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BEN SLAY: The Russian economy is like a very sick patient that has started to get better. There is dramatic improvement but the patient is still, if not in intensive care, then still in serious condition.
KRISTIN MCHUGH: This week on Common Ground, Russia’s struggling economy and faltering security.
CLAY MOLTZ: I think one of the key focuses of the Putin administration is to reestablish pride in the Russian state. And the military is one key element of that.
KEITH PORTER: Common Ground is a program on world affairs and the people who shape events. It’s produced by the Stanley Foundation. I’m Keith Porter.
MCHUGH: And I’m Kristin McHugh. Vladimir Putin is working to rebuild Russia’s global status. Reviving the country’s economy is key to the process.
PORTER: But after nearly a decade of financial turmoil that culminated in a complete economic meltdown in 1998, Putin has his work cut out for him.
MCHUGH: Ben Slay is a Senior Economist with PlanEcon, an economic consulting group in Washington, DC. And Paul Saunders is the Director of the Nixon Center. Both are cautiously optimistic about Russia’s economic future. Ben Slay begins today’s discussion with his personal assessment of Russia’s financial health.
BEN SLAY: The Russian economy is like a very sick patient that has started to get better. There is dramatic improvement but the patient is still, if not in intensive care, then still in serious condition. And a full recovery is by no means assured. But still, all of the vital signs are improving. And a lot of the problems that seemed terminal only 12 or 18 months ago have, in fact, now been understood to be, if not temporary, then at least of less significance than was thought before. In more specific terms, GDP is growing at about 7 percent; inflation has come way down; there are a lot of Russian companies that are making profits-expanding, investing for the first time. Unemployment has come way down. And there are just-there’s good news about the Russian economy in ways that there haven’t been good news for at least a decade.
MCHUGH: Paul Saunders, would you agree?
PAUL SAUNDERS: I would agree in part. The Russian economy is clearly experiencing some modest growth now. I think we have to remember though, two or three things when we think about the growth that we see. The first is that they’ve been helped out enormously by quite high oil prices. Russia is a substantial oil exporter. The second thing is, is simply the effect of the devaluation in August of 1998. The ruble has come way down. That has helped Russian domestic producers by encouraging Russians to buy goods produced in their own country because imports are too expensive. So I think we have a window of opportunity in Russia, probably in the next year or so. It kind of depends. It’s hard to put a fixed amount of time on it.
MCHUGH: Fifteen years ago Russia was a communist economy. How would you describe the mix of the economy today? What makes up the economy today? Ben?
SLAY: It’s a market, capitalist economy. But it’s a poorly functioning one. The markets are very distorted. And the problems relate to the fact that there are many legacies, not so much in the form of ownership, but in the form of regulatory institutions and in the form of relations between government and business, that are inherited from the Soviet period and continue to impact, have an influence upon economic decision-making. So, I mean, the Soviet Union existed for 70 years. It doesn’t disappear, can’t be eradicated overnight. And there are major problems still that have to be addressed because of this. And many of those problems are in the mentality of the citizens of Russia. It’s one of those half-full versus half-empty questions. So much progress has been made in the last 10 years, but there’s still a great deal more to be done.
MCHUGH: Paul Saunders, how would you describe the makeup of the current Russian economy?
SAUNDERS: I would probably prefer to call it a semi-market economy rather than a, really a market economy, for a variety of reasons. We don’t really see markets functioning in many sectors of the economy. Is there a real, kind of national labor market? I don’t think so. People are very restricted in their ability to move around the country. Are there capital markets? Well, you know, yes and no. Clearly Russia faces an enormous set of problems as a result of the communist legacy. The psychology problem that Ben raised is an enormous problem. People in many parts of Russia do not view earning money as a good thing. They’re very suspicious of people who are earning money. They wonder, “What is this person doing? They must be breaking the law?” ‘Cause we have to remember, small businesses are really the driving force behind most modern Western economies. And you can’t have the kind of development of that sector that Russia needs without a lot of people in the country being convinced that this is something that is valid, legitimate, important to do. Not, not even mentioning where they’re going to get the money, how much of it they have to spend paying off city inspectors, or organized crime, or whomever else.
