Russias Changing Economic and Political Regimes: The Putin Years and Afterwards Andrey Makarychev Andre Mommen

CEPS Maarssen

2012

Introduction

The idea of this book was to a great extent inspired by dynamics of Russian political system starting from December 2011 which surprised many analysts who believed in the stability of the regime created by Vladimir Putin and in inherent passivity of Russian citizenry. Nowadays, both assumptions proved to be wrong. Civil society groups in Russia want their voices to be heard, which made the regime launch important transformations obviously not that radical as opposition would like to see them, but nevertheless moving Russia towards more pluralism and more open public sphere. It seems that Russia is today on its way to more thoroughgoing political and social reforms, which inspired foreign observers to predict the end of the Putin era in the nearest future. Russia, therefore, after a relatively stable and uneventful decade, again becomes a research puzzle, a situation which requires due reflection by Russias neighbors and key international partners. The mass-scale protests that followed the December 4, 2011 parliamentary election is an important point in the evolution of the Putin Medvedev regime. Though the immediate reason for discontent was ubiquitous electoral fraud that ultimately allowed the United Russia party to preserve its majority in the Duma, the opposition raised the whole gamut of issues that reach far beyond that particular campaign, including the demands for greater transparency, accountability, good governance, civil rights, etc. About 125,000 people demonstrated on February 4, 2012 in the streets of Moscow, protesting against Putins presidential candidacy and the regimes control of the media and its hold on civil society. The breadth of these claims makes it clear that simply reloading the regime (finding the scapegoats and making some cosmetic changes or minor concessions) will definitely not assuage the situation. The structural effect of the new political momentum in the post-December Russia consists in the clearly articulated public demand for drastically upgrading the whole system of political, social and economic relations which, as both pundits and ordinary people deem, is way far from effective. This was clearly elucidated already by the public debates on the concept of modernization in/of Russia which its key advocate, President Medvedev, deliberately was trying to reduce to purely financial and economic matters, and thus to bracket the prospects for modernizing Russian political institutions and the whole system of governance. By the same token, both Putin and Medvedev explained the rise of anti-government movement

in fall 2011 by the negative effects of economic crisis. Of course, Russian economic hardship does matter, but it is our assumption in this book that the purely economic explanations of the new wave of Russias transformation, triggered by the post-December events, are far from sufficient. This is why we start this introductory chapter with explicitly political issues that loom large in todays Russia, and then put them in a wider context of factors explaining Russias underperformance in a globalized world economy.

After December 4, 2011: a New Russia-in-the-making? The mass-scale political demonstrations and actions of protest in Russia that bobbed up immediately after the Duma election on December 4, 2011 have fleshed out a deep crisis of the model of governance instituted by Vladimir Putin more than a decade ago. In a matter of few days it became clear that instead of stability, promised by Putin as the core justification for his reign, the nation is deeply split along political lines, which begs serious questions about the social contract between the Kremlin and the society, and undermines the idea of Putins majority widely propagated by the Kremlin spin-doctors. The roots of the widely spread public discontent date back to September 2011, when at the United Russia party convention Dmitry Medvedev not only refused to run for his second presidential tenure, but instead proposed this job to Vladimir Putin in exchange for securing his own appointment as the next prime minister. This blunt job swap revealed two important points. First, in spite of all weakness of Medvedev as President and his reputation as Putins marionette, a significant part of the Russian society still perceived him as a moderate alternative to Putins hard-line policy of state centralization and anti-Western rhetoric. Medvedevs voluntary self-removal from the presidential race for many symbolized the end of their hopes for modernization and for a more liberal political regime in Russia. Secondly, Russians turned out to be very sensitive to the overt manipulations of electoral procedure, as exemplified by the clandestine agreements between Putin and Medvedev, as well as by the mass-scale vote fraud widely covered on the internet and monitored by various social networks. As Anna Litvinenko and Svetlana Bodrunova uncover in their chapter on the role of the social media in political mobilization in Russia, urban citizens are all on-line now which helps explain the impact of the protest movement after the legislative elections of 2011. Technologies of instant communication and social networking are the main focus of their analysis, inasmuch as they are instrumental in redefining the civil society in Russia. Sergei Akopov in his contribution to this volume follows the suit and fleshes out an important 3

