With a Bang, Not a Whimper
- By Roland Nash
- Feb. 22 2007 00:00
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It seems unlikely that the timing of the major reshuffle in the Kremlin power structure last week was just a coincidence. Set in the context of the recent spate of domestic and foreign policy activity, the Kremlin seems to be setting itself up to utilize Putin's popularity and the centralized political structure built over the last seven years to push forward aggressively with the Kremlin's agenda -- both official and unofficial -- in the final year of his presidency.
As with almost every major government decision in Russia today, any shift in policy is partly a reaction to expectations of a new president next March. While the consensus in the West might be that Putin is in full control of his regime's electoral destiny, there is no such consensus in Moscow. Everything remains in flux. Some pre-election fiscal largesse and the last minute reshuffling of asset control can help buy some alliances, or at least provide some financial security for those who may not have much after 2007.
But any new impetus should equally be seen in the context of Putin's longer term ambitions. In fits and starts, and with success continually stunted by the limitations of the Russian bureaucracy, Putin has pushed to restore what he sees as Russia's traditional global position and influence. In loose terms, this has involved three policy planks. The first has been to centralize authority in the Kremlin to make policy formation possible and more credible. In the Kremlin that Putin inherited, power was distributed so widely that policy commitments were simply implausible. The second was to generate economic growth commensurate with Russia's potential. The insight that a powerful Russia depended on a powerful economy, and that this would only come through the market and trade, were perhaps the most important ideas Putin took into the Kremlin. The third was that large swathes of the economy have social and political responsibilities beyond the economic. Hydrocarbons, commodities and parts of the military-industrial complex must, in the Kremlin view, be under government control and influence.
The interplay of these three strategic aims -- with all of the inconsistency and conflict between them, in the context of a weak institutional framework and an inefficient and corrupt bureaucracy -- is what drives Putin's Russia. Recent policy initiatives should be seen in this context. Some of them are simply a New Year focus on old ambitions. A renewed assault on Mikhail Khodorkovsky, the promotion of new parties and more government pressure on the hydrocarbon sector are hardly new. But much also appears to be a real shift in the underlying direction of policy. Domestically, the oil bonanza that has so far been so successfully pumped into the stabilization fund will increasingly be focused on government policy. Social spending and infrastructure investment are set to increase, financed both from the federal budget and via arm-twisting in industries under government control. Government spending and the sponsorship of selected industries will increase the role of the government in the economy.
Internationally, reflecting both U.S. weakness and Russian strength, the priority of a strategic relationship with the United States appears to have been demoted substantially. Instead, Russia is looking for partners among the emerging economic powerhouses in Asia and its fellow commodity-rich countries in the Middle East and South America. To India, China, the Middle East, North Africa and South America, the message is a call for partnership and the offer of access to influence on the global stage. To the EU, it is the usual ambiguity encouraging (successfully) a divided, and therefore largely ignorable, response. To the United States, it is a new level of provocation, popular at home, winning the respect of those countries wanted for partnership and, ultimately, believed to be relatively costless -- the major nonmilitary U.S. lever is money, and if there is one lesson learned by Russia over the last decade, it is that private money flows in a very different direction from that threatened publicly.
What is clearly not happening, despite the rhetoric in Washington, is a new Cold War. Phrases charged with this sort of historical baggage can be dangerously misleading when used out of context. The Soviet Union, with a substantially larger economy than that of today's Russia, poured 30 percent of its GDP into its military. Even after this year's expected fiscal expansion, Russia's entire federal budget is only just over half this size. Russia's total budgeted federal expenditures for 2007 are less than one half what the United States will spend on its military. Foreign direct investment last year was $25 billion and will likely rise further this year. One of Putin's major grouches is that Russian companies are prevented from investing more in the West. Russian companies in 2006 raised more money on international exchanges than any other country except China, Britain and the United States, and the number of IPOs is expected to increase in 2007. The ruble last week became euro-clearable, something that has already kicked off a new leg in Russia's integration in global capital markets. One of the central economic ambitions for Russia in 2007 is to gain entry into the WTO. International companies consistently cite Russia as one of the most lucrative markets globally. Imports have risen from $45 billion in 2000 to $162 billion in 2006. Russia has become immensely more integrated into the global economy under Putin.
Russia sees itself very much as part of the modern, global economy, albeit a country with unique assets and interests. It competes for influence and authority with the same interests and goals, in the same forums and, largely speaking, according to the same rules as many other countries. This is a very different situation from that when the Soviet Union struggled with the United States for entirely different ideological visions while the rest of the world looked on. Applying the term "Cold War" simply encourages the antipathy and withdrawal that the term itself implies.
An ambitious Kremlin in the final constitutional year of a successful presidency looks set to push forward with a wide range of political and economic initiatives both domestically and abroad in 2007. Some of these, like the expansion of fiscal policy and the promotion of trade, will be official government policy. Others, like pressure on strategic firms and the promotion of various power groups, will be less ordered. The impact will be varied, but will at least involve heightened uncertainty, a more stimulative economic policy and a more assertive foreign policy agenda.
Roland Nash is managing director and head of research for Renaissance Capital.