POLITICS AND ECONOMICS 

IN PUTIN’S RUSSIA

Stephen J. Blank

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POLITICS AND ECONOMICS 

IN PUTIN’S RUSSIA 

Stephen J. Blank

Editor

December 2013

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ISBN 1-58487-598-4
v

CONTENTS

Foreword ...................................................................vii

1. Introduction: Politics and Economics

 in Putin’s Russia: What do They Mean 

 for the U.S. Army? ..................................................1

 Stephen J. Blank

2. Russian Economic Reform 2012: 

 “Dèjà vu All Over Again” ................................... 37

	 Steven Rosefielde

3. Economic Reform Under Putin 2.0: 

 Will Petrodollars Suffice to Keep the 

 Ship Afloat? ........................................................... 67

Stefan Hedlund

4. Authoritarianism and Modernization 

 in Russia: Is Russia Ka-Putin? ...........................125

Harley Balzer

5. Russia as a Pole of Power: Putin’s 

 Regional Integration Agenda ...........................175

Janusz Bugajski

About the Contributors ..........................................207

vii

FOREWORD

The papers included here, except for the editor’s 

introduction, all come from the Strategic Studies Institute’s annual conference on Russia in May 2012. 

In one way or another, they all point to the internal 

pathologies that render Russian security a precarious 

affair, at the best of times. As the editor suggests, the 

very fact of this precariousness makes Russia an inherently unpredictable and even potentially dangerous actor, not necessarily because it will actively attack its neighbors, though we certainly cannot exclude 

that possibility, but rather because it may come apart 

trying to play the role of a great power in Eurasia or 

elsewhere. As we all know, that outcome happened in 

1917 and in 1989-91, with profound implications for 

international security and U.S. interests.

The strategic point at issue here goes beyond 

merely cataloguing Russia’s deficiencies, many of 

which are well-known. These indicators should give 

early warning to analysts within the Army, the U.S. 

Government, and the broader society, if not abroad, 

about the fundamental problems of instability that lie 

at the foundation of Russian governance and security. 

Precisely because Russia is so important an actor in so 

many theaters and issue areas, any manifestation of 

that inherent unpredictability and instability should 

set alarm bells ringing. As we are now, according to 

many analysts, in a “risk society,” it becomes incumbent upon us, if we are not to be unduly surprised, 

to diversify our risks and to develop greater understanding of the potential challenges that those risks 

could trigger.

For these reasons, these essays are a unique value. 

That value is not because they are provocative, which 
they are, but, as noted earlier, because they function 

as a kind of early warning to the U.S. Army and the 

U.S. Government that future scenarios may well involve contingencies that we do not wish to imagine 

at present but which we may be obliged to confront. 

Therefore, we must think about preventing them from 

growing into full-blown military contingencies while 

we can. If that effort ensures and owes something to 

these essays, then they will have served their purpose.

 

 DOUGLAS C. LOVELACE, JR.

 Director

 Strategic Studies Institute and

 U.S. Army War College Press

viii
1

CHAPTER 1

INTRODUCTION:

POLITICS AND ECONOMICS IN 

PUTIN’S RUSSIA: WHAT DO THEY MEAN 

FOR THE U.S. ARMY?

Stephen J. Blank

The five diverse chapters herein are papers presented at the Strategic Studies Institute’s (SSI) IV Annual Conference on Russia that took place in Carlisle, 

PA, on May 15-16, 2012. They represent the first two 

panels of that conference, which examined politics 

and economics in Vladimir Putin’s Russia. Despite 

their diversity of assessments and the varied subjects 

upon which they touch, the conclusions that they present are rather uniform in their pessimism concerning 

current and future trends in Putin’s Russia. Readers 

will encounter here an immobilized political system 

that is essentially an archaic, neo-Tsarist, patrimonial, 

insular, even criminalized system where there is no 

rule of law, sanctity of contract, or guaranteed right 

of property, not to mention the civil and human rights 

we take for granted. 

