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The G8 Summit in Russia

Published by Other on 2006-07-15

The Group of Eight (G8) annual summit scheduled for July 15-17 in the historic Russian city of St. Petersburg offers Presidents George W. Bush and Vladimir Putin a timely opportunity to repair fraying political relations between America and Russia. It also offers them an opportunity to strengthen the economic corridor between the two countries.

The actions of the two presidents will send a strong signal to the American and international business communities not only about the future of bilateral relations between the United States and Russia. Their actions may also offer clues about prospects for a genuinely free market economy in Russia - and for opening up the Russian system to more foreign entrepreneurship and investment.

Other than Mr. Putin, host of the 32nd annual meeting of G8 leaders, the St. Petersburg summit will focus on Mr. Bush. Regardless of where a G8 summit is held, an American president is almost always the main attraction. However, the event comes at an inauspicious moment for Mr. Bush, with the political capital of his 2004 re-election largely expended on account of the continuing war in Iraq, and assorted domestic scandals.

And while Mr. Putin enjoys unprecedented popularity at home, there is growing concern in the American and international business communities over the Russian state's draconian interventions in the domestic economy; attacks on media institutions; widespread bureaucratic corruption; and backtracking on systemic reforms that began shortly after the collapse of the erstwhile Soviet Union in December 1991.

Mr. Putin's campaign to eliminate all challenges to his authority are worrisome to Western supporters of democracy. They are troubled by the closing down of independent television networks, the elimination of elections for regional governors, and the jailing of oil tycoon Mikhail Khodorkovsky in October 2003, and the subsequent destruction of his private company, Yukos. And, say Western critics, Russia's record on human rights isn't terribly encouraging.

Beyond the current situation in Russia, two questions raise themselves:

If Mr. Putin continues to consolidate power in the presidency, what about the traditional system of power-sharing between the executive, legislature and judiciary in a democratic system based on adult franchise?

And second, who will succeed Mr. Putin when he leaves office after his two terms expire in 2008? Will Mr. Putin relinquish office readily? Will he install a puppet and himself act as the power behind the presidential office?

Participants at the G8 summit are unlikely to discuss these questions, of course, let alone expect any answers from Mr. Putin. Suffice it to say that the questions are part of the general dismay with which Russia is being regarded these days.

Notwithstanding such dismay, more than 10,000 visitors are expected to descend on St. Petersburg, a city of 4.7 million people. Located on the delta of the River Neva at the east end of the Gulf of Finland on the Baltic Sea, it was founded by Tsar Peter the Great in 1703 as a "window to Europe." The city served as the capital of the Russian Empire for more than 200 years until that honor was bestowed on Moscow after the Russian Revolution of 1917.

St. Petersburg is President Putin's hometown. Obviously, he wants to show Russia's best face during the summit. Millions of dollars are being spent on preparations, which include brightening the urban environment of St. Petersburg, burnishing Konstantinovsky Palace - where the summit will be held - and tightening local security in anticipation of the leaders of the industrialized countries that constitute the Group of Eight. The G8 members - the United States, Britain, Canada, France, Germany, Italy, and Japan - account for nearly 67% of the world economy, which is $44 trillion.

Unlike many earlier G8 summits, this one is unpredictable. Russia has put energy security at the top of the agenda. Mr. Putin has also said that education will be discussed, as will the scourge of infectious diseases such as HIV/AIDS that are spreading not only in Third World countries but also European nations such as Russia.

Mr. Putin wants his friend Mr. Bush to sign a bilateral protocol ahead of the summit. The latter is already under considerable pressure not to do so. But critics of Russia fear that the longstanding friendship between the two presidents may influence Mr. Bush to disregard criticisms, and sign a protocol anyway. Of course, any pledge made by the president would need to be ratified by Congress - and the Congressional leadership, both Republican and Democratic, is warning against supporting Russia unless Mr. Putin puts forth credible demonstrations of his willingness to institute a genuine democracy and free market system.