dimension of the rise of new civic activism in Russias major cities its trans-national character. Economic and cultural globalization all around the world has weakened citizens exclusive attachment to the nation-states and challenged restrictive notions of national citizenship. In this vein, the mass-scale protests in Russia in 2011 and 2012 are viewed as the result of a shifting perception of the world caused by outreaching globalization in major Russian cities. Of course, as in the case of any unexpected and potentially far-reaching political developments, the post-December events in Russia fueled excessive expectations and symbolic parallels with the Arab spring or color revolutions. These comparisons and political meanings ascribed to them appear to be way exaggerated. The Putin regime received a series of serious blows, but it still has huge administrative potential and financial resources for survival. Yet this regime will be forced to transform itself, get rid of the most obsolete political and managerial practices and open up new spaces for political competition. In only two weeks after the scale of resistance movement became clear, Medvedev urged for the partial restoration of the popular elections of governors (the procedure which Putin cancelled in 2004 under the pretext of putative danger for national disintegration), while Putin promised the legal registration of oppositional parties. Therefore, despite the much discussed lack of strong leadership and internal splits, the spontaneous (and networking in many senses) anti-Kremlin movement will definitely influence the developments of Russian political system in many ways. Due to the high level of mistrust within the society and dissatisfaction with the Putin Medvedev socio-political and economic model, the entire system of governance is increasingly becoming dysfunctional. Though immediate reasons for protest were fraudulent vote counting, the dissatisfaction with the regime is much deeper, and focuses on its structural ineffectiveness in delivering public goods and providing social justice and security. It is these issues of sociopolitical nature that kindled decreased popularity of the ruling tandem and public outcry against this rule. The lack of trust and the crisis in communication between elites and society are the most crucial issues. Unlike in 1990s, this time the street protestors were not jobless workers struggling for feeding their families; in fall 2011 the discontent was mostly spread across Russia s nascent middle class with a much wider worldview and higher degree of education, expectations and demands to the quality of governance. It is mostly within this social milieu that the most advanced technologies of instant communication are widely spread as the most effective type of information exchange and aggregation of everyday interests. Against this background, the protest movement reflects a new form of civil society activism in Russia,

whose political protest is mostly post-material, being a reaction against the arrogant style of the execution of power, the deficit of transparency, and the shrinking of public space. In fact, by its origins it was an aesthetical yet very much prone to politicization - gesture of denying ridiculous and clumsy practices of old-style bureaucracy incapable of proposing a convincing prospect for the future which seems to be quite meaningful to these social groups that are most critical to the Kremlin. The Kremlin discourse is overwhelmingly perceived as retrospective, with triumphalist glorification of Russias military victories (especially in the Second World War) and with simultaneous denigration and vilification of the pre-Putin decade of 1990s as the time of upheavals and disorder. It is against this background that Putin has constructed his narrative of Russia, but what worked rather smoothly in his first and second terms in office ceased to work out in the second decade of his regime. The major reason for that was that people in Russia were increasingly eager to compare the present-day situation neither with 1990s nor with Soviet times, but rather with the most advanced countries of the world. This shift in perspective, largely influenced by globalization, questioned the stability of the regime and its ability to deliver public goods. Tatiana Teterevleva in her contribution to the volume discusses the dark side of the Putin Medvedev rule - the most recent wave of brain drain. The question Pora valit? (Is it time to shove off?) is now often asked and discussed in Russian social networks and blogosphere. According to the Levada Centre, 22 % of Russias adult population would like to leave the country, which is more than a threefold increase from 2007. These attitudes reveal the depth of dissatisfaction of the young generation with the ruling elite. Against this background, the Kremlin seems to both politically and intellectually lose its authority to those social groups which it tried to marginalize (like the oil tycoon Mikhail Khodorkovsky, or popular blogger Alexei Navalny whose characterization of the United Russia as a party of crooks and swindlers was deeply imprinted in Russias public discourse). The decay of the ruling elites is illustrated by the evident lack of authoritative speakers for the Kremlin willing and capable to defend the Kremlin against political attacks and articulate new arguments. There are increasing testimonies of Putins growing inability to handle the situation and adequately respond to the drastic changes. Many of his public pronouncements immediately turn into public mockery a drastic departure from the situation in the beginning and the middle of 2000s when he enjoyed an overwhelming popularity and respect. Under these circumstances, the whole administrative system in the forthcoming future will increasingly experience political overloads to which it is ill-adjusted.

