Oil and Gas in the Capitals

Vol. 232 No.7

The St. Petersburg International Economic Forum ended on June 18 with the usual mutual congratulations between participants. Symptomatic of this self-satisfaction was the quite programmatic closing speech delivered by President Dmitry Medvedev. Assumed by many pundits to be a sort of lame duck in the face of a likely presidential run by Prime Minister Vladimir Putin next year, Medvedev has nonetheless presented his own distinct vision of Russia’s future, centered on modernization and a move away from reliance on natural resources. That vision was reiterated in his speech at the forum.

Also at the forum, Minister of Economic Development Elvira Nabiulina offered a very different presentation highlighting difficulties remaining on the road to World Trade Organization admission for Russia and warned that, if an agreement could not be reached within three weeks, this admission could be “significantly delayed.”  

These two speeches, seemingly unrelated, serve as witness that the debate about Russia’s future, held behind curtains for so long, is now becoming increasingly public and strident.

Medvedev has tried to position himself as the main modernizing actor in Russian politics and has sought to gather a large spectrum of Russian society behind him through his multivectored attacks on corruption, administrative red tape, lack of innovation and too much reliance on raw material resources. However, his efforts have hit the hard rock of the crisis.

Russian society is still suffering from the shock of the 1990s and the reforms of that decade, reactivated by the short but violent crisis of October 2008 to December 2009. This reality has made stability the most important thing for the Russian population.

Of course, as Medvedev said in his closing speech at last month’s economic forum, stability could be just a pleasant word hiding the sad reality of stagnation. The main challenge is to move toward the hoped-for bright future envisioned by the president without compromising stability. So far, there’s been no real answer for Russia.

The path defended by the prime minister appears to be much more realistic. It is quite true that the Russian government responded to the 2008–2009 crisis by expanding the scope of government control on the economy. But to a large extent this shielded the vast majority of the population from the nastiest effects of the crisis and ensured that the country’s real income was maintained and even went up, albeit at a smaller rate than in 2007.

Putin, too, has expressed his displeasure with the enlargement of the government’s role in economic activity and proclaimed the need to re-privatize sectors over which the government had reasserted control. In fact, a program is in place for the next five years to privatize or, more precisely, to open up to capital investment some state-owned companies. But this program is following the cautious policy that has been a trademark of Putin, by making a clear distinction between “strategic” sectors where the government intends to maintain a controlling hand, such as in the oil companies, and others sectors where private investors may replace the state to varying degrees. The most obvious case of the second category is the expanding interest of Renault/Nissan in Russian carmaker AvtoVaz.

The road followed by the government continues to be one of incremental steps, of introducing carefully selected new actors into the Russian industry and fostering innovation through the development of the military sector. Even on the anti-corruption program, widely popular and wisely considered a priority by both Medvedev and Putin, there are some significant differences between the two politicians. Where Medvedev tried to promote a large and wide-ranging reform of regulations and laws, Putin seems to prefer to put his faith in political pressure applied to some administrative actors with the help of closely controlled political movements.

Finally, the Skolkovo project, aimed at the creation of a sort of Russian “Silicon Valley” near Moscow, has been raised to a top priority by Medvedev, while it is viewed with caution by a wide majority of Russian and international experts and has been downplayed by government officials aligned with Putin.

It is in this context that Economic Development Minister Nabiulina warned of possible troubles standing in the way of Russia’s admission to the WTO. While Medvedev’s entourage has clearly made admission a top priority, people more closely linked to Putin are putting the brakes on the process, warning that admission could damage Russia’s industrial recovery. Quite obviously, tariffs on imported cars would be a large issue, as the recovery is substantially linked to the expansion of the automobile industry.

Nabiulina’s speech was a good reminder that if Russia really wants to be admitted, it is not at all costs. It will not be long before either Medvedev or Putin declares his candidacy for the presidency in the 2012 election. Whereas the choice of a candidate in 2008 to succeed Putin was more a problem of personality than one of program, this time we are seeing two lines more or less clearly defined.

The main question is this: Will Russia embark upon a new round of sweeping changes with high stakes for both the society and the economy, or will the government maintain its pace of incremental changes resulting in more or less steady improvements? The latter direction runs the risk of deadlocking the Russian economy if energy prices do not remain sufficiently high to pay for these incremental changes.

More than an opposition of style and personalities, this is the real choice for the coming election. WO