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On the Record

Putin’s Next Move in Russia: Observations from the 8th Annual Valdai International Discussion Club

Clifford G. Gaddy and Fiona Hill

In recent days, Russia has undergone a significant political shift, one that presents a great challenge to Prime Minister Vladimir Putin’s power as well as his potential for winning the upcoming presidential elections. The Russian political landscape is clearly at a turning point. Russia’s future trajectory will depend in large measure on how Prime Minister Putin reacts to these recent challenges to his power. Given these events, it is critical to understand the underpinnings of Prime Minister Putin’s motivations and actions, as well as what his agenda for Russia’s future may be.

One month ago, Brookings scholars Clifford Gaddy and Fiona Hill had a chance to meet the Russian Prime Minister in person, at the Valdai International Discussion Club. The eighth annual meeting of the Valdai International Discussion Club took place November 7-11, 2011, in Moscow and the region of Kaluga. When Hill and Gaddy returned from Russia, they sat together and discussed some of their observations from that meeting. The recorded conversation originally was intended as background research and material for their forthcoming book, Mr. Putin: Operative in the Kremlin. In the light of recent events, the two researchers have decided to produce a transcript of their discussion, in order to provide insight into Putin’s current thinking.

The Valdai International Discussion Club, at which Hill and Gaddy met with Putin, is an initiative of officials and analysts in and around the Kremlin. The Club is financed via the governmental news agency, RIA Novosti. Each year around 40 foreign think-tank experts, academics, journalists, and politicians are invited to Russia for two days of discussion with a number of their Russian counterparts. The foreign contingent then also participates in meetings with Russian government and political figures in Moscow. The Valdai Club remains under the informal patronage of Vladimir Putin; he is the only government figure that foreign participants have met with each year.


CLIFFORD GADDY:  Fiona, we are now back from Russia, where we attended this year’s session of the Valdai Discussion Club [Nov. 7-11, 2011]. This was the eighth meeting in the series. At least one of us has been at every meeting.

FIONA HILL: Except 2008. That was the year the Valdai Club was taken to Chechnya.

GADDY: Yes, of course. Every year except 2008. Some of those years, including this year, both of us attended. By now, we have some perspective on these events. Many of our fellow participants have already written about this year’s meeting. But I thought it might be interesting if you and I shared a few of our more informal and personal observations, both from the highlight — the dinner with Putin — and from the rest of the Valdai program, which was a trip to the Kaluga region.

So let’s start with the dinner session with Putin. You were seated right beside Mr. Putin for the second year in a row. Anything that struck you as different about him or the meeting this time?

HILL:  What really struck me most, was that in contrast to the past Mr. Putin started to repeat himself. There were several anecdotes that he had actually told us before. That is unlike Putin. Always in the past, he seems to have prided himself on coming up with some new idea, something interesting to say, some ‘zingy’ retort to questions.

Last year, for instance, he startled us with a response about Oliver Cromwell — about when Cromwell’s statue would be removed from the Houses of Parliament — in reply to a question from a British colleague about removing Lenin from the mausoleum. We all thought, “Wow, how did he think that one up?” This time I just didn’t feel he put as much effort into the meeting. I think he has become somewhat over-familiar with the group. He didn’t necessarily anticipate all the questions and have pat answers, but sometimes he was just going through the motions of responding. And on the ultimate question, how do you keep this system going that you’ve created — which was the question that everybody was asking one way or another when they weren’t asking about some very narrow, specific policy issues — he didn’t really have a response. He didn’t present any idea other than that he is the central figure in the system and he would stick to the plan that, as he said, he and his team had laid out about “Russia 2020.” I thought he even seemed somewhat exasperated with the members of the Valdai Group, that we hadn’t got with the plan, that we hadn’t figured out, after all these years of meeting with him, that he has everything under control and everything is moving smoothly along. Really, he seemed to say, “Everything is all laid out, why haven’t you got this yet?”

GADDY: I agree. I was not at the Valdai meeting last year, but compared to past years, I had very much a sense that Putin was mechanical. It was as if you just pushed a button and got a pre-programmed response.

It might be helpful if we explained the format for this dinner Q&A with Putin. That’s all it is — just a question and answer session. Putin doesn’t really say anything at all in the beginning; he just lets people ask questions. Then he answers. It is not a conversation per se, although that’s what he calls it. There’s no give-and-take or back-and-forth, not even what you might have in an ordinary press conference, where you ask a question and you can get a follow-up question or you can make it more precise if you see that the interviewee is evading the question. That means that there are obviously some real softball questions.

HILL: Yes, like, “Mr. Putin, how do you think relations with China are going this year?”

GADDY: Or “Could you comment on how great your performance has been?” Even so, most people do try to ask questions that will elicit some kind of a meaningful response. I think everybody knows that it’s completely up to Putin to decide whether he wants to give such a response or not. He can take any question, a boring question, and make it interesting, or he can take interesting questions and make them boring.

I think that in past meetings, there were times when we were impressed with how Putin handled the questions. He really wanted to say something, he wanted to communicate something, or he wanted to give the impression that he’s sharp and has all the facts at his fingertips.

HILL: But this time he didn’t try to do that — unless it was on the issue of fracking [hydraulic fracturing, the technique used to extract shale gas]. The only time I thought that he became truly engaged was when he wanted to explain to us how dangerous fracking was and how shale gas — which he claims has no real promise whatsoever anywhere outside of the United States and perhaps Poland -– is extracted.

GADDY: Yes, he took his menu or whatever it was, the paper he had in front of him, and he started drawing diagrams of what fracking supposedly looks like and how the horizontal drilling is carried out and how the fluid is injected and so on. With false modesty he said, “I’m no expert on this, but I probably know more than anybody else in this room…” and he then went on to draw illustrations and held them up to show everybody.

HILL: That was the only time where he really got lively, apart from when he talked about missile defense, when he did a similar thing. He drew all kinds of trajectories through space of the interception of ballistic missiles, and he drew — I wasn’t exactly sure what he was drawing – but there was a strange, celestial arc on the page. He was, in any case, trying to show us the way that the currently proposed missile defense system was targeted against missiles.

Authors

GADDY: Well, speaking of ballistic missile defense, how do you view his attitude towards the West, the U.S. in particular? You know, every year we ask ourselves, what does he want to convey to us, what kind of messages, if any, is he trying to use this group to communicate?

