September 2008 - The Russia’s Gambit

As the dust settles over the perturbed Caucasian landscape, the world tries to adjust itself to a new global environment. Unlike the previous situation when only one power could operate beyond the bounds of international law when expedient, now Russia claims to have the same right of convenience. This new development creates a qualitatively different setting that divides the world in two unequal groups of players – active and passive – who compete in the market for establishing international norms. Using game theory framework the first group can be described as the existing monopoly and entrant while the rest of world composes countries that take the global order for granted. Ignoring passive players, the composition of potential strategies that the two active players – the USA and Russia – can pursue, payoffs associated with them and their revealed actions indicate what the world will look like in near future.

Up to recently, the USA was the only power whose implicit right to recast international norms was unquestionable. Using the first mover’s advantage, Washington could often preclude global developments detrimental to American national interests without resorting to explicit actions. It sufficed to indicate American displeasure – often portrayed as the defense of democracy or human rights – that a presumed offender would fall back in line. When oral notation did not work, several layers of sanctions were invoked one by one until the determined trespasser was relegated to the lowest rank of international “pariah”. Other countries were expected to follow the suit or face the danger of being sanctioned next.

For some time Moscow felt that the USA defined global rules to its own benefit and that Washington used big words to cover the promotion of its national interests. Finally, the Kremlin decided that it should not follow the rules that give it solely headache.

That is against this background Moscow moved its military might to destroy the Georgian army last August. A week later, sensing that Washington prepared to launch its usual system of sanctions, the Kremlin made a number of pre-emptive diplomatic strikes. With blistering speed Moscow announced that it froze cooperation with the NATO, postponed negotiations on the WTO accession and expressed indifference to the proposal to replace G8 group with another formation that excludes Russia.

This combination of actions is very similar to what a “mean and lean” entrant would do expecting retaliation from the existing monopoly. Russia has both entered the domain occupied by another power and committed itself to staying in by raising the cost of its exit. It worked. Judging by US reactions, it took time for Washington to realize that its contingency plans were in shambles. The White House behaved as if a “strong warning” from its side would do the trick, apparently, not realizing that the Kremlin’s moves rendered “milder” forms of sanctions useless.

Because of higher stakes, Washington faces stark choice between going straight to the “hard” form of sanctions – that is officially demoting Russia to the group of global outcasts – and eventual accommodation.

Currently, the first option prevails as seemingly optimal. Indeed, by preserving the status quo Washington retains a powerful tool to protect its interests that may be further eroded if other countries – such as China, India and, possibly, the EU – decide that following in Russian footsteps is safe. To enforce the “hard” sanctions, the USA needs to establish a quarantine zone around Russia hoping that this country suffocates slowly in isolation. This task is daunting. It has to build a coalition of western powers including Germany and France that is willing to severe ties with Russia. The “old” Europe is visibly unenthusiastic about such a prospect. This move has grave consequences for its own economic wellbeing and, hence, to assure European cooperation Washington should offer a serious incentive or make a credible threat. Second, even if Washington succeeds in uniting Europe, Russia is still able to hang on by redirecting its trade flows to other countries. Its top export staple – energy products – is fully marketable abroad and, hence, immune from sanctions while the composition of its imports shows relative competitiveness among suppliers many of whom, like China or countries of South America, would be more than happy to replace EU exports to Russia. To widen the blockade, Washington needs to unite the world against this country by portraying Russia as an “Evil Empire”. In this respect, Moscow has clear advantage because to defend its new status it is not obliged to pick up every fight. Recent developments show that the Kremlin has chosen the tactic of avoiding confrontations it is unsure to win; for example, it did not respond to provocative US and British actions in Ukraine and revealed its “dovish” side approaching the conflict in Moldova.

From the Russian point of view, the new situation carries some early costs but delivers greater dividends down the road. So far, the costs were reasonably low. The cost of military conflict was covered from contingency funds. Investors pulled out of the Russian stock exchange in anticipation of US sanctions but the outflow of speculative capital made hardly a dent in national currency reserves. Rumors say that a couple of wealthy Russians were seen selling assets at home, thus opening the way for their eventual desertion to the west, but most of elite expressed solidarity with the Kremlin. The talk that Russian acquisitions in the west should be placed under greater public scrutiny intensified but no consequences followed. The costs of preparing for the next armed conflict in the Caucasus, as the USA seems to rearm the Georgian army under the leader who vows to fight again, were anticipated and budgeted in advance.

Potential advantages are mostly of long-term character and they are less visible today. They rank from greater negotiating power in foreign trade, for example in energy sector, to a higher international status that may eventually help Moscow to re-establish a regional union with Russia at the helm. There are early indications that payoffs are coming, especially in the Caucasian region and Central Asia, but their actual value cannot be estimated today.

