In his opening remarks, Senior Fellow Clifford Gaddy said that recent events and President Vladimir Putin's dilemmas were inextricably linked to previous Soviet missteps, an argument advanced in a recent Brookings book, The Siberian Curse, co-authored by Gaddy and Senior Fellow Fiona Hill, another panelist.
"Misallocation was an essential feature of the irrationality of the Soviet system," said Gaddy, referring to the Soviet Union's costly and inefficient decision to build factories in distant, frigid regions of the Soviet Union, forcing millions to relocate there in order to work in the plants.
This irrational move, according to Gaddy, placed a virtual "cold and distance tax" on Russia, which conservatively costs Russia 2% of its GDP each year, and will take 100 years to overcome if economic reform continues at its current pace.
"This is critical to understanding Putin's dilemma," says Gaddy. "He came into office with two mandates, partially self-imposed, and fundamentally irreconcilable: First, to improve the efficiency of the Russian economy?and second, to ensure stability in this country, to prevent the fragmentation and collapse of Russia. The first imperative can only come by shrinking Russia economically, by moving capital and labor back to where it was before the Russian Revolution, to the warmer regions of Russia?This will mean massive, revolutionary change, disruption, instability, thereby violating the second imperative."
This economic conflict, in part, pushes Putin towards drastic civil measures, as witnessed recently by his arrest of YUKOS oil billionaire Mikhail Khodorkovsky. This step has made many worry that Russia may be returning to the old days of targeted attacks against prominent figures and restrictions on civil society.
"We are seeing a direct continuation of the Yeltsin era," said Fiona Hill. "What Putin is doing today in terms of squeezing civil society, arresting Khodorkovsky, and continuing in this line of political pressure is, frankly, what Yeltsin would have liked to have done before him and what leaders in the former Soviet Union are trying to do?Yeltsin put all the building blocks in place for the authoritarian system."
She reminded the audience that Yelstin filled state positions with KGB officials, including Putin, started the first Chechen war, created necessary structures for a strong state, and "reinvented and reinvigorated 'Kreminlogy.'"
"Yelstin made 'divide-and-rule' an art in the last two years of his presidency," said Hill.
Given their similar leadership styles, Putin's ability to succeed where Yeltsin failed was due primarily to an improved economy, thanks to the devaluation of the ruble in 1998 and the rise in world oil prices, both of which allowed Putin, according to Hill, to "come in on the crest of a wave of economic growth."
As that surge has begun to taper off, Putin has been forced to reevaluate the management of Russia's economy.
"With the pot shrinking," said Hill, "Putin couldn't afford to let too much money fall out into private hands. It was fine when everybody was plush with money in 2000, but once the belt had to tighten, the belt turned into a noose, tightening around Khodorkovsky's neck."
Roughly one-third of Russia's budget comes from oil and gas revenues, creating an economic situation akin to "an addict and its fix," according to Hill. Consequently, Khodorkovsky's various tax havens—which potentially cost the Russian government $2 billion despite YUKOS's increased oil production—threatened Putin's leadership and Russia's sustainability.
"[Khodorkovsky] was a threat to the state because he was an alternative source of money to the system," said Hill. "He could really influence economic policy within Russia at the expense of the state. He was successful at lobbying the Russian parliament, spreading money around to all sorts of political parties in order to curry legislation in his favor?His whole strategy was to maximize oil output and exploit as many tax loopholes as possible and to reduce corporate taxes so that he wouldn't have to pay many taxes to the state."
Z. Blake Marshall, the executive vice president of the U.S. – Russia Business Council, didn't see Khodorkovsky's arrest and the YUKOS affair as being detrimental to Russian economic reform. However, Marshall worried that recent actions in Russia would prompt foreign investors to retreat, citing negative third quarter investments figures, which threaten to create "capital flight."
Marshall said that the business community was concerned with rule of law issues, political uncertainty, property rights and prosecutorial abuses.
"If the war against YUKOS is a war against the oil industry," said Marshall, referring to the worries of many investors, "that would have a very negative impact on investment overall."
Panelists agreed that recent events would have little, if any, effect on upcoming parliamentary elections, given Putin's popularity and that of his party. "Russia's relations with the West are so much better than they were in the past," said Hill. "It's hard for opposition parties to really offer something new to the Russian public."
Panelist and Vice President of Brookings Foreign Policy Studies James B. Steinberg predicted that current events in Russia would not upset U.S. – Russian relations. "As long as [Putin] continues to be a good partner, it would take more than simply the throwing of an oligarch in jail to alter relations."