Graham T. Allison, Directoreditor: Ben Dunlap

RUSSIA WATCH

No.3, October-November 2000

Graham T. Allison, DirectorEditor: Ben Dunlap

Strengthening Democratic Institutions ProjectProduction Director: Melissa Carr

John F. Kennedy School of GovernmentEditorial Staff: Emily Van Buskirk,

Harvard UniversityDavid Rekhviachvili, Emily Goodhue

RUSSIA’S REMARKABLE TURNAROUND

The events of August and early September illustrated the symptoms of Russia’s economic travails—and highlighted a challenge for economic recovery: chronic lack of investment in infrastructure. But figures from the first half of 2000 tell a different story: all the important indicators show Russia’s economy on the rebound.

—See page 4

AUGUST AND SEPTEMBER IN RUSSIA

Kursk Disaster to Spur Military Reform?

Vladimir Putin made military reform a priority even before the Kursk nuclear sub—the pride of the Northern Fleet and vanguard of Russia’s nuclear defenses—sank to the bottom of the Barents Sea during training exercises in August, killing all 118 sailors on board. Only the day before the Kursk sank Putin told his Security Council, “Our task is to work out the future development of the armed forces, taking into account the state’s needs and means; our actions must be based on economy.”

The Kursk tragedy focused the attention of Russian citizens on the dismal state of their country’s armed forces, and brought into sharp relief the difficulties of operating a superpower military on a defense budget one-sixtieth the size of America’s.

The Security Council has proposed a 350,000 troop cut in the nation’s armed forces—from 1.2 million to 850,000. Also on the table is a plan to transfer command of strategic nuclear missiles from the Strategic Rocket Forces to the Air Force. Defense Minister Igor Sergeev, who came to the job after serving as commander of the Strategic Rocket Forces, has bitterly opposed the move. The Chief of the General Staff, Anatoly Kvashnin, who has argued for cutting funding to strategic missile forces and building up conventional forces, appears to have gained the upper hand in his struggle with Sergeev. The General Staff recently announced that 96,000 servicemen, 40,000 of them from the Strategic Missile Forces, will be dismissed from the Army and Navy in 2001.

At a subsequent Security Council meeting at the end of September, Putin postponed a decision on the scale of down-sizing, saying “there will be no wholesale, massive reductions of the Russian armed forces.” Instead, he proposed a “five-year plan” for reforming the military and security structures. Calling for a military that is “more compact but more effective,” Putin raised the possibility of cutting some 600,000 military and security personnel in the next five years. What will the army do with the money it will save? Spend it on training, fuel, and servicemen’s pay, says Putin. A final decision on military reform is expected in November.

In UN Speech, Putin Calls for Proliferation-Proof Nuclear Fuel

In his speech at the United Nations Millennium Summit in September, Putin expressed alarm at plans for the “militarization of outer space,” praised the 1972 Anti-Ballistic Missile Treaty as the “foundation” of disarmament, and called for redoubled efforts to prevent nuclear proliferation. Most notably, he used a portion of his allotted five minutes to advocate a radical plan to help block the spread of nuclear weapons. Putin proposed excluding the use of highly-enriched uranium and pure plutonium—which can serve as components of a crude nuclear weapon—as fuel in civilian nuclear power plants. Instead, he called for implementing existing technology that would allow use of “proliferation-proof” fuel in civilian reactors.

Independent Mass Media: the Few Become Fewer

Vladimir Putin rarely misses an opportunity to extol the virtues of democratic freedoms, especially before international audiences. He has said that a free and independent press is indispensable to Russia’s development as a strong and prosperous country. But when Putin pronounces the words “freedom of press,” they seem to have some special meaning known only to him. Indeed, once, when asked by a reporter about freedom of press Putin responded: “you and I understand that term differently.”

Putin’s contradictory thinking about the role of mass media in Russian society is reflected in the new “information security doctrine,” drafted by the National Security Council and signed by the President in September. Much of the document in fact attempts to address Russia’s legitimate concerns in the area of information security, including protection from hackers, spies, and cyberterrorists. But a few key points illustrate the apparent unease and confusion that many in the Putin government—especially those with a state security background—feel about the relationship between the state and mass media.

For example, the document includes references to the “constitutional rights” of individuals to receive and impart information, and to the state’s need to “defend national interests in the information sector as defined by checks and balances safeguarding the interests of the individual, of society, and of the state.” But it also hints darkly of threats to Russia’s national interests posed by unspecified foreign powers, media outlets, and foreign journalists.