HILL: Obviously missile defense was a critical issue where he was laying down markers. He seemed to be making it very clear that we — the U.S. and the West at large — were trying to pull one over Russia on missile defense, and he wasn’t fooled by anything. He expressed a personal conviction, his view, that missile defense is all about Russia, not Iran — he didn’t even really mention Iran — and the intent was to intercept Russian ICBMs.

GADDY: And how about his alleged quote from Rogozin [Russia’s ambassador to NATO]?

HILL: Yes, he went on to claim that a group of U.S. officials had told a Russian official that, indeed, missile defense was “all about Russia.” He didn’t actually name the Russian official, but Andrew Kuchins [of CSIS] intervened to say that the referenced conversation was supposed to have taken place between Dmitri Rogozin, Russia’s envoy to NATO, and visiting senators to Brussels. Andy pointed out that there was no evidence, apart from Rogozin’s own claim, that the senators said anything of the sort. This was an apocryphal story, a myth. Putin then counter-launched into another, classic KGB myth to try to rebut Kuchins’ point. He essentially claimed that a number of scientists involved in the Manhattan Project had given away secret details of the project because the international scientific community wanted to create balance in the global system and didn’t want one country alone to have the preponderance of nuclear power. He claimed basically that there had been an international consensus, not a conspiracy, on the part of scientists to make sure that the Soviet Union and everyone else would have access to the same technology, so no country could lord it over others. And he said this was happening again with missile defense, scientists were telling the truth about its capabilities in order to restore balance.

Putin didn’t go much further with this because I think he realized he was being a bit too harsh and the whole discussion was now focused on missile defense and the nuclear relationship with the U.S. So he then backtracked ever so slightly after putting a very clear marker down and going on at quite great length about missile defense. He said, “But, of course, we are interested in continuing to cooperate with the United States.”

However, Putin didn’t come up with anything particularly concrete on what that might entail. So he was definitely staking out rather aggressive, rather than simply conservative positions on missile defense. He did something similar on the energy question, which always seems to engage him. Putin argued strongly against the prospects of shale gas (even though we know that Russia itself is investing in some boutique fracking and shale gas exploration of their own in the U.S. to make sure that they’re quite well aware of the techniques).

GADDY: Right. As you said, he insisted that shale gas has no future except in Poland and the United States.

HILL: Because of the environmental impact. Rather oddly, he claimed that in the United States, drilling is only being done in remote areas. In fact, of course, it is being done in the heart of one of the densest areas of population on the East Coast. He also said even more bizarrely that if one were to take a helicopter ride over the U.S. East Coast — suggesting almost that he himself had done that — one could easily see the environmental damage from above. That’s rather strange, because you can’t actually see what’s going on to that extent from the air. We speculated afterwards that perhaps he was confusing it with mountaintop removal for coal mining. We had no idea what he was talking about.

GADDY: He typically doesn’t make these kinds of mistakes. So either he’s being misinformed or it’s his own arrogance that refuses to let him seriously think about how much he knows and how much he doesn’t know. He repeatedly projected the idea that he’s on top of everything, that he doesn’t need to either explain himself or defend himself. He gave another response to Andy Kuchins that kind of summed up his whole attitude.

Andy asked about the reset. He said to Putin that the reset has been more closely associated with President Medvedev than you, and people fear that when you come back, you’re not going to be supporting the reset. What do you think you need you do, Mr. Putin, to prove to people that you support the reset? Putin’s answer was, “I don’t think I need to prove anything to anybody.”

HILL: That really does sum up the entire tone of the dinner. First of all, the fact that he came extraordinarily late, and when he finally did arrive he gave no explanation or obviously no apology. Why would he? He doesn’t have to apologize to anybody for anything.

Another thing I noticed this time is that he looked at his watch, as if he had got a bit fed up with the meeting. It was the first time I’ve seen him do that. In previous meetings, he never looked at his watch. If anything, we were looking at our watches rather than him. This time he looked at it twice. But then he obviously decided that he should keep on going for whatever reason, which I found a little bit mystifying. It was almost like he was going through the motions. Then maybe he felt that he really needed to put a little bit more effort into this and just hear what everyone had to say. But, as usual, he didn’t take any notes. He was, however, passed notes by [his press secretary] Peskov.

GADDY: You had an interesting story about one of those notes, didn’t you?

HILL: Yes, there are a couple of stories about the notes. The notes he was getting from Peskov were usually personal things about the people who were asking questions. For instance, one at the very end was about Gabor Stier from Hungary. It was to tell Putin that this was Gabor’s 50th birthday and that he might want to mention that. Putin did so, and that was how we ended the dinner.

Another note before that, which was significant, was one that Putin just glanced at and then put inside his left breast pocket. Sometime later he remembered it was there. I saw him pat his pocket — I guess he was thinking, “Oh, the note” — so he reached in and took it out. It was in very big print — so big that I could read it easily. It told him that John Scarlett, who was sitting across the table from him to the left, was the former head of MI6 — that is, the senior intelligence service of Britain — from 2006 to 2009. Putin apparently had not been briefed about this beforehand. The note suggested that he should acknowledge John Scarlett. Now, the note also pointed out that John Scarlett was wearing a red flower in his lapel. Well, this was Armistice Day, the end of World War I; it was 11-11-11, and all the Brits were wearing poppies in honor of the day. So it was a little confusing. Especially since by the time he read the note, John Scarlett had already been called on to ask a question. He’d asked a question relatively early on about foreign policy. So Putin had clearly not registered that he had already called on Scarlett.

This was interesting, since there were rather large placards around the table identifying the participants. They all faced Putin. Now they weren’t in Russian; they were all in English, as I recall. But Putin can read English. So my observation from this is that here we have a situation where Putin is being passed printed notes that have to be written in large text and he is also unable to read a large placard identifying John Scarlett. So I think Putin may be pretty near- sighted. And he doesn’t wear contact lenses, because, of course, I was sitting so close that I could stare into his eyes see that he was not wearing contact lenses.

Clearly, a man of his vigor and superior physical attributes would not want to be seen wearing glasses. In any case, with all these sports that he partakes in, they are probably not the most practical thing to wear.

So I fear that he wasn’t able to read the name placard, so he was just looking for the red flower. Unfortunately, the person with the red flower in the direction Putin was looking was Anatol Lieven, who was not the head of the SIS or in MI6 from 2006 to 2009. I was very confused when Putin gestured toward Anatol and referred to him as a “former colleague.”