Май 2007 - Идеи для президента

Предвыборные кампании сезона 2007-8 годов официально должны начаться этой осенью, но неформальное позиционирование основных кандидатов на пост Президента России уже в самом разгаре. Данное обстоятельство объясняется необычностью текущего момента.

Впервые за новейшую историю страны российский лидер собирается отойти от управления государством добровольно, то есть несмотря на наличие объективных возможностей для «удержания» власти в своих руках. Подобное поведение настолько необычно для россиян, что оно побуждает дискуссии о том, каким же таким хитрым способом Владимир Путин планирует осуществлять руководство страной после выборов 2008 года. Логика подобных разговоров понятна – что же еще традиционно желает российский правитель как не власти? – но она строится на ключевом предположении о том, что власть в стране нужно именно удержать поскольку она «взята» по праву силы. Следовательно, потенциальный уход г-на Путина будет рассматриваться как его проявление непростительной для руководителя слабости.

Обоснованность подобной логики далеко не очевидна. При всем несовершенстве государственного устройства современной России, неправомерно утверждать, что национальный контроль сконцентрирован в руках узкой группы людей. Для того, чтобы такой контроль был эффективным, необходима непротиворечивость интересов основных властных группировок - или федеральных, региональных и деловых «элит» - что, как показывают события последних лет, невозможно в настоящих условиях. Вопреки общепринятому мнению, которое представляет пресловутую «вертикаль власти» в виде иерархической структуры с четким распределением прав и обязанностей, последняя строится на переговорной основе с учетом интересов влиятельных сил. При подобном раскладе ни одна отдельно взятая группировка не может взять и удержать общенациональную власть полагаясь на одну грубую силу.

Необходимость проведения переговоров – включая установление «правил игры» - открывает возможности для вовлечения новых участников в процесс передачи власти. Этому способствуют атрибуты демократического строя, которые хотя и не гарантируют влияния рядовых избирателей на конечный результат – особенно на этапе выдвижения кандидатов - но предполагают формальную легитимизацию нового лидера через его (или ее) победу на массовых выборах. При условии равного доступа «прокремлевских» кандидатов к административным ресурсам, что является одним из основных положений стратегии Владислава Суркова, привлечение на свою сторону наибольшего число выборщиков становится одним из важнейших факторов влияющим на результат выборов. Последнее требует от претендентов если не реальных инвестиций в предвыборную программу действий, то хотя бы в маркетинг идей, которые избиратели сочтут для себя полезными.

Вот над этим – составлением предполагаемых планов действий после получения власти – и начинают задумываться кандидаты на пост президента. При этом им приходится учитывать ряд ограничений. Во-первых, они должны ориентироваться на рейтинг наиболее популярного российского политика – Владимира Путина – что объясняет их непреодолимое желание позиционировать себя как единственно верного продолжателя дела последнего. Здесь нужно отметить, что уходящий президент не только не дает карт-бланш на проведение независимой политики после 2008 года, но и существенно ограничивает поле действий нового президента. Например, вопреки своей обычной законодательной практики правительство фиксирует федеральный бюджет на три года вперед, то есть на период работы будущего президента. Во-вторых, кандидаты вынуждены учитывать особенности поведения российских избирателей, которые хотя и слабо осознают свои интересы, но начинают оценивать предложенные программы со все более прагматичных позиций.

Как свидетельствуют события последних месяцев, основные претенденты на пост президента – такие как Сергей Иванов и Дмитрий Медведев –чувствуют себя неуверенно в области менеджмента идей. На недавно закончившемся XI Международном Петербургском экономическом форуме (8-10 июня) Иванов озвучил программу национального развития, косвенно адресуя одну из основных тем волнующих избирателей. В этом он последовал примеру Медведева, который выступил со своей программой развития в Давосе в январе этого года.

Обе претендента базируют свои программы на идентичной начальной предпосылке. Экономика России должна отходить от сырьевой направленности и специализироваться на производстве продуктов и услуг с высокой степенью добавленной стоимости. Однако, их позиции относительно выбора приоритетных направлений расходятся. Иванов, как человек связанный с военно-промышленным комплексом, видит будущее страны в развитии технологий двойного (военного и гражданского) применения таких как ядерная промышленность, авиа- и судостроение, космические услуги и нанотехнологии – что предполагает активную роль для государственных корпораций. Медведев придерживается более рыночной позиции, ратуя за федеральные инвестиции только в те сектора, которые частный бизнес «избегает» - инфраструктуру и человеческий капитал.