A new wave of democratization: the contours of a new agenda The activation of political life in Russia in fall 2011 demonstrates that twenty years after the fall of the USSR, the results of the post-Soviet transformation process are by no ways satisfactory. Politically, the Russian Federation still needs modernization, democratization and a vibrant civil society. Putinism as a ruling ideology of sovereign democracy stresses only the need for Russia to ward off external predation and hostile foreign influence, under the assumption that Russian citizens will prioritize economic growth and political stability over political and human rights. Elections were never going to turn Russia into a democracy, but became referendums on the Kremlins leadership. This created an inherent tension, for although Russias political leadership promotes economic growth, it does so to generate the rents needed for political manipulation, while eschewing economic reforms that, though necessary for modernization, could threaten their political dominance. Hence, the Putin system that has defined Russian polity since 2000 is unlikely to last beyond the current decade, since its vulnerabilities cannot be addressed by modest reforms that the current elite are willing to tolerate. To truly modernize, Russia must overcome Putinism, develop stronger political parties, achieve greater political freedoms and mobilize Russian people around a common agenda of development breaking with authoritarianism and corruptive practices which are so typical for Putins sovereign democratic system. Democratic institutional reforms are indispensable for overcoming the present deadlock caused by rampant corruption and authoritarian rule. In every modern society the only likely alternative to democracy seems to be an authoritarian regime that becomes tyrannical whenever its security is threatened. There are two dimensions of democracy building in Russia that deserve attention against the backdrop of the emerging political changes. First, the governmental forms of democracy, including the state of political leadership, will play a determining role in a new transitional phase that Russia has entered. Suffice it to remind that the issues of succession of power were always at the core of all political crises and transitions in the Russian history, including its most recent periods. The resignations of Mikhail Gorbachev and Boris Yeltsin, as well as highly questionable from the viewpoint of democratic legitimacy job swap between Putin and Medvedev all these crucial points in the most recent political history of the country demonstrate how fragile and politically flammable are the mechanisms providing continuity of governance in Russias predominantly autocratic political culture.

The second important dimension of the democratization agenda in Russia is social groups and networked coalitions. Democracy needs citizens who respect the law and resist individually or collectively its abuse, whosever rights are being abused. 1 Evidently, without a pluralist party system democratic institutions are doomed to failure. Political parties are perhaps the primary, although by no means the only, institutions establishing and defending democracy. The greater the participation by political parties, the more need for institutionalization as well, but, as we know, both do not necessarily progress together or at equal pace. Oleg Reut in his chapter argues that the current drive to strengthen state power, accepted by the majority of Russian political brokers as necessary both as an instrument for national modernization project and as a corrective to the disorder of the Medvedev years, produces neither the internal stimulus to reforms nor the external point of reference which would allow multifaceted engagement with an international community, especially in the context of a changing international system and developing notions of sovereignty. Against this background, Andrey Makarychev and Andrey Deviatkov in their chapter discuss the Putin Medvedev regime through the lenses of concepts of politicization and de-politicization. They analyze the Kremlin discourse and its key signifiers as seen from the prospects of Russias integration in the international society strategically the most important policy purpose for the years to come..

