Why the EU must help Russia to reform | European Voice
Why the EU must help Russia to reform | European Voice
The price of economic meltdown in Russia would be high for the EU too.
So which is it to be? Is Russia the “virtual mafia state” in which “one cannot differentiate between the government and organised crime”? That was the description that was, according to WikiLeaks, offered to United States officials by Spanish prosecutor José Grinda González.
Or is the Panglossian view, long professed by Goldman Sachs's economist Jim O'Neill, more accurate? For O'Neill, Russia is a BRIC, one, along with Brazil, India and China, of the current and future growth poles of the world economy.
Difficulty in identifying the true Russia is not new. In 1939, Winston Churchill declared in a radio broadcast: “I cannot forecast to you the action of Russia. It is a riddle, wrapped up in a mystery, inside an enigma.”
Earlier this month a low-key EU-Russia summit ended with progress towards the goal of Russia becoming a full member of the World Trade Organization. But the meeting in Brussels on 7 December brought no certainty about when this shared objective might be achieved. Perhaps, however, we should be grateful for small mercies. After the upheavals of the past few years, after Russia's invasion of Georgia and its clumsy gas- pipeline diplomacy, relative calm is to be welcomed. Indeed, it may be something more than relative calm.
Take Russia's economy. From a short-term perspective, it is not in such bad shape, which, given the transatlantic financial crisis, is something to be grateful for. Partly as a result of the lessons that it learnt from the financial and economic disaster of 1998, Russia was quite well prepared to react to the West's financial catastrophe.
It had not simply squandered its natural resources wealth. Like Norway, it had put aside significant sums in an oil stabilisation fund and followed a conservative budget policy.
So it was able to inject a massive fiscal stimulus into its economy in 2009 as the crisis struck. Output slumped, which was not surprising given the importance of natural resources to its economy. But, despite this, and the troubles of its major trading partner, the EU, the world's twelfth-largest economy is now recovering. It was helped initially by higher oil prices but latterly, as the Organisation for Economic Co-operation and Development (OECD) points out in its latest Economic Outlook, by stronger consumption and now investment (see table).
Shrinking population
Thorsten Nestmann, an economist with Deutsche Bank Research, expects output in Russia to expand at around 4% a year over the next five years. This is well below the average for 2000-08, which was nearer 7%, and not in the same league as China or India. But Russia's population of 141 million has been shrinking (and ageing) fast, so on a per person basis its economic performance looks better – although in the longer term its horrendous demographics threaten to create huge social and economic problems.
Courtesy of the adoption of the simplistic free-market ‘Washington consensus' economic ideology, Russia evolved under Boris Yeltsin, Vladimir Putin's immediate predecessor as president, from a communist authoritarian state to one in which a corrupt and sometimes criminal oligarchy held sway over an economy dominated by the exploitation of Russia's rich, natural-resource base.
The country owes its steady economic recovery largely to its oil and gas production (which together account for more than 25% of gross domestic product). Indeed the recovery could have been stronger, but while prices have been rising, output in the energy sectors has stagnated for a decade, because of inadequate investment and long-standing inefficiency.
Natural resources alone will never provide healthy foundations for Russia's long-term growth. Diversification is essential, hence the OECD's call in 2009 for Russia to develop “a more robust growth model”.
Importantly, Russia's top political leadership, no doubt anxious about the increasing political and economic strength of its eastern neighbour China, sees the challenge. In September last year, President Dmitry Medvedev warned, in uncompromising terms, of the threats to social and economic modernisation. He highlighted corruption, alcoholism, demographic trends and what he called his country's “shameful” dependence on natural resources and Soviet-era nuclear weapons to stay “afloat”.
Some now see Russia's leaders returning to the path of reform adopted in the early years of the Putin presidency. “Kremlin rhetoric on modernisation and the privatisation plans suggest that energy and state-based authoritarianism is on a downward trend,” says Fredrik Erixon of the European Centre for International Political Economy, a Brussels-based think-tank. And Deutsche Bank's Nestmann points out that much economic modernisation can take the form of upgrading existing infrastructure and plant.
Foreign know-how
But foreign know-how is nevertheless bound to be an essential part of modernisation and industrial diversification. A business environment still so inimical to attracting foreign know-how is a potentially critical weakness, not least because it raises the fundamental question of whether Russia's leadership is even capable of asserting the rule of law and overcoming vested interests in order to implement the far-reaching reforms that are needed.
The EU, for its part, is right to keep its guard up, given the risk of political instability in Moscow. But it also needs to do all it can to support Russian reforms. It must try to prevent this troubled state from turning into a northern version of Nigeria, a country cursed by the wealth of its natural resources and the feedback loops between corruption and its oil industry. The EU would pay a high human and economic price if its eastern neighbour were to sink into disease-ridden, criminal anarchy.