GADDY: I think Anatol was very confused as well.

HILL: We all were. Everyone was thinking, “Hello? Did we not know something about Anatol Lieven?” Anatol went ahead and asked his question. And Putin, if he had realized that he had made the mistake, never flinched. Of course, because he’s trained not to.

But it is a fact that the man himself is getting older. He’s 59 years old. Everybody’s eyesight goes after 40, no matter who you are, unless you have miraculous eyesight. So even if perhaps Mr. Putin could use some bifocals, he would not wear them, certainly not in public. This is not just a trivial observation, a bit of color from the dinner. It sums up the fact that he has this image that he has to keep up at all times. He just cannot let his guard down. Any sign of frailty or any sign of confusion must be avoided.

GADDY: Yes, exactly. We came away with the idea that he is the self-sufficient man. He is the one. He is enough, and he really doesn’t, as he said, have to defend or explain himself or apologize to anybody for anything. Moreover, he doesn’t even seem to be concerned to reassure people that there is something more than him. [Russian analyst from the U.S.-based World Security Institute] Nikolay Zlobin asked the question about what the system will be like after you. Zlobin said, “We don’t see any new faces. We don’t see any younger faces around you. Are there no younger faces?” That’s when Putin answered, “Oh, you’re wrong. There are younger faces.” Nikolay says —

HILL: “Well, who?”

GADDY: “Medvedev,” says Putin. We were shocked.

HILL: I know. We all stifled a laugh.

GADDY: And then later, Nikolay pushes it further, “So who else?” And again he answered, “Medvedev.”

So he did not even admit that this is an issue that he’s trying to deal with. You’d think he would at least pretend that he recognizes that this is a legitimate concern that people have. He doesn’t even seem to want to try to address those sorts of questions.

So in this context the notion of his personal vigor, his health, and his youth becomes all the more important precisely because he doesn’t have anyone else, and so he has to be the one to embody dynamism and youth and strength.

HILL: And the one who keeps the system going, and keeps the plan on track, and keeps everything going for the future.

GADDY: It’s going to be like The Picture of Dorian Gray. He can stave off the appearance of aging for a while, but, as you say, everybody ages and the evidence of it eventually shows. The other thing that struck me … I don’t know if anybody else saw it. I think nearly everyone was standing around the table waiting for him to come in when his motorcade arrived. But I couldn’t get to my seat because that’s where all the TV cameras were. So I decided to just stand by the entrance door, where I saw him come in. The weather outside was pretty mild, there was a dusting of snow, but it was quite mild weather for Moscow. His car arrives within literally 10 or 12 feet of the doorway, he gets out of the car, he’s wearing this puffy ski jacket.

He strides through the door, then pauses without saying a word and just stands with his hands down, sort of out from his side. One of his security aides glides up to him, removes the ski jacket from him, fades off into the background. A second guy moves equally smoothly forward with a sport coat and slips it onto his shoulders. He then keeps moving forward. It’s almost as if he never stopped.

HILL: It’s like a fashion show with quick changes, they come off and come back in.

GADDY: Exactly. Of course, having seen that when he entered, I was curious to see if the same thing would happen in reverse when he left. And, indeed, it did. I wondered what kind of a self image is this.

Another aspect of the dinner that was interesting was the location, the setting.

HILL: I agree. The meetings between Putin and the Valdai group are no longer in official locations, like the Kremlin or other official government locations. Now we are out in the private sector world. The last meeting in Sochi was in the Rus Sanatorium, where Putin appeared in the most beautiful linen suit, incredibly tailored, looking like he just came from a massage or a sauna or something because he looked so fresh and relaxed. This time we met in this restaurant that several people have written about.

GADDY: At an equestrian club.

HILL: The Novy Vek [New Century] Equestrian Center, in a restaurant called Cheval Blanc in French, or the White Horse, something that led to all kinds of predictable speculation about whether he is a knight on the white horse, and questions about who selected this venue, and so on.

It was an extraordinarily odd setting for an event like this, again, showing this personalization, this privatization, of the whole system. The question is, who picked this? Now, the significance of this place was that the presidential horses are stabled there — that is, the horses that have been given as gifts –- most perhaps from the Turkmen. There were a host of exotic Turkmen breeds, which are supposed to be the precursor to the Arabian stallions, because as people probably remember, the Turkmen are really the famous horse people of the steppe and perhaps the people who first domesticated the horse. So there were some pretty spectacular horses in here.

GADDY: That were given to Medvedev, right?

HILL: That were given to Medvedev, rather than Putin. But then, of course, we have all these images of Putin on horseback, Putin bare-chested on horseback, Putin as a man of action. And there were several equestrian dressage champions of Russia who were training within this compound. It was quite impressive watching them practice. None of us were quite sure what to make of the setting and what message was being conveyed. We were quite flummoxed by it, very confused. But it added to this sense of opulence that has successively built up over the Valdai Club meetings with Putin and other leaders, framed around rather extravagant meals. There was even a couple of endangered sturgeon floating around in a tank, although they weren’t on the menu that night. It was just extremely strange.

GADDY: Hanging around there for the three hours that we waited for Putin to arrive, being served wine and other drinks, you had to figure out something interesting to do. So a couple of us talked to the manager of the restaurant. He told us that that the entire main room of the restaurant in which we dined had been reconstructed only for this one meal. Normally, this very exclusive, private restaurant had intimate small booths and so on. The booths and columns and so forth in the middle of that big room had all had been removed, and would be replaced once we finished our dinner. But you wouldn’t have known that when you came in there.

HILL: No, you wouldn’t have believed that there had been such an elaborate staging. Well, that’s how good staging is supposed to work.

GADDY: Speaking of staging, the Valdai Group itself is the ultimate staged event, wouldn’t you say? There we were, some 40-odd foreign participants — analysts, journalists, all kinds of people from different countries of the world who look at Russia. Not only do we have this dinner with Putin — that’s the prize, if you like. But before you have that dinner, you have to pay the price, which is to endure several days of morning-to-evening long discussions with Russian counterparts.

These sessions are held out in a region of Russia somewhere outside of Moscow. Over the years, we’ve been everywhere from Tatarstan to Khanty-Mansiysk in Western Siberia, to the deepest part of eastern Siberia, to the North Caucasus, and to European Russia. This time we were bused to what is basically a suburb of Moscow, the oblast of Kaluga. Kaluga is a showcase of foreign direct investment in Russia that features a number of special industrial zones for mainly foreign companies. It’s headed by a progressive governor, Anatoliy Artamonov, who spoke to us and hosted us for a dinner.