Прямолинейность позиции Иванова оказывается ее слабым местом. В эпоху глобализации программа развития от военного комплекса предполагает либо наличие существенных связок между двумя типами технологий, что поможет России занять глобальные позиции в областях смежных с военными (например, альтернативная энергетика или спутниковая связь), либо растущую напряженность в мировых отношениях, что повлечет за собой рост экспорта вооружений.

Политика Медведева является более гибкой, поскольку она оставляет принятие деловых решений за частным бизнесом; то есть за теми предпринимателями, которые уже доказали свою эффективность на мировой арене. С другой стороны, слепое следование рыночным сигналам может привести к чрезмерной зависимости России от низкодоходных (сырьевых) секторов. Предположительно, Медведев осознает данную опасность и пытается найти инновационные идеи развития страны через узконаправленные государственные инвестиции; например, в энергетический сектор.

В целом, следует ожидать активизации работы по поиску приемлемых программ развития со стороны участников избирательного цикла 2007-8 годов. Те партии и претенденты на пост президента, которые заявят о себе программой развития приемлемой для среднего избирателя, могут ожидать значительного улучшения своего показателя на предстоящих выборах. Иначе не получится: в условиях политической конкуренции почивать на лаврах не приходится. Что же, сезон охоты на идеи открыт.

April 2007 - Programs for the President

A recent economic conference, held at the Higher School of Economics on April 3-5, is, apparently, the closest Russian analog of annual American Economic Association meetings. However, unlike US academic gatherings that are normally visited at most by mid-rank government officials, the list of participants at the Moscow meeting included such dignitaries as Deputy Prime-Minister Alexandr Zhukov, Finance Minister Alexei Kudrin and Economic Development and Trade Minister German Gref. The attention that top state officials pay to what social scholars say is not limited to this conference. For example, First Deputy Prime Minister Dmitry Medvedev attended a similar meeting on the role that human capital plays in Russian development on March 13.

Why state officials express keen interest in seemingly academic debates is puzzling if not for one observation: the country prepares for the next electoral cycle. While many foreign observers and ordinary Russians resign to the idea that democracy ever takes roots in this country, the Kremlin knows better: it cannot assure what course Russia assumes after President Putin steps down in 2008.

The last proposition appears to be ludicrous. The state dominates almost all spheres of public activity, which seems to guarantee that no cardinal changes are allowed. The Kremlin controls Duma and state apparatus. Non-systemic opposition is disorganized and squeezed out of public space by parties that simulate competition within the boundaries set in the Kremlin. The bulk of media is run by state monopolies or government-friendly magnates. Voters are tired of changes and apolitical. So what is the problem that bothers the Kremlin so much that it turns to academics for help?

The trouble is that for all classic power attributes that the Kremlin has amassed in its hands, it cannot continue along the path of repression. Moscow understands that the change of leadership in 2007-8 is a qualitatively different exercise than what Russia experienced in 1999-2000. Then, the country was reeling from the mess created in 1990s and exacerbated by the sovereign default of 1998. People longed for stability. The image of a leader who was sober, energetic, spoke right words about peace and order was sufficient to lead voters at the poll. Meanwhile, if the projection of positive image failed to deliver victory to the “right” candidate, time-honored methods of electoral fraud were kept - and occasionally used - as the last resort.

There was no need to bias the voting results in 2000 and in 2004 but this time the Kremlin needs more than the victory of “right” candidate propped by force if necessary. Putin realizes that he cannot control his chosen candidate after he or she is elected. Thus, any promise that such candidate gives him today should be insured against the possibility of reneging. First, such insurance comes in the form of limits imposed on the next president administratively. This consideration explains why, for example, budgetary horizon has been recently extended to three years instead of one year. Second, Putin may require his successor to comply with voters’ dominant preferences.

The last point explains why Dmitry Medvedev, the frontrunner for the position, and his economic associates in the government are so interested in new ideas. They shop for programs, with which the presidential hopeful can appeal to the median voter. Second, this voter, in spite of her publicly professed political apathy, is smarter today than in 2000. She will not be swayed by the right words alone. The modern Russian voter appreciates practical ideas that will work. Moreover, she sets high standards that cannot be circumvented easily.

To find the right key to increasingly demanding voters is difficult not only for aspiring presidential candidates. The results of the conference, where the cream of Russian academic community assembled, showed increasing strain of expert community to come up with new thoughts. However, some of the expressed ideas can be incorporated into potential strategies and others may be worked out. But, first, a note on current electoral preferences is in order.

