Publication: Eurasia Daily Monitor Volume: 4 Issue: 118

Russia’s economic performance cannot fail to impress even the most skeptical experts. The sustained growth that a year ago showed signs of slackening actually accelerated in the last quarter of 2006 to 7.8% and to 7.9% in the first quarter of this year and is confidently predicted to keep up the pace in the second quarter (Vedomosti, June 15). This is still not quite good enough for achieving President Vladimir Putin’s aim of “doubling GDP,” but that guideline is rarely remembered in the loud self-congratulations prevalent now in the Kremlin and its environs. Speaking at the St. Petersburg Economic Forum a week ago, James Wolfensohn, former president of the World Bank, praised Russia’s growth, and First Deputy Prime Minister Sergei Ivanov asserted, “By 2020 Russia may and should be among the five biggest economies in the world” (RIA-Novosti, June 14).

The Economic Forum was expanded to an unprecedented scale this year, with some 10,000 guests crowding the newly constructed conference center on Vasilievsky ostrov and enjoying a rich entertainment program during the famous “white nights” – from the Mariinsky ballet to the Scorpions rock band (Moskovsky novosti, June 15). Seeking to emphasize the success of this heavily promoted event, Minister for Economic Development and Trade German Gref announced that contracts and agreements totaling $13.5 billion were signed during the meeting. A closer examination, however, reveals that most of the deals, for instance Aeroflot’s $3.5 billion purchase of 22 Boeing-787s, had been finalized some ago but still awaited political approval (Ezhednevny zhurnal, June 15).

The desire to demonstrate the “economic efficiency” of the Forum pertains directly to the key issue of investor confidence that was hanging over its sessions, not least because of renewed persecution of the Hermitage Capital investment fund and the expected decision to cancel the BP-TNK license for developing the Kovykta gas field (Newsru.com, June 15). These “spoilers” were left out of the carefully controlled debates, but Putin did address the confidence issue in his keynote speech, invoking the irrefutable evidence of $150 billion of accumulated foreign investments in Russia. Former presidential advisor Andrei Illarionov dared to point out a slight misrepresentation of this evidence, since earlier in his presentation Putin was speaking about direct foreign investments, which actually constitute less than a half of this sum, amounting to modest 7% of the GDP (Kommersant, June 15).

Promising “the most favorable climate” for foreign investors, Putin also criticized the protectionism that “is often implemented by the developed economies” and mentioned that the energy policy “pursued by traditional consumers is far from unambiguous.” This criticism not only betrays disappointment over the stalled negotiations on Russia’s entry into the World Trade Organization and irritation about obstacles for Gazprom’s expansion into European energy infrastructure, it also camouflages the fact that the oil and gas sector has become closed to foreign investments.

The new buzzword in the propaganda that frames Russian economic debates is “innovations,” spanning a wide range of priorities from a surge in nuclear power generation to the presidential order to cultivate nanotechnologies (Expert, June 14). This shift in official discourse reflects an attempt to reorient economic policy from the goal of consolidating the status of “energy superpower” to the emphasis on industrial modernization and catching up with the technological revolution. The key role in formulating this new policy is given to Sergei Ivanov, who promised that by the year 2020 Russia would gain leadership (measured as 10% of the world market) in such high-technology sectors as nuclear energy, shipbuilding, aircraft, satellites and delivery systems, and computer software. His role at the Forum was demonstratively more prominent than that of Dmitry Medvedev, another first deputy prime minister who “starred” at the far more modest gathering in St. Petersburg last year (GlobalRus.ru, June 14).

Ivanov’s advancement to the central stage is interesting in two respects. First, he champions the expansion of state control over key industries as a means to channel investments and secure their competitiveness in the struggle against Western trans-national companies (Polit.ru, May 31). This “re-nationalization” is desperately opposed by Gref, Anatoly Chubais, Yegor Gaidar and other economists who argued in the coffee-breaks and partying-nights of the Forum that the state remained an inefficient planner and wasteful owner in every economic sector (Rossiiskaya gazeta, June 13). Second, he personalizes the link between the revival of the military-industrial complex and the return to a Soviet-style assertively anti-Western foreign policy. Moscow’s readiness to escalate every disagreement with the United States and the EU, from the status of Kosovo to the import of Polish meat and from the “moratorium” on implementing the CFE Treaty to the threats of “asymmetric response” to the deployment of elements of U.S. strategic defense in Europe, is in many ways driven by the fast-approaching transfer of power from Putin to a successor, and Ivanov clearly aims at securing the top place in the list of candidates.

His current prominence certainly does not mean that the choice has been made, and the hint from Putin’s aide Igor Shuvalov about a possible “surprise” quite probably indicates that the warring factions in the Kremlin are pushing Ivanov ahead as a cover figure for a yet-to-be-resolved compromise (Kommersant, June 15). This successor, however, would be expected to follow the course that Ivanov currently is busy charting – and that constitutes a serious problem for Russia’s economic prospects. The World Bank warned in a recent report that inflationary pressure in Russia was growing and that institutional reforms were a precondition for sustaining growth (Nezavisimaya gazeta, June 15). Optimistic investors expect that such reforms would indeed proceed after Putin’s scheduled retirement, but in fact the character of this transfer of power determines a turn in a rather different direction. A winner in the many rounds of palace intrigues and bureaucratic infighting would have to consolidate his grasp on power by rewarding loyalists and exterminating opponents while encouraging apathy in the general public; these rational political choices are certain to defy and violate common economic sense.