We visited some of the special economic zones. In fact, our hotel was essentially in one of the industrial zones, not in the city of Kaluga. A few of us had the opportunity — we took the opportunity — to take a taxi into town. That was not part of the program.

HILL: On reflection, I realize why the city of Kaluga itself wasn’t on the program. We were a little surprised when we arrived at the hotel that we had been booked into. From its website from afar, it looked like it was possibly near the center of Kaluga. There was nothing to suggest that it was not. But it was on the outskirts of the town, in fact, about a 20-minute ride from what would be the actual center of Kaluga itself, and had nothing next to it — apart from some small nondescript village settlement — but the giant new Volkswagen factory. Some of the other larger factories were nearby, Volvo and Peugeot. And a factory which does some of the pressing out of steel parts that would, to some degree, be supplying the nearby car factories. So we were essentially in a compound in the middle of nowhere. There was nowhere to walk to –- we actually tried to go for a walk and ended up stuck on the road to the factory. The only alternative was to strike out into some empty fields. There were no public buses or public transportation going by, apart from the buses shipping the people to the Volvo factory. It was a really very strange set-up. So we were kind of captive there.

We discovered, as a result of being in this spot, that this was also the experience of the people who come to the Volkswagen plant, because this was their hotel. As far as we could tell, it was entirely built to cater to visiting Germans. It could have been taken from some industrial city in Germany and just plopped right there directly into this isolated spot. All the fixtures were German-made.

This was a theme that we noticed about Kaluga’s special economic zones. They were very separate from the city itself. So there was a sense of separation of this investment. When we escaped on our taxi ride into Kaluga, we realized that this was very much the case, that the presence of these car factories had almost no impact on Kaluga itself. Our taxi driver told us, for example, that even though there were 400 Germans working at the Volkswagen plant, as well as Swedes at the Volvo plant, French at the Peugeot factory, and so on, they were not evident in Kaluga itself. This investment had not had a great deal of trickle-down into Kaluga as far as the ordinary people were concerned.

We didn’t notice that Kaluga had been particularly spruced up as a result. There were definitely some new buildings that the local government had built. There was a trade center. There were another couple of hotels in the downtown. A couple of the churches and parks had been nicely revamped. There were lots of small shops in the center of town. But the overall fabric of the city, in terms of the places where people lived, had not really shown any particular benefit.

We couldn’t figure out where it was that the Germans and the Europeans who were assigned to the factories could actually be living, or whether there was an international school. There was a very odd sense of separation from all this.

GADDY: Kaluga is billed as a model local economy that is to be replicated in the rest of Russia. Kaluga seems to have had clear success in attracting foreign investment into these clusters. They have one for pharmaceuticals, another for auto, and others for other types of industries. We were told about these at length. The government is trying to bring in the foreign investors under a program that really started before the financial crisis and was very much accelerated during the crisis.

I’ve been looking at this issue for quite some time. Russia, at the peak of its boom, before the oil price collapsed in 2008, was the leading auto market in Europe. The Russians were buying more automobiles than the Germans were. But 80 percent of all the autos being sold in Russia were imported. That had risen from roughly eight percent in the year 2000. So what Putin decided to do was say, “Okay, if you’re going to sell to us and take advantage of our market, we need to see you locating some of your manufacturing facilities here, at least assembly facilities.” So he tapped this local figure, Anatoly Artamonov, the governor of Kaluga, to develop these special economic zones. Artamonov explained his approach to us. He outlined a very simple set of principles on which his program operated. “We’re going to make some guarantees to foreign investors, and we’ll stick with them. If we think a project is acceptable to us, our word is our bond and we will stick to them.”

It’s quite interesting to see what specifically he guaranteed. He made four promises. The first two are exactly what you would expect in special economic zones everywhere: lower taxes and tariffs and elimination of bureaucratic red tape. Now it’s interesting to ask the question: If you have a special economic zone, what’s so special about it? There must be something happening here that doesn’t happen on the outside. So if you know what’s special about the zone, by implication you know the default, what’s normal outside. So clearly there are higher taxes outside, there are higher tariffs, there is a lot of bureaucracy. But there were also two other points on his list of promises that I thought were the really telling ones. The first was, “no extra costs and expenses.”

HILL: Right. You’re not necessarily expected to have to pay for upgrading roads and railways, schools, churches and so on that other investors outside of these zones have to do.

GADDY: Or pay kickbacks and bribes. What they are saying is, “Come here, we’ll protect you against the exorbitant rates of kickbacks and bribes in Russia.” So that was the third point, no bribes and kickbacks. The fourth was even more interesting. It said you will have “full freedom to choose your suppliers.”

What that’s telling you is that the rule in the rest of the Russian economy for foreign investors — and domestic investors as well — is that you will be assigned certain suppliers. You will be expected to participate in production and supply chains that are there for the benefit of our domestic industries.

This is important because it is how the old Soviet-era dinosaur enterprises in Russia are kept afloat. The oil companies inside of Russia, whether foreign or domestic, as well as Gazprom and most of the other large and profitable Russian industries, are required to place orders for inputs and supplies with domestic and often local Russian industries, the big old heavy manufacturing plants, the former Soviet defense plants. You can’t get out of that; that’s a requirement. I like to call that an informal tax. There are formal taxes in Russia, of course. But this is also a kind of tax. What they are doing in these zones is saying you’ll be exempt from all these formal taxes and informal taxes.

This is a kind of a protection racket. Governor Artamonov was a sympathetic figure, but the fact is that his approach is to basically say to these companies, “Come be in my economic zone, and I’ll choose to enforce laws inside this zone that I should be enforcing everywhere. But I’m not enforcing them elsewhere. If you’re with me and you’re doing what we need you to do, you will enjoy these special privileges.” That’s a protection racket.

HILL: Yes, and right after our Kaluga visit we noticed an article in a Russian business newspaper reporting that most of the foreign investors are actually paid up front with a loan or a credit or a direct subsidy, an outright grant of a rather significant level, to locate in Kaluga.

GADDY: The article added up all these benefits, the direct subsidies as well as the reliefs that investors are getting, and found that it came to $5 billion over the next eight years. The authors then pointed out that $5 billion is exactly what the foreign companies plan to invest in Kaluga and similar locations. The two figures cancelled each other out. So in effect Russian authorities are paying the foreign companies to come in and set up operations.