The pitfalls of economic reforms In the Russian case, the transition to a democratic system was frustrated by the rise of new elites having acquired economic power after privatization of state companies and capturing the access to natural resources. The results of a transition from state-planned economy to market capitalism are by no ways satisfactory. Compared with China, economic growth in Russia remained slow, technological changes were insufficient, and the dependence of Russian economy on export of oil and natural gas is high. Meanwhile, Russias producers of durable consumption goods were unable to gain control of the domestic markets. In addition, after two decades of stop-and-go politics, the Russian Federation is not fully integrated into the world economy and is still facing political and economic tensions with most former Soviet republics. As Hans von Zon argues in his chapter, the most appropriate mode of integration in the world economy depends on many factors, including the level of development, specialization patterns,
1 J. Roland Pennock, Democratic Political Theory, Princeton, N.J.: Princeton University Press, 1979, p. 241.

domestic political priorities, etc. The opening up of Russia towards the world economy was ill thought and did not protect adequately the domestic economy. First of all, this opening up allowed a predatory elite to plunder the country and to channel resources abroad. Net capital inflows were since 1991 almost always negative. It was not only the collapse of the socialist (international) division of labor and the transition to market economy that led to deindustrialisation, but also import competition. Foreign economic relations shifted since the early 1990s from the near abroad to the enlarging EU. Even more than before, exports were composed of raw materials and fuels. Since Putins accession to power there was more consideration for the protection of the national economy but the ultimate aim is to fully integrate in the capitalist world economy. Membership in the WTO is part of this process, but it also means that Moscow has not only to get rid of industrial subsidies and allow foreign firms greater access to the domestic market, but also to slash protective tariffs. In return, the WTO membership ought to facilitate FDI and help Russia raise investment abroad through the establishment of foreign subsidiaries in Russia. As Pascal Lamy, the head of WTO, said, the WTO label is extremely important for international investors and thats one which now Russia deserves2. When joining WTO Russia promised to diminish its average tariff level of 10 per cent in 2011 to some 7.8 per cent, which means that Russias entry will not destroy its economy. Nevertheless, the Russian government wants to hold control over some vital parts of the national economy, such as the weapon industry and the energy sector. It is especially in this sector that Western know how and capital is needed and foreign investment can open many doors to western markets as well or establish alliances with foreign countries importing Russian natural gas. In the Russian Federation, with its sharp regional divides, uneven economic and social development caused distortions and economic decline in many a sector or region. Especially the old industrial regions without natural resources were facing increasing difficulties in balancing their budgets and sustaining the living standard of their population. All regions are therefore looking for strategies enabling them to reform their economies and integrating them more or less into the world economy. In this book Irina Busygina and Alexander Sergunin discuss some preconditions for a successful political and economic strategy integrating local economies into the globalization process and establishing stable relations with the major economic powers in the world, i.e. the United States, Germany and China. They argue that some cities and regions
2 Financial Times, 11 November 2011.

attract the globalization agents and become innovation centers, while others remain at the periphery of the globalizing world economy. Their main argument is that the most important constraints to develop a competitive advantage with a potential possibility to participate in the globalization drive in contemporary Russia come from the central authorities. The Russian state is combining two non-compatible territorial orders: federalism and vertical power based on the idea of control and selective support of certain regions and cities in exchange for electoral support of the regime.

