Motives Behind Russian Foreign Policy
Head of Department, Institute of Economy, Russian Academy of Sciences, Moscow
Commenting the August war in Georgia, Lilia Shevtsova (Carnegie Endowment, Moscow centre), a Russian political expert, concludes: “Pushing ahead for taking the revenge outside the country, the Kremlin is, thus, trying to preserve the status quo inside”.
This is very true. Moscow’s recent anti-NATO and, generally, anti-Western rhetoric is meant not only for stronger consolidation of Russian society around the leading Medvedev–Putin tandem but also for securing the justification of further enhancing centralized bureaucratic control over the weakening Russian economy and frustrated Russian society.
Russia’s aggressive behaviour towards the rest of the world is tied up with economic expansion and profit-seeking. It helps the Kremlin to conceal political centralization and compensates for outweigh failures in economic modernization.
This article seeks to demonstrate that the Russian-Georgian war in August and the subsequent growing isolation of Russia from the developed world community are logical outcomes of the Kremlin’s course of embedding the system of vertical-type governance at home. Moscow’s “asymmetric response” to Georgia’s intervention in South Ossetia is a natural consequence of the failure to proceed with market reforms and the economic management crisis in Russia.
The Disparity in Value codes – Key Reason for Russia’s Anti-Western Drift
The reality of globalization, and especially the current international financial crisis, is drastically challenging the existing system of world order, let alone the classical priorities of Realpolitik. Although the principles of sovereignty and territorial integrity still continue to be corner stones in shaping international relations, they can no longer provide a nation’s security and independence, even more so its economic security.
The contemporary approach to economic security, shared by the EU leadership, offers an entirely differing value code (see Table). It implies that to compete successfully in the ongoing IT revolution, one should focus its domestic policy on the speed in innovations, i.e. on controlling the factor of time, not a national territory as such. Likewise, traditional protectionist ideology is objectively replaced by more market openness; promotion of flexible networks is replacing traditional verticals of subordination; the win-lose competition-led games are giving way to win-win coordination-oriented strategies; and the principle of creative reconstruction (not merely creative destruction) is gaining the upper hand in achieving sustainability over outdated attempts to preserve a status quo.
Meanwhile, Russian political leaders mostly disregard these fundamental changes and keep prioritising security in its classical, geopolitical sense (a powerful federal centre must provide sovereign control over national territory and be ready to expand its influence upon others). This makes the Russian system of values extremely archaic in terms of contemporary driving forces of economic growth. Almost all economic decisions the Kremlin makes, both in the domestic and in the foreign policies, are highly politicized from the outset and streamlined with an old-fashioned approach to security, which lays the foundation of Russia’s Military doctrine and Foreign policy concept, as adopted in the beginning of 2000-s and recently renewed. This very approach has formed a leading motivation behind Kremlin’s course towards consolidating verticals of power in the Russian society, establishing control of state-owned corporations over key sectors of economy, aggressive takeovers in foreign markets and retaining Russia’s image as a super-power, especially in the CIS.
Table. Russia and EU: Disparity in General Value Codes
Traditional Security Thinking (Russia)
Contemporary Security Thinking (Europe)
Priority of Internal Policy
To gather power for the federal centre,
to hold control over the national territory
To control the factor of time,
to gather momentum in innovations
Priority of Foreign Policy
To protect sovereignty, to expand economic influence upon other territories
To long for more openness, more cooperation and integration across frontiers and borders
Way of Arranging the Economic Space
Centralisation of federal control over regions. Building verticals of subordination
Regionalization. Developing horizontal partnerships and network-type communities
Way of Competitive Edge
Gaining monopolistic benefits,
playing win-lose games
Developing flexible economic links, seeking
for coordination and win-win benefits
Principle of Sustainable Development
Maintaining of status-quo
Creative destruction and reconstruction
Source: the author’s compilation
Traditional Russian Story - Sliding Down off the Westernized Route
The planned Soviet-type system was a classical mobilization economy functioning according to orders from above. The present Russian system is functioning under free market prices (for almost 30 years), but has also faced a reinforced centralization of power. Basically, the Russian historical experience has showed more than once that any step to enforce hierarchical order is inevitably pushing the country down the track of more state control and militarization. Russia has failed to leap out of this traditional scenario even now, in the 21st century, when the world is relying more and more on flexible multilevel cooperation and horizontal partnerships. This time, the tendency of sliding down to a mobilization growth pattern has been generated in 2000 by Vladimir Putin’s drive towards a powerful federal centre and the vertical-type system of administrative governing.