HILL: The whole exercise of setting up these enterprise zones or new industrial estates is a common one. I was reflecting while I was in Kaluga that this is very similar to the north of England where I grew up, or other post-industrial settings across Europe, where local governments in conjunction with the central government make a lot of effort to attract new, often foreign, investment to a particular place where the old traditional manufacturing or mining industries have gone under and there is high unemployment. They give tax breaks, spruce up critical infrastructure, they provide all of the various basic inputs that companies need to get started up, and obviously tax breaks extend for a period of time.

They also focus on clustering. It’s classic to start with things like pharmaceutical companies that are producing on the spot. And also car manufacturing, usually for the local regional and national market, but also for export purposes. But they’re usually only successful in places where you’ve got a larger market that you can tap into. In the case of the north of England, it’s the UK market, but also more broadly markets in Europe that you can easily ship to. This is exactly what we saw when we visited Hemofarm, one of the foreign pharmaceutical companies in the Kaluga region. Hemofarm, which was a mixture of a Serbian and a German company, was producing drugs for the CIS markets, in other words, the old Soviet market. That also included Latvia and Lithuania, where there are large Russian-speaking populations — all the product inserts were in the Russian language.

The notable point of the pharmaceutical production was that the pharmaceutical grade chemicals were not made in Kaluga or anywhere in the rest of Russia. Both the raw materials and the machinery were all imported. The machinery was all Italian. Most of the chemicals I asked about seemed to be from Germany. The manufacturing process took place there in the new plant in Kaluga, but nothing they used as inputs was produced in and around Kaluga. It’s essentially the same with the car factories, with the exception of a few pieces that were being produced by Gestamp, which was joined onto the Volkswagen factory, and producing some of the pre-printed or pre-pressed out metal fittings. Everything else was being shipped in from either the Czech Republic or Germany. It was purely assembly going on there from shipped- in parts.

This is going to be a difficult issue for Russia and the WTO. We were there against the background of several announcements suggesting that Russia had finally overcome most of the hurdles to join the WTO. One of the most contentious issues in the WTO negotiations between Russia and the EU was the issue of automobile manufacturing. Putin had announced a major initiative out to 2018, as part of the Russia 2020 plan, to revitalize the whole Russian automobile industry. And Russia had been pressing European firms to source their auto parts in Russia itself instead of importing everything. European firms weren’t keen, and Russia will not be able to insist on this once it gets into the WTO.

There was another observation that we had for both the automobile manufacturers and the pharmaceutical manufacturers. The goal seems to be to get at least one representative of every major producer in the special zones. Then, if they were all in there, and if Russia violated WTO regulations in some way or another, these foreign companies and the foreign governments would have less of an incentive to call Russia to task. They would be risking their position in this lucrative market.

GADDY: Exactly. The point is that while some action may technically be a violation of WTO, nothing happens until some other WTO member country brings charges and says their industry is being damaged by that action. In other words, some other country that has an auto industry that is not benefitting from these sweetheart deals in Russia has to argue that they are being affected. Clearly the smart thing for the Russians to do, if they think that there is some country out there that might potentially bring a case, is to invite them in so that everybody is on the inside. This idea of co-opting people, getting them on the inside of the deal, is key.

HILL: Yes, so you basically try to make sure that everyone is invited one way or another into one of these special economic zones, be it in Kaluga or elsewhere. The point of all this is that the experience of Kaluga is only in a formalistic way replicable in some other Russian region. The essence of the model is to promise to give people protection against falling prey to the vagaries and exigencies of otherwise doing business in Russia.

It’s not the model of industrial development or of generally doing business that’s necessarily replicable. It’s the protection system that’s replicable. So basically what the whole model is, is one of special privilege and access and protection. That’s all that there is to this model. It’s not a special way of doing business, nor does it suggest that these manufacturing sectors are going to flourish across Russia.

Otherwise, Kaluga’s obvious advantage is the fact is that it is only 170 kilometers or so from downtown Moscow. Kaluga Oblast is the region that lies just outside of the Moscow region’s boundary. So it’s basically the fact that it is an appendage to Moscow that makes Kaluga an attractive place to do business. That proximity to Moscow is not something that can be replicated out in the Urals or Siberia, in Perm or Yekaterinburg or Novosibirsk. The idea of creating protected zones is obviously replicable. But it costs a lot of money to set these up, and that’s what we also saw for Skolkovo, Russia’s proposed version of Silicon Valley. We didn’t physically go to Skolkovo, because I think there’s not so much to see there at this particular stage. But we did meet with the directors of the various parts of Skolkovo, and the person who was also the business manager, in Moscow. They explained the setup to us in very similar terms to the rationale we heard in Kaluga. They told us that Skolkovo was specifically set up to create protection for Russian scientists, and particularly for those Russian entrepreneurs who need to be given a chance to develop something that is commercially viable but who wouldn’t be able to do it under normal circumstances, because the instant that they came up with something that might be workable, they’d fall prey to organized crime or other unscrupulous business, bureaucrats, or any of the other difficulties that businesses in Russia face. So Skolkovo was literally set up as a protection for scientists and entrepreneurs. They said this quite explicitly. They also said it was a way of revitalizing the old scientific establishment of Russia that had fallen on hard times since the collapse of the Soviet Union.

GADDY: Yes, it’s a curious model. You once described this kind of effort as a policy of creating nature reserves — zapovedniki, in Russian — where you have endangered species that are protected.

HILL: Or sites with special historical and cultural significance, because the zapovednik can also be a collection of old buildings. They are protected from what otherwise might happen to them in their normal environment. Which would be that they would be pulled down. They would be bulldozed for new development.

GADDY: By definition, this cannot work for the whole economy. For a protection racket to work, you have to have an outside threat, and that threat is that if you are not in our zone, you are at high risk for hostile takeovers, for shakedowns, for other kinds of rackets and criminal activity. You are at the whim of the bureaucrats. You have to be in our protected zone, and you are dependent on us.

HILL: With a sense of personal protection. Because the investors in Kaluga are under the personal protection of Governor Artamonov, and Skolkovo is the project of President Medvedev and others who are spearheading modernization. I think you were the one who asked, what will happen to Skolkovo if its protector, Medvedev, disappears. Who will protect it then? This was basically the question that I asked of Putin, that is, how does this system exist without you?

