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Analysis & Opinion
25.06.10 Medvedev Promises Change To Believe In?
Introduced by Vladimir Frolov

Contributors: Vladimir Belaeff, Bruce Bean, Ethan Burger, Eugene Kolesnikov

President Dmitry Medvedev, delivering a keynote address at the annual economic forum in his home town of St. Petersburg last week, told the world’s business leaders that Russia has already changed for the better and that it is serious about economic reform to secure a boom in foreign investment to modernize its economy. He also reshuffled the state’s informal hierarchy of adjectives, for the first time putting “flexibility, adaptability” ahead of the “stability” favored by Prime Minister Vladimir Putin. Does this signal a political reform to go alongside the economic change? Is this really change one can believe in?

“We are truly modernizing Russia. The changes take time but it will happen….Russia understands the tasks ahead and is changing for itself and for the rest of the world… Russia needs a genuine investment boom,” said Medvedev. He announced that from 2011 Russia would abolish capital gains tax for long-term direct investment in a bid to lure funds to reduce the economy's energy dependence and subdue speculative capital. “We understand that international competition is the decisive stimulus for our modernization…Russia should become an attractive country to which people from the whole world will come in search of their dreams,” he said, promising more relaxed visa policies for qualified foreign businessmen working in Russia.

Medvedev announced that he had signed a decree that would cut fivefold the number of firms deemed “strategic” and in which the state is obliged to own a stake, opening the way for broader participation of foreign companies in the country's top companies. “No matter how many state-owned companies we have, modernization will happen, above all, through private businesses, and only if there is competition…The state should not tear the apples from the tree of economics. What the government should do is help to grow our apple orchard, develop our economic environment,” he said.

Medvedev also called for the creation of a new investment fund focusing on modernization, where state cash will be supplemented by greater sums from the private sector. He also promised to send the best Russian students to leading Western universities to get inculcated with the Western culture of innovation and entrepreneurship. “Flexibility and adaptability are words that have become much more popular than stability and predictability,” Medvedev said.

This was basically all he said about political reform in Russia. Medvedev steered clear of this critical aspect of Russia’s modernization, focusing on tax breaks and financial incentives to Western companies. But by putting flexibility and adaptability above “stability” he tacitly acknowledged that his predecessor’s recipe for Russia’s development, based on a tightly controlled political process, has run its course and is no longer responsive to the new challenges Russia faces.

Is this really change one can believe in? Does Medvedev’s program of modernization now look credible? How can Medvedev’s “flexibility and adaptability” trump Putin’s “political stability?” What kind of political reforms may flow from this? What should be the West’s proper response to Medvedev’s promise and claim of change?

Eugene Kolesnikov, Private Consultant, the Netherlands

Modernization, defined as rapid technological advancement and fundamental structural changes in the economy and society, is a geopolitical phenomenon. It requires internal mobilization of resources and favorable external circumstances. If external circumstances are not favorable, extreme internal effort is necessary.

The Soviet Union succeeded in modernization by extreme mobilization of internal resources in the face of an unfavorable geopolitical environment. The United States modernized in the hugely favorable circumstances of World War I and II, followed by the benefits of the dominant position in world affairs it until recently enjoyed.Western Europe’s modernization has been a function of its prevailing position for centuries, followed by American support during the Cold War. Japan, Taiwan and South Korea managed to modernize due to the decisively favorable policies of the West in the face of threats posed by the Soviet Union. China has been able to advance technologically because the United States allowed its industry to migrate there, in part as a means to counter the might of the Soviet Union.

What geopolitical circumstances are going to facilitate Russian modernization? President Medvedev counts on a Western green light for investment and transfer of technology and industrial production to Russia, supported by internal stimuli for innovation and free enterprise. This looks nice. The question, however, is why would the West facilitate Russian modernization? In the cases of Japan, South Korea or China the answer was clear. It is emphatically not so in the Russian case.

President Medvedev’s model of modernization must assume a cardinal change in the attitude of the West toward Russia. It must assume a complete geopolitical turnaround leading to Russia joining a true alliance with the West “from Vancouver to Vladivostok.” Such an alliance has been pondered by politicians and pundits for a long time, but it has never happened. Geopolitics is largely against such a tectonic change in the world order.

Therefore, although such an alliance is theoretically possible, it is quite improbable, meaning that modernization a la Medvedev is based on dreams and hopes rather than on solid geopolitical grounds. I believe it is doomed to fail. The only real option that Russia has at its disposal is mobilization of its internal resources. But how can you mobilize a society, particularly the enigmatic Russian society, if your dream is reduced to achieving the Western level of consumption? Whichever way you turn, it seems that Russia has to go its own way, not the way of president Medvedev, if it were to modernize and survive as a great nation.

