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byby byby Katinka Barysch Katinka Barysch Katinka Barysch Katinka Barysch
Deputy Director of the Centre for European Reform in London2
The EU and Russia launched a ‘partnership for modernisation’ at their last summit in Rostov on May 31st / June 1st. The initiative – first muted by Commission President Barroso at the previous summit in late 2009 – is meant to help Russia diversify and remodel its economy, and breathe new life into the stale and sometimes tense EU-Russia relationship. It is unlikely to succeed in either objective.
At first glance, an Russia modernisation partnership looks like a clever attempt to improve EU-Russia relations. Disagreements and tensions will remain inevitable in the EU’s dealings with Russia, whether over gas sales, Iranian sanctions or the fate of Ukraine. The modernisation partnership could encourage co-operation that is independent of politics and instead focuses on technical, environmental or social issues. Such co-operation could help to stabilise bilateral relations and create mutual trust. By fostering day-to-day co-operation and exchanges, it could mitigate the pernicious intellectual isolation in which many Russian bureaucrats and scientists seem to operate today. That, in turn, could facilitate progress on more contentious political and economic issues.
Indirectly, a modernisation partnership could contribute to the EU’s ultimate aim: to make Russia more democratic, accountable and open. Joint projects in business, science and education could allow the EU to acquaint Russia with European norms and values, not through lecturing – which the Russians loath – but through day-to-day co-operation. In the medium term, successful modernisation could help to transform the apathetic Russian middle class into an entrepreneurial class that demands property rights and civil liberties.
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Politically, the modernisation partnership looks promising. ‘Modernisation’ is what Russia talks about today. President Medvedev has warned repeatedly that unless Russia radically reforms its economy, the country will face terminal decline. Russia, he argues, must diversify away from exporting energy, and create jobs for the 95 % or so of the workforce that does not work in oil and gas. A survey published by the EU-Russia Centre at the beginning of 2010 showed that Russian policymakers overwhelmingly believe that Russia needs outside help with modernisation. The EU, as Russia’s biggest trading partner, foreign investors and source of capital and technology, is the logical partner for this. This insight seems to be accepted at the highest level. A memo from the
2www.cer.org.uk
29 Russian foreign minister, leaked in May, called for Russia to forge ‘modernisation alliances’ with European countries.
The EU has found that lecturing Russia on the need to reform does not work. So why not speak in Russia’s own interest by offering help with what has become – according to its leaders – a national priority? Moreover, some EU policy-makers hope that since it is mainly President Medvedev who is pushing for modernisation, a refocusing of EU-Russia relations on this topic may strengthen his hands leave vis a vis he more statist and authoritarian Putin clan
Last but not least, the EU has a big stake in Russia’s future economic success. Russia’s fast-growing domestic market has become the destination of €100 billion worth of goods and services made in the EU (although that figure dropped significantly during the 2009 recession). Scores of European companies are doing good business within Russia, from building cars to selling groceries.
A successful modernisation partnership would generate new business opportunities for companies from the EU, which would, for example, be able to sell energy savings technologies to Russia or help with the development of pharmaceuticals.
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However, while the modernisation partnership looks promising at first glance, it is likely to run into a host of difficulties in practice.
First and foremost, what most people in the EU mean by modernisation is very different from the notion held by the Russian leadership. Although President Medvedev likes to talk about the need for broad change, from civil society to the military, the main focus of his modernisation agenda is innovation. Russia, he says, must be transformed from a petrostate into a dynamic, knowledge-driven economy through the spread of technology, preferably home-grown. (Putin’s notion of Russia’s renewal is fuzzier still. He likes to prefix words like modernisation with ‘conservative’ and highlights the need for stability.)
The idea that Russia could leapfrog from an economy that relies on oil, gas and heavy industry towards a cutting edge, high-tech one is spurious. Russia should first try to move existing industrial sectors up the value chain by using imported technology and know-how. Large-scale indigenous innovation may come later.