MCHUGH: Paul, you brought up something that I wanted to raise and that is the issue of corruption. We hear a lot about corruption in the West in terms of what’s happening inside Russia. How serious of a problem is it really, on the ground?
SAUNDERS: Well, it’s really a very big problem. It goes from top to bottom in the system. Russia’s former prosecutor general, Uri Skaratov??, who was recently removed from his post for political reasons, primarily, called corruption the number one national security threat facing the Russian state today. You have, as I mentioned, tax inspectors or city inspectors regularly shaking down people for bribes. Traffic police shaking people down. There are just a host of problems-racketeering, protection money, larger-scale transactions, capital flight, massive fraud. It’s a very, very serious problem. And precisely because it’s at every level in the society it becomes very difficult to overcome, because in many respects it’s self-reinforcing. You can protect your organized crime activity by paying off prosecutors and judges.
MCHUGH: Ben Slay, would you agree that corruption is a national security threat in Russia?
SLAY: Yes, I agree. It’s a very serious problem, itself a legacy, in my view, of the Soviet system in many respects, that came from the fact that once the transition began you had private property and need to protect that property. And the Soviet system was incapable, or prevented the rapid appearance of, a rule of law to protect that property. And so people turned to non-rule of law ways to protect their property and enforce contracts. Which are things that we would call extralegal or illegal in this country.
MCHUGH: Vladimir Putin is promising economic reform. What is his economic reform plan and will he be able to succeed in the short term? Ben Slay?
SLAY: Well, you have to realize that there have been dozens, if not hundreds, of previous economic reform plans. Most of them have not been implemented; none of them have been implemented in the way it was supposed to be implemented. So you need to start out with a certain amount of skepticism about Putin’s plan. On paper it’s a wonderful plan. It reads just as if it was drawn up by, sort of, a wish list of the best economists who know about transition, all across the former Soviet Union and Eastern Europe. It talks about making markets work better. It talks about making things more transparent. Restructuring monopolies, privatizing things that haven’t been privatized yet. But the really interesting questions are not what the program says.
The really interesting questions in my view are, will it be implemented? And so far there are some encouraging signs and some very discouraging signs. Russia is this big, complicated place with, where nothing is ever black and white, it’s always shades of gray. And how you read the tea leaves, so to speak, is a very individual matter. There has been a tax reform that has been passed. It’s very helpful, but there are lots of reasons to be concerned as well. And one of them is that Putin has, does not have a democracy agenda at all. And I don’t think you can have well-functioning markets in an-with a political system that’s not democratic.
MCHUGH: What role does Russia really want to play in the global economy?
SLAY: Well, I think President Putin wants to restore Russia’s status as a great power. I think, however, he is realistic enough to understand that, that will not come through economics. Or at least through Russia’s economic relationship with the rest of the world. Russia represents less than 1 percent of all world trade. By contrast, trade for the Russian economy is very significant. So it’s really an asymmetric kind of relationship, where Russia needs the rest of the world a lot more than the rest of the world needs Russia. I think, that in the end, Russia would be very fortunate if it is going to be able to broaden its relationship with the international economy to be more than simply than just an exporter of raw materials and a borrower from the IMF and World Bank, which is pretty much where it is now.
MCHUGH: Paul Saunders?
SAUNDERS: I would agree with Ben that economics is really kind of a means to an end, essentially for President Putin. He’s very interested in restoring the status of Russia on the international scene. And one way to do that is to develop the economy and become kind of a serious player. At the same time though, I think Putin, and probably a lot of other Russians are somewhat ambivalent about this because, again returning to the psychological issue, the international economy today is dominated by the United States. So for Russians really to embrace integration with the rest of the world, to embrace globalization, they have to psychologically be willing to admit that Russia is not an equal to the United States. And some people have been willing to accept that; President Putin has said things that suggest that he accepts that. But I think a lot of people in Russia have not accepted that.
MCHUGH: I’ve heard from both of you a mix of optimism and pessimism. Where would you say the Russian economy is headed in the next ten years? Are you optimistic or are you pessimistic overall? Paul?
