Russian Resilience

As Chekov once put it, “Russian life weighs upon a Russian like a thousand-ton rock,” and for today’s Russians, the times have certainly been tough. For years, the country’s famous wealth of natural resources has been the thing to pull it out of a clinch, but as its leaders move towards economic modernisation, will they be able to maintain stability? Written by Nicholas Charity.

After a period of crisis management following the global economic crash in 2009, Russia is back on form and planning its next stages of economic growth. Andrei Baklanov, Head of the International Affairs Department of the Federal Assembly’s Federation Council said: “Russia has emerged as one of those countries least affected in its aftermath,” but he cannot deny that the country has experienced a jolt to economic growth, escalating inflation and plummeting commodity prices.

Certainly, the country continues to assert itself as a world power, in terms of both its military and industrial resources, with a wealth of land and minerals and the world’s single biggest gas reserves, strengthened by the tandem rule of President Dmitri Medvedev and Prime Minister Vladimir Putin. But as the country’s leadership begins to lose its sturdy position, due to shifts in public loyalty and an increased pressure to provide political transparency, the economy faces a whole new set of challenges.

Tsars in their eyes

The post-Soviet years have seen a pattern of tenacious economic growth, especially with Putin at the helm. But this image of a powerful, resourceful Russia may now be under threat from a rise in the level of public opposition, highlighted by the recent protests in Moscow.

Many believe that any ruling political party, whether Putin’s United Russia or otherwise, would go to whatever lengths were necessary to make sure that the failings of the past were not repeated. American columnist, Anne Applebaum, wrote following the protests: “Fear of anarchy is part of Russia’s genetic code. Memories of the 1990s, when pensioners, doctors and teachers went unpaid, are still fresh.” History has certainly shown that disruption to Russian life can present dire consequences. Mikhail Gorbachev attempted to produce an open and transparent establishment in the late 1980s, with the ‘glasnost’ and ‘perestroika’ reforms. But the party was met with contempt as the Russian public were presented with the uncomfortable truth about their Soviet rulers. The communist party lost its control over the media, and severe social issues began to make it to light. Following an unsuccessful coup d’état in 1991 to preserve the old, clandestine Soviet Union, the Russian Federation saw further attempts at liberalisation with the arrival of its first democratically elected president, Boris Yeltsin.

Any high hopes that Yeltsin might have had for political and social reform fell away, as the Union began to deteriorate, with nationalists and separatists rising against him, economic turmoil and armed conflict in the Northern Caucasus. By 1993, Russia had a 49 per cent poverty rate. By 1995, the country had been brought to its knees, with capital flight causing a 50 per cent decline in industrial output and GDP. At its lowest point in 1998, with the Russian Financial Crisis, the country cried out desperately for solid leadership.

Shifts in leadership

Under the Putin reign, most conflict had ceased by the turn of the millennium. The economy quickly stabilised with an average growth rate of seven per cent between 2000 and 2009. The country recognised how important it was to be stable, and as for the crimes revealed in the spirit of ‘glasnost’ – the un-doings of the establishment had become the legacy of some old institution. Today, despite any claims against Putin’s methods, only six per cent of Russians are unemployed and the poverty rate has come down to 14 per cent, a record low since the Soviet boom times.

President Medvedev’s strong position towards a liberalised and privatised economy, therefore, has been met with polar responses. Having announced in 2009 that state corporations would eventually become stock companies, all regions of the federation were pushed to sell all non-core assets between 2010 and 2013. A revised plan was set in July 2011, unrestricted by the initial three-year time frame as the government sought the best possible price for its assets, hoping to raise an estimated one trillion rubles (US$37 billion).

“We understand that a successful privatisation, in addition to providing financial benefits, will also help Russia’s institutional transformation,” said Alexei Uvarov of the Economy Ministry, who stressed that the government had a long-term commitment to the plan and would see it through to the end. Around 5,500 state-owned businesses are now up for grabs, including OAO Rosneft, OAO Alrosa, VTB Group, United Grain Co., and 10 other resource giants. While the Kremlin is in no rush to be rid of them – OAO Rosneft represents a landmark in the scheme, with the state’s 75 per cent stake worth approximately US$14 billion – the income from privatisation will go a long way towards paying down the country’s present budget deficit.

Diversifying the economy

The resource-based economy of Russia has enjoyed the comfort of oil, gas, coal and timber in abundance – with oil and gas still comprising the vast majority of its exports. Having survived since the 1920s almost exclusively on revenue from hydrocarbon industries, the government is now moving to broaden Russia’s economic base. One of the matters that Medvedev and Putin have publically agreed upon is the need for a more diversified spectrum of technical industries.

Much of the government’s efforts have been directed towards the development of the Skolkovo Innovation Centre outside Moscow. The ‘Russian Silicon Valley’ has already attracted interest from parties such as Microsoft, IBM, Boeing and Intel for new R&D facilities, as well as Rosatom, the Russian state nuclear company. Focusing on the areas of energy, IT, biomedical and nuclear research, the intention is for Skolkovo to provide an open forum for Russian innovation.

