Few Russians would be willing to agree with British Prime Minister Winston Churchill’s famous statement that democracy is the worst form of government – ‘with the possible exception of all others that have been tried from time to time’.
Throughout Russia, democracy has a bad name because it is associated with the economic and financial crisis of the Yeltsin years and the ensuing political trauma. The Kremlin’s media, including the various parts of Gazprom’s media holding, find it easy to denounce their opponents as ‘russophobes’, playing on the Russian penchant for self-pity and suspicion. The term ‘Western agents’, generously applied to anybody less than enthusiastic about Putin’s regime, is borrowed from Soviet times and KGB phraseology.
Power and the people – the December 2007 elections suggest that the Kremlin is willing and able to merge them into unity. There is not much room left for political dissent, let alone a material base. Khodorkovsky’s fate serves as an unequivocal warning to all those who want to try. The fall from grace of the energy tycoon who challenged the Kremlin and its incumbent is never talked about but always remembered.
As long as oil and gas fire the economy, inflation is curbed and pensions and wages are paid, the memory of the bad old days, whether the last Soviet decade or the Yeltsin years, will be strong enough to buoy the authoritarian system, especially when it allows and encourages bread and circuses, Russian pride and foreign travel. What can clearly be seen, however, is that politics in the future will be more monochrome than in the initial Putin years. Social engineering will help to keep the voters quiet. A lot of social control will ensure a balance between autocracy, there will be the velvet glove over a steely hand, and an occasional, reluctant display of democracy.
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The pleasures of doing business with Russia
‘What is it to travel to Russia? For one who has his eyes open it is continuous and obstinate work which consists of laboriously distinguishing, at every turn, between two nations in conflict. These two nations are Russia as it is and Russia as it would like to show itself to Europe.’
German business is not normally given to displays of public enthusiasm. At the end of 2007, however, the well connected Ost-Ausschuss der Deutschen Wirtschaft, representing most of the German companies active in Russia, made no secret of its endorsement of Putin’s choice of successor, of continuity secured and stability promised.
The mood among German companies in Russia is optimistic, a summary assessment reported for the year 2007. Dr Klaus Mangold, chairman and former Daimler-Chrysler member of the board, outlined the results of four opinion polls conducted among the thousands of Germans doing business in Russia, mostly out of Moscow: ‘The business climate in Russia has continued to improve, and companies see this trend continuing well into the next year.’ ‘Seven out of ten companies believe that overall conditions have improved.’ Among the reasons given were the rise in purchasing power, the spending mood among Russian consumers and the high quality of the companies’ Russian employees.
But there were also the usual caveats. Companies made their optimism conditional on visible progress in reducing red tape, fighting corruption, securing rational and predictable rules for import duties and taxes, harmonization of norms and standards in general and a more positive attitude of government towards medium-sized family-owned companies. In 2006 foreign direct investment from Germany reached a record high. At an accumulated USD 10.1 billion since 1990 Germany at the end of 2007 holds 6.6 per cent of foreign direct investment, ranging behind recycled Russian money from Cyprus and Luxembourg, energy investment from the Netherlands, and assorted funds from the UK, the latter due to ConocoPhillips and TNK-BP. German investment came not only through large-scale commitments by E.ON and Volkswagen, but also from hundreds and thousands of small and medium-sized companies seeking entry into the rapidly expanding Russian market for everything from capital assets to consumer goods to colourful journals like Computer World, Forbes or Newsweek – the Russian edition. But again, the caveats were serious. One in four companies expected the forthcoming legislation on foreign participation in Russian industries to put a dampener on further investment. Half the companies polled said it would make no difference. One in four expected an improvement through predictable framework conditions.
Never so close
Bypassing the high level of trade before the First World War, the specific conditions of the inter-war years and forty years of Comecon, today’s Ost-Ausschuss proudly maintains that never before have Germany and Russia been so close in economic terms. Indeed, Germany is Russia’s number one partner for foreign trade, at roughly 10 per cent of Russian exports – mostly hydrocarbons in the form of natural gas and oil from Siberia.
Meanwhile, Russia continues to be the fastest-growing market for German products, primarily machine tools and premium cars. German exports to Russia grew twice as fast as exports to the rest of the world, and from January to October 2007 increased 28 per cent over 2006. At the end of 2007 commercial turnover reached 40,64 billion euros. During the same period, imports from Russia went down by 11.7 per cent in dollar terms, due to the fall of the US dollar against the euro.
This enthusiasm contrasts sharply with impressions which old Russia hands like Anders Aslund from the Carnegie Endowment for Peace brought back from Russia not long before. In the autumn of 2005 Aslund, a paper circulated among the strategic community, had recorded some warning signs: ‘The dominant impression for the World Economic Forum Russian Summit was the contrast between the jubilant Western investors, both portfolio and direct investors, and the Russian businessmen. The Western investors were cheering not only Russia but also Putin, and would have given him a third term by acclamation, if the choice were up to them. The Russian businessmen kept their heads down and displayed a remarkable lack of enthusiasm. Nobody believed in any severe risk of oil curse because the government’s macroeconomic policy remains convincing.’
What do Russian businesspeople know that their Western counterparts do not? It may well be that among well-informed Russians the gap between the oil and gas economy and the rest of the economy is indeed disconcerting, and that the cocksure attitude displayed by Kremlin officials at all levels creates an impression of hubris and uncertainty about business and foreign policy, in long-term relations with the West, particularly the US. Aslund again, combining anecdotal evidence with the long view: ‘In private conversations, Russian businessmen mentioned both their wonderful profit expansion and the unpleasant political climate which also aggravates the business climate. It is all too striking how big Russian businessmen prefer to stay abroad as much as possible so that they are not called to the Kremlin to be extorted. As a result, many Russian businessmen seem lost. They do not want to invest too much in Russia but to diversify abroad, and they have already done so in the CIS countries. Many do not quite know how to proceed further. Therefore, Russian investment is only rising by some 10 per cent a year when it should increase by 20 to 30 per cent a year.’
Aslund had already observed the decline of the more liberal-minded ministers like deputy prime minister Alexander Zhukov, a Putin loyalist throughout, who announced many reform measures either adopted or in the pipeline – ‘but not all that important’ – while omitting the vastly increasing role of the state in the resource sector. The minister was visibly uncomfortable when asked about the recent Yukos affair and the ensuing near stagnation of oil production. Aslund said that he ‘responded very officially that state companies could also work and that oil production would rise again because of tax changes and investment policies’. German Gref, a star among the Western-oriented liberals, seems to have confounded the visitors from the West by first denouncing the old Russian habit of concentrating resources in state hands and then stating, out of the blue: ‘All legislative activity is oriented in that direction.’ Aslund’s conclusion after the performance of the liberal ministers was: ‘They are without power and they swing between public protest and resignation.’ German Gref, responsible in the government for industrial modernization, was dismissed in September 2007 only to reappear at the helm of Sberbank, Russia’s foremost high street bank.