While such warnings are bruited about in Washington and the high chancelleries of Europe, Mr. Putin is aware that the West - and specifically America - cannot risk alienating and isolating Russia. For one, it is a big country - with an area of 17 million square kilometers, Russia is the largest country in the world by land mass, covering almost twice the territory of the next largest country, Canada. Its population of 143 million is the seventh largest among the 191 members of the United Nations. And its military might remains formidable. Mr. Putin is aware that Mr. Bush covets his support in the UN Security Council for a resolution critical of Iran's reported nuclear weapons program.

Such support, and any other concession, from Mr. Putin are unlikely to be forthcoming unless Mr. Bush is prepared to make allowances for the Russian's desires.

For example, Mr. Putin wants the American president to endorse Russia's bid to become the 150th member of the World Trade Organization. He sees the continuing obstacles posed to Russia's WTO entry as more than an irritant - Mr. Putin believes that there is a concerted campaign to deny membership to Russia that would enable it to be a more effective participant in globalization. A principal problem is the well-known tendency for American lobbies to get the US Trade Representative to use WTO entry as a way to force new entrants to accept "WTO plus" obligations - or additional concessions - that exceed those accepted by existing members, including themselves, according to Padma Desai, Harriman Professor of Comparative Economic Systems, and director of the Center for Transition Economies at Columbia University.

The major sticking points relate to conditions governing the entry of US and Western banks and insurance companies in Russia and protection of intellectual property rights, Dr. Desai said. Russian negotiators also seek to protect Russian agriculture and specific sectors such as the aircraft and auto industries.

"Evidently, the Russians have good reason to feel aggrieved at the continuing opposition by the US to their WTO entry," Professor Desai said. "It is time to drop the US recalcitrance, instead of indulging in continued bargaining till the cows come home. The trade barrier reductions necessitated by WTO entry will bring in the competitive pressures that Russian industry must sooner or later muscle through. Now is the correct time to do so because oil-rich Russia currently has the financial resources for the trade adjustment costs associated with displaced workers. President Bush can launch the process by signing a bilateral protocol with his Russian counterpart on the eve of the St. Petersburg G-8 Summit."

Some 55 of the 58 members of WTO's working group that was set up to consider Russia's accession to the world body have signed bilateral protocols with Russia. The three countries that have thus far withheld endorsement are the US, Australia and Colombia. If Mr. Bush signs such a protocol, it would have to be ratified by Congress. In a complicated process that would build on the 1974 Trade Act, Congress would also have to suspend the Jackson-Vanick Amendment that placed trade restriction on countries of the then-Communist bloc, which had restrictive emigration policies - specifically with regards to Jews. Under the law, if any of the countries on the list refused or hindered emigration, they would not be allowed to trade with the United States.

Removing countries from that list is hardly without precedent. When Ukraine applied for WTO membership, Congress acted to strike it from the list. Congress would have to do the same thing with Russia.

She is concerned that the Russia-bashing of recent months may spawn a "revival of the Cold War mentality."

If indeed the current wave of Russia-bashing results in a revival of the Cold War mentality - deep mutual distrust between America and the West on one side, and Russia on the other - it would be deleterious to all parties. Given the fact that Russia is perceived by Russians themselves as stable, and that is economy is reviving, thanks to the oil and gas boom, Russians rightly view their country as considered important to be negotiated with on par with other industrialized nations - such as members of the G8.

To be sure, domestic Russian self-perception isn't shared by the chancelleries of most of those G8 members. Their officials say that under Mr. Putin's two immediate predecessors, Mikhail S. Gorbachev and Boris Yeltsin, there was a pronounced convergence of interests and values between Russia and the West. It was Mr. Gorbachev, after all, who ended the Cold War and took the steps that led to the collapse of the Soviet Union. It was Mr. Yeltsin who launched the big demolition effort that dismantled a state where all governance was centralized and the economy was a hostage to inept centralized planning. Little wonder that in those years - from 1991 to 2000, when Mr. Putin succeeded Mr. Yeltsin - diplomatic relations between Russia and the West were almost consistently cordial. Professor Desai recalls former Ambassador Jack Matlock saying how pleasant it was to represent America during his term.