While the new information doctrine represents an effort to define the government’s attitude toward the exchange of information in principle, events of the last two months shed light on the government’s relationship to the press in practice. Russia’s state-run natural gas monopoly, Gazprom, is trying to seize control of Vladimir Gusinsky’s private media company, Media-Most. And influential businessman and one-time Kremlin insider Boris Berezovsky claims he was pressured by Putin’s chief of staff to give up his 49 percent stake in the nationally-broadcast ORT television station.

Were the government to gain control over Media-Most’s NTV station, and Berezovsky’s ORT, the media landscape in Russia would change significantly. Average viewers, who before could choose among three channels—the government’s, Gusinsky’s, and Berezovsky’s—would have only one choice: a channel financed and controlled by the state. Freedom to receive and impart information, which before meant the right to choose among three channels expressing different viewpoints, would mean the right to receive one point of view: the state’s. The government, which before was held accountable for its actions by critical (if sometimes biased) reporting on competing networks, would be free to spin its own version of events, without fear of opposition. As US Secretary of State Madeline Albright said recently, “Nobody is going to believe that the Russian government is committed to media freedom if independent television is under government control.”

Of course, the struggle for control of Media-Most and ORT is not really so simple. Media-Most is heavily indebted to Gazprom and has been negotiating a shares-for-debt swap because it is unable to meet the payments. The company’s owner, Gusinsky, is facing fraud charges for allegedly moving its prime assets offshore. The gas company won a court order freezing the media outlet’s shares after accusing Gusinsky of failing to pay debts and reneging on an agreed sale of $773 million in cash and debt cancellation.

Berezovsky, who claims he was threatened with imprisonment if he refused to give up his shares in ORT, used the TV network and its chief political commentator, Sergei Dorenko, to propel Putin into the presidency by viciously attacking his opponents last year. When Berezovsky announced in September that he would give up control over his 49 percent stake in the company, it turned out that he was entrusting its management in a select group of journalists and intellectuals—many of whom are actually working for Berezovsky.

If the battles between ORT and its government minders, or between NTV and its creditors, were routine disputes among media empires in an established market economy, the solution might be simple: let the two giants and their lawyers duke it out in court; if they can’t resolve their dispute, viewers can always change the channel.

The problem in the Russian case is that ORT and NTV are the only alternatives most Russians have to government owned and managed TV.

The media are rather like another democratic institution in post-Soviet Russia: political parties. Parties are also weak, fragmented, and subject to pressure at the fringes. They are also highly dependent on big business and big power on the national stage. Yet Russia’s political system functions because existing parties represent a range of views and positions that roughly correspond to the beliefs of their members and constituents. The pluralism of the media market works in the same way. Having a range of imperfect choices is not ideal, but it is better than having no choice at all.

It is probably natural that Putin, in his effort to “restore order” in Russia, which is itself a highly popular proposition among ordinary Russians, should get around to straightening out the state’s relationship with the press. And it may be unrealistic to expect that a former KGB colonel, no matter how sincerely he espouses democratic ideals, should place the interests of “freedom of press” above the interests of state security.

But it is noteworthy that a Russia attempting to make the leap into the 21st century global economy is at the same time closing off its citizens from the outside world. Attempting to transform its economy into one in which information is the most valuable commodity, the government is simultaneously restricting the flow of information into and within Russian society.

Freedom of press in Russia is not dead—yet. Cases of outright censorship by the state are still few, and the state tolerates criticism that would have been unthinkable ten years ago. But pluralism of ownership and control of the country’s biggest and most influential media outlets is under attack, and the prospects for true media independence—financial as well as editorial—appear to be diminishing.

–Ben Dunlap

Russia’s Economy:
Rising from the Ashes?

Of the 190 nations around the world, which national economy has:

Doubled its economic growth rate from 3 percent in 1999 to more than 7 percent per annum in real terms during the first half of 2000;
Over the same period has more than doubled real disposable incomes of its citizens;

In the first half of 2000, seen personal consumption increase by 7.8 percent, capital investment by 14 percent, and government consumption by 6.2 percent;

In the first half of 2000, reduced inflation by half from the rates observed in 1999;
More than doubled its national reserves as its currency has strengthened relative to the dollar;
Had a trade surplus of $35 billion in 1999 which is on a schedule to double in 2000, with a current account surplus of more than $25 billion in 1999 that will increase significantly in 2000;
Seen Central Bank reserves more than double in the past year;
Had its debt rating upgraded twice in the past year;
Seen federal government revenues more than double in the past year;
Run a primary account surplus of more than 4 percent with an overall surplus of almost 2 percent of GDP;
Seen its stock market increase by more than 125 percent in dollar terms in the past year;
Seen foreign direct investment more than double in the past year.

