they affected Russia and its relations with other states.

The year started with great expectations for Russia’s future as the Kremlin engineered a seamless political transition from the highly popular President Vladimir Putin to his hand-picked successor Dmitry Medvedev, who then quickly appointed Putin his powerful prime-minister.

Medvedev came to power pledging to implement Putin’s Plan – a strategy of rapid economic development until 2020 that would have weaned Russia from its dependence on exports of oil and other commodities and made Russia’s economy innovation driven. Significant investments in critical industrial and transportation infrastructure, in healthcare and the education system were planned. A war on corruption was declared and sweeping anti-corruption legislation passed. Finally, Medvedev began positioning himself on the world stage as an open-minded, progressive leader the West could do business with.

Then, on August 8, Georgia’s President Michael Saakashvili recklessly invaded South Ossetia, testing the resolve of the young Russian leader. Medvedev, faced with the choice of accepting international and domestic political humiliation or rolling back the Georgian army, responded with an overwhelming show of force and sent the Russian Army into Georgia proper to destroy Saakashvili’s war machine. He then moved rapidly to extend Russia’s recognition of Abkhazia and South Ossetia as independent states, prompting a wave of international criticism of Russia.

All of a sudden, instead of focusing on a modernization agenda, Russia was facing international isolation and enormous pressure. 

Almost simultaneously with the war with Georgia, an international financial crisis, brewing on the American shores for quite some time, has finally reached Russia.

In September-October 2008 Russia found out the hard way the truth in the old saying that if anything can go wrong, it will. The price of oil dropped over 60 percent in less than three months from the high $140 a barrel in July to less than $40 a barrel in December, sending Russia’s trade balance, the current account and possibly its budget into deficits. The ruble plunged 20-25 percent to the dollar and even more so to euro, depleting the Russian Central Bank’s reserves.

The nation’s stock market plunged 75 percent from the record high in May, destroying billions of dollars in wealth.

International credit markets froze and some of Russia’s leading companies were facing margin calls on their corporate debts prompting the government to rush to their rescue.

It appears that the Medvedev - Putin government initially underestimated the severity of the crisis and its full impact on Russia. Initially the government tried to wish away the problem by restricting a public discussion on the crisis and emphasizing its “American origin”. But as the Russian banking system found itself on the brink of collapse as people rushed to withdraw their deposits and covert rubles into dollars and euros, and as the industrial sector began to grind to a halt without access to credit, it began to dawn upon the Kremlin that Russia was much more vulnerable to the global slowdown due to its heavy dependence on commodities exports than previously thought and that the accumulated financial reserves might not be sufficient to last through the crisis and the collapse of the commodities markets.

In December, Russia’s economy officially entered into recession, as output in some key sectors dropped 20-30 percent. Rosy forecasts of Russia’s economy growing 6-7 percent in 2009 gave way to optimistic scenarios of zero growth to gloomy prognostications of a 15 percent negative growth rates.

The Kremlin is facing mounting social tensions and even the prospect of mass protests by people pushed into rising unemployment and mortgaged housing foreclosures.  However, its political response to the crisis has been to push through dubious constitutional changes that extend the presidential and Duma terms in office to six and five years respectively. The move quickly raised expectations that Vladimir Putin might be planning his return to the presidency.
The year seems to be ending quite badly for Russia with its economy in recession and its finances strained by the crisis and the drop in oil-prices.  Why has such a reversal of fortunes become possible, while only six months ago the future looked so bright? Was it inevitable? Or is the country’s leadership guilty of negligence and failure to anticipate crisis and then correctly assess its likely impact on Russia? If the latter, who is more to blame? Putin or Medvedev? With the economy much worse than a year ago, how is Russia fairing in foreign policy at the end of 2008? Has its international position become stronger or weaker as a result of the war with Georgia and the impact of the financial crisis? Is Russia today more feared or more respected in the world? What is in store for Russia in 2009? Will it weather the storm and emerge from the crisis a stronger nation with a more efficient and diversified economy, or will it slide toward more economic uncertainty and political instability?

