From August 31 to September 7, 2010, Brookings Senior Fellow and Director of the Center on the United States and Europe (CUSE) Fiona Hill participated in the seventh annual meeting of the “Valdai Discussion Club” in Russia. Launched in 2004 by the Russian government in conjunction with the official Russian News and Information Agency, RIA Novosti, along with the Council for Foreign and Defense Policy, the Russia Profile and Russia in Global Affairs magazines and the Moscow News, the Club has brought together international scholars and journalists covering Russia and international security issues (primarily from the United States and Europe, but also China, Iran, Japan, Turkey and other countries) with Russian counterparts.
Bouncing Back from the Downturn …
In fall 2008, the Russian government had an unpleasant jolt when––after almost a decade of rising oil prices and unprecedented average growth rates of just over seven percent a year––the global economic downturn bit into the Russian economy and oil prices plummeted. For most of 2008, there had been widespread confidence in Moscow that the U.S. housing crisis would blow by Russia, leaving barely a ripple on its surface. But, as Russian President Dmitry Medvedev admitted, during his April 13, 2010 presentation at the Brookings Institution, the crisis hit Russia hard. The leadership was astounded (“udivilo”) by how badly the country was affected—and by how interdependent Russia had become with the global economy and international financial markets since 2000.
Judging by the Valdai meetings with Russian leaders in St. Petersburg, Sochi and Moscow, from September 4-7, 2010, official Russia, at least, seems to have got over its astonishment. Although the strong growth rates of the last decade seem unlikely to return, the Russian economy is growing again. Russia appears to have bounced back and weathered the financial storms much better than most of its European and Eurasian neighbors (not to mention the United States). While the financial crisis for the United States may rival the 1930s, or at least cast a pall over the long period of U.S. economic growth since World War II, Russia lived through a much deeper crisis in the 1990s. 2008-2009 was unpleasant for Russia, but the memory already seems to be fading. Most major indices—industrial production, unemployment, real disposable incomes, dollar wages––now show significant signs of recovery. In many respects this is thanks to the “war chest” Mr. Putin and his team had the perspicacity to stash away during the boom years of the last decade, but it is also the result of an oil price recovery to the $70 a barrel range. Russian leaders, on the surface, were brimming with confidence in their interactions with Valdai Club members.
The main determinants of Russia’s future remain oil and gas—a fact underscored by the recent crisis and openly acknowledged by Prime Minister Putin and others in the Valdai Club discussions. Russia’s catastrophic economic collapse in the 1990s, its unprecedented growth in 1999-2008, its relative decline in 2008-2009, and its recovery from collapse this year have all tracked the oil price. This has been the historical pattern for Russia and the USSR since the 1970s. Russia’s stock market, the annual sales revenues of its top one hundred non-oil and gas companies, the production of major manufacturing products like rail freight cars (which are used to transport oil across country), and budget revenues (rents—from oil and gas) all closely correlate with the oil price.
If oil prices turn down again, Russia’s prospects will be bleak, but if the trend continues upward then Russia remains a major economic contender. Indeed, the most authoritative international energy agencies, including the U.S. Energy Information Agency [EIA] and the International Energy Agency [IEA], currently calculate their projections on a baseline oil price trajectory of up to $133 barrel (in today’s prices) out to the year 2035. This assumes a global economic recovery, the return to growth, and a continued upswing in energy demand. A scenario along these lines with oil prices well over $100 a barrel would provide the Russian state with revenues/rents easily matching and potentially outstripping those of the 2008 boom year.
… But “Infrastructurally” Challenged
Looking out to 2020, Russia now faces the paradox of the state remaining potentially very wealthy from energy revenues and yet having to deal with the reality of reversing the effects of decades-long domestic decay. Rosy (from Russia’s perspective) oil price scenarios, notwithstanding, the 2008 global financial crisis and the relatively short period of plummeting oil prices provided a dose of reality for Moscow after the heady days of the economic boom. They were reminder of the dangers of having an economy so closely tied to commodities and thus subject to the inevitable volatility and uncertainty of oil prices. The explosion at a giant Siberian hydroelectric plant in August 2009, at the height of the economic crisis, further highlighted Russia’s chronic infrastructure problems and the potential for more domestic catastrophes––like the raging peatbog fires and debilitating clouds of toxic smog that brought Moscow to a virtual standstill in August 2010 just a few weeks before the Valdai Club conference. Antiquated and inadequate power-generation and transportation infrastructure and basic public services, along with deteriorating public health and education sectors, have long been viewed as a potentially serious impediment to sustaining economic growth.
The confluence of financial and infrastructure crises engendered a sense that something had to be done. According to one official, in an off-the-record meeting with the Valdai group in Moscow, Russia’s leaders were sobered by the global downturn. The government recognized that diversifying the economy to mitigate the dependency on volatile energy revenues, and strengthening Russia’s weak banking system, could no longer be avoided and put off indefinitely. Something drastic also had to be done to resolve the infrastructure problems—and Prime Minister Putin set out personally this year to get things moving (literally!).
The Valdai group’s dinner meeting with Prime Minister Putin in Sochi on September 6, 2010—scene of one of the largest public works and infrastructure projects in the country to prepare for hosting the 2014 Winter Olympic Games––came right on the heels of Putin’s much-publicized and chronicled drive in a jaunty canary-yellow Lada “Kalina” across Siberia, from Khabarovsk to Chita. Putin’s road trip was intended to promote the revitalization of Russia’s domestic automobile industry and to mark the opening of the new Amur highway––the first paved road connecting Russia’s east and west.
Behind the vivid images of the Prime Minister at the wheel lies a shocking statistic. Russia’s network of paved roads is only slightly more than four times that of North Carolina––in a country roughly twice the size of the United States. Most of Russia’s roads are one to two lanes, and Russia has only two thirds as many four-lane highways as North Carolina. Mr. Putin’s drive took place on a two-lane road, one lane in either direction. This summer, Prime Minister Putin fared much better in his Lada Kalina on the new paved highway than a group of less intrepid and much more humble Russian travelers in Siberia in 2006. Four years ago, for about a week between September 10-19, 2006, around one thousand vehicles were literally stranded and bogged down in mud on the M56, which runs north to south to connect the republic of Sakha to the road Putin traveled on. This less uplifting set of images was a distant memory for Putin during his whizz through Siberia.
En route, the Prime Minister gave a lengthy series of interviews to Kommersant journalist Andrei Kolesnikov, made a few pitstops in otherwise remote villages, stopped to greet small throngs of people tracking his movements, and visited some massive construction sites—to officially open the Russian section of a new pipeline to export oil to China and to examine the site of a new space launch center––but he was hardly overwhelmed by crowds. The Amur region is one of Russia’s most sparsely populated and has seen its population shrink even further since the 1990s. In the next decade, Putin and other Russian leaders will be grappling with the challenges posed by a declining population in Siberia and countrywide.
Russia’s population––which currently stands at just under 142 million––has shrunk since 1993 and dropped sharply from 1995-2006, in spite of considerable migration into Russia from neighboring states. In 2007, the rate of decline began to taper off and in 2009, the population began to increase again, growing by about ten thousand people.
The current cohort of reproductive-age females is the largest ever in Russia, but by 2012, this group will begin to shrink as the much smaller cohort born during the 1990s, when births were at an all-time low, begins to take its place. Similarly, as the current, comparatively large, cohort of working-age Russians begins to retire it will be replaced by a less numerous group, and the labor force will shrink by over one million per year, beginning this year, in 2010. This deterioration and decline in Russia’s human capital is often regarded as the country’s largest long-term threat––although this is debatable.
As the distinguished historians and other experts in the Valdai Club discussed, on the floating conference around Lakes Onega and Ladoga, Russian leaders have always equated Russia’s status as a European “Great Power” or global “Superpower” after World War II with having a large and growing population. Russia’s population was consistently mobilized and deployed in the service of the state through serfdom, collectivization, the gulag, and mass military conscription, to generate tax revenues, develop a vast agricultural base, build industrial capital on a massive scale from scratch, and expand and defend the world’s largest country with continent-wide frontiers. At this juncture in its history, however, Russia no longer “needs” the mass manpower of the past either to be economically competitive or to remain a major global player, as Brookings scholars Clifford Gaddy and Barry Ickes point out in a recent monograph “Bear Traps: Can Russia Avoid the Pitfalls on the Road to Sustainable Economic Growth?” Only about two percent of the Russian labor force is engaged in the big state revenue generating sectors of oil, gas and other extractive industries. Russia does, however, need a highly educated and healthy population if it is to develop (as the government hopes) a more diversified, high-tech economy outside of the commodities sector.
All of these issues were at the forefront during the Valdai Club meetings. They have also been reflected in recent speeches by Russian officials and in articles in the Russian press—including discussions of attracting highly-skilled “expats” to Russia from Europe to off-set the large scale migration of low-skilled workers from Central Asia and other former Soviet republics who have flooded in to fill niches in Russia’s construction and service sectors. The government has made considerable efforts to woo ethnic Russians and Russian-speakers from various waves of migration back to Russia from abroad. The Valdai Club group notably included several European experts of ethnic Russian origin, some of whom pressed Prime Minister Putin on resolving bureaucratic difficulties preventing émigrés’ from acquiring Russian citizenship in a speedy fashion. In addition, Prime Minister Putin––who had just hosted Israeli Defense Minister Ehud Barak in Sochi before the Valdai group––made a point of stressing the new closeness in Israeli-Russian relations thanks to the large number of Russian-speakers in the Israeli population and government, and expressed hope of that some of these might consider relocating to Russia for work.
In the last couple of years, President Medvedev and Prime Minister Putin have also emphasized a government program of incentives, including cash payments for parents to encourage more births. Officials have relished the fact that birthrates have, in fact, trended steadily upward since 1999, even if they did not grow every single year. Russia’s main problem is, in any case, not the fertility rate per se (which largely mirrors the rates of other mature industrial states in Europe and Japan) but the overall mortality rate, especially for men. Russian men between the ages of 18-30 die at rates equal to those of men 20-30 years older in the United States, Western Europe and Japan––more like sub-Saharan Africa than OECD. The trends took a turn for the worse in 2000, when Putin first came into power as President, with alcohol and tobacco consumption (major mortality factors) rising, and average male life expectancy dipping below 60. There has been a notable and sharp improvement since 2005 with male life expectancy rising to around 63 by 2009, and much better prospects for men living in Moscow.
Prime Minister Putin in Sochi highlighted these statistical improvements, and claimed that the Russian government would soon get a handle on Russia’s mortality rates. Putin also went so far as to assert that Russia’s population had now stabilized and the country would not need any additional large-scale migration to fill in the labor force gaps—although, even with an increased birthrate and population growth in 2009, it will take Russia around 18 years (to 2026-2030) to really turn things around and head out of the demographic woods.
Russians on the Move
Another demographic challenge of a new “brain drain” to Europe since the 1990s was also raised at the Valdai Club conference and in discussions with officials. This has been a frequent feature in press commentary as high-profile “oligarchs” as well as more “regular” Russians travel frequently abroad in search of educational and professional opportunities, and purchase property as both first and second residences, and as business investments. One official, in a frank exchange with Valdai members, for example, made a reference to owning a flat in central London––seemingly counting himself among the reportedly 200,000 Russians living in the UK capital. In the Valdai Club discussions, however, the dimensions of the brain drain were unclear and much of the information seemed anecdotal. One Russian expert talked of two million Russians leaving since the 1990s, with 300,000 in Berlin alone, but European experts were more skeptical of the figures. Other Russians referred to recent polls where more than seventy percent of respondents expressed the desire to live abroad if given the opportunity, and just under twenty percent had actually applied for long-term visas or emigration documents. Professionals between the ages of 20-40 were seen as the most likely to want to move abroad––a painful issue highlighted by the announcement in early October 2010 that the 2010 Nobel Physics Prize was awarded to two Russian-born scientists (including one born in Sochi) living and working in the UK.
Whatever the real dimensions of the problem, Russian officials expressed genuine concern about the potential loss of the most highly-skilled Russian workers and the potential impact on modernization efforts. Prime Minister Putin and others asserted that there were now ample opportunities for skilled Russians as well as Russian émigrés and expats to find high-paying jobs in Russia as well as the possibility of generous state support for new business ventures they might want to undertake. Putin took great pride, in Sochi, in telling the story of encountering a Russian émigré who had returned to Russia from California and set up a successful agricultural complex in the Belogorodskaya region south of Moscow, with the help of state subsidies and the personal backing of the governor. The émigré turned businessman had told Putin that he would never have been able to do this had he stayed in California.
This example underscores two key challenges facing Russia as it seeks to attract skilled labor and entrepreneurs to help modernize and overhaul the economy. First it is, ironically, easier for a Russian émigré from California to move to and set up a new business south of Moscow than it is for a Russian from Vladivostok (often thought of as the “San Francisco” of the Russian Far East) to move to Moscow. It may also be easier—visa difficulties with Europe notwithstanding––for a Russian student from Vladivostok, with the ambition and means, to go to study in London or California than in Moscow. Internal mobility is highly constrained in Russia by a number of factors including bureaucratic restrictions on moving to Moscow, which has the greatest concentration of opportunities and services in the country and has seen its population increase by almost three million people (including illegal immigrants) in the last two decades. As one Russian official remarked to the Valdai group, Moscow has become a “difficult” and even intimidating city to move to and live in, and its infrastructure and basic public services are stretched beyond capacity. Second, the state, rather than personal choice and the private sector, tends to be the primary determinant of who goes and does what, where. Just as the Californian émigré was only able to set up his agricultural business with state subsidies and the personal involvement of the regional governor, the discussions at the Valdai Club made it clear that modernization will not happen without the state maintaining the leading role.
Modernization or State-directed Make-over?
Modernization, in one form or another, is a perennial Russian theme—be it in the form of Peter the Great “Europeanizing” Russia in the 1690s and 1700s by forcing Russian men to cut off their beards and adopt European clothing styles or raising St. Petersburg (the “Venice of the North”) from the swamps of the Baltic coast, or Stalin building “Socialism in One Country” from the 1920s to the 1950s, or Mikhail Gorbachev’s “Perestroika” (reconstruction) in the 1980s. The historians in the Valdai group spent the first day of the conference deliberating over whether or not there could be anything other than a top-down, state-led modernization in Russia after essentially more than three hundred years of the state initiating monumental national overhauls and exhorting society into action––often successfully, albeit at huge cost in terms of both human and financial capital. Most in the group argued that, given the shifts in the global economy in the last two decades and the economic rise of China, India and other new powers, Russia would have to rely on society and the innovative capacity of individuals rather than the state and new forms of coercion or persuasion to move forward and remain competitive. This also led to observations about a decline in Russia’s capacity for innovation over the last two decades, linking back to the discussions about the perceived brain drain to Europe.
In keeping with the historians’ discussion on the boats, Russian officials also made it very clear that modernization was centered on a number of grandiose projects spearheaded by the state and pulling in the private sector essentially under the rubric of “build it and they will come.” One official assured the group that “we [the government] have a plan for everything,” and ran through a detailed review of initiatives that the government was promoting––often naming a senior official who had been ordered or designated to take charge of working groups to get them completed. These included plans for building up the automotive sector; creating a new global financial center (akin to Hong Kong) in Moscow to stimulate capital investment in both Russia and Eurasia; establishing a new high-tech center and innovation incubator in Skolkovo in the Moscow suburbs that will become Russia’s version of “Silicon Valley;” improving road construction; and redeveloping Siberia and the Russian Far East to increase Russia’s competitiveness in this region and tap into the economic dynamism of the rising powers of the Asia-Pacific. Other state-championed mega-projects that were show-cased or referenced over the course of the Valdai meetings included Sochi’s make-over for the 2014 Winter Olympics; the new space center Prime Minister Putin visited in Siberia that will replace the Soviet-era center in Baikonur, now beyond Russia’s borders in independent Kazakhstan; and the construction of a huge tourist and convention complex on Russky Island near Vladivostok in preparation for hosting the 2012 APEC summit.
The only area for modernization that was left to private, individual or local initiative was basic public services, including the fire service in the wake of debilitating summer fires. One government official, in an exchange with the Valdai group, rejected out of hand the idea that the central government should take any responsibility for laying out a plan to overhaul the fire service or other similar services, and stressed that individuals and local authorities would have to deal with these issues themselves––“Vlast’ (the Russian term for the top authorities or top government officials) can not be responsible for everything … people have to understand that the future of the state also depends on them, not just on [X official] and Putin.” The general message was the state does the grandiose, the people can do the mundane (sewage/sanitation, firefighting etc.).
In spite of this kernel of an idea that individual should have a role, there was little conviction among the Valdai Club members––both in the discussions in the first part of the conference and after the meetings with Russian officials––that the Russian government is committed to “real” modernization. For participants in the group “real” modernization would involve moving beyond technical fixes, upgrading infrastructure, massive demonstration projects, and kick-starting new high-tech ventures to instead focusing on the reform of the state itself and its institutions and encouraging individual initiative. In fact, Russian officials in their meetings with the group made almost no reference to “reforms” (which were the watchword of Putin’s first presidential term in 2000) and often used the term “sovreminizatsiya” (a noun formed from the Russian adjective “sovremennyi” or contemporary) rather than modernization when discussing what they were engaged in. This has connotations of upgrading and renewing things, rather than engaging in a wholesale reconstruction, as Perestroika was intended to be in the 1980s. More of a “make-over” or a “face lift” for Russia than a transformation of the state.
Russian participants in the Valdai Club asserted that there was no strong motivation for the government to engage in “real” modernization or do things any differently. They pointed out that with oil prices high again, and revenues from oil and gas flowing into government coffers, Russia was set on a strong economic track for next 5-10 years, even if growth rates were lower than before the financial crisis. Russian officials echoed this assessment, noting that rising oil prices had “taken the edge off” earlier concerns and pressures to take on difficult issues. All officials emphasized the imperative of maintaining stability. Prime Minister Putin, in Sochi, noted, for example, that his goal for his premiership was “to create … a system that will guarantee stability for the Russian state and society.”
Officials frequently invoked the need to do things slowly and avoid any sudden changes in economic or political direction in their responses to Valdai participants’ questions. They also made constant references to Russian history echoing many of the themes discussed by the historians during the deliberations in the first part of the conference. Putin and others described themselves as good students of Russian history who had studied and understood it in a very specific way, seeing efforts to move too quickly with reforms as inevitably ending in social and political upheaval and revolution. In a seemingly deliberate echo of the famous exhortation of Tsarist era reformer, Piotr Stolypin, Prime Minister to last Tsar Nicholas II from 1906-1911––“Give me twenty years of [domestic] peace, and you will not recognize Russia!”––one Russian official referred to Russia’s 2020 strategy for development, which had been carefully laid out by Putin when he was President and which was still being closely adhered to in the pursuit of modernization. The same official stressed that going too fast on any front and trying to change too many things at once would only lead to problems. “More haste, less speed!” he warned.
Tandem Politics and Tandem Capitals
The general consensus among the Russian officials the Valdai Club members met with seemed to be: Russia’s roads may need paving, the old infrastructure needs fixing, and the economy needs more sectors independent of oil and gas, but the political system at the top is working just fine and isn’t broken at all. When criticized by group members for political shortcomings, including recent heavy-handed suppression of street protests (and arrests of prominent opposition members among the protestors), the appointment rather than election of regional governors and mayors, and the seeming failure to de-personalize Russian politics—after a decade of clear domination by Putin himself first as President then as Prime Minister––Putin and others immediately pushed back.
The Prime Minister referred to British and French police beating up protestors during high-profile demonstrations and street riots, and called street protestors “revolutionaries and demagogues,” infringing on other peoples’ civil liberties by refusing to abide by the law and demonstrate in officially-sanctioned meeting places. Putin asserted that Russians who opposed the current system of government were legally entitled and free to lodge their protests through pamphlets, posters, newspaper articles, and on the internet, and they could also seek permission from local and regional authorities for an official protest—but they could not take spontaneously to the streets. Under further questioning, Prime Minister Putin also stressed that the Russian government had no intention of following the Chinese path and censoring the internet. Instead, he noted (without any apparent irony) the government was focused on putting up its own content on the internet to counter criticism and shape alternative images.
Elections and elected rather than appointed officials were generally disparaged by Prime Minister Putin and other officials, including St. Petersburg Governor Matvienko––who had herself been initially elected before being appointed to her post for an additional term by the Russian President. Each told Valdai participants stories of elected officials literally running off at the slightest hint of trouble in their constituencies, not fulfilling their election pledges and provoking a popular backlash. In the Sochi meeting, Prime Minister Putin stressed that the Russian people expect their leadership to fix things. Appointed officials, Putin asserted, know it is their duty to fix things as they will be held accountable not only to their constituents, but also to a higher authority––ultimately the Prime Minister and President. Putin noted that the biggest problem for the Russian government was getting bureaucrats and the Russian people alike to know what they have to do, assume responsibility for their individual role, and to get things done without always waiting for a command from the top.
As far as personalized politics was concerned, Prime Minister Putin argued that he had mitigated this and personally overseen the institutionalization of the political system in 2008, by stepping down as President and affecting a transfer of executive power to new President Dmitry Medvedev, before he assumed the new role of Prime Minister. Putin stressed that the uppermost concern in the presidential election of 2008, which marked the end of his constitutionally-mandated two terms in office, was to maintain the integrity of the Russian Constitution. He assured the Valdai participants that this would also be the goal of the next presidential election in 2012. Putin suggested that the “tandem” arrangement at the top of the Russian power structure, with him as Prime Minister and Medvedev as President, adequately addressed the criticism of having too much power concentrated in the hands of one man. Now, he suggested, Russia has two men instead of just one and “I have done everything possible to hand off power … Dmitry Medvedev is President and he is fulfilling a huge role.”
Although there were few references to the role of the cabinet or the parliament or other institutional entities, Putin and other officials the Valdai Group met with made it clear that the members of the tandem were not working alone. In fact a group, they referred to as “We” (“My” in Russian)—some of whom were named explicitly––was presented as all working together with a strong corporate sense of common cause and assuming different roles at different times in the political system, depending on necessity. As Putin stressed when talking about Medvedev––with whom he had, Putin said, worked together for twenty years, attended the same university (albeit at different times), and formed similar points of view––this group was forged through a common background of first working together in St. Petersburg in the 1990s.
Other officials, including St. Petersburg Governor Matvienko, who clearly considered herself part of “We,” also emphasized the shared background, and the similar views. Putin noted about Medvedev, for example, that “we’re both fulfilling our duty … working on everything together and discussing everything together.” Another official remarked that “we’re all together … we worked together in the past and now … we all understand what we have in mind about the development of the country.” The general message seemed to be that the “We” group would, in some form and certainly with Mr. Putin right at its center, be leading Russia out to 2020 (in line with the much-touted development strategy)––if not beyond.
St. Petersburg, itself, was also presented in a similar fashion, as part of the tandem and a larger “We” for helping to develop Russia (as in fact it was in the Tsarist era when it became the Russian capital). Valdai club participants were told of plans to take some of the infrastructure and other strains off Moscow with the proposed relocation of the Admiralty/naval headquarters back to its original home in St. Petersburg from Moscow; plans to locate the new Russian Constitutional Court and other institutions in St. Petersburg; and the intention to cement the annual St. Petersburg Economic Forum as one of the world’s leading economic forums and a rival to Davos. The new “Sapsan” St. Petersburg-Moscow high speed train link was also featured (by transporting the Valdai Club participants) emphasizing the new ease of modern travel and cutting the inevitable di