Furthermore, the Russian leadership’s concept of innovation is an odd one, being predominantly top-down and focused on grandiose projects. A publicly financed nanotechnology institute, state-owned development banks, a brand-new ‘innovation city’ outside Moscow set up by government fiat – these are the building blocks of Medvedev’s innovation economy.
In today’s dynamic global economy, picking winners is not something that governments can do. A truly innovative economy needs open markets, venture capital, free-thinking entrepreneurs, fast bankruptcy courts and solid protection of intellectual property. Russia’s business environment is
30 characterised by wide-spread monopolies, ubiquitous corruption, stifling state interferences, contradictory laws and slow-moving, biased courts.
The Putin-Medvedev administration has announced a new anti-corruption drive, a reduction in import tariffs on high-tech goods and the sale of €30 billion worth of state companies (or stakes therein). Yet there is no sign that it is embarking on the kind of thorough reform that would be needed for a radical improvement in the business environment. In the World Bank’s latest survey of the ease of doing business in 183 countries, Russia ranks 120th, far behind other emerging economies such as South Africa, Turkey or China, and just ahead of Nigeria. When Insead, the business school, looked more specifically at the components of the business environment that matter for nimble, inventive companies, Russia scored just as poorly. In Insead’s ‘innovation index’, Russia ranks in the middle of the 130-odd countries included, some ten places behind India and 20 behind China. The challenge is massive.
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A state-led approach to economic change is particularly problematic in today’s Russia with its hierarchical, corrupt and slow-moving bureaucracy. Sergei Guriev, a Moscow-based economist, has compared the quality of Russia’s state administration and legal system of today with that of South Korea 12 years ago, before it embarked on its impressive growth spurt. He concluded that South Korea’s institutions were quite simply in a different league and that Russia’s chances of catching up with the world’s most developed countries were slim.
The Russian leadership hardly trusts its own bureaucracy to implement a road building programme.
How is it supposed to construct a replica of Silicon Valley? To its credit, the Russian government is seeking a bigger role for private business in the transformation of the economy. It has persuaded Cisco, Siemens, Nokia and Google to set up shop in Skolkovo, the, yet-to-be-built ‘innovation city’
outside Moscow, and invited Western companies, from pharmaceuticals to venture capital, to start up joint projects with Russian organisations.
However, even if such isolated initiatives were successful, their impact on the wider economy would be limited so long as competition is restricted and successful ventures fear being cut down by kleptocratic officials. There is even a risk that the billions of dollars that the Russian government is now pumping into selected sectors and high profile projects will not only be wasted; they could damage Russia’s future growth prospects. Cliff Gaddy and Barry Ickes, two US economists, warn that subsidies for new industries and institutes will create a constant, future demand on public resources that might better be spent elsewhere.
In short, the modernisation and diversification of the Russian economy does not need vertical state intervention but a horizontal improvement of the business environment. The Russian leadership would have to clamp down on corruption, improve competition, reform the education and science sector and strengthen the rule of law. Igor Yurgens and his colleagues at the Insor think tank go further. They argue that real modernisation does not only need comprehensive economic reform but also political opening and social change. While full democratisation is not on the cards in
31 Russia today, (Putin may well decide to reoccupy the presidency in 2012), more political competition, decentralisation and accountability would indeed be a prerequisite for building a modern economy.
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The question the EU needs to ask itself is whether it should accept and support Russia’s flawed concept of modernisation. Or whether it should make support conditional on Russia implementing at least some of the changes needed to strengthen the rule of law, property rights and competition.
In the past, EU attempts to cajole or persuade Russia to implement reforms have had limited success or no impact. The modernisation partnership is unlikely to be very different.