Andrei Tsygankov, Professor of International Relations and Political Science, San Francisco State University, San Francisco, CA:

Russia has had a difficult year, during which its model of development and international strategy has been challenged internally and externally. Although it has become stronger, Russia is only modestly successful relative to challenges rising ahead. It is catching up with some European economies, but is unable to narrow a widening gap with China and India. Russia has progressed in some areas, but continues to stagnate or fall behind in others. Key tests of the Russian model will come in the next couple of years, when it may be strengthened or undermined by the pressure of the global recession.

Internally, Russia reformed its political system by introducing a formally dualistic power structure with Dmitry Medvedev as president and Vladimir Putin as prime minister. The new system may become an important step in the direction of forming an ideological consensus and integrating within the elite circles pro-Medvedev moderate liberals, who place a greater emphasis on civil society and rule of law, and pro- Putin conservatives, who are concerned with preserving stability, governance and independence.

Externally, Russia was challenged by Georgia’s decision to use force against South Ossetia and the rapidly spreading global economic crisis. Georgia’s behavior in the region encouraged by its powerful patrons in the West made it imperative for Russia to reinforce its military presence in this critically important region. Procrastination with recognizing South Ossetia and Abkhazia would have increased international pressure on Russia to replace its peacekeepers and lose a strategic presence in the Caucasus.

Russia’s response to the economic crisis has indicated the Kremlin’s overconfidence regarding its economic model and energy reserves. Some elements of the Russian model, such as assertion abroad by heavy borrowing from foreign banks, must now be reevaluated, but the model itself should not be surrendered to the advocates of political decentralization. Much of the crisis is not of Russia’s making and should not be blamed on it. The emphasis on the state’s role in initiating economic projects and strengthening integration with European markets remains vital and should not be abandoned.

Russia’s main losses are in the area of soft power. Russia continues to be viewed by Western nations as a corrupt power with no principles of its own, and the Kremlin’s strategy remains poorly understood. Part of this is not Russia’s fault, but the other part has to do with the Kremlin’s inconsistency and inability to explain its objectives. Examples of such inconsistencies include recognizing the independence of Georgia’s breakaway provinces, but not Kosovo, or supporting friendly political forces in the former Soviet states, while attacking the United States for funding the colored revolutions. Russia must also be clear in how far it may go in defending what Medvedev introduced after the war with Georgia as Russia’s “privileged interests,” and how such defense may correspond with the overall strategy of normalization.

Ethan S. Burger, Adjunct Professor, Georgetown University Law Center & Scholar-in-Residence, School of International Service, American University, Washington, D.C. :

2008 has been the year when Vladimir Putin discovered that as prime minister, he could hold onto political power while the Russian population and foreign leaders would acquiesce (despite any misgivings they might possess).  He largely achieved his goal by ensuring at rather minimal costs that his successor would be his reliable and weak protégé, Dmitry Medvedev, and by ending the State Duma's independence -- thus eliminating the existence of party politics, as that term is largely understood.  Only faint complaints could be heard -- in large part since domestically persons holding such views had no access to the media and were politically isolated.  Abroad, Western Europe's energy dependence on Russia, the United States’ preoccupation with other matters (foreign and domestic), and Russia's newly-found economic clout kept criticism of Russian domestic policy to a low murmur.

At the beginning of the year, Putin's laudable economic and social plans seemed feasible (albeit unlikely to be implemented in an efficient manner).  President Medvedev seemingly appreciated the need to reduce the arbitrary nature of state power by speaking candidly about the country's corruption problem and laying out plans for combating it.  Granted, having a written program is not the same as being able to implement it -- if this were to come to pass many compromises would have to be made including his objectives timings and intensity -- but each journey starts with a single step -- and Medvedev is a young man.

Unfortunately, the world financial crisis made both prime minister Putin's and president Medvedev's plans unachievable in the near-term - if ever.  Thus, we will never know whether they indeed possessed the capability and determination to bring to fruition either individual's declaratory goals.  Even if they did, the question would remain whether they would be done in an equitable manner - only the naive would answer in the affirmative.  At present, Russian economic, sociological and political trends do not augur well either for the Russian people or the country's neighbors.