Moreover, the present leadership has already 

shown that it will not hearken to increasing public 

demands from below for reform. Instead, President 

Putin, in his new term, has shown an increasing 

willingness to engage in repression and actions that 

cannot even be called cosmetic reforms. These repressions, show trials, and farcically staged exhibitions of 

Putin’s masculinity, new laws that are essentially decrees passed by what was once called an aggressively 
2

obedient Duma, uncannily duplicate the same methods and procedures used by the Tsars after 1860 and 

the Soviet regime under Brezhnev from 1964 to 1982 

when, in the wake of the great reforms, Russian society began to awake and demand still more reforms, 

and some brave souls even demanded revolution. The 

ruling regimes after 1860 were never able or willing 

to meet these demands and, for the most part, refused 

to make the necessary adjustments and reforms to 

survive and preserve Russia as a competitive great 

power. Ultimately, due to their failure to adapt to the 

requirements of a modernizing society and modernity 

in general, not only in terms of domestic political or 

economic progress, but also strategic competitiveness, 

these regimes found themselves increasingly deprived 

of internal legitimacy and authority and prone to enter into a series of wars, none of which they won, and 

some that were catastrophic, that led to their ultimate 

destruction in 1917 and again in 1991. Moreover, the 

Tsarist and then the Brezhnev regimes responded in 

much the same way as does the current government. 

Essentially, they all resorted to show trials, police repressions, occasional murders, incarceration of dissidents, and mounting corruption, while the engine of 

economic development and growth broke down. More 

recently, the Duma, with its aggressively obedient 

majority, is redefining the laws of treason that would 

criminalize any dissent. In a sense, this calls to mind 

Joseph Stalin’s 1950 formal reintroduction (in anticipation of another great purge) of capital punishment, 

allegedly in response to the wishes of the Soviet intelligentsia. Or, they revive the earlier Stalinist practice 

of the 1920s and 1930s of drafting draconian and seeping decrees and laws to criminalize any behavior that 

the regime felt like attacking at any given moment.1
3

These same ploys characterize the resemblance of the 

current regime’s policies to classic Tsarist, Soviet, and 

even Stalinist tactics and policies.2

Apart from the neopatrimonial and neo-Tsarist 

political system, with some important accretions from 

the Soviet period, we find an economy that also does 

not work and is becoming ever less competitive. By 

officials’ own admissions, Russia today depends far 

too much on a cash crop (in this case, energy), again 

a resemblance to the Tsarist system that depended on 

agricultural exports and collapsed when they were either not possible, as in World War I, or when there was 

a global decline in the price of wheat. But the economy 

is inhibited not only by this structural backwardness, 

but also by the burden of enormous corruption. Russia is probably by far the most corrupt economy of the 

G203

 and, in July 2010, the Association of Russian Attorneys for Human Rights issued a report saying that 

about 50 percent of Russia’s $1.2 trillion gross domestic product (GDP) involves corrupt transactions.4

 This 

corruption has, if anything, worsened since then. 

The pervasiveness and scale of such corruption affects the country’s defense spending, where at least 

20 percent of annual defense spending (if not 40-50 

percent) is routinely stolen, misappropriated, lost, or 

just wasted. 

According to the Russian Statistical Committee, the 

volume of the shadow economy in Russia was 15% [of 

GDP] in 2012, whereas in [the] 1990s it was 22-23% of 

[the] (much smaller-SJB) overall economy. At the same 

time the Ministry of Economic Development estimated 

that the shadow economy contributed more than 50% 

of the population’s income in 2011. The Federation of 

Independent Trade Unions stated that more than half 

of 2011 salaries paid in Russia were paid outside legal 
4

channels. Viktor Zubkov, than Deputy Prime Minister, said that about a trillion rubles were taken out of 