According to surveys, Russian voters focus on two objectives. On one hand, they want political and economic stability, the main achievement of Putin’s presidency, to continue. On the other hand, the voters become increasingly concerned with relatively low standards of living. Given that the stability of 2000-7 has coincided with growing average income, the median voter asks to preserve stability but, paradoxically, to replace its foundation allowing for faster economic growth. Moreover, this growth is expected to be reversed towards benefiting predominantly the poor.

To combine the objectives of pro-poor growth and stability is a challenging task because they contradict one another. This combination indicates a potential rift within the Russian collective soul that one can loosely associate with the conflict between two main groups of voters. The first group comprises people who have adjusted to existing situation. Not necessarily rich but mostly well-to-be, they are individualistic and rely on themselves exploiting newly found opportunities to organize their lives. These people are mistrustful of the state, which they see as a bunch of inept bureaucrats, but even more of self-professed “reformers” who, they suspect, bring nothing but disorder if they come to power. Needless to say, the members of this group vote predominantly for the main “party of power” or United Russia.

The second group combines those who believe that the situation in the country is far from being perfect and demand changes. Many of them want the state to take the lead and improve their well-being. Some others are concerned with perceived “injustice” and expect the state to punish those “egoists” who they think are guilty of public “wrongdoing”. In addition, a relatively small and wealthy minority demands the state to take the back seat and let private initiative to play a greater role in public affairs. All three sub-groups align with opposition parties - social-democratic, nationalistic or progressively liberal - with their specific choice depending on secondary characteristics.

Given that the United Russia is supported by 40-45 percent of voters, the chosen Kremlin candidate cannot win in free and fair election unless he or she attracts a part of oppositional electorate. Thus, the presidential hopeful should both assure United Russia voters that the state will respect their autonomy and, simultaneously, to come up with a program of pro-poor growth or restoration of “justice” liked by opposition voters. In practical terms, it means that the candidate should obtain his or her acceptance by the three pillars of political stability - federal bureaucracy, regional elites, and business owners - and indicate broadly but pointedly how he or she increases the return on existing national strengths or currently dormant but potentially productive factors.

The first part of the problem is more pressing because the current status quo is, possibly, unsustainable. To see this, consider an example. Business owners associate stability with commercial expansion including inter-regional trade. However, when they move to new regions they upset, inadvertently, the local balance of power. Regional leaders are considered by voters to be responsible for “law and order” but often lack necessary fiscal base. To compensate for missing funds, they demand companies to contribute “voluntarily” to the maintenance of public infrastructure. Instead of conflicting with the “boss”, local businesses prefer to add extra costs to their budgets charging, essentially, the consumer. New entrants whose main base stays outside of the region incur lesser costs because they refuse to pay and undercut local suppliers in prices. Unsurprisingly, local authorities rush to defend their clients while “invaders” appeal to their federal patrons.

Another potential conflict of interests involves top bureaucrats and owners of large businesses or “oligarchs”. Many voters believe that large enterprises have been privatized illegally, consider their owners to be illegitimate and, hence, demand “justice” to be served. Sensing this attitude, officials threaten to reverse the results of privatization and to bring formerly state-owned companies, such as YuKOS, back under their control. To minimize the risk of nationalization, oligarchs invite state officials to share in their projects. Such attitude corrupts bureaucracy from the top to bottom of the Kremlin “vertical of power” triggering another problem. Public opinion does not hold smaller businesses to be owned “illegitimately”, which allows their owners to resist what they see as bureaucratic meddling in their private affairs. Thus, while being supporters of United Russia in general, business owners may switch sides if the next president does not protect them from corrupt bureaucrats.

Expert community appears to reach consensus on two possible approaches on how to maintain stability. First, they recommend oligarchs to recognize their “original sin” of illegal privatization adding that their reputation can be eventually redeemed through active involvement in public works. The latter may benefit them directly because public interests can be integrated in their business projects. Second, because arbitrariness of state officials is indicative of legal uncertainty, stabilization of legal environment will help. The more repetitive public functions become; the less creative bureaucrats can be interpreting the law. In addition, the next president scores points within the business community if he or she ride on the promise of lower state control and greater reliance on joint state and private regulation of business affairs. The last pledge is likely to be welcomed by regional administrations as well as they are wary of growing Moscow control of local affairs.