The intricacies of economic growth The least developed countries try to boost their economic growth by exporting their natural resources, which maintains them into a dependent economic situation. The more developed countries attain high economic growth rates by specializing in industrial and technological products. Foreign trade can lead to dependent development as well. Producers of raw materials can decide to keep the status quo in their relations with the developed countries by providing them with the natural resources they require for their own economic growth. On the other hand, producers of raw materials can be convinced that their natural resources should be a guarantee for their economic and political stability. These earnings should be necessary to pay for welfare programs and an ever enlarging bureaucracy. Finally, these policies always lead to an oversized and inefficient public sector. In most cases these policies require a populist regime imposing its will on all social classes and dictating a policy of redistribution of the national income in favour of the popular classes. Within this context the state tries to limit competition between different industrial sectors and to regulate the accumulation process in the interest of bureaucratic layers and the actively organized interest groups. Today, state-backed companies like Gazprom are playing an important role as engines of economic growth. Ekaterina Demakova and Alexander Gusev in their chapter discuss formal and informal aspects of the most important branch of the Russian economy the energy industry. Formally it is ruled by the state owned Gazprom; while informal aspects are shaped by the principal - agent relations between the state and Gazprom. The chapter provides a description of Russian gas industry from the institutional perspective paying attention to formal government structure of the sector, domestic and foreign gas market characteristics, and economic performance of the sector. A brief description of the political structure of Russia will provide an insight into the transformation of relations between the state and Gazprom. Also an extensive analysis of the interrelations between the state and the gas company will give an 9

answer on the main question of how the change in political government influenced the economic performance of gas industry. The paper will also address a complex relation between the state-owned Gazprom and independent gas producers, which have close ties with governmental officials. Most economists agree that sustained economic growth can only be the result of innovations and technological revolutions having a major impact on local production. Because qualitative growth is of crucial importance to any country, even when it can trust on large reserves of natural resources, the Russian government had to redefine its industrial strategy. Policy options had to target investing in Research and Development (R&D) or purchasing new technologies abroad; investment in exploring and exploitation of natural resources; and investing in human capital (skills, know-how, education) in order to develop the sectors of capital and consumer goods. Most of these problems date back to the beginning of 1990s. The table below shows the interrelated social and economic problems the federal government had to resolve in order to restore the accumulation process of capital and economic growth in the aftermath of Russias independence. Table: Interrelated social and economic problems and policy proposals

Ports are military centers, not centers of Reconversion of military ports and airports and commerce and industry open to the outside investment in facilities, railroads and highways world; no important international airports in the regions High military costs of a declining great power Sequels of communist practices Reconversion of Russias territorial army into rapid deployment forces and Introduction of more market mechanisms and anti-monopoly legislation and agencies

inefficiencies of a central planned economy only centers of industrial concentration

No typical centers of technological growth, but Creation of high-tech centers and centers of excellence at the universities and academic institutes promoting R&D (technoparks) Characteristics of a half-developed Euro- Modernization of backward regions Asiatic country A peasantry having no particular technical Introduction of biotechnology in farming and

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qualifications or commercial skills experience exchanges and networks An aging unskilled working class A fragmented intelligentsia globalization

food processing skills and know-how of international exchange programs, electronic publication facilities and networks Training and skilling of workers resisting Promotion philosophy of world art, literature and

No entrepreneurs with international business Development of international commercial An academic world lacking international Introduction

In the first decade of independence, two policy options were debated by economic reformers: an ultra-liberal economic policy liberating Russia from the sequels of Communism (state planning and collective property); and a state-led economic modernization policy resembling to that in South Korea. Under Yeltsin, most economic reformers backed by experts from the International Monetary Fund (IMF) preferred neo-liberal reforms. It is exactly these reforms that gave birth to the faction of the oligarchs who had acquired the most effective state enterprises, especially in the exploitation of raw materials and natural resources. All by all, the Yeltsin years were a decade leading to industrial decline and shrinking living standards. When in 2000 President Putin established his power, central authority was restored and a plan for modernization of the Russian economy drafted. This meant the end of regional autonomy and a return to increased state control on the economy. As one knows, during the past PutinMedvedev decade, strategic sectors of the Russian economy were kept under national control and supervision. Foreign investors were reduced to the role of minor partners or ousted in the case they were hampering local cronies. Although the American, Japanese and European ways of doing business were known, no typical Russian model was developed. However, in the international media the Russian way of doing business was often identified as a kind of mafia practices implemented by a system of widespread corruption inherited from the Soviet period. The devolution of political power and the economic downturn of the Russian industrial sector had wrecked the social system, while the state was unable to meet the demands of the population. Especially the sector of industrial durables was severely hit by the industrial crisis. Institutional problems were due to the ill-fated attempts to solve legal conflicts which made that property rights unprotected. In the natural resources sector no real growth could be achieved because of procrastination with technological