Granted, when the 180+ national governments assess whether their countries' citizens are better off today than at the beginning of the year, few are likely to believe that from a human or material perspective that this is so.  Russia had been having a good year until world energy prices fell and the decision to use force against Georgia occurred.  Of course, things could have been a lot worse.  Russia has not experienced any major catastrophes such as a new Chernobyl or the equivalent of a Hurricane Katrina.  Life is certainly better in almost any place in Russia (bar Chechnya) than in Congo, Darfur or Somalia.  The Russian government is not engaged in two unpopular wars abroad or trying to understand how a well-respected financier could have operated a Ponzi scheme that caused people and charities to lose $70 billion.

What is important is not how foreign citizens judge Russia, but how Russians judge themselves.  Over time, they have come to expect hardship and have cynically tolerated corruption as a fact of life.  While personal income has seemingly declined and there is a greater concern about street crime, in the long-term Russians genuinely expect their lives to get better.  While not approving of all their government's policies, they generally have faith in it to weather the storm and keep the country on the right course (albeit after some detours).  The concerns of intellectuals such as Gary Kasparov, Masha Lipman and Lilia Shevtsova are not the primary concerns of Ivan Ivanovich Ivanov and his friends.

Russians (as with most peoples) place a high premium on stability in their lives. The Russian political leadership appreciates this fact and so long as it does not demand great sacrifices of the population, should maintain its hold on power.  The leadership benefits from the psychic value Russians seem to enjoy now that their country is again regarded as a player on the international stage (and although not a "great power," it is a regional power worthy of respect).

Also on the positive side, the country's infant mortality rate has dropped and its birth rate has increased.  These developments, however, are offset by an on-going brain drain of some of the country's best educated individuals (estimated to be about 400,000 in 2008) and a genuine concern about the health and safety implications of the release of violent criminals who spent much of the last decade in prison.  Also troubling to many Russian citizens, particularly those who are not ethnic Russians, is the continued unwillingness of Moscow to decentralize political power and the growing power of the radical right in the streets.

In the long-term, it is the winners who write history.  Thus, any sense that the Russian political leadership has that it has succeeded in Georgia (Abkhazia & South Ossetia) and Chechnya is likely to be altered by future events.  But neither situation is likely to have much of an effect on Russia's relations with countries of the near abroad (particularly, Ukraine) and the NATO states so long as Russia stops seeing its energy exports as a tool for rewarding friendly countries and punishing those that criticize them.

Professor Stephen Blank, US Army War College, Carlyle Barracks, PA:

There is no doubt that the Russian government did not conceive of the possibility of a recession or even slowdown in growth and that its initial reply, even in some respects, today, has been one of denial.  Furthermore the recession will almost certainly not be a brief or shallow one but rather a protracted and painful event.  This again owes much (though not all, after all this is a global phenomenon) to the failure to continue with reforms launched by Putin and Kudrin in fiscal policy. 

Russia did not diversify its economy to produce competitive industrial goods or services; it did not create auspicious conditions for foreign investment, quite the opposite.    Rather than move toward a rule of law that would guarantee property holders and create favorable conditions for entrepreneurs, the regime resorted to corruption, extra-judicial persecutions, autarchic reliance upon energy used for political purposes, and neglected infrastructure. 

Russia only belatedly awoke to the need for investment in its human capital, education, health care and science and technology.  The ensuing result of a rent-seeking elite, ever greater nationalization of the "commanding heights" of the economy, excessive reliance upon energy and other commodities and failure to invest properly have led to a situation where the reply to the crisis has been to bail out inefficient oligarchs and take ever-greater central control of the economy lest foreign creditors (who have to answer to market forces) take over heavily leveraged firms.  These Russian state behemoths are inherently inefficient and suboptimal responses to the crisis, suggesting that recovery will take longer than necessary and not reach optimum targets. 

