Observations from Russia

By Charles Grant

On a recent trip to Russia, I found that the momentum for reform, very evident last year, has dissipated. The more encouraging news is that Russia’s leaders are trying to be civil to Americans and Europeans. In early September I was in Russia with the Valdai Club, a group of think-tankers, academics and journalists that meets Russian leaders and intellectuals once a year. A year ago, the economic crisis was biting and President Dmitri Medvedev’s schemes for ‘modernisation’ were being taken seriously. There was much talk of shifting the economy away from dependency on natural resources – and also of encouraging manufacturing and service industries, boosting innovation and R&D, and fighting corruption. Some Europeans, and the German government especially, became excited about the prospect of helping Russia to modernise.


On this visit Prime Minister Vladimir Putin was less combative than he had been in previous Valdai meetings. He went through the motions of saying that modernisation mattered, but did not engage on the subject. He talked of the need to avoid sudden changes of direction. Stability is his watchword. A number of factors may explain his relaxed mood. Last year the economy shrunk by about 8 per cent, but this year the oil price is above $70 a barrel and there is solid growth. Ukraine is not going to join NATO and is more or less in the Russian camp (this matters hugely to Russian leaders). Relations with the US are quite good, and there has also been an – entirely unreported – ‘reset’ with China.

One senior Russian official who met the Valdai Club was alarmingly frank. “During the crisis, business was mobilised to change its ways; provincial authorities tried harder to think of improving the business environment. But the economy has suffered from oil going to $70 so rapidly,” he said. “We’d have had more progress on modernisation with a slower rise in the oil price. Now we have complacency.” He said corruption had got worse. He had hoped that last year’s budget cuts would help to squeeze corruption out of the system. But this year the budget had grown again and the “shadow sector” had bounced back, siphoning money out of the economy. “The mind-set [for corruption] has now returned to its pre-crisis level.”

None of the Russian intellectuals on this year’s Valdai trip thought that modernisation would go anywhere. They believe that ‘top down’ efforts to modernise – such as giving Rosnano, a state entity, the money to build a nano-technology industry, or creating a ‘silicon valley’ near Moscow at Skolkovo – will not have much impact without broader political change.

One reason for this pessimism is that the position of Medvedev – who has always been more enthusiastic about modernisation than Putin – seems to have weakened. Conservatives never liked him, but some of them now sneer about him with open contempt. Meanwhile Russian liberals, who used to praise Medvedev, have become disdainful. This is because for all his eloquent talk about modernisation, the rule of law and democracy, he has changed so little. Medvedev has sacked some provincial governors, introduced a little judicial reform, made a start on military reform, and responded to Barack Obama’s initiative by agreeing to a ‘reset’ with the US. And that’s about it. The general assumption in Moscow is that Putin will run for president in 2012. Two terms of six years would then mean Putin staying in charge till 2024.

Some of Putin’s most powerful lieutenants show no enthusiasm for Medvedev’s plans for modernisation. Vladimir Yakunin, who runs Russia’s railways and is close to Putin, argued in a letter to The Economist earlier this month that state capitalism “simply works better” than western models. Russia’s past attempts to “reject all history and tradition, combined with the blind imitation of foreign experience, [had] impeded the country’s political and economic development for 20 years”.

For all the gloom about economic modernisation, Russian foreign policy may offer a slightly happier story. Although the oil price has picked up, the swaggering arrogance of a couple of years ago has not reappeared. Last year’s economic crisis brought Russia’s leaders down to earth with a bump. They saw that the growing disparity between the Russian and Chinese economies will be a serious problem in the long term, and that Russia needs to strengthen its position – economically and politically – by looking west. Hence the reset with the US, modest co-operation with the West on Iran and Afghanistan, the deliberate rapprochement with Poland and the settlement of the maritime border dispute with Norway.

Putin confirmed that the reset between Russia and the US still holds by saying that he found Obama “a deep and profound person whose view of the world coincides with ours”. There has also been an improvement in Moscow’s relations with Beijing. Though unreported in the press, “this is more important than the reset with the US”, according to a senior official in the Russian security establishment.

China and its increasingly assertive leaders have been a source of worry to Russia in recent years. But this year there has been a rapprochement. “We now have a relationship that is strategic, pragmatic and based on equal status,” said the official. Each side has agreed not to play off the other one against the US. And the two governments have reached agreement on some difficult issues, such as building a pipeline to take Siberian oil to China, handling the Iranian nuclear problem and co-operating on civil nuclear power. One minister who met the Valdai Club stressed the importance of integrating the Russian Far East and Siberia into the dynamic Asian economies. He saw China not only as a growing market for Russian raw materials but also as a source of investment in areas such as ships, aerospace and high-tech equipment.

Despite the new modus vivendi with China, deep down Russian leaders still fret about the growth of Chinese power. A new Valdai Club report by a group of Russian thinkers calls for a ‘Union of Europe’, including Russia, the EU, Turkey and Ukraine. The report argues that Russia (with its natural resources) and the EU (with its technology) need to get together in order to prevent a ‘G2 world’ run by the US and China. The report therefore proposes a union that would have supranational institutions and its own treaty, covering not only economics and energy but also foreign and security policy. The implication of the report is that if Russia stays on its own it will become a subsidiary of China. The Union of Europe would also help to further the long-held Russian ambition of drawing European states away from the US.

One minister took a similar line when he met the Valdai Club, saying that in the long term he favoured a single market running from the Atlantic to Vladivostok. The Customs Union that Russia has set up with Belarus and Kazakhstan was a first step to a common economic space and then full integration with the EU. But his westward orientation was rather hesitant. “Don’t try to teach us to be civilised or call us black sheep or we will react badly,” he said. “If you push us away we will want to walk away. For all our problems, we are Europe’s salvation, it needs our new blood. But if you don’t want us we will turn to the more dynamic east.”

Despite the rhetoric about integrating with Europe, few Russians are interested in the nitty-gritty of the EU-Russia relationship; the current talks on a new partnership and co-operation agreement have stalled and nobody in Russia seems bothered. There are two obvious problems with the schemes being floated for union between Russia and the EU. One is that most Europeans will not want a closer union with Russia so long as its political system remains authoritarian. The other is that many people in the EU still look to the US for their security, and would not want to join a union that would inevitably weaken transatlantic bonds.

On current trends neither Russia’s economy nor its political system is likely to undergo serious reform anytime soon. That means that China will continue to pull ahead of Russia economically, while the EU will spurn grandiose schemes for ‘union’.

Charles Grant is director of the Centre for European Reform