Russian Modernization, Part 1: Laying the Groundwork

11 MINS READJun 23, 2010 | 12:23 GMT
Russian President Dmitri Medvedev is leading a large delegation of Russian economists, politicians and businessmen on a tour of the United States this week. Medvedev's visit is part of Russia's effort to launch a massive modernization program that will involve attracting investment and expertise from the West. Russia's long-term survival depends on such modernization, but the process will require changes and compromise within the Kremlin. Editor's Note: This is the first installment in a series on Russia's modernization efforts. For the second installment, click here.
Click here to download a PDF of this report Russian President Dmitri Medvedev is leading a large delegation of Russian politicians, businessmen and economists on a visit to the United States this week. During his U.S. tour, Medvedev will travel to Washington and meet with U.S. President Barack Obama. The two will discuss the expected issues — the START nuclear treaty, the standoff with Iran, ballistic missile defense in Europe and Russia's resurgence into its former sphere of influence — some of which Russia and the United States have found common ground on and some of which are still sources of disagreement. But this trip has a different focus for the Russians. Russia is launching a massive modernization program that involves seriously upgrading — if not building from scratch — many key economic sectors, including space, energy, telecommunications, transportation, nanotechnology, military industry and information technology. Over the past few years, Moscow has come to realize that such a vast modernization is imperative to Russia's future. Russia has spent the past decade restabilizing after the fall of the Soviet Union and the chaos that followed; Moscow has also spent the last five years resurging into its former sphere and re-entrenching its authority as one of the main powers in Eurasia. Moscow has seen incredible success at home and in its near abroad. Now the plan is to make it last as long as possible. However, there are two factors that could keep Russia from remaining strong enough to carry out its plans. First, Russia is suffering from an extreme demographic crisis that could lead to a further decline of Russian society as a whole, much like the decline seen in the 1990s. Birth rates are already insufficient to sustain the population. This is compounded by a high HIV/AIDS infection rate and alcohol and drug abuse — the latter creating an increasingly unhealthy population and a diminished life expectancy for the young, in addition to worsening fertility rates. Compounding this is the "brain drain" that occurred after the fall of the Soviet Union as the best and brightest Russian minds sought better lives in other countries. Russia's current labor force is already considerably less productive than that of other industrialized nations, and the difficulties caused by a shrinking labor force are already hitting Russia. Second, Russia's indigenous capital resources are insufficient to maintain its current economic structure — much less the economic power of the former Soviet Union. Russia currently relies on one thing for the bulk of its economic strength: energy. Russia is blessed geologically; its vast territory contains the world's largest proven natural gas reserves, second-largest proven coal reserves, third-largest known and recoverable uranium reserves and eighth-largest proven oil reserves. However, as far as economic development is concerned, Russia is anything but well-endowed. Russia is starved for capital because of its infrastructural needs, security costs, chronically low economic productivity, harsh climate and geography. Russia masked these issues when energy prices were high, but such high prices are not guaranteed — as the last two years have shown. Moreover, Russia has not been immune to the global financial crisis. And, adding to the financial uncertainty in Russia, foreign investors and businesses were already nervous about working in the country because of the Kremlin's tough laws regarding foreign investment and firms.

Planning for the Future

Russia is now looking to extend its economic lifespan in hopes that the country can remain strong for another generation. That means Russia is looking to import the capital, technology and expertise needed to launch itself forward 30 years technologically. This does not mean Russia will turn away from energy or resource wealth as the basis of its economy; it is looking to diversify as best it can while learning how to better use its economic strengths (Moscow is especially interested in modern energy technology). This is not the first time Russia has sought to leapfrog into modernity. Russia has traditionally lagged behind Western nations in the fields of military, transportation, industry and technology but has employed periodic breakneck modernization programs, which have destabilized the country during their enactment while also bringing it into the modern era. This kind of activity was seen when Czar Peter I implemented the massive Westernization campaign at the beginning of the 18th century with sweeping economic reforms in trade, manufacturing and naval capabilities. Czarina Catherine II continued the Westernization in 1765 with her Free Economic Society, which modernized Russian agricultural and industrial standards and brought them in line with Europe's. Alexander III helped to unite the nation by building the Trans-Siberian Railway. Soviet leader Josef Stalin implemented rapid industrialization in Russia in the 1920s, and Soviet leader Mikhail Gorbachev opened the nation to modern technology during Perestroika. The main unifying theme of each modernization period in Russia was that it required the import of Western technology, information, planning or expertise. Those modernizations required picking up pieces of technology from the West and forcing them into the Russian system. Except for Gorbachev, each Russian leader who modernized Russia did so through brute force. Whether it was laying rail, making steel or turning the earth, these modernization efforts required low skills, a large population and long working hours. Russian leaders would throw incredible amounts of human labor at the modernization, not caring if it crushed the population in the process. The current modernization effort is different, however. The resources Russia needs cannot simply be picked up abroad and taken home; this push for modernization requires the import of highly qualified people who have trained for years, if not decades. Russia cannot simply throw more of its domestic population at the problem as it has in the past. It must import foreign expertise on a massive scale. So Russia is turning to the West for help. Over the past few months — in bilateral talks in Europe, during Russia's recent economic conference in St. Petersburg and now this week in the United States — the Kremlin has been preparing to seal hundreds of deals meant to give Russia what it needs in exchange for political concessions, resources in Russia and Soviet-era technologies that Western governments or firms desire. Russia's timing in this is critical. Moscow feels more secure in reaching out to the West for such deals because it has already expanded and consolidated control over much of its near abroad. Furthermore, Europe is fractured (and becoming more so) and the United States is occupied in the Middle East. This is a very opportune time for Russia to undertake another grand modernization.