Pleasant though it must have been to be a diplomat during the 1990s, it was a decade of extreme macroeconomic turbulence in Russia. Between December 1991 and December 2001, the Russian ruble's value dropped by more than 99 percent against the US dollar. In 1998, three years after the authorities managed to stabilize inflation, a speculative crisis broke through the central bank's defenses, forcing the government to devalue the currency. Many people concluded that Russia's attempts at economic reform had failed.

Despite the Russia-bashing, the irony is that there is again a convergence between Russia and America on several issues. They include nuclear nonproliferation, cracking down on terrorism, bilateral strategic force parity, and oil and gas.

"But these common interests come under a crowd because of Mr. Putin's consolidation of federal power," Professor Desai said. "Because things seemed to be going so well under Gorbachev and Yeltsin, many observers find today's situation difficult to grasp."

As she sees it, the "big macro overview question" between US and the West, and Russia is how high a price are we willing to pay in terms of turning a blind eye toward repression in Russia in exchange for using Mr. Putin's good offices for problems that aren't in our control - such as Iran, North Korea and the Hamas militants who rule the Palestinians.

Indeed, Mr. Putin has made moves in recent weeks that suggest he's amenable to playing the role of interlocutor between America and Hamas. When he invited Hamas representatives to come to Moscow for discussions that could lead to Russian foreign aid, Mr. Putin was first criticized in Washington. But the fact is that Russia has a significant Muslim population. The gesture toward Hamas was a conciliatory signal to Muslims. At the same time, the Kremlin gave Hamas the right message: Give up any idea that you may harbor of destroying Israel.

But some critics are implacable.

"When you look into Putin's eyes, you don't see a soul that you can love," said Jonathan Sanders, director of the Future for Russia project at Columbia University.

He then spun out a host of actions attributable to Mr. Putin: The shutting down of the dissenting press; failing to take meaningful action against skinheads who have been assaulting foreigners with dark skins; eliminating a number of regional elections; pulling oil and mining companies back into state control and away from the private sector; not allocating enough resources to schools, while mollycoddling the military; and failing to demonstrate serious concern about the AIDS pandemic.

Mr. Sanders, who also produces television documentaries, said that Russians missed being the superpower they were during the erstwhile Soviet Union.

"They are a proud people," he said. "Yet they know that they need to get integrated into the globalization that's taking place. They know they missed so much of the industrial revolution. They want to get up to speed. Thus, they need the G8 psychologically, economically - in every possible way."

Critics such as Sen. John McCain, Republican of Arizona, are calling for a boycott of the summit. That is unlikely to happen, not the least because the Russians are dangling tantalizing contracts before Western companies for drilling oil and natural gas in the Murmansk region's Prirazlomonoye and Shtokman fields. The contracts for these Arctic fields are worth billions of dollars, and the Russians have shrewdly held back from announcing who will get the nod for providing financing, technology and exploration for those fields. Two American companies, Chevron and Conoco Phillips, the French company Total, and two Norwegian companies, Norwegian Statoil, and NorskHydro, are said to be on the short list for the first stage of drilling, estimated to cost at least $10 billion.

With a resurgent economy whose annual growth has ranged in the last three years between 6% and 7%, Western businessmen realize that Russia is a market that they cannot ignore. Mr. Putin knows this, too, but he also understands that foreign direct investment often takes its cues from political signals.

Perhaps that is why he has embarked on a pre-summit campaign to romance Western investors and officials. He and his advisors see the advantages of playing a charm-and-disarm card ahead of the G8 summit, thereby giving it a certain pre-summit momentum that would play to Russia's economic interests.