The dearness of new economic ideas is more profound. The obvious suggestion is to employ Russian advantages in energy resources. Essentially, this is what the Putin Administration is already doing as it lobbies intensively on the behalf of Russian oil and gas interests internationally. But, as one of the participants observed, if energy companies employ not more than 5 percent of the labor force, what other 95 percent are going to do? The question went unanswered. Yet, some potentialities are apparent. If Russia decides to become a global champion in energy technologies, its expansion abroad will increase domestic employment in energy sectors beyond 5 percent. Abundance of cheap energy is a necessary condition for the development of energy-intensive sectors such as iron and steel, non-ferrous metals or chemicals that can also absorb additional labor. Growing internal demand for transportation, banking, real estate, retail and other services is another source of both employment and sustainable growth.

In general, the conference materials have left ambivalent impression. On one hand, it is refreshing that top Russian policy-makers show growing interest in the advice given by expert community. On the other hand, not many experts were up to the task. The current political demand is centered on turnkey economic or sociological projects and not on abstract theorizing. For Russia to progress, this demand must be met.

April 2006 - Gazprom and Europe: an Elephant in a China Shop

The recent Gazprom-EU altercation, replete with recriminations of double standards and blackmail, show a curious mixture of genuine puzzlement and misunderstanding on both sides. Gazprom, a Russian natural gas monopoly, does not comprehend why its language of overt threats and bullying behavior is considered, unlike in Russia, as something exceptional. The EU officials maintain an entirely rational, albeit unsubstantiated, assumption that since the Kremlin is the dominant shareholder in Gazprom, the latter’s expansionist overtures in Europe are politically motivated. The resolve with which both sides defend their convictions guarantees that Gazprom’s current attempt to force its entry into lucrative but well-protected European energy market will be thwarted at great cost to both sides.

 However, as the dust settles down, both sides have to pause and re-assess their troubled relationship. There are serious problems that each side has to confront as recent events in a larger pan-European energy market indicate.

 Gazprom has aggressively moved to position itself as a global player at least since November 2005 when it obtained consent of Central Asian countries – Turkmenistan, Uzbekistan and Kazakhstan – to buy up their available stock of natural gas. This move, erroneously attributed to the escalating price dispute with Ukraine, was followed with a similar agreement signed with Sonatrak, an Algerian state-owned petrochemical company. In another signal, ominously addressed to Europe, Gazprom pledged to deliver natural gas to China from its West Siberian fields – traditionally reserved for European export. The active role that the Russian government played promoting Gazprom’s interests abroad prompted speculations that Putin will become its CEO after he steps down in 2008. Putin denied the allegation explaining that he is not interested in business career.

The EU is not enthusiastic to see Gazprom within its borders. It does not want a company mired in murky deals with the likes of RusUkrEnergo and suspects that Gazprom pursues unclear political agenda deviously devised by the Kremlin. Naturally, the eyes are set on energy alternatives. The truth is that Gazprom pursues standard corporate agenda of greater profit and long-term growth. Its management is as much surprised as the Europeans are that their “innocuous” aspiration to grow sends jitters across the EU and lashes out at what it perceives to be “double standards”. To its credit, it should be recognized that Gazprom corporate practices are extraordinary for a company that matured during the “wild capitalism” years of the 1990s when ruthless disregard of partners’ interests if not outright criminality was a norm. Certainly, to grow in Europe, Gazprom needs to bring its corporate practices in line with the OECD standards. There is no reason to believe that it will not happen. By entering in European markets Gazprom submits itself, perhaps willingly, under the EU jurisdiction. If the EU succeeds in enforcing its rules, a “christening” of such a structurally important company will have favorable effect on business culture in Russia.

 The tandem Kremlin-Gazprom that many commentators see as a patron-client relationship is more complex than that. The Kremlin expects commercial entities like Gazprom to contribute to its political tasks at home and, occasionally, abroad. Yet, the current Russian leadership realizes that its global agenda is of secondary importance until the standard of living for ordinary Russians improves. This overriding objective depends on the ability of domestic companies to expand abroad, particularly in advanced sectors with high value-added. The Kremlin’s interest in the “Gazprom project” is the first in a series of smaller ventures that it plans promoting abroad – notably, oil company Rosneft and newly established aircraft-making monopoly United Aviation Corporation.

 The EU is right that greater competition in energy markets is important. However, it should not shy away from studying Gazprom’s offers either. Perceived “boorishness” and political dependency of this new claimant on European gas wealth is the main obstacle. But the EU has a successful history of “grooming” rough members until they learn appropriate “etiquette” without compromising its integrity. It should not be lost either that the current concurrence of interests between the Kremlin and Gazprom is far from being stable. Mistrust runs deep as not-so-distant state attacks on Russian large corporations demonstrate. As Russian businesses establish their base abroad, they evade direct political pressure from the Kremlin. Then, the current or future Russian leaders may learn – to their surprise – that having succeeded in economic integration they have inadvertently imposed a check on the Kremlin’s political power.