On Russia’s contradictory globalization path

November 11, 2006

On Friday Russia and the Unites States cleared the way for Russia’s accession to the World Trade Organization (more here). Accession negotiations started 13 years ago and have lasted almost as long as China’s (14 years). There have been delays in reaching a final agreement due to issues related to financial services liberalization and the enforcement of intellectual property rights. More generally, energy politics and other highly sensitive international issues involving Russia and the US have made talks very difficult. It seems that the last big hurdle will be approval of Russia’s entry by Georgia which has the legal right to veto Russia’s accession, and might want to use this leverage to shake off Russia’s fierce political claws.

Russia’s economic recovery since the 1998 default and economic-financial crisis has been impressive. Yet there are two views on Russia, a pessimistic and a cautiously optimistic one.

The pessimistic view says that Russia relies too much on oil and is doomed to have a crisis if oil prices collapse. The current oil bonanza slows down economic reform. Worse, the government meddles increasingly in the economy, taking stakes in so-called “strategic industries” and treats badly foreign investors in the oil industry. The state-owned world’s biggest gaz company Gazprom is not only not as productive as it could be, but is used as a political tool to pressurize neighbours and the EU. Putin’s increasingly authoritarian rule undermines the rule of law and public accountability, while growing bureaucratic rule is taking an ugly turn. Apparently such a pessimistic view seems to be represented by people like Anders Åslund of the Peterson Institute (more here).

Personally I tend to share the cautiously optimistic view of many players in Russia coming mainly from the non-oil business community I have been dealing with for about a year. Of course, business can only be optimistic about a country which has been growing at an average rate of 6 percent since 2000, and where there is a rising middle class of consumers surveyed in a beautiful feature by Neil Buckley in the FT recently. Cynics will say that democracy does not matter to business, and Chechnya even less… Yet, in the meantime, retailers such as Auchan or IKEA, automobile companies such as General Motors and Volkswagen which entered Russia to serve the local market among others contribute to Russia’s recent pick-up in foreign direct investment, which reached a record $14.6bn in 2005. It is only about 3% of Russia’s GDP and is far from the levels received by other globalizers such as China or Brazil. But this marks an increasing confidence in Russia. More importantly, capital flight is waning, and a lot of capital coming from abroad is in Russian hands. When even Russians invest money at home, this means that strong qualitative change has occurred in the country. Graduates from Western universities are also increasingly willing to return home as they see acceptable or even bright prospects in a still modest but thriving “western-style” corporate sector.

On the political and rule-of-law side of things, I think Russia is at crossroads and should be given constructive support. First, it is important to put Russia in context. Russia’s recent internal stabilization and growth is impressive when seen in historical context. Remember, the country has never really known what we call “rule of law”, not even after the rise of democracy in the early 1990s. It more or less directly went from a tsarist regime which freed serves as late as 1861 to the most cruel of totalitarian rules which sent millions to the gulag. The USSR collapsed in 1991, and despite being a formal democracy, the country plunged into economic and political chaos. Population decline, the rule of mafias and oligarchs, economic decline and pauperization, financial crisis, capital flight, etc coincided with the adoption of democracy. This context can only discredit a “democratic” regime in the average Russian’s opinion. The stability, growth and relative increase in opportunities which arose under Putin’s rule – one can debate whether it is to be put to his sole credit, but he has surrounded himself with a motivated and able economic team – this is what many Russians see and benefit from at the moment. Let me quote from Neil Buckley’s article on this issue:

“In the early 1990s our people were paupers – and it’s ridiculous to say they were free,” Vladislav Surkov, a senior aide to Mr Putin seen as the Kremlin’s chief ideologist, said recently. “When you have a car to ride in and things to buy – that’s freedom.”

… (no comment;-)).

Second, in terms of achievements, one can also have a “glass half–full” approach to Russia. Yaroslav Lissovolik, Chief economist of Russia’s investment bank Deutsche UFG talks of Russia’s “Eurasian path to modernization” and underlines that “a rules-based policy framework is emerging in the monetary, fiscal and structural spheres…”. Given the larger historical context this is already quite an achievement. Russia has only started to become more rules-based, and there is very much of a long way to go. Of course the murder of the journalist Anna Politkovskaya and how it was commented by Putin is worrying, as well as the recent murder of the deputy governor of Russia’s central bank Kozlov. He was busy cleaning up the banking sector and taking away licences from untransparent and generally crooked local banks.

Accepting Russia into the WTO is in my view a way of strengthening the reform-minded part of Russia and of the clique of Putin advisors which aim at moving forward, to the detriment of the still very strong forces in Russia, and around Putin, who oppose moves towards a more civilised political rule. Now, will Georgia’s last little resort to pressurise Russia – blocking Russia’s WTO entry – be a civilising force for Russia’s crude neighbourhood power politics?
To finish. How are prospects for real political change in Russia, as a “colour-revolution” type of change seems to be excluded?

Let me, again, quote from Neil Buckley’s recent article:

Why is Russia’s Mango-clad, Ford-driving, Egypt-holidaying middle class not becoming more politically assertive? Some suggest Russians are too busy enjoying the comparative stability and prosperity the Putin years have brought to protest about the accompanying erosion of political and media freedom.


Stephen Jennings, chief executive of Renaissance Capital, a Moscow investment bank, believes pressure for change may grow out of more prosaic, but concrete, issues. “You have a good job, you have money, you have a nice dacha, but you can’t get there because the roads are so terrible,” he says. “I think the next big wave of change will be more bottom-up. That’s why this middle-class phenomenon is so powerful.”

So, let time and in particular the Russian people do their work, and the economies of the West get their act together to become less dependent on oil and Russian gas.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: