Assessing Russia’s Future

In the winter of 2003 — five years of fairly strong economic growth notwithstanding — it is difficult to feel optimistic about Russia.

There are six quite daunting major weaknesses and threats:

It is not at all clear where the country's real power base lies. The Kremlin under President Putin — indeed Putin himself — fit perfectly into Churchill's famous description of Russian policy under Stalin as a "riddle wrapped in a mystery inside an enigma."

The relationship and balance of power between the presidency, the army and the oligarchy are opaque. The current showdown with Khodorkovsky is clearly a power-play, but what will be the final act?

A dozen years after the collapse of the Soviet Union, the question "What kind of state is Russia anyway?" is impossible to answer.

There is widespread corruption, bureaucratic inefficiency, a completely inadequate legal system and a gaping democracy deficit, notably in respect of the media.

And there is the omnipresent mafia, with several thousand gangs controlling tens of thousands of businesses and banks. Even small retailers are subjected to protection racketeering.

Russia's demographics are catastrophic. It is one of the few countries in Europe where life expectancy is quite dramatically declining, alcoholism is rife, as are many other diseases (including HIV/AIDS).

According to estimates, there are 17 billionaires in Russia — while about 40% of the population lives below the poverty line.

The country's economic structure and income distribution are in a worrisome state. The infrastructure is collapsing and in many places it simply has collapsed. There is far too much dependence on oil and gas.

The concentration of wealth is skewed in several respects: 85% of Russia's financial assets are concentrated in the capital city of Moscow, where less than 10% of the country's population lives.

Russia's small-and-medium sized sector (SMEs) contributes only around 10% of GDP, in contrast to 50% in most Western countries. It is also far lower than in many developing economies, where the SMEs are the most dynamic part of the economy.

Domestic investment is very low. Thus, Russia's huge landmass notwithstanding, it accounts for only about 1% of world GDP.

A major weakness is that the Russian economy is markedly "unglobalized."

Russia, with a population of 145 million, accounts for less than 2% of world exports, including oil and gas. That is less than Spain's share with its 40 million people.

In 1913, Russia accounted for 3.8% of the world's grain exports. Ninety years later, its share has fallen to 1%. Russia's share of foreign direct investment (FDI) flows hovers at about 0.25% of total FDI. Russia is a minor and peripheral player in the globalized economy.

Ethnic relations, both inside Russia and with its close-by neighbors, are a mess. The war in Chechnya has strained relations with some of its neighbours, such as Georgia.

Tensions between Russian minorities — which make up more than 30% of the population in Latvia and Estonia, 38% in Kazakhstan, 22% in Ukraine and 13% in both Moldova and Belarus — are problematic as well. Taken altogether, these ethnic compositions represent an explosive mixture.

It is much easier to count Russia's weaknesses and threats, than to enumerate its strengths and opportunities.

Something that must be emphasised, however, is that Russia is coming out of a very, very long and extremely arduous winter.

It is perhaps only now that it is possible to even begin measuring how devastating the effects of the protracted decades of Soviet rule were — whether the terror under Stalin or the ossification under the aging Brezhnev and his immediate successors.

No European country — and very few countries anywhere — have experienced anything comparable. Especially crippling for the country was the haemorrhaging brain drain driven by the massive exodus that followed the October Revolution.

In the 20 years after 1917 — in other words, before the institutionalised Stalinist terror — over three million people left the country, many of them scientists, writers and artists.

The fact that Russia nevertheless managed to maintain high international standards in both the arts and the sciences attests to what a remarkable pool of talent the country contains.

In enumerating the country's strengths, its key strength is the Russian people. On the face of it, that is a pretty banal, indeed platitudinous, thing to say. But it is something that resonates strongly with most people who have either a long — or indeed only brief — exposure to Russia.

When Hans Rausing — the long-term CEO and former owner of the Swedish firm TetraPak — was investing heavily in Russia in the early 90s, he was often asked why he did so. Invariably, he replied that it was because of his strong affection for the Russian people.

It is not that Russians are particularly polite or pleasant. They are not, indeed they are often amazingly rude. But whatever it is, there is something striking and highly engaging about the Russian personality.

Russia's culture — its music, painting and literature — represents a remarkable strength and has immense potential for truly global reach. With the exception of religious art, Russia was a bit of a late-developer in cultural output.

Within a period of about 150 years, however, it became exceptionally prodigious and rich. That cultural vibrancy remains — not just in the "formal" cultural sector. Just witness the masses of truly talented musicians one finds bustling in the streets of Russian cities — and indeed throughout the world.

Beyond the country's human and cultural resources, there is its immense wealth in energy and natural resources. This wealth is an asset and a potential great opportunity — but it can also be a millstone around the Russian economy's neck.

Enormous efforts in improving the infrastructure will be necessary if these opportunities are to be exploited. However, without linking its human resource potential with its energy riches, Russia will forever under perform its true potential.

A wealth of natural resources often brings out the less desirable elements of human nature, such as greed, corruption, racketeering and the like. Limiting these destructive forces is the greatest development challenge for Russia — and one that leaders should focus on first and foremost.

The terror and brain drain notwithstanding, Soviet Russia did achieve a very high level of education, notably in mathematics and sciences. Nowadays, the state of education — in Russia as elsewhere — is deteriorating, mainly because of budgetary cuts.

Nevertheless, there remains a quite strong heritage from the past — which, among other things, translates into considerable strengths in certain high-tech sectors.

In terms of political structure, there are clear deficiencies. And yet, the county has at least the trappings of democracy.

Though Russia may have a democratic deficit in respect to many European countries, it has a democratic surplus in comparison to many of its Asian neighbors — notably China.

According to the 2003 Freedom House indices of political rights and civil liberties, Russia gets an overall ranking of "partly free," with a score of 5 for both (with 1 the best and 7 the worst). This in contrast with China, which is deemed "not free" — with a 7 for political rights and 6 for civil liberties.

Of course, Russia has a long way to go, but the opportunity to build on democratic foundations is in place.

Which of the four scenarios presented at the beginning of this paper will prevail? A good deal will depend on how the world — and especially some of the world's key players — responds to Russia.

There is no doubt that Russia is a wounded bear. If it feels taunted, caged in, humiliated and frightened, it is more likely to become vicious, as wounded bears do.

That was precisely what happened in the immediate aftermath of the collapse of the Soviet Union in the early 1990s. It was a time when Japan virulently insisted on the "return" of its so-called northern territories in the Kuriles.

NATO was keen on expanding east and incorporating Russia's neighbours and former satellites. Meanwhile, the EU was busy proposing to extend to Russia's borders, all the while excluding the country.

Looking ahead, a situation where Russia feels humiliated and insulted is one that will bolster the forces of chauvinism and reaction — making the renascent "Soviet" Russia scenario a greater likelihood.

Which scenario prevails will also depend very much on how internal forces develop.

Strengthening only one part — or a couple of them — can have a considerable positive and cumulative effect.

Strengthening institutions and the rule of law, while opening the economy, encouraging entrepreneurship and boosting the SME sector would immediately have significant positive spill-over effects in governance and in diminishing the demographic deficit.

In that context, the implications and consequences of the current show-down will be especially critical.

Russia matters — a lot. If Russia could overcome the abysmal inheritance of seven decades of communist rule and develop along the lines of the 21st century Eurasian nation scenario, it would be truly great for Russia — and equally so for the rest of the world.

Engaging Russia in that direction should be a strategic priority in the West — indeed a strategic imperative.