Steps to Modernization

However, this will not be as simple as Russia deciding to modernize and then striking deals with the West. The Kremlin must first do several things to entice foreigners into the country while retaining the control needed to hold Russia together. First, Russia will have to change its restrictive laws against foreign investment and businesses, which the Kremlin implemented from 2000 to 2008 in order to contain foreign influence in the country. These laws limit which sectors foreign firms and investors can enter and how much of a stake in Russian businesses and projects they could own, and kept foreign groups within a strict set of rules to keep them from influencing society. Such a reversal in the laws is already under way, though the challenge of doing business in Russia still lingers. Second, Russia has to moderate anti-Western elements of its foreign policy implemented from 2005 to 2008, to show that the country is pragmatic when it comes to foreigners. Such a shift is being debated and could be introduced in mid-July by Medvedev or Prime Minister Vladimir Putin. Traditionally, any time Russia launches a modernization program, it signals a detente with the West based on common economic interests in order to obtain foreign technology. This does not mean that Russia will become pro-Western; instead it will try to find a careful balance with other powers in order to have foreign governments' support for their countries' businesses working in Russia. Third, Russia will have to decide which investors and businesses to invite into the country. After the free-for-all of Western business following the fall of the Soviet Union, the Kremlin will be very particular about who is allowed to help modernize Russia and to what degree. Moscow does not have to extend a blanket invitation to any Western firm that wants to help modernize the country — especially since the governments and businesses from the United States and Europe are not coordinated and currently are preoccupied with other matters. This will allow the Kremlin to strike separate deals with each contributor. For example, Moscow is making deals with Washington on the issue of Iran, working with Norway on maritime issues and giving France significant economic assets in Russia — all separate deals intended to bring in investment and expertise. This way, Russia can (theoretically) get what it needs while maintaining control over what it must concede. The fourth part of the process is the most difficult and the most important. The Kremlin must calculate how far it can modernize without compromising the core of Russia, which depends on domestic consolidation and national security above everything else. This means Russia must keep tight control over the foreign groups coming into the country to prevent their influence from undermining the Kremlin's control. This seems counterintuitive to the modernization process, especially since bringing in modern thinkers and technicians inherently involves introducing different values and requires Russia to give them the freedom to continue thinking and operating as they do. However, Russia remembers all too well what happened during the last modernization process — Perestroika — when too much modern and Western influence flooded the country, collapsing the Soviet Union's social structure and political control. The shock still haunts the current Kremlin leaders. Trying to balance modernization with control is the most crucial dilemma facing Moscow — something that has split the government into three camps. First, there are those in the Kremlin — like Medvedev — who want full modernization, with sweeping reforms. These more democratically minded figures understand that Russia is being left behind and that the country will not be able to compete as a world power for much longer. Second, there are the conservatives — who form the majority in the Kremlin — who are terrified that the chaos and collapse which followed Perestroika will recur. Each of these camps has valid concerns, given Russia's permanent and inherent struggle. Russia is a delicate and difficult state to manage. That is why Russia is heading down the path of the third group within the Kremlin. This group is led by Putin, who is attempting to implement modernization in an incredibly careful step-by-step process in order to lead the country into the future while controlling foreign forces, to prevent them from shaking Russia's foundation. Putin believes modernization can be implemented in a way that does not remake Russian society as a whole or interfere with Russia's political aims in the region. It is far too early to know whether Moscow can accomplish this. There are myriad factors that could lead to disaster for Russia. It seems nearly impossible to implement modernization with foreign help in a country as locked-down as Russia. But whether it succeeds or fails, Russia's current attempt at modernization will determine Moscow's foreign and economic policy for the next few years, as well as its ability to hold onto power within the region in the decades to come.

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