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modernizations. Legal problems concerning ownership, royalties and profits remained unresolved and in many cases led to conflicts as well. Financial sector was depending on a small group of bankers involved in international trade and finance. The development of real economic activities was hampered by speculative operations and illegal transactions. Parallel circuits preventing the development of real economic activities and the accumulation process gained currency. The oversized military sector could not be downsized in time. Meanwhile, a general political crisis developed in the wake of growing corruption, inefficiency of judicial system, instability of state organizations, regional divides, etc. All investors had to face institutional difficulties due to a defunct legal system. By the end of Medvedevs presidency it became obvious, that this model is hardly compatible not only with domestic demands, but also with globalization which challenges most domestic actors, including social institutions and state authorities.

Strategies of Foreign Economic Policy It is noteworthy that the Russian Federation can be considered as a laboratory of economic and social transformation. Globalization means that international trade and investment are taking the lead in the accumulation process of global capital. The former socialist economies trusting on import-substitution industrialization were the main victims of the globalization drive. They all had to dismantle their state-owned conglomerates and integrate them into the international economy by means of privatization (institutional reforms) and/or ally them with foreign capital groups and markets (business reforms) to keep up with the developed capitalist world. In its search for an economic strategy, the Russian Government had several options at its disposal. Two of them are most important: Export-Led Growth (ELG) and Import-Substituting Industrialization (ISI). Boosting economic growth could be obtained by promoting Foreign Direct Investment (FDI) and by using these export earnings to modernize the countrys infrastructures, human resources and technological capabilities. In this case, ELG would require priority investment in export industries exploiting local (national) resources (energy; raw materials, labour force) and in infrastructures and services facilitating exports. ISI investments in industries producing for the local market(s) and employing local resources can be very useful for increasing the employment level and creating jobs in remote regions. ISI and ELG can easily be combined and contribute to balanced economic growth and full employment as well. Both strategies or a mix of them require strategic intervention by the national and/or regional

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governments. As the example of the Newly Industrializing Countries (NICs) in Asia (including China) have proven, ELG is mainly built on a policy mix of low wages, input of technology, upgraded existing industries, monetary reforms, tax incentives and public investment. Industrial growth is much more difficult to obtain with ISI policies because of input shortages, rising labour demands, and technological troubles. However, ISI and ELG have both in common their reliance on public investment and fiscal policies sustaining the capital accumulation process by choosing for strategic investments expanding industrial output. In both strategies foreign trade is also playing an important if not decisive role. ELG is aiming at making a countrys economy competitive by introducing modern technologies and management techniques and specializing in niches or sectors promising a high return on investment. ELG can be developed by trusting on two export strategies. First, there is the classic export strategy of selling abroad natural resources (mining products, energy, fishing, forest and agricultural products). This strategy requires heavy investment in technology, processing industries and infrastructures. Although depending on foreign demand, ELG promises a high return on investment, but it also makes a country depending on foreign markets. Therefore, most governments prefer diversifying their exports, although their competitive advantage will be located in obtaining advantages of scale. Until now it is unclear which strategy the Russian government will choose. Apparently, the Russian economy is increasingly oriented on the export of natural resources in order to pay for its imports and sustain the welfare sector. ISI policies have not completely been abandoned, but in several sectors, such as the motorcar industry, alliances with foreign producers were formed in order to attract FDI, import technologies and production lines. The World Bank assumed that by joining the WTO, Russia could bolster its annual GDP by as much as 11 percent over the long term. However, short-term gains would be much lower, because many Russian industrial enterprises would suffer heavy losses. Russias economic power is still challenged by the sequels of the chaotic disintegration of the Soviet Union in 1991. This explains why Moscows grand strategy is the formation of a new alliance of former Soviet countries called the Eurasian Union. Russias relations with Ukraine are shaped by Moscows oil and gas diplomacy and security interests, but, as Elena Gnedina and Evghenia Sleptsova explain in their chapter, Ukraine is also looking to Europe for business opportunities. Both countries have nonetheless many common interests. However, security and economic interests have since 1991 separated the governments in Moscow and Kiev. Russia is strongly opposed to Ukraines intentions to become the member