When the system of subordinating verticals (‘verticals of power’) began to be re-established in Russia, the national competitive market space started to shrink, and the subsequent ‘vacuum’ quickly filled up with powerful bureaucratic networks. In this bureaucratized, profit-oriented macroeconomic environment, transaction costs are so high that real development cannot take place by definition. Private business deprived of incentives to compete also joins rent-seeking game on a massive scale. And the ruling elite concentrates on gaining and keeping indivisible control over sources of rent incomes - to prevent the redistribution of wealth. It is no surprise that in recent years the Russian economy has been growing rapidly but not developing, with the value of GDP enlarging mostly statistically (thanks to additional income generated by extra-high oil-export prices).
By 2007, when the RF budget and reserves had accumulated huge volumes of oil-gas-dollars, the Kremlin decided to make the country ready for a break-through into the post-industrial world. To this end, the authorities started to build a very wide range of so called ‘development institutions’ - beginning with the Investment Fund and Development Bank (Vneshekonombank) and ending with a network of state-led corporations in various “strategic” branches where foreigners are not admitted (like Rosatom, Rosnanotekhnologii and others). However, it is clear that these agents are not working for the purpose of modernization. At best, they operate to re-industrialize the economy (construction of roads and approach lines to deposits of natural resources, other transport infrastructure) but mainly to provide the bureaucracy with new monopoly benefits. The state-owned corporations are enjoying “soft budget constraints” in terms of financial discipline of the market (similar to Soviet enterprises), no control by the RF anti-monopoly bodies or the RF Account Chamber (thanks to their status of non-commercial institutions) and practically an unlimited access to federal budget funds through different federal target programs. In essence, they constitute a kind of ‘economic spetsnaz” to suppress any competitors or exercise any market takeovers, a tool to reproduce corruption and a ready infrastructure for shifting to the mobilization type of growth.
The Narrower the Profit Sources at Home, the More Aggressive the Expansion Abroad
How long could economic development policies in Russia be shaped by the logic of special operations, and how long could her social and market structures be distorted by outdated security thinking?
The eight-year-long practice of re-centralizing the economy and re-distributing the corporate property proved to be enough to crucially aggravate Russia’s Dutch disease (the over-dependence of an economy on oil-export earnings), drastically speed up the process of a growing entropy in all fields of societal development, and make the inertia of restoring a state-led, highly monopolized economic system almost irreversible. ‘Almost’ stands for the fact that unlike the Soviet prototype, the present Russian system of administrative verticals lacks real pivot and is actually fragile. Nevertheless, it’s indicative that since 2007, the government has no other way to support economic growth except for substituting the lacking private investment by more budget allocations, strictly controlling domestic energy tariffs (instead of their planned liberalization), and introducing temporary freezing of prices for basic foods.
The inertial movement back to the Soviet-type system could not but lead Russia to a steady decline in labour productivity, a slowdown in GDP growth rates, and a skyrocketing inflation. Remarkably, the Kremlin has become a natural hostage of its own political option: it is rapidly losing the levers of control over aggravating economic situation, while able to do nothing against the abnormally high level of corruption and redoubled bureaucratic pressures.
To outweigh the slow down in economic growth and the resulting contraction of the domestic base for rent extraction, the ruling elite has moved to a more aggressive and outright manner of advancing its vested interests over and above the national boundaries. First, Moscow enhanced ‘carpet’ purchases of foreign assets by large-sized companies, in an attempt to transform Gasprom and Posneft’ into global energy transnationals, and Russia as a whole, into a global centre of power. Secondly, Russia has launched trade wars against its westernizing post-Soviet neighbours (and in parallel, against the EU as a whole) through a series of economic blockades. In November 2006, Russia largely banned fish import from the Baltic states, Ukraine and the EU countries, depriving them of their traditional transportation routes, and thereby, of traditional outlets - as it was done earlier regarding Georgian wine and water, or Polish meat and vegetables. Thirdly, to ease its takeovers in European markets, especially regarding the companies with advanced technologies, Russia has used to politically press its country-partners from the near and the far abroad by means of export ‘gas valve’ as skillfully handed by Gasprom (bargaining on gas export prices, on terms of transactions). The same idea to free its hands in ‘a big geo-political game’ has been largely backing up Moscow’s decision to shift the route of the projected Nord Stream (Baltic gas pipeline) away from the territories of Poland and the Baltic states.