Which national economy?

Russia.

The fact that so much good news seems so surprising, indeed almost incredible, reflects a combination of resentment for the August 1998 crash (“fool me once”), fatigue with Russia, and skepticism. While such sentiments are understandable reactions to recent experience, they can distort perceptions of Russia today.

As Vladimir Putin has agreed, Russia’s economic growth following the August 1998 crash has been due in large part to rising price of oil on the world market (oil prices have tripled since the end of 1998), and the devaluation of the ruble, which made Russian goods relatively cheaper on foreign markets and spurred growth in domestic production based on import substitution. Russia’s oil and gas exports, which account for a third of all exports and some 15 percent of GDP, have helped fill the state’s coffers and given the economy a needed boost.

Russia’s strength and potential in the energy sector are indeed impressive. But in the long run, Russia cannot support its large, complex industrial economy based solely on advantageous energy prices. Oil prices won’t stay high forever, and supplying raw materials to the West is no way to move Russia into the “new” global economy.

Moreover, the oil and gas industry faces a severe investment crunch. Old reserves are being depleted and the efficiency of existing production operations is impaired by broken and obsolete equipment. With the typical cost of bringing a new field onstream between $8 and $10 billion, most Russian companies are unable to develop new fields on their own. Squeezing the remaining oil out of old fields, like the Samotlor field in Western Siberia, will also require billions of dollars in investment.

Russia could attract up to $60 billion in new oil and gas investment over the next decade if production-sharing agreements (PSAs), which give foreign energy companies special legal protection, were properly implemented. Putin has expressed support for PSAs, which may help overcome the protectionist tendencies that have held up a workable PSA law for years.

The events of August and early September illustrated symptoms of Russia’s economic decline—and highlighted a challenge for economic recovery: chronic lack of investment in infrastructure. The sinking of the Kursk nuclear submarine and the blaze that nearly destroyed the Ostankino TV tower, which supplies some 15 million citizens with their only television access, were not directly caused by failures in the Russian economy. But they focused the nation’s attention on the lack of investment in infrastructure over the last ten years that has dangerously depleted the country’s technological and industrial capacity.

Russia invests very little, even compared with other emerging economies. In 1998, for instance, Russia’s domestic investment as a percentage of GDP was half of Hungary’s, behind Indonesia, Argentina, and Brazil. Gross domestic investment has fallen an average of 20 percent per year in the last ten years. Last year’s investments accounted for a mere 22 percent of the 1991 figure. Foreign direct investment in Russia since 1993 amounts to about $10 billion—roughly 10 percent of estimated capital flight from Russia in the same period. Cumulative net foreign direct investment (FDI) in Russia from 1992 to October 1999 amounted to $11.7 billion, according to then Prime Minister Putin, compared with over $350 billion in China during the same period. Net FDI in Russia in 1999 amounted to about $2 billion, out of a global total of $827 billion.

The average age of Russian manufacturing plants and equipment is three times higher than the OECD average. The share of production equipment that has served over 15 years is now 46 percent. The necessary updates and replacements will require trillions of dollars. The country has essentially been living on borrowed time since perestroika.

Despite legitimate concerns about Russia’s ailing infrastructure, prospects for future growth and investment are promising. President Putin has spoken candidly about his country’s economic challenges and seems prepared to press for real reform. His government’s economic plan includes simplification and reduction of taxes; prudent monetary and fiscal policy that ensures a balanced budget; renegotiation, reduction, and repayment of external debt; guarantee of property rights; reversal of capital flight; attraction of foreign investment; strengthening rule of law; and alleviation of poverty. Some parts of the plan, such as a revolutionary 13 percent flat tax, have already been pushed through parliament.

Investor confidence appears to be returning to Russia as well. Fixed capital investment in 1999 rose by 4.5 percent to $28 billion, or 15 percent of GDP, with a further 5 percent rise expected in 2000. Gross domestic investment was up 5.6 percent in 1999. Foreign direct investment in 1999 was up almost 20 percent over 1998 levels, and foreign investment in the first half of 2000 is up 12 percent over 1999 levels. Many of the companies that pulled out of the Russian market in 1998 are now cautiously moving back in. As Pepsico head Don Kendall said recently: “Compared with last year, our sales are up 100 percent in Russia. For us that’s a very good indicator of the business climate in the country.”

Investment in Russia is not only a question of Russians’ prosperity. It is a basic requirement for the Russian state and society to function: to provide a secure defense, protect citizens from environmental hazards, and ensure the most basic democratic freedoms.