High-Level Expert Group Meeting
28-29 April 2000
Stockholm School of Economics
Stockholm, Sweden
Chaired by Kalevi Sorsa
The New Russia: A Test for the World
1. The end of the Cold War and the demise of Soviet Russia
as a Super Power was a shock, not least to Russia itself.
But the brave new world of a diminished Russia is not
necessarily a safer place.
2. Just to take the new geo-political world map as a
starting point, Russia occupies not only a central place,
but is the largest territory on the Eurasian continent, a
vast sprawling landmass extending from the densely
populated and developed cities of St Petersburg and Moscow
to the sparsely populated areas of Siberia, which are home
to rich resources.
3. This Russia is a neighbour to more numerous and varied
countries than any other state in the world so that Russia
will have to expend great efforts to keep harmonious
relations with them all.
4. To the east are China, ruled by a Communist Party and
with a different culture and world view; and Japan that
industrially is modern and developed but has a territorial
dispute with Russia. The immediate neighbours on Russia's
southern borders are what might be called the soft
underbelly of Central Asia and Caucasus, an area with so
many flashpoints and the potential to be the new hotspot
of the world. Given too that Russia is no longer a
SuperPower but still possesses nuclear capacity and holds
10,000 nuclear weapons, it behooves the rest of the world,
and particularly the sole remaining SuperPower and its
allies, to treat Russia with respect, prudence and
understanding of Russia's difficult journey to find its
place in the modern world.
Putin's Election as President Takes Russia to a New
Crossroads
5. In this context, the election of Vladimir Putin to
succeed Boris Yeltsin as President of Russia marks an
important milestone in Russia's journey. Putin is
something of an unknown quantity but he won a clear
mandate and represents the yearning of the Russian people
for a strong leader with a sense of mission.
6. Putin himself has to make the journey from being a
bureaucrat with the reputation of being a good listener
and operator to the decision taker. He is the person who
has to accept the ultimate responsibility and take the
hardest decisions.
7. Putin has quickly shown awareness of the problems in
front of him by describing Russia as a rich country of
poor people, by appointing some good advisers, welcoming
investment from the West and persuading the Duma to pass
the nuclear test ban treaty. On the other hand, there are
questions whether he understands the building blocks of
democracy.
8. Until the 19th Century the autocracy of the Czars,
followed by the Communists, created a state with a strong
centre but which not only lacked concepts, such as
democracy and the rule of law, but also discouraged free
enterprise and the development of markets. The economy
depended directly on the political leadership, and this
mutual entanglement has not been fully cleared.
9. What Putin has to do is very much the basic task of
laying the foundations of modern nation-building: to
define the various powers of the presidency, the
government, parliament and courts and to decide which
powers and functions should be decentralised to the
provinces and to make sure that they can all go about
their work effectively and efficiently.
10. The task is made the harder by two factors. Russia is
very short of qualified senior civil servants who will
implement the policies. At lower levels, for example, the
procurators (prosecutors), who were part of the long arm
of the Communist Party, still entrenched in the provinces,
prevent implementation of laws.
11. On the other hand, any clear lines of efficient policy
are distorted by the power and influence of the so-called
oligarchs and organized crime.
12. Putin has to find a way to reconcile the deep yearning
for stability and order with the need for freedom and
reform.
Quest for a Modern Economy
13. Nowhere can this be seen more clearly than in the
economy. Superficially, Russia has recently done well. The
economy has been growing by 7 to 8 percent and will show 5
percent growth this year, but it is not clear whether
investment is rising. Production and exports are also
growing rapidly, thanks to the undervalued rouble and
rising oil prices.
14. The modern economy is still only a thin veneer on top
of many problems. The improved performance offers a
breathing space, a short time for Putin to tackle the deep
underlying problems. In Putin's own words, ''It would take
us approximately 15 years and the 8 percent annual growth
of our GDP to reach the per capita GDP level of the
present day of Portugal or Spain, which are not among the
world's industrialised leaders.
15. One aspect of these is to look at the levels of
poverty in Russia. Putin said ''The overall working
incomes of the population add up to less than 10 percent
of the U.S. figure.'' According to the World Bank
household survey data for 1998, about half of the Russian
population lives below the poverty line, and 20 percent
falls into the category of ''very poor''. Although higher
economic growth is necessary, it is not sufficient to rid
Russia of poverty, and specific steps will be needed to
address poverty and attendant social problems.
