The Resurgence of Russia and its Relations with Europe: A True Transformation or a Superficial Change?

By Krzysztof Siczek
Interstate - Journal of International Affairs
2011, Vol. 2011/2012 No. 1 | pg. 1/2 |

The first decade of the twenty-first century was a period of change for Russia. The crisis of the 1990s was/were overcome and its international posture has improved. However, the scope and the stability of the shift are debatable and there is no agreement in the literature over its meaning for European security. On the one hand, it is argued that Russia has become the energy superpower1 successfully pursuing an independent foreign policy. Dmitri Trenin2 has gone so far as to state that Russia has left the West politically. The adherents to this line of reasoning point to the macroeconomic revolution3 of Vladimir Putin’s first presidential term. They reject the idea of ‘“petro-state”’,4 stating that the Russian economy is not dependent on the revenues from the export of energy resources. Also, they state that structural problems such as the demographic crisis are manageable.5

On the other hand, it is suggested that Russia’s partial recuperation has a frail foundation, based on the world market price of oil and gas,6 and it can easily be reversed. It is underlined that the new-found wealth is being consumed by the corruption of the ruling elite and that the structural problems, such as an under-developed infrastructure, are being neglected.7 In the foreign realm, Russian power is questioned, as the lack of market diversification makes it EU-dependent.8 Also, relations between the two - no longer a ‘strategic partnership’9 - are characterized as a mutually interdependent ‘partnership in modernization’.10

The insights these and other approaches provide in the study of the Russian resurgence will be examined. Firstly, the analysis will focus on domestic developments. The state of the economy, political stability, corruption and the importance of energy resources will be scrutinised. Secondly, the impact on its relationship with Europe will be investigated. For the purpose of this analysis the European Union has been chosen to represent Europe due to its crucial importance on the continent and the increasingly blurred distinction between itself and Europe. The EU will be analysed as an individual political entity. The examination will concentrate on the issues of human rights and energy security in mutual EU – Russia relations. By way of these arguments it will be maintained that, both in terms of the resurgence of Russia and its impact on relations with Europe, substantial transformations took place, but nonetheless, these processes have not, so far, altered their underlying characteristics. In the domestic sphere, Russia overcame the crises of the 1990s however the “resurgence” is reversible and internally contradictory. Simultaneously, relations between the EU and Russia have been influenced – the latter’s relative power has been strengthened, though this has not diminished the importance of either side - illustrated by the fact that their mutual interdependencies continue.

Economic Improvement and Political Stability

The change of paramount importance in Russia is its improved economic situation. Statistics, whether those prepared by the World Bank, IMF, or the Federal State Statistics Service, all lead to the same conclusions – since 1999 Russia has undergone a ‘virtual macroeconomic revolution’.11 The Russian GDP increase rate for 1999, 2000, 2001 and 2002 stood at an impressive 6.4, 10, 5, and 4.3 per cent respectively.12 In spite of the economic crisis Russia managed to recover high growth rates, with real GDP improving by 4 per cent in 2010 and with predictions of a growth of 4.3 per cent in 2011 and 4.5 per cent in 2012.13 Moreover, in 2006 Russian foreign currency reserves reached $450 billion and were the third-largest in the world.14 Even more impressive, considering loan-dependency on the West in the 1990s, is the fact that Russia has lowered its debt from 100 per cent of GDP in 1999 to 4 per cent.15 The above-mentioned data demonstrates how far-reaching and thorough the economic recovery has been. Russia has clearly rebuilt itself, economically speaking, after the crises of the 1990s.

The second indication of the “resurgence” is political stability. Having been elected president in 1999, Putin quickly won over the hearts of the Russians and has remained the most popular politician since. In a 2011 nationwide survey, Putin received an approval rating of 69 per cent, the lowest since mid-2005.16 His popularity has not been weakened by the most severe economic problems since the 1930s, or by handing over the presidential post to Dmitri Medvedev.17 This means that his position has consolidated and is immune to even severe short-term problems. The basis for the stability of support, atypical for a Russia of the 1990s, is the prosperity the Kremlin provides for the Russian population.18 As real disposable income between 2000 and 2002 rose each year by 8-9 per cent,19 the general population associates the increase in its well-being with Putin’s presidency. There is a clear “cause and effect” relationship between economic recovery and political stabilization.

Since 1999 Putin has worked to reinforce cohesion within Russia. The subordination of the Duma and media and civil dissent restrictions, amongst other examples,20 led to a situation where ‘all political institutions outside the Kremlin’s centralized authority are weak’.21 The handling of the “Yukos affair” demonstrated how the new balance was drafted. The rationale for Khodorkovsky’s imprisonment was political, not economic, as it followed his decision to finance the opposition. The Kremlin interpreted it as a direct challenge.22 The response was robust; he was stripped of his company and given a choice - exile or jail.23 The option of exile illustrates how the Kremlin’s motivation was not to recover the supposedly stolen roubles, but to paralyse any opposition by denying it financial means. By excluding from politics a man who once provided 2 per cent of world oil, and taking control of the most essential sector of the economy, Putin neutralized the most vital source of opposition under Yeltsin, the oligarchs, and ensured political cohesion. Therefore, since 2000 Russia has achieved a political stability and cohesion, the absence of which was a permanent feature of the previous period.