By Stewart Fleming is a freelance journalist based in London.
The price of economic meltdown in Russia would be high for the EU too.
So which is it to be? Is Russia the “virtual mafia state” in which “one cannot differentiate between the government and organised crime”? That was the description that was, according to WikiLeaks, offered to United States officials by Spanish prosecutor José Grinda González.
Or is the Panglossian view, long professed by Goldman Sachs's economist Jim O'Neill, more accurate? For O'Neill, Russia is a BRIC, one, along with Brazil, India and China, of the current and future growth poles of the world economy.
Difficulty in identifying the true Russia is not new. In 1939, Winston Churchill declared in a radio broadcast: “I cannot forecast to you the action of Russia. It is a riddle, wrapped up in a mystery, inside an enigma.”
Earlier this month a low-key EU-Russia summit ended with progress towards the goal of Russia becoming a full member of the World Trade Organization. But the meeting in Brussels on 7 December brought no certainty about when this shared objective might be achieved. Perhaps, however, we should be grateful for small mercies. After the upheavals of the past few years, after Russia's invasion of Georgia and its clumsy gas- pipeline diplomacy, relative calm is to be welcomed. Indeed, it may be something more than relative calm.
Take Russia's economy. From a short-term perspective, it is not in such bad shape, which, given the transatlantic financial crisis, is something to be grateful for. Partly as a result of the lessons that it learnt from the financial and economic disaster of 1998, Russia was quite well prepared to react to the West's financial catastrophe.
It had not simply squandered its natural resources wealth. Like Norway, it had put aside significant sums in an oil stabilisation fund and followed a conservative budget policy.
So it was able to inject a massive fiscal stimulus into its economy in 2009 as the crisis struck. Output slumped, which was not surprising given the importance of natural resources to its economy. But, despite this, and the troubles of its major trading partner, the EU, the world's twelfth-largest economy is now recovering. It was helped initially by higher oil prices but latterly, as the Organisation for Economic Co-operation and Development (OECD) points out in its latest Economic Outlook, by stronger consumption and now investment (see table).
Shrinking population
Thorsten Nestmann, an economist with Deutsche Bank Research, expects output in Russia to expand at around 4% a year over the next five years. This is well below the average for 2000-08, which was nearer 7%, and not in the same league as China or India. But Russia's population of 141 million has been shrinking (and ageing) fast, so on a per person basis its economic performance looks better – although in the longer term its horrendous demographics threaten to create huge social and economic problems.
Courtesy of the adoption of the simplistic free-market ‘Washington consensus' economic ideology, Russia evolved under Boris Yeltsin, Vladimir Putin's immediate predecessor as president, from a communist authoritarian state to one in which a corrupt and sometimes criminal oligarchy held sway over an economy dominated by the exploitation of Russia's rich, natural-resource base.
The country owes its steady economic recovery largely to its oil and gas production (which together account for more than 25% of gross domestic product). Indeed the recovery could have been stronger, but while prices have been rising, output in the energy sectors has stagnated for a decade, because of inadequate investment and long-standing inefficiency.
Natural resources alone will never provide healthy foundations for Russia's long-term growth. Diversification is essential, hence the OECD's call in 2009 for Russia to develop “a more robust growth model”.
Importantly, Russia's top political leadership, no doubt anxious about the increasing political and economic strength of its eastern neighbour China, sees the challenge. In September last year, President Dmitry Medvedev warned, in uncompromising terms, of the threats to social and economic modernisation. He highlighted corruption, alcoholism, demographic trends and what he called his country's “shameful” dependence on natural resources and Soviet-era nuclear weapons to stay “afloat”.
Some now see Russia's leaders returning to the path of reform adopted in the early years of the Putin presidency. “Kremlin rhetoric on modernisation and the privatisation plans suggest that energy and state-based authoritarianism is on a downward trend,” says Fredrik Erixon of the European Centre for International Political Economy, a Brussels-based think-tank. And Deutsche Bank's Nestmann points out that much economic modernisation can take the form of upgrading existing infrastructure and plant.
Foreign know-how
But foreign know-how is nevertheless bound to be an essential part of modernisation and industrial diversification. A business environment still so inimical to attracting foreign know-how is a potentially critical weakness, not least because it raises the fundamental question of whether Russia's leadership is even capable of asserting the rule of law and overcoming vested interests in order to implement the far-reaching reforms that are needed.
The EU, for its part, is right to keep its guard up, given the risk of political instability in Moscow. But it also needs to do all it can to support Russian reforms. It must try to prevent this troubled state from turning into a northern version of Nigeria, a country cursed by the wealth of its natural resources and the feedback loops between corruption and its oil industry. The EU would pay a high human and economic price if its eastern neighbour were to sink into disease-ridden, criminal anarchy.
By Stewart Fleming is a freelance journalist based in London.
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