On May 29, for example, Mr. Putin announced the establishment of new car manufacturing plants in Russia of General Motors and Germany's Volkswagen. A new VW factory in the Central Russian region of Kaluga will assemble Polo, Passat, Touareg, Skoda and other models designed for the Russian market and is set to produce 115,000 cars annually. Construction will begin in August 2006, and the factory is expected to open in September 2008, and is slated to employ 3,500 people. Investment in the new factory will total nearly $350 million.

St. Petersburg itself will benefit from the Putin campaign. Economic Development and Trade Minister German Gref said GM intended to sign a deal on the construction of its car assembly plant in St. Petersburg in June. Mr. Gref told Reuters that GM was planning to invest $115 million in its plant, which would assemble three models, adding that the company would double investments for the second stage of the project. Other foreign carmakers active in Russia include Ford, which currently assembles its cars in the Leningrad Region town of Vsevolozhsk, Renault in Moscow and General Motors, BMW and Kia in Kaliningrad, Russia's exclave on the Baltic Sea. Japan's Nissan has said it is also planning to launch production in Russia soon. Russia's SeverstalAvto has signed licensing agreements with Fiat, Ssang Yong and Isuzu, while AvtoVaz and General Motors are producing the Chevrolet Niva 4WD.

Mr. Putin also dispatched the chief of the presidential staff, Sergei Sobyanin, to London recently, apparently to convey Moscow's desire to allay Western fears of an unconstructive attitude to the G8 summit agenda, according to Boris Kaimalov, a columnist with Novosti.

"It was a very timely and wise decision. The phlegmatic-looking Kremlin official with the calm eyes of a reasonable human being did better than anybody could in that situation. People like him usually avoid the political limelight," Mr. Kaimalov wrote.

The Times (London) quoted Mr. Sobyanin as saying: "Our biggest problem is the rhetoric. We do have differences with our Western partners, but nothing of critical importance and certainly nothing that cannot be resolved through direct dialogue."

His boss, Mr. Putin, must certainly have wondered about differences with Western partners when US Vice President Dick Cheney let loose a surprise salvo against Russia at a conference of leaders of Baltic and Black Sea countries. Speaking in the Lithuanian capital of Vilnius, Mr. Cheney accused Russia of all sorts of crimes - from violating neighbors' territories to interfering in their democratic processes to reverting to authoritarianism at home.

Calling on Moscow to return to the path of democratic reform, Mr. Cheney accused Russia's leaders of using oil and gas as tools of "intimidation and blackmail" against neighbors. The reference seemed to be to Moscow's recent demand that neighboring Ukraine and Georgia pay fair - meaning, of course, higher - prices for energy shipments.

That Mr. Putin should want to capitalize on current oil prices - which have edged beyond $70 a barrel - should come as no surprise. The 1990s were a decade of extreme macroeconomic turbulence in Russia. Between December 1991 and December 2001, the Russian ruble's value dropped by more than 99% against the US dollar. In 1998, three years after the authorities managed to stabilize inflation, a speculative crisis broke through the central bank's defenses, forcing the government to devalue the currency. Many people concluded that Russia's attempts at economic reform had failed.

Russians don't want a reprise of Russia's crash in 1998. It came in the middle of a wave of similar currency crises around the world. But as bad as the 99% drop in the ruble's value sounds, International Monetary Fund figures show that 11 other countries - including Belarus, Brazil, Turkey, and Ukraine - suffered even larger currency declines during the 1990s. Moreover, although the ruble's value fell by a massive 61% in just two months during 1998, similar or larger two-month currency collapses occurred 34 times in 20 other countries from January 1992 to December 2001. The consequences of Russia's devaluation were also less dire than was claimed at the time. In fact, the move was followed by a sustained growth spurt and a reinvigorated drive toward liberal economic reform.