Putin didn’t have an answer for that question. And the people we met from Skolkovo had no answer, either. They just said everybody believes in this. At the very end of the meeting, someone from the group asked one of the very senior scientists who was involved with Skolkovo, “Well, will it work?” And he said, “We don’t know. We hope so. We have to hope so.”

GADDY: In other words, “We have to believe in it, because there’s nothing else.” That is probably true in a broader sense of a large part of the Russian population. They have to believe in something good, because faith is all there is. I think this was the case for many of those Russians who had high hopes for Medvedev. They had to believe he would represent something new and different, because there was nothing else. It doesn’t mean that they were so naïve to believe that he would be a great reformer and so on. But what’s the alternative? People look for the next thing they can hope for. Yet Putin doesn’t seem to want to offer them anything they can hope for any more.

HILL: No, that was really the whole thing with the Valdai meetings. In the past we’ve usually met with an array of different people from other parts of the government. This time it was just Putin. It was just Putin as the embodiment of the system, the government, the presidency. Then we had Skolkovo and Kaluga, and we had brief meetings with the heads of the three “museum parties,” as [Harvard Professor] Timothy Colton called them: [Gennadiy] Zyuganov of the communists, [Vladimir] Zhirinovsky, and [Sergey] Mironov. Zyuganov himself called them “three old relics.” Zyuganov, I have to say, is a man with a sense of humor. He had a self-deprecating perspective on this. He admits fully that it’s a surprise to him that he’s still there, but he’s trying to make the Communist Party more relevant because there isn’t really another opposition. He was the person who at least feels a sort of sense of responsibility as a result of the fact that the communists are the only alternative that’s being offered to the people, so he’s trying to bring new people in. His whole presentation to us was not about the manifesto or the party program. It was just about trying to show that they actually had some new, young people in the party.

Then we had the staged meltdown of Vladimir Zhirinovsky. The purpose of his performance was obviously to raise for us the specter of the rampant reactionary threat of the extremist forces that are out there lurking around all the fringes, the forces that — in the absence of the person of Putin who is keeping everything under control — threaten to overwhelm the center and the political heartland of Russia. Zhirinovsky is the lightening rod to take all of that away. He went through one of his classic performances to that regard, a shameless racist, anti-Semitic rant.

GADDY: His role is important because he has to convince people both inside and outside Russia that there’s so many more horrible prospects than Vladimir Putin. You may not like Putin, you may think he’s an autocrat, but —

HILL: — but, as we kept hearing, 90 percent of Russians are more extreme than Vladimi Putin.

GADDY: Yes, and Zhirinovsky’s role is to make sure that people realize that. And then we met the third party leader, Mironov, the head of “Just Russia.”

HILL: Mironov tries to sound indignant and principled about things, and he really comes across as a very genuine man who feels that he’s playing an important role in channeling people’s grievances against the system and the ruling party, United Russia, which he used to belong to. But the crux of the questioning at the end was — I and others asked him this question — why do you think you’re allowed to be in the opposition and to contest seats in parliament, when other parties are not even allowed to register for the elections. Mironov tried, of course, to avoid answering. But he didn’t really deny the fact that he thought that this was kind of strange. He said he thought that they should have been allowed. I pointed out to him that perhaps he was allowed to be in the official opposition because he was from St. Petersburg, and he knew everybody in the regime. He didn’t deny that, either.

And he did say at the very end, when he was asked the question about whether he would really be allowed to take people to the streets if there was massive vote fraud -– which he claimed he would do if United Russia stole the election -– he said he didn’t think that this would actually be necessary, because he thought that he was on the same page with the leadership. He used the word rukovodstvo, which means “the authorities” in Russian, but actually it’s a very symbolic word. It comes from the word ruka, “the hand.” The rukovodsto are the people who hold everything in their hands. And who is that, of course? That’s Mr. Putin, as he made very clear at the Valdai meeting. He is the man who holds everything in his hands. So Mironov clearly thinks he has some kind of deal or understanding at least with the top, with Putin, Medvedev and whoever else is significant in the immediate circle. He seemed to suggest that even though opposition within the election was going to be kept within the confines of the three parties — Zhirinovsky’s LDPR, the communists, and Just Russia, his party — the ruling party, United Russia, was not going to try to steal the election from all of them.

GADDY: But the three opposition leaders know their limits, and that’s the criterion for being allowed in the process.
 
HILL: And that’s what Mironov meant when he suggested that he understood the Russia leadership. He was trying to do the best with the role that he had been assigned, to play the best possible role that he could.

GADDY: Well, we see that a lot. People try to do the best they can without compromising too much on their principles. It’s all very constraining. You’re not clear what the alternative is. There are a few bold souls who are willing to go out there and protest and demonstrate. But many, including many people we know and respect, choose to work within the system to try to do whatever they can that will be beneficial for the country in a technocratic sense.

HILL: Yes, that was true of [former Prime Minister] Yegor Gaidar, for instance. That was the role that he thought he was playing at the end of his career and of his life. He defended that decision on his part rather eloquently, and I would say vehemently. Gaidar was trying to improve the situation as much as he could. That was really what Mironov was trying to say as well, that he had taken on this role — whether it had been assigned to him or not — because he felt that the Russian people deserve better than just to be manipulated constantly.

But there was also very much then the sense, even in the meeting with Putin, that the leadership is worried about this election, that they’ve run out of steam, they’ve run out of new ideas, and that the population is not behind them.

We spoke to many people who were going to vote for the communists as a protest vote. That’s something that might suddenly give Zyuganov a bit more of a boost than he was expecting to have. There is a feeling that people are disillusioned with Putin. There was this recent little vignette of him going to a mixed martial arts match and being booed by people when he showed up, which is clearly something that doesn’t normally happen. It shows that people are not being as restrained as they were in the past.