Russia illegally in 2011 that corresponds to 4% of GDP 

and represents almost half of all money taken out of 

the country; it is almost equal the entire budget of the 

MVD (this would amount approximately $70 billion 

and the disparity with other reported figures show 

that officialdom has no exact idea how much is leaving the country except for the fact that the sums are 

enormous-SJB). Zubkov also estimated that about a 

trillion rubles was laundered in Russia in 2011.5

As one would imagine, such corruption has several profound consequences. It adds to the widespread 

preexisting disregard and contempt for the law and 

the culture of due process that is equally pervasive 

and reinforces arbitrary rule or what Russians call 

Proizvol. Second, it renders the country inhospitable 

to large-scale foreign and direct investment or even to 

investment by wealthy Russians who routinely ship 

money off shore before it comes back to Russia. Thus, 

estimated capital outflows in 2011 amounted to $85 

billion.6

 Third, it demoralizes many potential younger 

elites who are already voting with their feet and leaving Russia. Fourth, in the defense sphere, it corrupts 

much of the country’s overall national security policy, 

not least because it is clear that high officials are for 

sale, even to foreign interests.7

 Personal pecuniary interest, therefore, often trumps national interest, e.g., in 

key areas like arms sales or in the energy market. As 

a result, the temptation for these officials to engage in 

what might be called black operations, like running 

weapons to Iran, ultimately undermines the vital security interests of Russia itself.8

 Fifth, it deprives the 

economy of the capital needed for technological and 

military recapitalization, investment, and moderniza-
5

tion, and thus consigns the country and millions of its 

citizens to greater poverty and incompetent or suboptimal goods and services than would otherwise be the 

case. Thus, even as Putin et al., regularly state, in true 

Soviet and Stalinist style, that the defense industrial 

sector is the locomotive of technological progress, this 

sector cannot meet the military’s needs, forcing Russia 

to buy weapons abroad from France, Germany, Italy, 

Finland, and even Israel. Worse yet, there are cases 

where the armed forces have refused to accept weapons produced for them by that sector, e.g., the Pantsir 

air defense system that Moscow also exports!9

Meanwhile, the state sector has grown voraciously 

at the expense of the overall economy’s growth potential, a fact that is not surprising, given the opportunities for personal enrichment through corruption 

with impunity. Thus, The Economist reported that during the past decade, the number of bureaucrats has 

risen by 66 percent from 527,000 to 878,000. The cost 

of maintaining this structure has risen to 20 percent 

of GDP.10 Naturally, this phenomenon is accompanied 

by ongoing decay of infrastructure. In the late Soviet 

period, the government invested 31 percent of GDP; 

however, in the last 10 years, it invested only 21.3 

percent, compared to China’s 41 percent. Whereas the 

Union of Soviet Socialist Republics (USSR) built 700 

kilometers (km) of railways a year, the present government only built 60 km in 2009. Similarly, the total 

length of paved roads in Russia in 2008 was less than 

in 1997, a sure sign of governance failure and misallocation of resources. As Zbigniew Brzezinski wrote:

Informed Russian observers are also increasingly 

concerned that Russia’s reliance on capital inflow in 

return for Russia’s oil and gas is breeding a decline in 

the country’s capacity to sustain technological innova-
6

tion and industrial dynamism on the global competition for economic preeminence. The renewal of Russia’s industrial infrastructure, which in Soviet times 

was being replaced at an annual rate of 8 percent, has 

declined to 1-2 percent, in contrast to the 12 percent 

of the developed world. No wonder that the World 

Bank reported in 2005 that fuels, mining products, and 

agriculture accounted for 74 percent of Russia’s total 

exports, while manufactures accounted for 80 percent 

of Russia’s total imports.11

Consequently, Russia has recovered more slowly 

from the 2008 economic crisis than did the other BRIC 

countries (Brazil, India, and China). Since foreign direct investment (FDI) in Russia is a fraction of the total 

for the other BRIC members, 4.1 percent for 2007, that 

pace of recovery will probably not change anytime 

soon. Reportedly about 20 years behind the developed 

countries in industrial technology, Russia develops 20 

times fewer innovative technologies than does China 

and devotes considerably less money to research and 

development than China does. 