SAUNDERS: I think I’m optimistic, but I have to qualify that a little bit if you don’t mind. The first thing that we have to remember is that Russia is coming out of a ten-year period that has just been devastating economically, and wrenching. But almost regardless of what was done I think we should expect some modest, gradual improvement, just as things stabilize. The second reason that I want to qualify my optimism is that I’m considerably less sure about Russia’s political future. Russia that’s economically strong, but has taken on political characteristics that are unattractive-authoritarian or whatever other form we can imagine-is not really something that I, as an American, want to face.
MCHUGH: Ben Slay, the final word. Optimistic, pessimistic?
SLAY: Like Paul I am much more optimistic about the short term than the long term. Russia has bottomed out and the economy is growing, and there’s a certain amount of inertia and momentum that comes with that. But that won’t last forever. At some point down the road Russia will have to deal with some very disturbing long-run trends that are already apparent. Russia’s population is shrinking dramatically. Life expectancy is falling. These are not the sort of things that will cause great problems for Russia in the next five years, maybe even 10 years, but 20 years or 30 years, they have the potential not only to devastate Russia, but Russia’s neighbors and indeed everyone in the context of a global economy. So it’s easy to be optimistic in the short term, looking at the economic trends. In the longer term, bringing in the demographics, the public health, the politics, it’s easy to be very concerned.
MCHUGH: Ben Slay is a Senior Economist with PlanEcon, an economic consulting group in Washington, DC. We also heard from Paul Saunders, the Director of the Nixon Center.
PORTER: Russia’s security threats, next on Common Ground.
CLAY MOLTZ: If you look at the kinds of incidents that have occurred at nuclear facilities throughout the former Soviet Union, we see very ample evidence of criminal activity, of corruption in the military, that have led to a leakage of material and technologies.
MCHUGH: Although Vladimir Putin is hard at work reviving Russia’s economy, he is also assessing his country’s security threats and interests, both internally and externally.
PORTER: But many in the West are wondering how Putin will address the issue. Russia is no longer a superpower and its military has fallen on hard times. Celeste Wallander is a Senior Fellow for Europe with the Council on Foreign Relations. Fiona Hill is a Fellow at the Brookings Institute. And Clay Moltz is the Director of the NIS Nonproliferation Project at the Monterey Institute of International Studies. All three believe Russia’s economy is one of the biggest security threats facing the former Soviet Republic. Celeste Wallander begins today’s discussion.
CELESTE WALLANDER: Well, internally its been pretty consistent that it is the failure to reform economically [that] creates a weakness in everything else, in all areas. It creates social weakness, it creates political weakness, and it means there’s a lack of resources. And that’s pretty clearly recognized that that is the biggest source of internal threat. And that’s been consistent through the 1990s, I think. What has changed is the assessment of the external threat environment, going from an assessment that there really are no external threats out there, to greater concern about the Caucasus and Central Asia, but also then, the West. That is,the United States in particular and United States and NATO more generally. One of the interesting questions in that is though, which do you prioritize? Do you prioritize your internal threat assessment-that is, are you more worried about your economic weakness at home and therefore you’re willing to put off concerns about the external threat? Or are you more worried about that external threat environment and therefore you’re willing to compromise on what you need to do [to] deal with your internal weakness? And I think they’re still going back and forth and it’s not clear which way they’ll go.
MCHUGH: Fiona Hill?
FIONA HILL: Celeste mentioned Central Asia and the Caucasus as being the major areas now of Russian foreign policy interests and foreign policy concern. And part of that is because of the encroachment of the West, of the United States and other Western powers, into that area, which is seen as a traditional area of Russian influence. It’s the interaction between conflicts in Chechnya and other conflicts in the South Caucasus. And it’s also the kind of concerns from farther afield-fears of the rise of China, of Afghanistan, international terrorism-very much similar, the similar kinds of threats that we in the West are perceiving here. But basically the Russian calculus here is very complicated because it’s partly, the relationship is a perceived threat from the US and its encroachment, and then its relations with all these other powers around-Turkey, China.
MCHUGH: Clay Moltz?
CLAY MOLTZ: The weak state has led to, I think, problems related to corruption and the Mafia. And I think this is something that Putin is taking very seriously. I think also if you look at the external threats, the rise of Islamic fundamentalism over the period of the ’90s in different regions in the southern part of Russia have been of great concern. Particularly because this has been linked to support by outside organizations from the Middle East, to groups in the Caucasus, for example, and also, of course, in Afghanistan. And so I think Russia is very concerned about these kinds of forces kind of contaminating their southern borders.