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of NATO, and criticizes the countrys inability to reform its economy and to pay for its gas consumption. Sometimes Russian media portray Ukraine as a corrupt state wanting to ally with Russias enemies and exploit cheap Russian gas. In spite of this, Russias policy to Ukraine focuses on a further economic and commercial integration of both countries. Another most important vectors of Russias foreign policy is determined by security and economic interests which always come to the fore in the countrys diplomatic and commercial relations with Europe (especially Germany). As Leyli Rustamova argues in her chapter, diplomatic relations between Russia and Europe under President Dmitry Medvedev have become much more friendlier than before. However, the dialogue established between Russia and Germany has mainly centred not only around security issues, but also trade and investment problems. Notwithstanding the Nord Stream project, many problems are still subsisting, especially because Russian-German relations are also strongly influenced by Germanys role in Europe and its handling of the sovereign debt crisis shaking the Eurozone. The problem seems to be whether Berlin is still willing to engage thoroughly in European economic and financial integration, or whether it is choosing for going globally alone. Some may wonder whether Germany has lost interest in a further economic integration of the European Union. The postWorld War II accommodation left Germany embedded in a dense network of institutionalized Western relations, from NATO to the EU, and the presence of the Soviet Union in Central Europe. Nowadays, Berlins global policy is tending to a more unilateral foreign policy which is benefiting Russia as well. On the other hand, an Eastern temptation, whether it comes from Moscow or Beijing, will have a serious impact on the restructuring of Germanys security policy and the countrys membership of NATO. The problem can be traced to the fact that Germany, as Henry Kissinger once noted, might be too big for Europe, but too small for the world. Germanys foreign policy is nowadays in a process of redefinition as a result of the countrys growing economic strength and the weakening of the other European economies, especially of Southern Europe. However, the leading practitioner of todays successful policy of state-backed economic growth is China. State-backed companies account for about 80 percent of the value of Chinas stockmarket and only for 62 percent of Russias. China considers state-led firms no longer as a waystation on the road to liberal capitalism, but as a sustainable model of redesigned capitalism on its own. Chinese firms are winning contracts all over the world, which signifies that they also are acquiring valuable skills and experiences abroad. Nowadays, China is not only one of largest oil importers, but also invests in refining capacity in many extracting countries, from Angola to Saudi Arabia. 14