They may not see another alternative, but they’re not necessarily happy with being just pushed around and being offered no choices. It’s been in some of the press that the manipulation of the elections by United Russia is not going down well. [Boris] Gryzlov, the speaker of the Parliament and the head of United Russia who eventually met with us — although that wasn’t necessarily lined up beforehand — was asked a question about why it was that the United Russian campaign posters and the Get Out the Vote campaign posters from the Central Election Committee looked identical. And Gryzlov confessed, “I don’t know. It’s not my responsibility to look at the posters.” It was a pathetic answer, frankly, and one that didn’t serve him well, the idea that he wouldn’t notice this, and that it was not his responsibility to see whether the election was being conducted in a free and fair manner. They’ve got to try to get people out there. So Medvedev and Putin are in full campaign mode. Obviously the fact that Putin did eventually spend so much time with us also shows that they were cognizant of the fact that there’s going to be a lot of criticism from the outside. The meeting was meant to explain to us all that they’ve got it under control and that there is a plan ahead and that we’re going to see something new after the elections. It’s just that they’re not going to tell us what it is, and it’s not going to really deviate from the plan for Russia 2020 that was laid out before. So I think all of us came away from this with a sense of staleness. Putin was asked the question about stagnation in many different ways. He basically replied, no, there’s a dynamism, we’re evolving — although everything is gradual. But he didn’t really refute that question in any way.

You know, that gets us back to the topic we’ve been talking about, the Valdai Club itself. This year they explicitly referred to Valdai as a focus group. This is what we’ve always said, that Valdai is the ultimate foreign policy focus group.

GADDY: They take this little group of people, they present them with various ideas, and then they observe us. They want to find out how we react — just like a focus group for a new brand of cornflakes.

HILL: That’s what they told us, it’s brand Putin.

GADDY: Some people have said that the purpose of the Valdai Group is to create agents of influence. Somehow the people who take part in this exercise are going to either pull their punches about Putin or they’re going to write something more positive about him than they otherwise would have. That may happen. I don’t know. After all, it’s true that by inviting people to meet Putin, one of the most powerful people in the world, the Kremlin is offering a valuable favor. It even has monetary value to some people in the consulting businesses and so forth. You can show a picture of you together with Putin. That impresses potential clients.

HILL: But it is clear that they are getting something out of our presence there.

GADDY: They wouldn’t do it otherwise.

HILL: Basically, they are getting what one of my old bosses at Harvard, Graham Allison, used to call “raps and responses” on policy. Every time he put out a piece of policy when he was in government or when he put out a report at Harvard, his main question would be, what criticism — what raps — will you get on this, and then what should your responses be. We used to have long sessions with him going through this.

GADDY: So, a focus group.

HILL: A focus group is directly linked to promoting policies or marketing a brand. What are people going to say, not only about policies but about the brand of Putin. Are we still buying it? What do we think about it? How could it be improved? Why is it that we’re not responding in a certain way? Why the skepticism about this answer and that answer? What are the criticisms? Why is it that we don’t respond in the manner in which they think we will, in kind of a positive way? They’re more interested in our negative responses really than they are in our positive responses.

And that’s where the interesting part of this exercise really is. They want to see what the criticism is. And then they want to understand if they can fix it. So they have PR people running around all over the place trying to figure out, well, how could this be done better, how can we hone our message, and how can we improve our presentation, how can we spruce up the brand?

GADDY: That’s right, except I think we both agree that it’s about much more than a brand change that’s needed now. This Russian system has got some real inherent limitations and it basically boils down to the personality of Putin. The personalization of the system which I think has now become a serious liability. He is ten years older or eight years older than when we first met him in the Valdai meetings back in 2004.

HILL: And if he keeps on — if we keep on doing this — he’ll be four years older, six years older, twelve years older, and we’ll all be old, as well, and we become frankly less useful as a feedback source.

GADDY: Well, fine, they can always find new analysts to put on the Valdai Group. Maybe we’ll anyway disqualify ourselves by saying all of this. But Putin will still be there, and that’s a much more serious issue than whether or not you or I or anyone else in the current configuration gets invited back to Valdai. I think the entire Russian nation is hostage to this one man. He may have certain accomplishments. But this is a dead end right now. This might not be the critical issue in the next year or next four years, but —

HILL: — but it’ll become one. Another of the most interesting parts of this year’s meeting, in some respects, was that we met with Putin against the backdrop of Berlusconi’s resignation as Italian Prime Minister. Was Berlusconi going to resign or not was a running question within the group given the number of journalists, including Italians. Eventually Berlusconi — the only person who had been able to show that he had staying power in Italian politics and was, in fact, the longest serving contemporary prime minister — became a liability. Because of the personalization of the politics. Putin waxed eloquently about his dear friend Berlusconi, calling him by his first name, even a diminutive form, talking about how he was the real deal in politics, how he really admired him.

GADDY: Saying that Berlusconi had brought the Italian nation together and brought stability to the country.

HILL: It’s true, Berlusconi’s the ultimate charismatic personality. Putin shrugged off some of Berlusconi’s personal peccadilloes and the rather outrageous behavior that helped to contribute to Berlusconi’s demise. Putin said that it was just grandstanding, that Berlusconi was doing it so he could grab attention. But, in fact, Berlusconi’s behavior was really not resonating at all positively within Italian society. Berlusconi was so out of touch with his own society that he hadn’t realized that he was actually damaging his brand by indulging in bizarre dalliances with underage women. The fact that Berlusconi did that, maybe that still plays well in Russian society, or certain segments of it, but it certainly does not play well in a progressive European country, which, frankly, is what Italy has become. Berlusconi was someone who basically symbolized the ancien regime or the whole ancien culture of Italy, of a place that was being constrained by its past rather than moving forward into its future.

Berlusconi was eventually pushed out by the market rather than by his own party. And, frankly, the same could happen to Putin. Because the one thing that also is a threat, something that came through all of our meetings and discussions, is the lack of a clear Russian perspective on what’s happening in the world around them. Part of that conclusion is a function of the fact that the Valdai Club is largely peopled by individuals who are one way or another Russia experts. They are focused on Russia and its narrow foreign relations. But they don’t really know much about the rest of the world apart from the United States and Europe.

This is true of even the Chinese participants in the Valdai Club. They are official Chinese experts on Russia who — though they will not admit it — are not allowed to talk in a broader, more critical way about larger issues. And they certainly were not in any position to talk about what was happening in China. They confined their remarks to what were, in some cases, witty and rather eloquent descriptions of how they saw Russia’s role. But they were also very circumspect about urging Russia to keep its own path and not to make choices between one side or another in international affairs, to remain itself, its essential self straddling Asia and Europe. They kept urging Russia to stay in its own place and not make choices between Asia or Europe or China or the U.S. But also they didn’t impart any information about the direction China is heading in or about larger global affairs. And that was really the same with the commentary we had from other international participants.