Prime Minister Wen Jiabao of China, when visiting 

Russia in 2007, noted with satisfaction that ChineseRussian trade in machinery products reached an annual level of $6.33 Billion. Out of politeness, however, 

he refrained from adding that $6.1 Billion of that sum 

involved Chinese machinery exports to Russia, leaving only $230 million of Russian machinery exports 

to China. Making matters worse, projections by the 

Organization for Economic Cooperation and Development for the year 2020 envisage not only China’s gross 

domestic product as approximately four times larger 

that Russia’s, but with India ahead of Russia as well.12
7

But the papers do not stop here. As Harley Balzer points out in Chapter 4, Russia’s epistemic communities, i.e., communities of people who work with 

their minds like scientists, professionals, etc., remain 

trapped in a mentality that precludes learning from 

others and doing things differently than they have 

done for years, if not decades. This insular, corrupt, 

and self-perpetuating approach to research, development, science, technology, and education is a powerful factor in reinforcing the fetters that bind Russia 

and hold the country back. As Judy Holiday memorably stated in the movie, Born Yesterday, “This country 

and the institutions that govern it belong to the people 

who inhibit it.” The insular, chauvinistic political system (ours is better, or in Russian, nashe luchshe) reinforces this proclivity to believe that there is no other 

way to do things other than what has always been 

done before, that Russia is uniquely endowed with a 

superior cultural-religious heritage, etc. Furthermore, 

these trends, as manifested in socio-political and economic action, only reinforce the tendency to repeat the 

same mistakes of the past in the misconceived notion 

that doing the same thing without meaningful reform 

will yield the desired results, if we only do it better 

this time. These pathologies, for that is what they represent, are no less present in the defense and defense 

spending sphere, as Stephen Blank demonstrates and 

as noted previously. Indeed, the huge spending increases on procurement allocated till 2020 are one reason why Finance Minister Alexei Kudrin broke with 

the government and warned about its policies.

The defense and security implications of this dysfunctional and archaic system are equally negative. 

Currently, there is a huge defense buildup that aims to 

spend $716 billion between now and 2020 to make the 
8

Russian armed forces a competitive high-tech armed 

force, with 70 percent of its weapons being modern 

(whatever that category means to Moscow). Yet this 

system already has shown repeatedly that it cannot 

deliver the goods and that the attempt to remilitarize 

at this relatively breakneck speed (relative to other 

comparable powers) is failing to produce the weapons 

Moscow wants. Consequently, it is clear not only that 

nuclear weapons will remain the mainstay of Russian 

military might through 2020, but it is also equally likely, from the current vantage point, that this nuclear 

preeminence will remain well into the decade 2020-30 

as well. This means that, for a whole range of contingencies, Moscow will have to rely more than any other 

comparable power on nuclear threats and deterrence, 

and deterrence presupposes a hostile relationship 

with the targets of that strategy. Apart from issues of 

democracy promotion and regional security in Eurasia, this conclusion has sobering implications for U.S. 

defense policy as a whole because it will place limits 

on what can be achieved through arms control treaties, obstruct the Barack Obama administration’s declared ambition to move on to a zero nuclear weapons 

trajectory, and inhibit a genuine military and political 

partnership with Russia.

Furthermore, given the postulate presented here of 

a deteriorating domestic situation due to an increasingly sclerotic economic-political formation, we could 

well encounter a situation where a revolutionary situation inside Russia due to the blockage of progress 

intersects with a massive security crisis that could, as 

in 1991, involve a coup and the danger of seizure of 

nuclear weapons and potential wars across Eurasia. 