This coercive approach in foreign policy could not make Russia stronger, either in terms of raising her competitiveness against the EU-members or in terms of her integration attractiveness for CIS-countries. Meanwhile, the rent-seeking nature of Russian state-owned companies and bureaucratic bodies was automatically pushing them further along the road of captures, to impose economic control upon extra resources and territories. As vested interests grew, and Russian extraction of oil and gas fell, this demand for expanding the sphere of control became more and more acute, to take finally an extreme attacking form– a direct military aggression of Kremlin against the territory of a former satellite.
A Small Victorious War – What Potential Benefits for Russia?
By mid-2008, the domestic economic situation in Russia has only further worsened. Therefore, a small victorious war against Georgia, a small disobedient neighbor, could be welcomed by Russian governing elites as well timed.
First, this war could strengthen Russia’s control over the routes of raw exports, weaken and disable the alternative routes bypassing Russia’s territory (like Baku–Tbilisi–Jeihan pipeline), and help Russia to retain her monopolistic position in defining terms and transit routes of energy deliveries to Europe.
Secondly, such kind of war could generate additional demand for products of Russian state corporations (both old and new ones, both from the fuel and energy sector and from the area of nanotechnologies) and basically, push up the production activities in Russian industry and construction (thanks to some new government orders connected with both the military activities and the restoration of destructed territories thereafter by way of humanitarian aid).
Thirdly, Moscow could formally attribute to the factor of war (and of the particular enemy) the current upsurge of domestic prices, other internal Russian troubles and the expected further enlargement of Russian military budget (since armaments are an important item of Russian export trade).
Fourth, Russia could demonstrate to CIS-members (and to the whole international community) the decisiveness to firmly hold her former satellites within the sphere of her influence and, thus, slow down their present drift towards the West. At the same time, she could get a better bargaining position towards the U.S. (and in all probability, has really got it) on sharing the spheres of influence in the Caucasus and Central Asia. Besides, Russia could make an attempt to integrate CIS-members under its aegis along the line of military-technological cooperation, as against the NATO alternative (the prospect now partly approached by Russia, albeit mostly formally, within the frames of the Collective Security Treaty Organization).
Fifth, Russia could use the conflict for reanimating its failed dialogue with NATO, perhaps with a view to future rapprochement. As a matter of fact, the Kremlin has sent Dmitri Rogozin, now President Medvedev’s aid, to negotiate this “narrow” issue (remember that five years ago he was an official negotiator with the EU on the “narrow” Kaliningrad transit issue). His strategic mission seemingly implied that the CIS countries would not be given the chance to join NATO earlier than Russia itself or without its approval.
Finally, a small victorious war (and a conflict as a whole) could to a certain extent kick up the energy prices and, logically, the revenues of Russian fuel and energy complex as well as those of the federal budget. In parallel, it could contribute to dropping the ruble exchange rate against the dollar - a natural outcome, also working as an anti-inflation domestic measure.
Russia’s Policy-of-Force Ideology - a Threat to Itself
Whatever top officials and leading TV channels in Russia say about the country’s peacekeeping efforts, a mix of cynicism and double ethics becomes more and more visible in Moscow’s foreign policy. On the one hand, Kremlin was recently calling to put President Saakashvili under international trial for his applying military force to provide territorial integrity, despite the fact that the same methods had been applied earlier in Chechnya by Russia herself. On the other hand, while condemning Brussels for bombing Yugoslavia, and Washington, for the war in Iraq, Moscow is actually following the lead of using force. By doing this, the Russian leadership clearly reveals its deep inferiority complex towards the so called “pragmatism” of the U.S. and NATO. Moreover, despite the rising wave of anti-American rhetoric, the Kremlin acts in most cases in a manner of step-in-step reflexion of what the present U.S. authorities are doing.
Bombing or simply pressing the neigbour territories may provide additional rent revenues for some Russian state-owned monopolies’, however, this cannot make Russia either economically stronger or politically more reliable. By knocking Georgia (or a similar country) off the game Russia would inevitably challenge the naturally established balance of global economic and political ties. But such a challenge would never help it to pull the blanket to its side. The renewed system of global interactions may be even more competitive and will automatically weaken Russia’s position in the world markets.
