Strategic Asia 2009-10: Economic Meltdown and Geopolitical Stability

Russia and the Global Crisis:Consequences of Delayed Reform

executive summary This chapter examines the effect that the global financial crisis is having on Russia’s economy, internal stability, and foreign policy. main argument: The 2008 credit collapse has hurt Russian markets due to the weakness of domestic financial institutions and the lack of industrial restructuring. This crisisisthreateningnotonlytheresourcesthatfundRussia’spowerprojection ability but also Putin’s “grand bargain,” in which society exchanged basic freedoms for economic stability. The economic reforms needed to weather this storm are, however, inherently destabilizing: freeing entrepreneurial energy, creating a meritocracy, leveling the playing field for businesses, and giving voice to the creative role of new capital formation will inevitably cost the entrenched interests that feed off Russia’s considerable resource wealth. policy implications: • If there is a long and deep global recession and energy prices sink near historic lows, the need for reform will become more obvious and the cost of such change much greater. Prolonged economic stress will lead to political polarization, making cooperation with the U.S. on strategic weapons, trade, nonproliferation, the environment, and other issues more difficult. • If the recession proves to be brief and there is a strong rebound, Russia’s leaders are likely to simply return to the status quo, putting off reform. • If global recovery is moderate, and energy prices stay at historically elevated levels, dissension and infighting among groups seeking to interpret the lessons of the crisis will lead to heightened and prolonged polarization. In this environment, Russia’s rulers will focus on survival by taking measures to minimize social unrest and conflicts between power blocs and to maintain major economic entities. Russia Russia and the Global Crisis: Consequences of Delayed Reform Steven E. Halliwell Russia finds itself on the horns of a dilemma of historic proportion. In order to recover as an industrial and military power and participate in world affairs, it urgently needs to reform its financial and economic institutions. Those reforms, however, are inherently destabilizing: freeing entrepreneurial energy, creating a meritocracy, leveling the playing field for business, and giving voice to the creative role of new capital formation will inevitably come at the cost of entrenched interests that prefer to feed on the country’s considerable resource wealth. Russia’s natural resources—oil, gas, metals, and forests—have provided the basis for economic recovery from the chaotic transition of the Yeltsin years. Fueled by surging global commodity prices throughout Vladimir Putin’s presidency, the government used export revenue to fund Russia’s extensive security and administrative apparatus as well as to promote the economic recovery of the country. Russia stepped confidently back into the global arena, making its presence felt in the former Soviet republics, regional security discussions, meetings of the group of eight (G-8) and group of twenty (G-20), and bilateral relations with the United States. Putin’s “grand strategy” for Russia—the reassertion of Russia’s influence in the region and the world—and his promise of greater wealth domestically could only be sustained if commodity prices stayed high indefinitely. Once the worldwide bubble burst, however, Russia’s economic prospects—and with them, Putin’s political message—became at risk. Steven E. Halliwell is Co-founder of River Capital Management, a New York–based investment management firm specializing in Russia and the former Soviet Union. He can be reached at . 168 • Strategic Asia 2009–10 The economic downturn has also brought the problems with Russia’s economy to the fore. Russia’s identity as a member of the G-8 club of marketbased economies is hard to justify, given the country’s outdated industrial base, authoritarian regime, and weak financial system. China, India, and Brazil, for instance, have each embarked on building a modern industrial economyand,withit,amiddleclass.Russianincomeshaverisendramatically and fueled the creation of a consumer culture, but lack a modern financial or industrial base. Russia still imports much of the country’s consumer and technological needs and sells basic commodities to pay for them. For U.S. policymakers, Russia will present serious challenges in the years ahead as the urgency of reform to the Russian economy becomes unavoidable. The global economic crisis has made clear how tentative and vulnerable the new order is, and it will be difficult to develop and maintain a dialogue with the Russian leadership on a wide range of issues as long as this leadership denies the need for thorough reform. Polarization within the elite is likely and will heighten inconsistency in the political...