June 17, 2009

June 17, 2009 | Commentary on Russia

Russian Paradox Forum

Cold and rainy days at the St. Petersburg Economic Forum earlier this month followed each other like waves on the Baltic Sea. The economic forecasts pushed by Russian leaders, foreign dignitaries and gurus were just as bleak.

Russians believe this is a "W"-shaped recession, and, as President Dmitry Medvedev said, "It is too early to uncork the Champagne." Yet the forum also highlighted a deepening rift between the approaches and the rhetoric of the Russian leadership.

Medvedev and the economic reformers would like to end the 16-year-long negotiations on Russia's accession to W.T.O. before year's end and revive Russia's bid to join the Organization of Economic Cooperation and Development, the club of rich and democratic market economies. Russia today doesn't seem to qualify.

In the meantime, the "siloviki" (leaders of the military and security services) and state oil honchos, led by Deputy Premier Igor Sechin, Prime Minister Vladimir Putin's enforcer in the oil and gas sector, would rather focus on a statist, anti-American, oil nationalist agenda.

It's an agenda their counterparts from Iran and Venezuela would cheer - dumping the dollar in energy transactions; inventing a new, state-based system to regulate the oil sector worldwide (gas is state-owned in Russia) and launching a new Russian oil brand.

Both the "Medvedevites" and the siloviki at the forum repeatedly called for supranational money, such as the I.M.F. drawing rights, which would replace the dollar as a reserve currency. Russia also proposed, as a temporary measure, to launch a regional currency based on the ruble, despite the small size of the economy such regional money would serve. During the forum, Parliamentary Speaker Boris Gryzlov, a Putin loyalist, proposed that Russia launch a palladium-based coin to compete with gold.

It also appears that Russia wants to have its cake and eat it too, as it is eyeing membership in two key international organizations. At the St. Petersburg forum, U.S. Trade Representative Ron Kirk negotiated speeding up Russia's W.T.O. accession with First Deputy Prime Minister Igor Shuvalov, a Sechin nemesis; Deputy Prime Minister and Finance Minister Alexei Kudrin, another target of Sechin and the siloviki, and Economic Minister Elvira Nabiullina.

Russian global businessmen, such as steel magnate Alexei Mordashov, the owner of Severstal, who invested billions in the United States, expressed enthusiastic support for bringing the W.T.O. talks to a successful finale, since Russian investors overseas and Westerners in Russia would be better protected.

The Russian government also wants the U.S. to finally lift the obsolete Jackson-Vanick Amendment, which was passed to allow free emigration from the Soviet Union, and now precludes Russia from receiving PNTR (Permanent Normal Trade Relations ). For now, U.S. presidents waive the Jackson-Vanick year by year.

Furthermore, Medvedev and Kudrin would like to see Russia join the O.E.C.D. Herein lies the rub: Russia today doesn't fit the organization's criteria for property rights, transparency and the rule of law.

Corrupt Russian judges regularly take property away from foreigners, such as Norway's Telenor. Russian law enforcers seized shares of value investors, such as Hermitage Capital, and then banished its owner, William Browder, from Russia. Mikhail Khodorkovsky and his partners and staff are facing a second round of trials for made-up crimes.

The St. Petersburg Forum also demonstrated how easily President Medvedev can be upstaged by Putin and Sechin. Putin did not deign to show up at all. Instead, he went to Pikalyovo, a shabby corporate town all but shut down by the crisis. There, on national TV, he tore into the one-time Kremlin favorite and formerly the richest man in Russia, Oleg Deripaska.

Not only did he blast Deripaska and other "city fathers" in Pikalyovo for incompetence and greed, he threatened to nationalize their cement and aluminum plants, echoing a bill pending in the Duma to seize properties affected by the recession.

By voicing an unmistakable threat that the Kremlin may resort to nationalization, Putin directly clashed with Medvedev, who called at the forum "not to forget the freedoms which took centuries to achieve." The Russian president also said that large state-owned enterprises are a temporary anti-crisis tool, and eventually need to be privatized - something that Sechin and Putin publicly oppose.

When President Obama meets Putin and Medvedev in July, he needs to keep in mind that Russia is once again in a bind. It can go forward, to liberalization and membership in W.T.O. and O.E.C.D., or it can solidify the anti-American petro-state model.

What Russia can't do is sit on both chairs - it cannot be a corrupt petro-state and at the same time join O.E.C.D. and attract high-tech investment. Obama can do his Russian hosts a favor: He can clearly formulate what the incentives and the disincentives are in each case, and stick to his game plan.

Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security at the Allison Center of the Katherine and Shelby Cullom Davis Institute at The Heritage Foundation.

About the Author

Ariel Cohen, Ph.D. Visiting Fellow in Russian and Eurasian Studies and International Energy Policy in the Douglas and Sarah Allison Center for Foreign and National Security Policy, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation
Douglas and Sarah Allison Center for Foreign and National Security Policy

Related Issues: Russia

First Appeared in The New York Times