In recent months, Mr. Putin has been noticeably vocal about the sustained economic growth. He pointed out that Russia's foreign exchange reserves will touch nearly $300 billion by the end of 2006. Repayments on its $140 billion external debt are on schedule. The gross domestic product is approaching a trillion dollars; calculated by "Purchasing Power Parity" (PPP), the GDP figure is almost $1.5 trillion.

Less noticeably, Mr. Putin has been saying good things about America. At a recent meeting with representatives of the European Union, he said: "The United States is our partner."

At another event, he alluded to Russia's oligarchs and said, "You cannot step on toes in order to get wealth and power."

Mr. Putin told his audience that he wished he were the author of those words - but that he was quoting Franklin Delano Roosevelt.

"Putin's message was clearly pro-Russia, and aimed at the oligarchs - but he was also quoting a much beloved American president," Professor Desai said.

"There's quite a dance going on - that dance wouldn't be going on if there weren't such a big summit around the corner," she said. "I think that this Russia-bashing is counter production - it's not going to work. Ultimately, Putin makes Russians feel good about themselves."

What does the future hold for Russia?

Professor Desai of Columbia University says that of all the policy challenges facing Mr. Putin and his successor, "the designing and implementation of a pro-immigration policy will remain the most urgent and formidable. Without progress on that front, the demographic crisis will continue to stalk Russian leadership for years to come."

President Putin acknowledged as much in his recent State of the Union address. The Russian population has dropped from 148.7 million in 1992 to 143.5 million in 2003, according to the United Nations. It estimates that the population to fall to barely 101 million by 2050, if current demographic trends continue. Earlier contractions of Russia's population were brought about by the massive losses associated with World War I, the civil war, famine, the repression and purges of the 1930s that were carried out by strongman Josef Stalin and his henchmen, and World War II. But the demographic decline is the result of a declining birth rate and a high mortality rate.

The only practical solution to this demographic problem is to open up Russia's doors to more immigration. But Russians have always been xenophobic. Not only do they oppose the influx of ethnic migrants from the Caucasus, central Asia and China, they seem against immigration by ethnic Russians from former Soviet republics.

The population decline is certain to monitored closely by foreign businessmen as they make long range plans for the Russian market.

Still, it is difficult to imagine a country as large as this to be running out of Russians. For Putin, this is one more problem to contend with as he thinks about his legacy.

There's a running joke in Russia about the optimist and pessimist who're toasting the New Year.

"Things couldn't get worse than last year," the optimist says.

"Oh yes, they can," the pessimist says.

Here are two optimists, Andrei Shleifer and Daniel Treisman. Listen again to them:

"Some see the sudden spurt of growth over the last four years as an indicator of more improvements to come, and they expect Russia soon to leave the ranks of middle-income countries to join those of Hungary and Poland as a poor developed one. They emphasize the country's advanced human capital, its reformed tax system, and its mostly open economy. Others see bureaucratic regulations and politicized interventions (so vividly exemplified by the Yukos case) as serious barriers that will stymie Russia's growth. In politics, optimists anticipate increased democratic competition and the emergence of a more vigorous civil society. Pessimists predict an accelerating slide toward an authoritarian regime that will be managed by security-service professionals under the fig leaf of formal democratic procedures.

"None of these predictions can be ruled out. But thinking about Russia as a normal middle-income country helps put extreme forecasts in perspective. Most countries in this category end up somewhere between textbook democracy and full-fledged authoritarianism. Their democracies are incomplete, unpredictable, and subject to temporary reversals as incumbents seek to manipulate the process to stay in power. When they grow at all, middle-income countries tend to grow in spurts that are often interrupted by financial crises. Russia has probably now destroyed enough of the vestiges of central planning to continue operating as a market economy, albeit with flawed institutions and an unhealthy dose of state intervention.

"That Russia is only normal may be a disappointment to those who had hoped for more. And it is little consolation to those who have no choice but to endure the insecurities of life there. But for a country that was an "evil empire" as little as 15 years ago -- threatening people at home and abroad -- it is a remarkable and admirable achievement."

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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