… And No Threat to the West
The armed conflict in Georgia may be over, but the continuing inflow of oil-dollars to the federal budget (its actual 2008-proficit is expected twice as much as planned by Russian officials) still perverts the perception of reality by Russian functionaries, fuelling their policy-of-force ideology. For example, Sergei Shmatko, the new Russian energy minister appointed in May, expressed his intention to take control over world oil prices by closing and opening the valve of export deliveries. ”We occupy such a significant place in the global oil community, - he argues, that our Russian factor of influence must matter more”. According to minister’s vision, Russia should make oil deposits (due to her cold climate): to keep them absolutely ready for use but to release them only when the international oil price has to be pressured.
Indeed, the Russian Dutch disease (and federal budget rests for one third on oil and gas revenues) may objectively move Russia to look forward to governing oil prices in the right direction. The more so, since Russia is extracting 10 mln barrels/day - the same quantity as Saudi Arabia, OPEC’s leading member (the 13 OPEC member-countries altogether are extracting 29 bln barrels/day, making 42% of extracted world oil volume). In reality, however, the power of the Russian oil and gas lever is rather limited even considering only domestic factors. In particular, extraction volume in old oil fields decreases, the new ones cannot compensate for this declining trend. Oil analysts still doubt whether there will be sufficient oil to fill the East Siberia - Pacific Ocean pipeline now under construction. And according to some estimation, to move up the oil prices, Russia will need to totally give up export for a time.
Popular Misleading Ideas
The following ideas, both lacking objective grounds, are now gaining popularity among the Russian elite.
The first idea implies that the contemporary globalized world is prioritizing the policy of force, even stronger than in the past, and therefore, that Russia has politically benefited from demonstrating her “pragmatic” approach and decisive actions in Georgia. Meanwhile, the course of life shows that it is the exclusion of the policy of force from the arsenal of actions, which constitutes the only pragmatic approach in the era of globalization. The sharply accelerated speed of changes and the sharply increased level of interdependences between actors in the globalized markets have forever buried the classical path to victory based on competitive win-lose games. Under conditions of modern hyper-competition, the loss of one of the market players will automatically entail knocking him out of the game, which may crucially modify the general balance of forces and immediately convert yesterday’s winners into today’s losers. It is this very reason for which countries and companies seek openness and multilateral cooperation for the sake of gaining mutual benefits: nobody is interested in your failure – it is dangerous for the one who loses, only cooperative win-win games may be in place, let them be with different degree of benefits.
The second belief runs that irrespective of the present political drive away from the West, Russia can enjoy favourable economic prospects in the long run, since it can rely on huge foreign currency reserves (of nearly $600 bln by August 2008) and on a rich base of raw materials. But this is also a misconception. According to International Energy Agency (IEA) forecasts, oil extraction in Russia will face a 3-percent decrease annually and may cease in 2010-2012 under the most favorable scenario. In this case, Russia will face a serious deterioration of its macroeconomic situation, with no support coming from outside.
Under the growing economic calamities in Russia (explosive inflation, collapses in the stock market, banking crisis, capital flight, expected transition from budget surplus to budget deficit and a negative trade balance), the Kremlin will apply any measures of force to preserve the status-quo and keep the existing system of governance alive. However, even under high oil prices the system of vertical subordination and the mobilization-type economy will not last long. A stiff hierarchical order could be sustained in the 17th and even 20th century, but in the epoch of global competition not a single economy can soundly operate under these principles. In the 21st century, the world is rapidly self-polarizing into those who have opted for the right institutional algorithm (openness, multilevel cooperation, etc.) and those who have failed to do it and thus stayed at the periphery, lagging behind.
The international financial crisis, now under way, leaves the Russian economy a narrow alternative between either hard or soft ‘landing’. The national priority is assumed to consist in shifting from anti-crisis measures towards a reform of the private financial system, with improving investment structure, and, in this basis, starting comprehensive economic modernization. But without removing the dominating policy-of-force approach from Russian domestic and foreign economic activities the desired turn towards post-industrial modernization is not viable. In contrast to the U.S. and other victims of the current crisis, the critical point for Russia is not a reform of financial markets as such but rather the question whether the authorities (be it Putin–Medvedev in tandem or separately) will be able to master alternative political thinking and start cultivating horizontal partnerships instead of administrative verticals.
At the moment, the Russian leadership takes most of the developed countries for neither friends nor just long-standing partners. Anxious to reduce Russia’s development gap with these countries, the Kremlin is at the same time frustrated by the prospect of their growing influence on Russia. Thereby, it fails to make a proper westernized option for Russia’s future development, simply remaining a hostage of its own political complexes, outdated perceptions and the political order it once introduced.
