The Most Probable Scenario for Russia Is Structural Stagnation

The current trend towards increasing social and defense spending, and raising salaries is destabilizing the financial policy and to a certain extent, is scaring off foreign investors. This trend will have negative consequences in medium term.

The VIII summit of the Valdai International Discussion Club “Elections 2011-12 and the Future of Russia: Development scenarios for the next 5-8 years” is held in the Kaluga Region and Moscow in November 7-11, 2011. interview with Hans-Henning Schroeder, academic director, head, Russia/CIS Division, German Institute for International and Security Affairs (SWP).

Mr. Schroeder, what are your expectations for the 2011 parliamentary elections and the 2012 presidential elections? What will the country be like in half a year – will it remain the same, fall back or move forward with its new (old) president?

Like its neighbors, Russia has been affected by the world financial crisis. A drop in prices on raw materials is a very heavy blow for it because of its dependence on exports. But owing to a far-sighted financial policy, Russia still has the monetary resources that allow it to alleviate some of the burden of the crisis. The question is how will the new government behave under these conditions? It must cope with the consequences of the crisis, restructure its economy (which can only be done with the help of foreign capital) and mitigate social inequality. These goals are hardly compatible with each other, and for this reason the government will have to determine its priorities. The current trend towards increasing social and defense spending, and raising salaries is destabilizing the financial policy and to a certain extent, is scaring off foreign investors. This trend will have negative consequences in medium term. Will the government change this economic policy after the elections? We'll have to wait and see.

There is the opinion that if Putin becomes president again he will be, and even must be, a “new Putin” who will have to adapt himself to the new times and challenges. What do you think?

Yes, he will have to face new challenges and we will see how the new government will deal with them. Dmitry Medvedev has failed to make a breakthrough with his sensible policy of modernization, and the question is whether this policy will continue under Putin. There are no indications of this for the time being. The populist measures that Putin announced at the United Russia conference do not yet amount to a rational strategy.

What do you think Putin should do, and what is he likely to do?

This is a difficult question to answer. These challenges amount to squaring the circle. Putin needs to protect Russia against the consequences of the financial crisis through stabilization measures – that is, a policy of restricted expenditure. At the same time, by implementing gradual social and healthcare reform and increasing people’s real income, he must alleviate social antagonisms and ultimately remove them with his New Deal in the medium-term perspective. He must also improve the framework of conditions for investors by keeping expenses low on salaries and social purposes, improving the infrastructure and creating an efficient legal system.

It is unrealistic to try to achieve these goals simultaneously. This is why Putin will have to determine his economic and social priorities and fix different deadlines for achieving these goals. The main question is whether the government is capable of carrying out reforms (modernization) in all spheres, contrary to the interests of elite groups.

Do you think Putin understands the need for modernization, and if so (and more importantly), is he capable of breaking through the resistance of one side of the elite and aligning himself with another side in order to mobilize it in pursuit of genuine modernization of the country?

This is the root of the problem. During his first presidency from 2000-2004 Putin carried out a number of sensible reforms and, apparently, is fully aware of the tasks facing him. The question is whether he will be able to resolve them despite the resistance of the elites. He does possess enormous power but he will only be able to stem the export of capital and the brain drain by creating attractive framework conditions for investors and innovation activities. To achieve this he must resolutely suppress any parasitic trends in state management and the political class. He found this to be beyond his capacities during his second presidency from 2005-2008. We will see whether he will be able to do this in 2012 and beyond.

Will Russia be able to carry out modernization on its own if it approaches this task properly, or will it need help from the West? The latter shouldn’t act as an all-knowing teacher, though.

It's not worth it to set Russia in opposition to the West. Russia is already part of the global economy, and the question is whether its leaders will be able to attract capital and forces of innovation for their efficient use while competing with other regions of the world. I’m referring in particular to the Russian capital that is flowing out of the country. If Russia increases investment, improves its infrastructure, promotes innovation, including in education and research, and expands the relevant agencies, it will be able to achieve modernization. However, greed, egotism, corruption, red tape and inefficiency could disrupt this cause.

Will Russian foreign policy change if Putin becomes president again?

Russian foreign policy is traditionally based on security cooperation with the United States, intensive economic exchange with the European Union and an attempt to integrate the post-Soviet space. I should add to this cooperation with China, which is aimed at protecting its southern and eastern flanks. These basic trends will remain the same but the priorities may change. The proposals made by Putin in 2001 and Medvedev in 2008 to the EU and the United States received no support. This is why Putin is now apparently focusing on the integration of the post-Soviet space, thereby creating a contradiction with the policy towards the neighboring EU. This will not make cooperation with the EU easier in mid-term perspective.

In one of your analytical articles you wrote that the United States and the EU have not been interested in changing the image of their relations with Russia in the last few years. Why is this the case? Are the U.S. and the EU satisfied with the state of these relations or is it very hard to renew them?

The United States is not particularly interested in Russia. It is primarily concerned with nuclear security and non-proliferation of weapons of mass destruction, and also in cooperation on such issues as Iran and North Korea. Washington has no economic interest in Russia. Having signed the START agreement, the U.S. has achieved a certain nuclear equilibrium. Besides this, it is much more interested in the Pacific, China and Asia than in Russia. Under the circumstances the EU should assume a constructive role in Europe, but recently it seems to have been preoccupied with its own problems rather than thinking about the idea of the Greater Europe.

Does the West treat Russia worse than other countries? Should Germany and the rest of the EU be guided by “the basic values” in their policy towards Russia, and should they pursue Realpolitik?

I don’t think that they treat Russia any worse than other countries. But it is also true that the public in Germany and other European countries pinned big hopes on Russia until 2004, and are now disappointed. These hopes were linked with Medvedev, whereas the image of Putin was predetermined by his speech in Munich (at the conference on security policy in 2007) and his boastful, macho PR. The European governments cannot ignore the opinion of their voters.

Honestly speaking, I don’t see any particular difference in our values. The Russian Constitution and the canons of the great Russian literature are consistent with the basic values adopted in the West. Violations of values take place everywhere. But in Germany such mechanisms as courts, including the Constitutional Court, that are designed to guarantee the observance of basic values, function better than they do in Russia.

What scenarios of the development of Russia in the next five to 10 years seem the most likely to you? Which of them seem the most probable?

In cases such as this, analysts tend to name three scenarios – the best-case, the worst-case and the happy medium. The worst-case scenario implies economic stagnation and aggravation of social tensions to which the regime would react with authoritarian measures. The best case would be a successful modernization that would remove social antagonisms and facilitate the growth of the middle class, which would also become politically active. However, in my view the most probable scenario would be structural stagnation (an energy-dependent economy and persisting social tensions), which will continue if energy prices remain high and the implementation of reforms continues in certain sectors of the economy.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.