16. It is instructive to compare recent Russian economic
history with that of China. China has shown rapid growth
rates in the region of 10 percent a year for 20 years and
has become the supplier to the world of many popular
consumer goods, today including computers. But China had
important advantages that Russia lacks, including a
developed and historic entrepreneurial tradition,
especially in Shanghai and the coastal areas, that dated
back to before the Communist era; well functioning
governmental authority, an economic transition that was
cautious and gradual; and 50 million overseas Chinese
prepared to invest their private fortunes in helping to
develop the motherland.
17. When Mikhail Gorbachev began his reform programme,
Russia did have first-class scientists and engineers able
to turn out quality productse but no entrepreneurs, no
competition and no legal framework.
18. The role of the army and the power of the
military-industrial complex still has to be sorted out,
which will be particularly tricky since it accounts for a
large portion of GDP. Western experts estimated that it
was worth 15-17 percent, but Gorbachev put the figure at
20 percent of GDP, and in some local areas it may account
for as much as 70 percent of the economy.
19. Economic restructuring particularly needs to go wide
and deep, which may challenge the yearning for stability.
Another problem may be that the feelgood factor is too
strong and the price of oil too high. Reforms have
previously been enacted when the oil price was low and the
sense of crisis imminent.
20. Economic reforms will mean tackling and cutting
through the historic identity and fusion between capital
and power. It will also mean surgery to cut out the cancer
in which criminal elements have laid claim to large chunks
of resources. Estimates vary between 40 - 60 percent for
their control of the economy.
21. Essential economic reforms should embrace industrial
restructuring and labor mobility; the banking and
financial system; public finances, and particularly the
power to collect taxes, including from national
monopolies; establishment of a modern legal system which
will incorporate bankruptcy laws and enforcfement of
private contract. An effective, efficient and predictable
legal framework is important along with a strong
professional administration in helping to stem the flight
of capital, estimated at between $1 and 2 billion a
month.
Russia In Her International Setting
22. For almost all the rest of the erstwhile Soviet
empire, the fall of the Berlin Wall, the end of the Soviet
Union and the collapse of Communism was a time of
liberation. For Russia on the other hand, it was a time of
humiliation, which had started already by the defeat in
Afghanistan. It was followed by further humiliations in
the Kosovo war, where Russia's wish was ignored, and in
the defeat of the first Chechnya war.
23. Russia's struggle to transform itself to cope with the
modern world is further complicated by the way it has seen
its identity historically. Until the time of Peter the
Great, Russian identity was seen through the Orthodox
church. After him the identity was with Russia as a power
in world politics. During the 1990s the enemy has been
perceived as the financial and industrial centres of the
West, NATO, the US, Muslims and Zionists. Before Chechnya,
the US probably climbed to the second position.
24. Given this history, it would be tempting, especially
for a strong nationalist government to divert attention
from domestic economic problems by embarking on foreign
military adventures. But the grim truth is that with a
budget of $20-25 billion modern Russia does not have the
economic wherewithal to sustain foreign military
action.
25. Dealing with Russia that is still struggling with the
core issues of how to modernise raises more questions than
easy answers for the neighbours. The issue is the more
difficult because if countries, especially the West, take
a soft line, Moscow is all too likely to take all the
advantage, but neglect reform; and if they press too hard,
Russia will stubbornly recoil.
26. For the US, now the sole SuperPower, the issue is how
to persuade Russia to accept the obligations of a modern
state, particularly in relation to questions of democracy
and human rights. Surveys of the Russian people have shown
that they don't much care for or see the advantages of
multi-party democracy, even though they effectively have
the beginnings of one.
27. Europe has to work out how to respond to Russia's
desire to try to become formally a part of the European
Community. It is unlikely that the European Union could
integrate Russia with its 146 million people as a full
member and withstand immense problems. The answer probably
lies in closer economic and trade links.
28. For the West as a whole, including Japan, the question
is how to wire Russia up to the information age. Greater
trade, cultural and student exchanges may be the way to
help Russia feel that it is not excluded.
29. For the Central Asian neighbours, the challenges are
the greatest, particularly because of their own economic
and political turmoil and Russia's fears of attacks from
fundamentalists. Leaders of the world outside would do
well to think of how they could help smooth out relations
and get the fire brigade ready to put out sparks before
they can develop into dangerous flashpoints and
conflagrations.