 Liliya Shevtsova. Konets epokhi: antitezis Gorbachevy (The End of Epoch: Anti-thesis to Gorbachev) //Vedomosti, #175, 17 Sept., 2008
 Russia’s formal approximation to Western countries in terms of GDP (the 11th place in the world if calculated at the official rate of exchange of the ruble and the 5th place at the purchasing power parity in 2007) does not mean much because it is not accompanied by approximation of qualitative parameters and the technological level of economic growth.
 In this regard, Roland Nash, head of analytical department in Renaissance Capital, noted: “The State-owned corporations are the next, potentially dangerous phase in choosing certain strategic industries. The danger is that the ineffective government and bureaucrats will affect the economy which is doing well without this unnecessary interference”. // WSJ, 5 Oct, 2007. See also Y. Pappe, E.Drankina. Kak razvivayut Rossiyu (How Russia is Developed)// “Den’gi”, # 36, 15 Sept. 2008
 This is especially true about “Rosatom” and Rostekhnologii”, as according to Yakov Pappe. See Y. Pappe, E.Drankina. Kak razvivayut Rossiyu:gosudarstvo i Ko (How Russia is Developed: the State and Co)// “Den’gi”, # 38, 29 Sept. 2008
 As estimated by Andrey Illarionov, the head of Institute of Economic Analysis, in terms of annual GDP growth, Russia slipped from 8.2% in 1999-2000 on the average (3d place among 15 members of the former USSR) down to 6.8% in 2004-2006 (13th place).(Cato.ru, 5 June, 2007). And as many experts believe, if not devaluation of the ruble in 1998 and not extra high international energy prices, the Russian economy would had run only 3% a year during Putin’s rule (Vedomosti, # 181, 25 Sept, 2008). In 2008, Russia is expected to make 7.1% according to IMF, or 7.8% according to the RF Government, which in both cases is relatively less than in 2007. As for CPI, it sharply went up from 9% in 2006 to 12% in 2007, and is expected to fly up to 13.8% in 2008 (the IMF forecast), which is by no means a ceiling (Expert, 4 Apr, 2008; RIA “Novosti”, 29 Sept 2008).
 As revealed by Anatoliy Kulikov, the former head of the Home Affairs Ministry, the corruption is currently eating up a third of Russian federal budget. As estimated by INDEM, the Russian business is totally losing $33.5 bln a year to bride the bureaucrats, while for housekeepers the relevant burden of corruption is making up $3bln (NEWSru.com 30 Sept, 2008).
 Such an attempt is backed up by an accelerated pace of the Russian business expansion abroad beginning from early 2000-s, which now is much larger in scale than in other BRIC countries and even larger than in China, as estimated by Moscow School of Management ‘Skolkovo’. By the end of 2006, the top of 25 largest non-financial corporations in Russia have accumulated totally $60 bln as foreign assets, with Gasprom and Lukoil making the largest share ($10 bln). During 2007, the Russian business society acquired foreign assets for the sum of $24 bln as compared to $18.2 bln for China and only $10.9 bln for India. (Vedomosti, # 234, 11 Dec 2007).
 DELFI, 28 Nov 2006; REGNUM, 30 Nov 2006
 Maxim Blant. Novaiya imperiya (The New Empire).// Cato.ru, 16 Jan, 2007 According to Prime Minister V. Putin, in 2007, the Russian military expenses were making up only 2.7% of GDP. This differs much from A. Illarionov’s expert estimation as of 3.6% for 2006, which is greater than the total average figure for NATO-members (3.3/%) and much greater than the average NATO level without counting U.S.(1.8%). See the report by A. Illarionov. “Predchuvstvie katastrofye” (The Presentiment of Catastrophe), Cato.ru. 5 June, 2007
 From the Editor: the Oil Consciousness // Vedomosti, #182, 29 Sept, 2008
 See Novoprudskiy, S. Vlechenie k voine (Inclination for a war) //Gazeta.ru, 5 Sept, 2008
 From the Editor: the Oil Consciousness // Vedomosti, #182, 29 Sept, 2008. According to
 Grigoriev, L.. Krizis: Sovest’ nado imet’ (Crisis: Have You No Shame?) //Vedomosti, # 181, 25 Sept. 2008.