Professor Bruce W. Bean, lecturer in global corporate law, Michigan State University College of Law, former chairman ABA Russian-Eurasian Law Committee

For much of the past two decades the stultifying obduracy and accelerating greed of Russia’s bureaucracy has led frustrated foreign business managers to condemn Russia by discreetly saying to one another “These guys just don’t get it. They do not have a clue as to what is required to create a sustainable business environment.”

The big news out of the St. Petersburg International Economic Forum last week is that president Medvedev has attempted to make it clear that he, at least, does get it. As part of the plan to modernize and diversify the Russian economy, the president has promised to eliminate capital gains taxes on long term direct investments, improve the mindless aggravation of the business visa regime, reduce the number of strategic industries and make Russia a “country to which people from the whole world will come in search of their dreams.”

The taxes, the visas, and the rest are quite welcome and long overdue. But even if fully implemented, such nice statements alone will not persuade the business world that this time Russia is serious about living up to its potential of becoming one of the modern world’s dominant economies.

During president Medvedev’s visits in Silicon Valley this week he may have confirmed that more than 25 percent of the firms there are led by entrepreneurs from India, China and elsewhere. As Microsoft, Boeing, Intel and others have confirmed, Russia has a huge reservoir of talented engineers and entrepreneurs. There is no reason Russia cannot have its own Silicon Valley at Skolkovo. There is no reason Russia’s Skolkovo cannot compete with Silicon Valley as a place for the world’s entrepreneurs to come “in search of their dreams.”

But what should the government do to persuade investors, particularly Russians with funds offshore, to invest? How can the government convince investors that the Medvedev announcement represents a genuine change and that now, for example, the government will step in if, occasionally, corrupted instrumentalities of the authorities are used to harass and abuse business?

There have been earlier pleas by Russia for foreign investment. But there are too many bad examples of businesses not being treated in accordance with Russian law. Why should direct investors trust that this time it is different? Perhaps a real change in the absurd visa regime will persuade a few. But foreign businesses that make direct investments become prisoners of their investments when things turn ugly. While portfolio investors may be able to sell their Russian investments in the market, direct investors are owners of hard assets which cannot be quickly sold. Will investors overlook the fate of other investors who have lost out to criminal raiders or bureaucratic extortion?

To persuade those with capital and new ideas that Medvedev’s St. Petersburg theme of “flexibility and adaptability” will be the government’s new policy I have two suggestions. To achieve a diversified modern economy and secure enthusiastic participation by foreign investors (something I have encouraged for 15 years), the government needs only forthrightly address the Browder – Hermitage Capital matter and allow the current Mikhail Khodorkovsky-Platon Lebedev trial to end in accordance with Russian law.

These two developments can be effected within the next 60 days. The business world will need no further proof that Russia “gets it.” They will understand that president Medvedev meant it when he announced last week that “Russia understands the tasks ahead and is changing for itself and for the rest of the world.” Foreign investors will make their strategic decisions to enter Russia, and the long-sought diversification and modernization of the Russian economy will have started.

Ethan S. Burger, senior lecturer, Faculty of Law & Centre for Transnational Crime Prevention, University of Wollongong, Australia

Indeed, Russia (along with many other countries) needs an investment boom combined with an increase in consumer spending to avoid a double-dip recession. The great swings in the London, Moscow, New York and other stock markets reflect global anxiety over the world's economic situation.

Genuine and sustainable economic reform is unlikely to occur in Russia until there is a broad consensus that half-measures are inadequate and that the politically connected elite are not entitled to be rich. This is a subject that president Medvedev is not willing to broach publicly, even though it might be popular with a large share of the Russian electorate. Like the late U.S. President Ronald Reagan, Medvedev seems (at least in his public speeches) to believe in a “trickle down” approach – that is, if the rich are doing better, it will lift “all ships.”

Ironically, the United Kingdom is one of the last advanced economies with a formal aristocracy – in Russia things are a tad less systematic. New British Prime Minister David Cameron believes that eliminating unsustainable deficits is essential for an economic recovery and must be implemented in order to jumpstart the country's economy. It is a matter of sacrifice (largely borne by the middle class). Political leaders typically must demand sacrifices of their citizens in order for economic health to be restored. One wonders who in Russia is willing to sacrifice for the greater good and which leaders will advocate “tough love.”

Businesses like to invest in countries where there is a high degree of predictability. Political stability is not synonymous with the absence of change. Repression does not prevent change, it merely suppresses it between explosions. One should not confuse stagnation with stability, however. The recent strikes in China are making some reconsider their positions. Political reform leading to respect for civil and human rights is not essential for economic growth, but Russia cannot follow a "Chinese model" that probably will not work even for China.

President Medvedev’s calls for the modernization of the Russian economy can only be successful if a larger share of the Russian political elite learns to appreciate that there is inevitable tension between its own narrow interests and those of the country as a whole.

In 1955, General Motors Chairman and Chief Executive Officer Charlie Wilson might have been sincere when he remarked that “what’s good for General Motors is good for America.” In 2010, Gazprom Chief Executive Officer Alexei Miller in good faith could only make a comparable statement if he regarded Gazprom and Russia as a single entity.