The savage economic downturn that Russia had to endure in 2009 fuelled some Western hopes that Moscow may get serious about reform. But with the oil price back above $70 per barrel and Russian growth recovering fast, complacency has returned to the Russian leadership. Russia’s political system may well have become too rigid and too dominated by vested interests to achieve radical reform from within the current regime. Brezhnev-era stagnation looks like a more plausible scenario than successful modernisation.
The EU may therefore be setting itself up for failure. The modernisation partnership is yet another EU policy the success of which is predicated on positive change within Russia. If Russia does not manage to improve its economy, how can the EU ever claim its new initiative is working?
The initial joint statement from the Rostov summit papers over such fundamental questions stating lamely that the partnership for modernisation will be a “flexible framework for promoting reform”.
Then it lists more than a dozen “priority areas” for the new co-operation – expanding trade and investment, helping small companies, making Russia’s economy greener, supporting research and development, fighting corruption, improving the judiciary, bringing civil society on board – while stressing that “other areas of co-operation can be added as appropriate”. The modernisation partnership is also supposed to build on progress that the EU and Russia have already achieved through their existing programmes - most notably the four ‘common spaces’ for mutual co-operation and integration in economics, energy, security, foreign policy, education and culture established in 2003. But progress here has been limited – which raises fundamental questions about the new modernisation partnership.
Through the four spaces programme, the EU and Russia already operate joint committees and working groups on information technology, energy efficiency, basic research, the car industry and much more. However, the 2009 progress report on the implementation of the four spaces suggests that most of them work badly or not at all. It is not immediately obvious why rebranding them under the umbrella of a modernisation partnership would breathe new life into them.
32 SOME LESSONS FROM GE
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Now that the EU has decided to go down the route of a modernisation partnership, it should perhaps draw some lessons from the German-Russian modernisation partnership that had already been launched back in 2008. Unlike the EU concept, which, so far, consists of a shopping list of vague targets, the German initiative is focused on five well-defined areas: health, energy efficiency, logistics, training and a horizontal programme on improving the legal system (which in practice mainly targets better business regulations). The EU’s temptation to link the modernisation partnership to a plethora of broader objectives, such as fostering Russia’s civil society, is understandable. But it may well kill off the new initiative before it gets going. The EU would be better off selecting a small number of areas where it has genuine competence, such as improving the customs administration, encouraging academic exchanges and tightening energy efficiency standards – and leave more political questions to the existing EU-Russia dialogues on these issues.
A narrower focus would allow the EU to move the modernisation partnership away from the political level. In the German-Russian partnership, the two governments usually kick off projects and then quickly hand them over to academies, industry bodies and the like, who are also expected to find their own money. The EU should resist the temptation to keep too much control over the process and encourage the Russian government to ‘let go’ of bilateral projects too.
Less political involvement would have various advantages. It would allow the scientists, managers and professors to ‘own’ their co-operation projects and develop them flexibly. It would get round the inevitable resource constraint (in Moscow the same economics ministry official who is in charge of the German-Russian modernisation partnership will presumably also look after the EU-Russia one.
France, Denmark and a growing number of other EU countries have their own bilateral modernisation partnerships with Russia now). And it would help the EU to deflect Russian accusations of unfairness and double standards that frequently stymie progress in other policy areas. Despite the rather pragmatic nature of the German-Russian modernisation partnership, Moscow is complaining about a lack of ‘reciprocity’, according to Justyna Gotskowska from Poland’s Centre for Eastern Studies. The Russians are reportedly upset that the partnership has not resulted in more Russian investment in German industries – as if the Berlin government could command German companies to sell stakes to Russian investors.
If it is done well, the EU-Russia partnership for modernisation partnership could result in useful projects at the level of industry, bureaucracy and civil society. It could broaden contacts between EU countries and Russia beyond ministries and officials. It could help Russia to become more energy efficient, adopt better technical standards and create better conditions for small enterprises and other much needed changes. What the new partnership will not do, however, is transform the Russian economy into a knowledge-driven one or restore momentum to EU Russia relations.
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