Structural Problems and Energy Dependence

However, the situation in many respects either has not improved or has deteriorated. The demographic crisis and military disintegration are two of several vivid examples.24 The previously mentioned “Yukos affair” is also critical in another way. The tax evasion and fraud convictions of its CEO and one of major shareholders, Platon Lebedev, served to validate a culture of corruption and legal nihilism,25 estimated to cost 2.9 per cent of GDP annually.26 This is not to say that Yukos did not evade regulations or take advantage of tax allowances. A table27 prepared by an analyst demonstrated that the behaviour of the main energy companies was the same – with LUKoil, Sibneft and Yukos all failing to abide by the official 35 per cent and 24 per cent tax rates.

Nevertheless, since only Yukos has been penalized, the authorities asserted that the other tax fraud and corruption cases would be acceptable as long as the perpetrators are loyal to the Kremlin. It is worth mentioning that Sibneft was administered by Igor Sechin, a close political ally of Putin.28 Considering this, it is hardly surprising that after ten years of resurgence Russia still finds itself amongst the twenty-five most corrupt world states.29 The achievements brought by the resurgence, the political stability and cohesion, have in themselves contributed to increasing corruption.

Moreover, the renationalisation of the energy sector, initiated by Yukos’ takeover, undermined its economic efficiency, questioning the future production capacity. Although undertaken, as explained by Putin,30 for the furthering of Russian competitiveness, the creation of giant state-owned companies, Gazprom and Rosneft, have had counter-productive effects. The long-term investments have been replaced by short-term interest in immediate profit, especially with Gazprom avoiding developing the new large production fields.31 Increased state control and restricted access for foreign investors hindered the possibility of advancing projects which require expertise and managerial skills.32 With Yuri Trutnev, Minister of Natural Resources, publicly underlining the need for investment33 one can understand the seriousness of the situation when the processes of a “resurgence” are threatening its foundation – energy resources exports. The difficulty is exacerbated by domestic demand growth, estimated at 150 per cent of available production by 2030.34

Furthermore, the well-being of Russia continues to depend on revenues from gas and oil exports.35 The avalanche of money gained following a change in the world carbohydrates market had a positive effect on the whole economy. Non-energy related sectors started to assume a higher profile within the Russian economy,36 however, as the 2008 crisis demonstrated, the process is not complete. When the oil prices fell from $147 in July to below $50 in November, the 2009 Russian real GDP contracted by 7.9 per cent.37 Also, Russia had to spend one-third of its impressive foreign currency reserves38 to compensate for the renewed budget deficit. It is estimated39 that should the price of oil fall by over 50 per cent and then stay at that level, reserves would be depleted which in turn would cause forced tax increases. Therefore, as world market prices are out of the Kremlin’s control,40 the very foundation of change is extremely fragile – making the achievements, economic recovery and political stabilization, prone to reversal.

Stronger Russia

The resurgence has influenced the relations with the EU in two ways. Firstly, in recent years, internal Russian issues (such as the energy sector ring-fencing or artificially low domestic energy prices41) were effectively removed42 from the agenda in its negotiations with the EU. It needs to be noted that the majority of EU member states abandoned their attempts at influencing Russia in criticizing human rights violations43 within its borders. As essentially no political opposition exists in Russia - the majority of the population being indifferent or Putinfriendly - and as the Kremlin is financially independent, (all results of the “resurgence”) the EU lacks leverage or a foothold inside Russia which it can use to advance its policies. Hence, although from time to time one of the European Parliament committees would prepare a report – for example on the situation in Chechnya -44 during the Russia-EU summits the issue of human rights is omitted.

This is further underscored by the confidence of the Kremlin and its complete lack of interest in its image abroad, which was even described as being lower than that of the USSR.45 With all the possible sources of opposition in check, the Kremlin is scarcely concerned with possible consequences of disregarding the EU human rights sensitivity as no one is able to exploit it domestically by criticizing the Kremlin.

Secondly, the “resurgence” provided authorities with additional diplomatic tools, the most valuable being energy resources. Robert Larsson46 found that most of the fifty-five energy-cuts or threats thereof occurred when Russia was trying to advance its foreign policy objectives. When the European Commission was actively supporting47 the Nabucco project, Russia was not only lobbying for the South Stream located in the same area, but also trying to reach bilateral agreements48 with key Nabucco countries that could undermine its viability. A natural gas deal signed with Bulgaria in January 2008 was described by director of the Bulgarian office of the European Council on Foreign Relations, as ‘really undermin[ing] Europe’s attempts to diversify its gas sources’.49

When trying to justify contracts of this kind Bulgaria was referring to the lack of common European energy policy,50 however, by reaching individual agreements with Russia it itself was preventing the attempts to develop such an approach from having any positive effects. Therefore, using its new diplomatic instruments, Russia has so far been able to hamper EU policy consolidation, channelling its relations to the level of bilateral negotiations with Russia-friendly capitals. The effectiveness of Kremlin policy is underlined by this and other examples,51 such as the discriminatory rail tariffs against Estonia, Latvia, Lithuania and Finland.52 To summarize, as Putin immunized Russia from EU influence internally and was able to apply a “divide and conquer” strategy using energy, he has strengthened the relative political position of Russia compared with that of the EU.

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