MCHUGH: Well, in the West in most recent years several people have expressed concern that Russia doesn’t even have the ability to maintain its military and its nuclear arsenal. How serious is that threat? We’ll start with Clay.
MOLTZ: Well, I think the threat is very serious. I mean, if you look at the kinds of incidents that have occurred at nuclear facilities throughout the former Soviet Union, we see very ample evidence of criminal activity, of corruption in the military, that have led to a leakage of material and technologies. In many cases they don’t have the technology, they don’t have the troops anymore. And so these materials are simply going to people who can steal them. And the kind of minimal protection that they have is not adequate. There have been Western programs in some areas, but it’s not enough. And so we are still looking at a situation where a lot of highly enriched material is at risk. And I think this is a very serious problem.
MCHUGH: Fiona Hill, would you agree?
FIONA HILL: Clay is talking specifically here about the proliferation of fissile materials of nuclear weapons. But there’s also a problem that we saw, particularly in the last war in Chechnya, from ’94 to ’96, was proliferation of conventional weapons, where the Russian military’s been a bit for sale to the highest bidder. So that the very Russian troops who are fighting the war in Chechnya are actually selling their weapons for a whole variety of-just money to survive, for food, but for drugs, alcohol, to the Chechins. So they’re kind of perpetuating the cycle of violence. And this could be a major threat to the internal security of Russia somewhere down the line once the fighting in Chechnya has subsided to some degree. And this is another thing that we need to bear in mind.
WALLANDER: In a way we anticipated it. There was some far-sighted people at the beginning of the 1990s who saw this could happen as a result of the Soviet breakup and the process of reform. Although we certainly didn’t know how bad it got. But I think things are worse now in a sense because-in a very strong sense-because in the early 1990s we had basically an optimistic view in, within Russia about how to cooperate with the West to deal with these problems. And one has to understand, to do the kind of control of these nuclear materials, to accept the level of technology and training necessary to control them properly requires a very high degree of intrusiveness in areas of central national security concern. And there was a willingness to do that in principle. There are more internal obstacles to being open to that kind of assistance, and more suspicion and skepticism. And so as we think about a new administration, the new Putin administration in Russia and a new American administration, we really are at a point where it’s just possible that things could get even worse because we’re not even gonna be able to continue the programs that have been sort of managing this problem throughout the 1990s.
MCHUGH: You mentioned the failures. Have there been any successes in US-Russian security relations in the ‘90s?
WALLANDER: I think there have been. And the one everyone points to most consistently is the cooperative threat reduction program and associated programs for nuclear safety, nuclear cleanup, those kinds of things. And they tend to not make the headlines. But they have been pretty consistent. There’s also the success in managing the denuclearization of Ukraine, Belarus, and Kazakhstan. All three of those countries, new countries, back in 1991 held nuclear weapons, strategic nuclear weapons and tactical nuclear weapons. And there was some concern that they would decide that they were so threatened by Russia or threatened by their regional security problems that they would need to retain those weapons as a measure of security. And the United States was very consistent-and the West [as] a whole, but especially the United States-was very consistent in viewing Russia as the sole continuing nuclear successor state of the Soviet Union. And played an active role in trying to ameliorate those security concerns so that a country like Ukraine, which has border disputes and all kinds of problems with Russia, would actually be willing to send nuclear weapons to Russia. It’s a pretty extraordinary thing. And it was successful.
MOLTZ: The question I think now is how can we move forward with these programs? There are areas that have not received enough attention.
MCHUGH: This again is Clay Moltz of the Monterey Institute of International Studies.
MOLTZ: For example, Russia still has 140 decommissioned but not dismantled general purpose submarines. These are not ballistic missile-carrying submarines. And yet there’s no program really to dismantle those vessels. And this is something that now is under negotiation. Because this benefits the Russian side. And they know they have to do it. I would agree also though, that in other areas such as training and in some cases in constructing new safeguard mechanisms at nuclear facilities, Russia has not always seen that there’s a great benefit. And so here they have been much more standoffish. They have slowed down programs. They have limited access in some cases. And so I think a key task in front of the next administration is to try to rebuild that trust, try to convince Russia that it needs to come up to international standards in these areas. And to try to develop creative programs to make sure that these materials are put under adequate safeguards.