There was no sense of a broader international perspective. For instance, there was talk about Russian’s role as the leader of the BRICS. But there was no real representation from the BRICS; there were no Brazilians, there were no Indians. There were no South Africans and certainly no Mexicans or representatives of other middle income countries. There was a lot of scathing commentary about Turkey, which was a bit surprising. At one point Sergei Karaganov, the Valdai club Russian chairman, made some flippant remark about Turkey being stuck in the 19th century. That showed a complete lack of understanding of the broader dynamic of the rising middle powers, like Turkey and Mexico and others, who will ultimately give Russia a run for its money. Jeffrey Mankoff [CSIS] asked the Russian Valdai Club members why was there no reference in their scenarios for the future to some of the larger issues that are going on globally — about climate change, about the rapid speed of urbanization and technological change, demographic issues outside of Russia, and the kind of world we can look forward to with 7 billion people.

The same goes for any discussion within the group about larger trends like shifts in labor and labor markets, all the kinds of issues that people outside Russia are talking about at this level. There wasn’t even a discussion about critical issues like employment or unemployment, or issues like inflation. All of these things were just sort of glossed over. So there was just a sense that we were talking about Russia in a vacuum, in a vacuum of particularism and personalization, where one man dominates the system, and the system feels itself somehow removed from larger global trends. Ultimately there’s no way that that can continue. Russia is not immune, as they discovered in 2008, from the larger ups and downs of the global economy. There was evident Russian schadenfreude about Europe’s economic demise and the potential implosion of the euro zone and how the West as a whole looks a bit of a mess at the moment while Russia somehow rises above the fray. Well, given Russia’s interdependence with Europe, which was on perfect display in Kaluga with Volkswagen, Volvo, and all of the other companies that people were talking about, that’s a rather silly attitude. The bulk of the investment to Russia is still coming from Europe.

There was also no real discussion of the larger trends in the Russian economy, apart from the vague idea, one that Putin talked about at dinner, of longer term economic diversification away from oil and gas. But ultimately, Putin, in his responses about the economy, was always more concerned about what was going to happen with the Russian budget than he

was, it seemed, about the future of the Russian economy in a turbulent period that is most definitely just ahead. I was very disturbed by that.

GADDY: Yes, we tried to press him on that. Just to invoke some sense of urgency, I asked him whether he was prepared for the worse case scenarios. He could have chosen to answer that question if he had wanted. He did not think it necessary or interesting or challenging.

HILL: Or just wanted to avoid it.

GADDY: Unfortunately, I think that’s the same approach he takes towards his own people.

HILL: Well, Russian society is basically a bigger version of the Valdai Club. Everyone in the Russian population is one way or another the subject of a focus group study. Everyone is polled, their opinions are taken, and it’s all statistically analyzed. Then the leadership is supposed to react by “giving attention” to the problems. But it’s all done in the framework of a staged performance. The people are actors in a play, who are supposed to play assigned roles. They are not independent actors in a society and economy.

GADDY: Well, the only way you can possibly be independent in Russia is to be completely irrelevant, be self-sufficient at a level at which you have no impact on the rest of your environment, and community, and especially not the economy. To the extent that you ever try to develop any sort of significant economic activity in Russia, you find that you’re very much dependent on connections and protection, protection from the political establishment, all the way up to Putin.

HILL: You and I collected a lot of personal stories from people we met with who found themselves in that situation. For instance, business people who find themselves hung out to dry when their original protective “roof” [krysha in Russian] has gone away. They may have been part of a larger company and they went off on their own, thinking that they could succeed alone. Then they find that they’ve been predated upon. They get slapped with huge tax bills and then pursued by the part of the FSB that deals with financial crimes or some other enforcement agency. Then they spend their whole time trying to find any tenuous connection in the Russian government hierarchy to turn this off. They don’t know how to do it, and they don’t know how to appeal for larger protection.

GADDY: That was a theme, that people — business people in particular — make the mistake of thinking that they are more independent than they are when they’re operating in Russia, that they possibly have some counter leverage against Putin, against other powerful Russians. This goes from the very biggest multinational corporation down to the small businesses: you don’t operate in Russia without being the victim of a protection scheme of some kind. You’re naïve if you pretend that’s not the case.

HILL: The same goes for people from our government, for politicians, for think-tankers. If you don’t have connections and protection, you don’t get access to the top people. Back in 2003, we took a Brookings study group over to Moscow. We had former high-ranking U.S. officials in the group. The American Embassy in Moscow was not able to organize a meeting for us with the Kremlin. The North American Department of the Russian Ministry of Foreign Affairs wasn’t able to. The only way we were able to get meetings in the Kremlin was because we knew someone personally. He worked in the presidential administration, and we had his mobile phone number. When we then tried to bring our colleagues from the Russian Ministry of Foreign Affairs with us to the Kremlin, they were almost denied entry from the Kremlin guards because they weren’t on the approved list!

We may be belaboring the point here, but again, this illustrates the difficulties even of people within the system who ought to have a defined role. They are victims of this hard personalization of the separation between the people who are in the inner circle and the people who aren’t.

This is another reason why we, from the outside, always have a problem of reciprocity at certain levels. We end up having relationships at the top levels between the presidents and their immediate top people. Or in these special zapovedniki, the special niche of preserves that get created for us to take part in, in the focus group that then gets to meet with the big guys. Otherwise we wouldn’t be doing it.

GADDY: That seems to sum up our take on the Valdai Discussion Club. You do learn a lot, but it comes at a cost. People ask, why are you taking part in this? You’re just legitimizing the system, you know. Why are you doing this? Well, the answer is, as an analyst, as somebody who is trying to understand this country and this system, you feel you ultimately have no choice if presented with this opportunity.

HILL: Looking back over the whole of Russian history, this is a tried and trusted approach. There is an ironic detail here. The people who organize some of the logistical aspects for the Valdai Group are headquartered in a place in Moscow called Gostiny Dvor, which means “the courtyard of the guests.” This is the place where the first foreign visitors to ancient Muskovy were housed and contained. They were kept within the white walls of the Gostiny Dvor, the official guest house, in the shadow of the Kremlin, and from there they were escorted to their various meetings with the tsar and everyone else. Basically things have not changed all that much. If you’re coming to Moscow for a specific set of meetings to try to interpret what’s happening, or in an official capacity, then you often find yourself circumscribed by these strange sets of formalized arrangements. For all the changes in the last twenty years, this is still not an open society in that regard.

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