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The End of Russia's Latest Liberalization Phase

Wednesday, May 29, 2013 - 18:54 Text Size Print

Russia’s desire for a more open Russian economy might be coming to an end. Sergei Guriev, a top economic adviser for Russian Prime Minister Dmitri Medvedev, has reportedly fled the country after months of intense scrutiny by Russia’s security circles, Vedomosti reported Wednesday. If true, Guriev’s flight comes as many of Medvedev’s inner circle have been targeted or dismissed or have left the country, leaving the liberal-minded Russian premier and his ambitious economic reforms in question.

Over the past decade, Medvedev has had two roles inside the Kremlin: to bring in a more liberal economic and financial plan to transition the country into a stable future, and to balance the more hawkish security circles that have traditionally dominated the government. When Medvedev, a civil lawyer by trade, was president from 2008 to 2012, he launched an ambitious series of economic projects called the Privatization and Modernization Plans. The objective of the plans was to privatize parts of several state-owned behemoths — to modernize them with foreign partnerships, technology and cash — most of which were formed during Vladimir Putin’s first two terms as president.

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Throughout its history, Russia has periodically attempted these types of economic overhauls, opening up to foreign aid and attempting to make major strides in industrialization. The latest phase had several components. First, it sought to overhaul Russia's image in the international community after a decade in which Russia had forced out foreign investment and made aggressive maneuvers in its periphery. Second, Moscow attempted to bring in large amounts of cash — $50 billion was the initial target for the programs in 2009 — at a time when Russia was just starting to feel the effects of the global recession on top of plummeting oil prices. Third, the Kremlin was starting to think about trying to forge an economy that could better withstand the global tremors for the long term by jumping ahead in technology and investment and business management. Fourth, the Kremlin wanted to strike strategic partnerships with foreign firms and governments that would gain access inside of Russia and create a loose alliance system between Russia and those countries. Finally, Medvedev was attempting to balance the overwhelming power of the security circle, which controlled many of Russia's strategic assets and sectors.

The concern about Medvedev's reforms, particularly within Russian security circles, was that they would bring in foreign influences that could undermine the government. This has traditionally been Russia's stance on economic reform: national security over economic growth. With Putin's support, Medvedev's reforms were able to overcome the resistance.

Medvedev’s liberalization plans hit a series of barriers over the past four years, including the Russian recession; lack of investment interest from Europe, which was consumed by its own economic crisis; and the political turnover that saw Medvedev and Putin swap offices. Nevertheless, the Kremlin announced that it would move forward with a large part of its modernization and privatization plans in 2013, in particular the privatization of parts of some of Russia’s most influential firms such as oil giant Rosneft, Russian Railways and VTB Bank, the last of which was to take place in an open bid in April.

A series of events in the past month suggests Medvedev's plans for a more liberalized Russian economy are a thing of the past. First, VTB's privatization was postponed at the end of March. Then several of Medvedev's top advisers and allies either left or were forced from their posts, such as Vladislav Surkov and, now, Guriev. There are also rumors that some of Guriev's cohorts are bowing out of their positions. One of Medvedev's technocrats, Guriev has been instrumental in designing his economic plans for Russia. There has also been an anti-Medvedev media campaign in Russia, blaming the premier for Russia's economic and social problems. And on May 23, Putin gave Medvedev an ultimatum, telling him to work out all of Putin's annual presidential edicts by June 7; it is unclear what will happen if Medvedev fails.

There is a potential explanation for each of these events, such as the current anti-corruption campaign in the country and the continued economic repercussions Russia is experiencing from the European crisis. In addition, there is the constant struggle for power between various groups within the Kremlin. The competition between the security circles and Medvedev's group has been particularly vicious in the past few years and is intensifying as Putin reorganizes his elite circles and begins planning for the future of Russia without him. There seems to be a concerted effort among the typically fractured security circles to work against Medvedev's group at this time.

But there is a larger economic reason behind Putin allowing Medvedev's stature to decline. When Medvedev launched his liberalization programs, Russia was strong financially, politically and economically and could flirt with the idea of loosening the Kremlin's hold over the country. The Kremlin was in a position where it could attempt to acquire significant foreign technology and investment through a more pro-Western economic plan. Medvedev — himself a Western-oriented civil lawyer — was the face of this shift. 

Over the past year, Russia has seen an influx of large business deals, such as Rosneft's partnerships with BP and ExxonMobil and Russian Railway's pairing with Siemens. Moscow has also entertained increased interest for investment from countries such as Japan and China. However, Russia has been able to bring in investment, technology and partnerships without fully embracing liberalization.

Instead, Russia has kept foreign influence at bay through strict social measures (such as restricting foreign nongovernmental organizations and squashing the opposition movement), while reaping the benefits of foreign business relationships. Putin has found a way to gain much of what Russia needs without having to implement Medvedev's liberal reforms. The question now is whether Putin can continue attracting foreign investment to create a more stable path for Russia's economy while preventing any real reforms that would weaken the Kremlin's grip on power.

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