MCHUGH: Well, now there’s one whole new person in this mix, and that is Vladimir Putin. What is his security policy and how different is it than the security policy of Boris Yeltsin? Start with Fiona.
HILL: In many respects there’s quite a continuation between the approach of Yeltsin and Putin. But there’s one fundamental difference here, that Putin is a much stronger leader. He now has greater resources at his disposal. Now the question though as to what is he entirely trying to do here, everything centers around this idea of strengthening the state. For example, one of the things that Putin is trying to do right now is to rein in the regional governors, to sort of reconsolidate the state. Because during the Yeltsin period, because he, or the Russian government seriously lacked resources, a lot [of] things were delegated out to the regions. The regions, for example, often footing the bill for the military that was stationed on their site, or kind of paying the salaries of local officials. Putin can now do that, so he’s kind of bringing everyone back into the fold again. He’s just defining this policy. And I think we’re gonna have to wait to see over the next year or so quite what he has in mind.
MCHUGH: Clay Moltz?
MOLTZ: I think Yeltsin was very passive in terms of a variety of relations with foreign powers in various regions of the world. But I think Putin has shown that he is a more activist leader. He wants to reestablish Russia’s role in various parts of the world. And he’s willing to use his political capital to do so. I might just also address the question of security policy more specifically. I think one of the key focuses of the Putin administration is to reestablish pride in the Russian state. And the military is one key element of that. I think it’s clear that he is going to reduce the size of the ground forces. He is talking about the possibility of fairly significant reductions in nuclear forces. But also modernization. And this is also something that the Russian military industry is eager to hear. And with the increased revenues from oil and other sources I think he is going to put money into more advanced weapons. And so on the one side I think it’s a good sign for the West that there are going to be reductions. But also he wants to strengthen the military, make the military an organization that Russians can be proud of and the Russians can trust. And so that’s gonna take some work.
MCHUGH: Considering everything that we’ve talked about today and considering the current climate, where do you see the future of US-Russian security relations? Start with Celeste.
WALLANDER: It seems to me the good news is we’ve learned from the 1990s that even with the ups and downs and sort of the high profile issues, and even with the difficulties in communicating at the highest levels sometimes, that there is a baseline of practical cooperation that has been sustained. And that practical cooperation isn’t just idealistic. I mean it is really in the interests of both countries, and it’s recognized as such. And it’s recognized within groups in the United States and in Russia that you might otherwise expect to be skeptical of cooperation. The problem is going to be that Russia is not going to have the same priority on the United States and willingness to accommodate American preferences. And so it’s a source of optimism but it’s a source of reason for caution and concern.
MCHUGH: Fiona Hill?
HILL: I think that there are definitely many areas in which Russia and the US can continue to cooperate together. Particularly where there is a mutual interest. The problem is going to be where we’ve come into a collision of national priorities. And this is going to be particularly difficult, if this touches upon the Russian sense of prestige or on this kind of crossing Russia’s need to project itself as a powerful state.
MCHUGH: Clay Moltz, final word.
MOLTZ: One of the real areas that I think there’s potential for conflict is in the area of national missile defense. If the United States decides to pursue this policy unilaterally to break out of the ABM treaty and to treat Russia as if it didn’t matter and as if its strategic forces were no longer a factor, I think it could lead to major problems for US-Russian relations and also for US relations more generally with the rest of the world. Russia has already been trying to make inroads with NATO on this issue because there are a number of NATO states that are not eager to see the US move in this direction. Obviously there have been discussions with China on this question. And so if the United States moves too quickly and without adequate consultation with other powers it could end up with coalitions against it in this area that could spill over into broader security and foreign policy questions that I think would be very harmful to the future of US policy.
MCHUGH: Clay Moltz is the Director of the NIS Nonproliferation Project at the Monterey Institute of International Studies. We also heard from Brookings Fellow Fiona Hill; and Celeste Wallander, a Senior Fellow for Europe with the Council on Foreign Relations. For Common Ground, I’m Kristin McHugh.
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