MOSCOW. (Ian Pryde for RIA Novosti) – At first sight, President Vladimir Putin and Russia had a good week.
During the G8 summit in Heiligendamm in Germany, Putin made a proposal on missile defense, suggesting that Russia and America use the Gabala radar station in Azerbaijan as an alternative to the US plans to base the system in Poland and the Czech Republic.
It remains to be seen whether his proposal will ultimately be acceptable to the United States, but his suggestion has at least got the two sides talking again on the issue, a major advance after months of unfounded and counterproductive rhetoric which may not be quickly forgotten.
The three-day St. Petersburg International Economic Forum followed hard on the heels of the G8 summit and chalked up an impressive list of achievements: 8,966 people from 65 countries registered for the forum, with 9 presidents, 40 ministers, 40 ambassadors and luminaries such as James Wolfensohn, Yegor Gaidar and Francis Fukuyama in attendance.
The forum saw contracts worth $13.5 billion signed between Russian and international companies, including a deal between Aeroflot and Boeing.
Many of the world’s business elite made upbeat statements about Russia’s future, confirming the clean bill of financial health Russia received in recent reports by the World Bank and the International Monetary Fund.
At the forum, Putin called for a new international financial architecture to reflect the changes in the global economy and the shift in manufacturing to Asia and emerging markets, and pointed to this year’s rising levels of foreign direct investment (FDI) into Russia and to the increasing investment Russia itself was making abroad.
Sergei Ivanov, Russia’s first deputy prime minister and a possible successor to Putin, said in his presentation that “by 2020 Russia may and should be among the five biggest economies in the world and have an annual per capita income of $30,000 on a Purchasing Power Parity (PPP) basis at 2005 prices.”
Russia is on the right track…
The Russian political and business elite seems very satisfied with this level of foreign investment, while one rather nationalistic Russian TV commentator said that British businessmen were continuing to invest in Russia in spite of warnings by Tony Blair and the British government that the allegedly deteriorating political situation should make them think twice.
Business is opportunistic and exists to make money, not promote democracy, so it was hardly surprising that British businessmen largely rejected Blair’s comments, and indeed were extremely critical that he made them public, arguing that they knew the situation on the ground better than the government and that President Putin and the Russian government were serious about introducing a more investor-friendly regime.
Such claims are nothing new. During my first visit to Moscow in 1986, I was immediately struck by the gulf between Russian reality and western reporting on Gorbachev and perestroika.
Since then, international opinion on Russia has fluctuated wildly, often with precious little relation to what is really happening in the country.
…but risks remain
But there is no free lunch; and while foreign companies are making good returns, the risk is correspondingly high – the Soviet and Russian governments have made frequent noises about attracting foreign investment, but Russia has never quite lived up to potential.
Putin is right to point to higher FDI this year and see this as a very positive development, but there is little doubt that investment flows into Russia would dwarf current levels if Russia had the kind of legal regime which exists in the United States and the United Kingdom – two of the biggest recipients of FDI in the world.
So while Russia is indeed doing spectacularly well by its own historical standards, it could do so much more with better and tougher policies aimed at introducing the rule of law, defending intellectual property rights and greatly reducing the country’s bureaucracy and rampant corruption – in a word, by creating the right environment to unleash both Russian and international business to allow it to get on with the job of making money.
The government, however, has been painfully slow on all of this, and indeed will find it hard to implement such changes.
…and government weakness and the lopsided economy hinder development
I recently pointed in this column that the Russian state was weak and ineffective.
Official confirmation came last week when Prime Minister Mikhail Fradkov addressed the Russian Cabinet and in televised remarks complained that in the key federal programs only 7% of the allocated funds were actually reaching the intended recipients. He didn’t mention where the other 93% were going.
These appalling statistics come three years after Putin sacked the then Prime Minister Mikhail Kasyanov and his cabinet shortly before the presidential elections in April 2004, arguing that he was doing so to increase government efficiency.
And yet the government is trying to increase the efficiency of industry by creating major enterprises in arms, energy and shipbuilding by consolidating many of the smaller state-owned companies in these sectors.
It is also hoping to increase Russia’s international competitiveness by investing huge amounts in the domestic IT industry and setting up technoparks.
So the question remains of whether such a weak government can actually implement its policies efficiently.
And if we forget about oil and steel companies, the Russian economy remains very lopsided – the Russian equivalents of the likes of Microsoft, BMW, Nestle, ABB or Toyota are nowhere to be seen – Russia cannot boast one single brand with instant global recognition and seems light years away from developing one.
Russia – catching up with the West or falling behind China and India?
In terms of per capita income, the rule of law, democracy and most other institutions, all the BRIC (Brazil, Russia, India and China) countries are far behind the West.
But despite its far higher per capita GDP, in many ways, Russia has a long way to go to catch up with China and India, let alone the West, and does not understand how far behind it really is.
India’s middle class, for instance, already numbers 300 million and rising – more than twice Russia’s total population.
So while Ivanov might well be right about the bright future of the Russian middle class, the country is in danger of being overtaken by the likes of China and India, whose economies boast much more in the way of high value-added manufacturing and services than Russia’s largely primary industries.
Like the West, Russia can compete only by ensuring that its institutions are the best in the world and that it stays far, far ahead in the value chain.
Counterproductive Russian rhetoric
Putin may well be right to call for a new international financial architecture, but the West is unlikely to give up its incumbent position.
Besides, Russian behavior and rhetoric have led the G7 and large parts of the western media to question the decision to admit Russia to form the G8 in the first place.
Quite how President Putin hopes to get the West to agree to a reform of international financial architecture with this kind of rhetoric and what many see as an aggressive stance on a number of issues remains unclear.
Russia – land of contradictions
Russia is trying to improve its investment environment – something it should and could have done years ago – but is not tackling many of the problems confronting Russian and international business.
As one British minister pointed out last year, for example, the United Kingdom did not privatize its industry in order to see state-owned firms from abroad buying up the country’s companies.
The Kremlin complains about this and yet seemingly expects foreign energy companies to cede control to Russian companies to create national champions.
Russia is doing far better nowadays than it has in recent decades, but if it wants to join the Western elite, it still has much to do and learn.
Political risk increasing
Valentina Matviyenko, governor of St. Petersburg, said that attendees were keen to learn about how Russia’s politics would play out over the 12 months due to the parliamentary elections in December 2007 and the presidential elections in March 2008.
Political risk will thus increase over the next year or so – it is therefore a sign of confidence on the part of foreign businesses that they are nevertheless investing in Russia’s future.
Ian Pryde is CEO of Eurasia Strategy & Communications, Moscow.
The opinions expressed in this article are the author’s and do not necessarily represent those of RIA Novosti.
Originally written for Ian Pryde’s weekly column for the Opinion & Analysis section of RIA-Novosti’s English-language website.
Now available at https://sputniknews.com/analysis/2007061467195499/, the site of the Sputnik news agency, the successor to Russian state-owned RIA Novosti’s international branch, which became defunct in 2013.