On Friday, June 25, Gazprom holds its annual shareholders meeting. To what degree do its senior management and board of directors feel the same way Charlie Wilson felt 55 years ago? True, the Russian state owns a majority of Gazprom’s outstanding shares. But to what degree do the individuals who benefit the most from Gazprom’s performance share Medvedev’s objectives, and if they do, what will they do to support his modernization program?

I do not have in mind tweaking the Russian economic system – that has been going on for more than a decade and it is not sustainable. It is too easy for the bureaucratic and economic elites to undermine such initiatives. There needs to be a genuine desire to stay on course even in the face of political opposition and the absence of immediate results to achieving a more competitive economy.

This would entail state enterprises being governed in a transparent manner. Merely opening up a few sectors of the Russian economy to foreign companies, granting tax incentives to those willing to invest in Russia, and making it easier for foreign specialists to work in Russia have all been tried before and have not produced the declared objectives.

It would be a mistake to encourage Russia’s best students to study abroad. Russia should aim to build an education system that can turn out economists, engineers, lawyers, and scientists not only as good as those trained abroad, but better. Russia should understand the numerous long-term benefits of having foreign students studying in Russia. Russia should be investing in the brain power of its own people.

Russia can only modernize its economy if it takes corporate governance seriously, improves regulatory enforcement, and protects private property in an apolitical, strict and uniform manner. The late writer and broadcaster Roman Kupchinsky and former U.S. diplomat Keith Smith identified corruption in the energy sector (e.g. Gazprom) as a major drag on the Russian economy – a fact that president Medvedev should understand.

If the Russian government and the directors of enterprises in which the state owns equity were to prohibit mysterious middlemen (who are frequently shills and thinly-capitalized foreign companies ultimately owned by criminal figures or government officials) from doing business, one could be more optimistic about Russia’s modernization program.

Similarly, if the norms established pursuant to president Medvedev’s anti-corruption program were applied not merely to low and mid-level officials, but senior ones as well as private sector actors working in violation of Russian laws, then perhaps Russian officials would not have to give so many speeches about what has to be done and could speak instead about what has been accomplished.

Vladimir Belaeff, Global Society Institute, Inc., San Francisco, CA

The economic modernization program announced some time ago by president Medvedev is specifically oriented toward subjects economic and technological. Russia has historically excelled in these areas, in particular when society was not oppressed by a totalitarian ideology (in the post war years computer science was designated by Marxists as a “bourgeois pseudo-science” – this definition predicated Russia’s backwardness in computer technologies that is still present, 60 years later).

Medvedev’s promises referenced by Frolov are related to economic modernization and there is no evidence suggesting that the promises cannot or will not be met. There is nothing in the announced program of Russian economic modernization that implies or requires radical political change. Therefore, to suggest that the promises may not be kept because a political component artificially attributed to the program will not be realized – is illogical and not grounded in reality.

Economic modernization does not require political reform, in particular systemic political change patterned after this or that (liberal) political system. There are many countries (Singapore, China, Taiwan, South Korea, and India) that do not have highly liberal political systems, yet exhibit very advanced economies.

Advocates of political liberalism like to argue that their favored ideology is connected with economic and technical advance, but on close examination the claimed correlation remains a fiction. So, the claim that Russia’s economic modernization requires the installation of a new, more liberal political system is not supported by observable facts about advanced economies.

An opinion is emerging that advocates of ultra-liberal ideology, not receiving extensive traction in Russian society, are grasping at the straws of claimed “imperative sine qua non requirements,” which can be used as a vehicle to promote their ideology to a dominant position in Russia. Hence the suggestion that political ultra-liberalism must be installed in Russia in order to achieve economic modernization. Moreover, if such political reform is not implemented, the “promises of modernization by president Medvedev” shall be considered “unfulfilled.”

Realistically, Russia has achieved enormous modernization of its economy since 1986, despite the well-known oscillations of its political system. In fact, Russia’s ability to withstand and to recover from the effects of the global financial crisis of 2008 to 2010 demonstrates that its economy is already quite advanced.

On the political front, Russia’s system is already rather liberal. Consider that the Russian Parliament includes more political parties than the United States Congress (a country with a very modern economy) and that Russia has abolished the death penalty, whilst America still executes criminals.

Such a list of comparisons can be quite extensive. Russia’s political need is not for more “liberalism” but for the growth of civil consciousness and responsibility on the level of individual citizens – this is not something achieved by reforms, but by slowly evolving generations of citizens. There is no magic wand and no silver bullet for this objective.

Medvedev’s promises of economic modernization will be kept in due time. These promises appropriately do not include political liberalization, and so this particular aspect is not in the scope of the project. Those who seek political power through political liberalization should not piggy-back their goal on an unrelated project, and seek elsewhere a vehicle for their dreams.
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