Part of the project has led to the opening of an office in the US, placing Russian minds in forum with the world’s best and brightest. “We are bringing Silicon Valley know-how and entrepreneurial spirit to Russia to create globally competitive products and services based on cutting-edge research, while also sharing our knowledge and experience with companies here,” said Alexei Sitnikov, Skolkovo’s Director of International Business Development.

Russia’s decision to concentrate all of this entrepreneurialism and innovation into one place could be seen, however, as more of an effort to isolate it – into “top-down, centrally-planned, command-style modernisation,” as columnist Wayne Merry wrote for OpenDemocracy.net, using the example that the Kremlin had to rescind over 50 federal statues for the Skolkovo site – and the Skolkovo site alone – for this base of free-thinking innovation to take place at all.

Nevertheless, since the initiation of this project, technical industries have indeed climbed, especially in the areas of defence and IT, as Russia has risen to the same level as China and India for outsourced software development. As the second largest conventional arms exporter after the US, manufacturing in Russia is dominated by defence and aerospace, but automotive production has also benefited from Medvedev’s modernisation programme, and is primed to be a major target for investment. “The component manufacturing sector may provide significant opportunities, considering the wide gap between the current state of the sector and the expected growth opportunities,” reads a report by Ernst and Young released in February 2011, entitled ‘Getting up to speed: An overview of Russian and CIS automotive industry’.

Crude behaviour

Hydrocarbons will of course continue to have an overwhelming dominance in the marketplace for years to come, so the organisation of this market will continue to be crucial to the country’s security. There has been a call for Russia’s oil giants to create an entirely different, new formula for how the industry should operate, in a bid to make the market more predictable.

More effort is being made to import oil and gas, with a closer trade relationship with Kazakhstan, in particular. One of Putin’s first visits after last year’s election was to discuss the Black Sea Shelf with Gazprom CEO Alexei Miller. As part of a JV with BASF, EDF and Eni, Gazprom is investing e7.5 billion into the project, initiating supply to Europe by 2015.

The Russian oil industry has made a move to begin exploiting the vast deposits in the Arctic Shelf, and, in theory, the market is open for foreign participation through joint ventures. Technological developments are soon to make Arctic exploration feasible, as new generations of ice-class vessels emerge, and seismic mapping technology evolves to suit the conditions. After the failure of BP’s proposed share swap with OAO Rosneft in May 2011 – a deal blocked aggressively by BP’s pre-existing partner in the country, Alfa-Access-Renova – it was US oil major Exxon Mobil that eventually sealed an Arctic oil exploration deal with Russia’s state-owned oil firm, following an agreement signed in August last year in the presence of Prime Minister Putin. Exxon’s proposal to Rosneft exploration rights was accepted in return for assets in Texas, the Gulf of Mexico and elsewhere. The deal also represented a milestone for President Obama’s ‘reset’ of Russo-American relations, paving the way for other industries to make a similar jump.

No more red tape

The fight against corruption – another of Medvedev’s pledges – has made a few landmark developments, with changes enforced to increase penalties for serious offenders. Quite a radical change, considering that in 2009 a law was passed allowing officials to charge members of the public to speed through bureaucratic procedures. INDEM, the Russian think tank, estimated that bribes accounted for 20 per cent of Russia’s GDP in 2005, comprising a market worth US$240 billion and making politics a more prolific industry than the country’s motor trade. Issues of transparency have been particularly brutal, especially with government control of the media. Privately owned media providers have submitted to the will of the state, and only brave critics express unfavourable opinions, or even publish unfavourable facts. In the past, prison sentences have been readily handed out and the more threatening figures in journalism, such as Anna Politkovskaya and Mikhail Khodorkovsky, have met an imaginative array of ill-fates.

The government’s grasp over news sources has been somewhat loosened since Medvedev has been incumbent, with the rise of less easily controlled web-based, independent news providers. The public voice has also found more of a will to speak, with online liberty ushering in a new era of free speech and personal freedom.

Putin’s tenure in Russian politics has at least seen the economy be pushed back to the top of Russia’s priorities. “The goal we have set ourselves is to propel economic growth to six per cent,” he said to the Bus-iness Russia association in December 2011. Furthermore, after 18 years of negotiating its membership, Russia has finally joined the World Trade Organization (WTO). Andrei Slepnev, the Russian official who oversaw the negotiations, referred to it as “a victory for Russia”, giving Putin and Medvedev credit for the deal.

Membership of the WTO will mean greater and more diversified trade between Russia and the rest of the world. It also ends the anomaly that Russia – a leading oil and gas exporter as well as a permanent member of the United Nations Security Council – remains outside the world trade system. With a population of 140 million, the country is the last major world economy to join the organisation.

However, membership is also expected to shine light on the regulations and corruption that dog the Russian economy. “By becoming a WTO member, Russia will have to import certain rules and regulations,” said Ivan Tchakarov, chief economist at Russian brokerage firm Renaissance Capital, in interview with the BBC. “These will address the very issues that foreign investors usually complain about, like corruption, the protection of minority shareholders and the independence of the judiciary.”