Russian oil firms and gas companies try to imitate the Chinese example by expanding abroad, but this time in alliance with foreign transnational oil companies. TNK-BP oil venture is intending to explore oil fields in as far as in Brazils Amazon rainforests. Mikhail Fridman, TNK-BPs CEO and main shareholder, said that the venture wanted to have access to significant new resources in one of the worlds fastest-growing markets3. Chinas rapidly growing demand for hydrocarbons and its wish to diminish its dependency on imports from the Middle East have stimulated cooperation between China and Russia. Since the 1990s China is looking for a new strategic alliance with Russia for its oil and natural gas provision from Siberia. Especially Russias energy negotiations with China are still at the heart of the discussions between both governments. In his chapter Andr Mommen argues, however, Russias relations with China is mainly based on Chinas interest in acquiring Siberias natural resources, especially hydrocarbons. Meanwhile Chinas growing presence in the oilfields of Kazakhstan may incite Russia to tighten relations with the oligarchy ruling in Astana. The Issue of Foreign Direct Investments One of the key issues in Russian foreign economic policy is the role of foreign direct investments (FDI). Because of greater openness and the weakened state authority, foreign investors tried to bypass political authorities and to ally with the new class of oligarchs. This reinforced the emergence of a kind of crony capitalism with a group of oligarchs running the economy, who had overtaken state assets during the period of the fiscal crisis of the state (1993-98). FDI concentrated in the financial sector, business services and oil and gas sector. Foreign investors were only interested in making rapid and easy profits, not in developing the Russian economy. They would not contribute to the populations well-being as a whole, only in exporting capital. Fearing growing political instability and chaos, foreign investors left the country one by one, while the class of the oligarchs kept on exporting capital. However, some foreign firms had no interest in leaving Russia, because they were eager to keep exploiting oil and gas fields. Oil and gas firms like Shell and BP had signed contracts in a hope to make easy and fast profits in collaboration with privatized Russian firms depending on western technology and capital inputs. Normally, investment decisions are targeting the development or modernization of production facilities and services. This always precludes a model or frame to be designed by political and business elites making important and decisive choices. In the case of Russia they were leading
3 Financial Times, 1 November 2011.

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to an integration of different enterprises into conglomerates or monopolized sectors having a determining influence on the countrys economy and political structure. At any rate, the crucial question remained that foreign investment was welcomed as long as it did not interfere into the fragile balance of political power between Moscow and regions where political and entrepreneurial cronies had their strongholds. Under Putins administration the Kremlin could keep the oligarchs in check, restore state authority and augment political and administrative stability. The price to be paid was that economic growth in most Russian regions was not picking up and that dependency on export earnings had remained. A thoroughgoing modernization of national economy was postponed as well. Foreign investors are always interested in institutional and political stability guaranteeing monetary (currency) and financial stability and a business-friendly social environment guaranteeing social and cultural peace. Transparency, developed civil society and a skilled and educated working force are among other requirements in order to keep foreign investors for a longer period in a country. Attracting FDI requires institutional reforms concerning property legislation, commercial and business rules, taxation, employment, etc. In Russia, conflicts between shareholders and business partners were not easily solved because of a defunct legal system and corrupt judges. Cooperation models had still to be developed in order to bring the public and private stakeholders together. FDI is the engine of world-market integration and globalization. However, FDI may also cause reverse effects. FDI may provoke a crowding-out process in several branches of the economy and generate high profits in the globalized sectors at the expense of the non-globalized and more parochial sectors, which may lead to rising unemployment rates, price increases, deskilling of segments of the labour force, poverty and social decay in specific regions, etc.. In addition, FDI increases class differences and cultural strives by creating modernizing social forces facing conservative social groups and by deepening the social gap between the winners and the losers of the globalization process. *** Two decades after the fall of the Soviet Union did not lead to a satisfactory liberalization and privatisation of the Russian economy. Wild privatisation, indeed, under Boris Yeltsin had led to high inflation rates, wide-spread poverty and a never seen before industrial decline. It is against this deplorable background that the establishment of the Putin regime, with its recentralization mechanisms, the vertical of power and the shrinking of the public politics, has to be understood. In fact, even 12 years after his accession to power in the Kremlin Vladimir Putin, 16

elected president again in 2012, has used constant references to the economic and social malaise of 1990s as the core justification for his recurrent reign. Yet since that time Russia has dramatically changed and diversified internally, in spite of the policy of unification pursued by the ruling elite. Russia does have both civil society and opposition, which means that its future is by no means predestined by the Putin team. It is Russias multiple identities, social actors, practices and discourses that the authors of this book try to unveil and analyze. Seen from different angles and analytical perspectives, they recreate a more multidimensional picture of Russia and offer a stereoscopic view of this country which still has to make its long-term choices.

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