Worse yet the obsession with great power status  has led the regime to  emphasize the bailout of inefficient defense industries and to refuse to cut defense spending, two more reasons to believe that the recession will be sharp in its effects.  Not surprisingly the political response has been to intensify police controls, extend the president's tenure, and prepare for repression of the expected mass unrest.

In foreign policy it is quite clear that, as The Economist writes, Russia gained nothing form the Georgian war that it had not already acquired, but lost a great deal more despite its battlefield victory. 

The geopolitical consequences of this war, coupled with those of the recession are very negative.  Russia will not be able to spend vast sums or count on doing so based on energy prices, and may find it difficult to supply its home market, let alone foreigners, as it is already talking about cutting oil production. If China, as expected, comes out relatively better than do others, this will only aggravate Russia's inferiority vis-ŕ-vis China and the problems of the Far East - another failed project. 
At the same time the most recent arms control proposals to Washington suggest that Russia now realizes it cannot sustain the burden of military rearmament, but is approaching Washington from a posture of intense and frozen mistrust and suspicion. 

Increasingly, Russia is likely to find that it cannot have a dialogue with Washington yet obstruct it in Europe, Iran, Latin America, and elsewhere if it expects to recover from its domestic  crisis.  Indeed, greater autarchy and isolation may be seen in some quarters as the answer to the crisis, this being a course leading to totalitarianism.  Alternatively the only other course is reform from the top that generates a corresponding burst of autonomous economic and social action from below that can regenerate the economy.   2009 will be a fateful year for Russia.

Eugene Kolesnikov, Private Consultant, the Netherlands:

The Year 2008 will be remembered in Russia as the next turning point, similar to if not more significant than 1991, when the Soviet Union disbanded, 1998, when the Russian financial system collapsed, and 2000, when Putin came to power. Just a few months ago it seemed that the devastating crisis into which Russia submerged after the demise of the Soviet Union was finally over. Russia reemerged as a confident, globally important, socially stable and dynamically developing country. The Russian leadership had a clear and feasible plan to get the country to a new level of modernity, dignity and prosperity. Russia only needed 20 years of undisturbed development, as President Dmitry Medvedev almost superstitiously pleaded.

Well, it is clear now that Russia will have no such luxury. Yet again Russia is sinking into a crisis.  In the most optimistic scenario the economic downturn will bottom out within a couple of years and it will take Russia another two to three years to get back in economic terms to the level of mid 2008. And an optimistic scenario is what it is: optimistic. In a more conservative scenario Russia will have to suffer through economic pains much longer. In any case, crisis management will be the hallmark of the current presidency of Dmitry Medvedev and quite likely of the next presidency as well.

 The response throughout the world to this enormous systemic crisis of capitalism is largely the same: more state regulation, more direct state involvement in the economy, partial nationalization of the banking and other sectors of the economy and growing protectionism. Social discontent and unrest throughout the world, including the West, is going to flare up as well. How will the political systems of the West and the developing world respond to the new challenges? How will Russia respond?

The trend for Russia is quite clear: an increasing role of the state, contraction of liberal capitalism and continuous crisis management. The risks that Russia will face are daunting: ineffectiveness of economic policies that erode the economic foundation of the state; emerging social instability; revival of inter-ethnic tensions; potential regrouping of the West against an economically weakened Russia; and  resurrection of all sorts of political opposition, a la Kasparov and Kasyanov, invigorated by the scent of trouble.

2008 will be remembered as the starting point of either successful or disastrous management of this quickly-widening crisis. It is not yet clear whether the Russian leadership will find the wisdom and courage to implement transformational economic policies of internalized growth fueled by massive state-driven investment and intervention, or whether it will continue to manage the crisis on the assumption that it will blow over and the country will be able to return to implementation of the original plan. It is not at all certain whether Russia will strike a new balance between democratic accountability and the inevitable increase in the role and authority of the state, or whether it will descend into authoritarianism. There is no guarantee that Russia will be able to effectively cope with the social discontent arising from high unemployment and a decrease in real incomes across the board. We can only hope and pray that Russia will get through this calamity shocked and transformed but not damaged, and we will remember the year 2008 as a transformational year in a positive sense