Or, we could see a diversionary war as the RussoJapanese war was launched in part in order to busy 
9

“giddy minds with foreign wars.” Arguably, we are 

witnessing the first signs in today’s Russia of the advent of a long-term crisis culminating in such a domestic and then international crisis. This crisis would 

combine mounting disaffection, if not protest, and 

continuing subpar economic performance is a situation that approximates Vladimir Lenin’s 1915 definition of a revolutionary situation. According to Lenin’s 

oft-quoted definition: 

What, generally speaking, are the symptoms of a revolutionary situation? We shall certainly not be mistaken 

if we indicate the following three major symptoms: (1) 

when it is impossible for the ruling classes to maintain 

their rule without any change; when there is a crisis, in 

one form or another, among the “upper classes,” a crisis in the policy of the ruling class, leading to a fissure 

through which the discontent and indignation of the 

oppressed classes burst forth. For a revolution to take 

place, it is usually insufficient for “the lower classes 

not to want” to live in the old way; it is also necessary 

that “the upper classes should be unable” to live in 

the old way; (2) when the suffering and want of the 

oppressed classes have grown more acute than usual; 

(3) when, as a consequence of the above causes, there 

is a considerable increase in the activity of the masses, 

who uncomplainingly allow themselves to be robbed 

in “peace time,” but, in turbulent times, are drawn 

both by all the circumstances of the crisis and by the 

“upper classes” themselves into independent historical 

action.13 (italics in original)

To be sure, none of this suggests the imminence of 

a revolution. Rather, it suggests the imminence of a 

structural crisis leading to the situation defined here 

by Lenin and which evermore characterized Tsarist 

Russia after the great reforms of the 1860s and the Soviet state after Leonid Brezhnev. Neither we, nor any 
10

other reputable observer, expect an imminent collapse 

of the Putin system. But Russia already appears to be 

visibly bearing the seeds of its own entropy and ultimate collapse. Distinguished Russian scholars like 

Lilia Shevtsova and Olga Kryshtanovskaya openly 

state that Russia has slipped into a revolutionary situation.14 That process took some 50 years in Tsarist Russia and a generation in Soviet Russia, suggesting the 

acceleration of large-scale socio-political change and 

its growing department, even if we are talking about 

a long-gestating process. But if this assessment has 

merit, then we are only at its inception, not its conclusion, and many more negative phenomena and Russian behaviors can be expected before the advent of 

a crisis that could occur, if this acceleration of protest 

trends and institutional entropy occur by 2030. Potential contingencies could even possibly entail the use 

of force either at home (and not just in a counterinsurgency mode against jihadi rebels as in the North 

Caucasus) or beyond Russia’s borders as in the RussoGeorgian war of 2008. Indeed, as the regime moves 

further along its current trajectory, such belligerent 

behavior increasingly appears to be the norm. As Andrei Illarionov, a former economic advisor to Putin, 

has observed:

Since its outset, the Siloviki regime has been aggressive. At first it focused on actively destroying centers 

of independent political, civil, and economic life within Russia. Upon achieving those goals, the regime’s 

aggressive behavior turned outward beyond Russia’s 

borders. At least since the assassination of the former 

Chechen President Zelimkhan Yandarbiyev in Doha, 

Qatar, on 14 February 2004, aggressive behavior by 

SI (Siloviki-men of the structures of force-author) in 

the international arena has become the rule rather 
11

than the exception. Over the last five years the regime has waged ten different “wars” (most of them 

involving propaganda, intelligence operations, and 

economic coercion rather than open military force) 

against neighbors and other foreign nations. The most 

recent targets have included Ukraine (subjected to 

a “second gas war” in early 2009), the United States 

(subjected to a years-long campaign to rouse antiAmerican sentiment), and, most notoriously, Georgia 

(actually bombed and invaded in 2008). In addition to 

their internal psychological need to wage aggressive 

wars, a rational motive is also driving the Siloviki to 

resort to conflict. War furnishes the best opportunities 

to distract domestic public opinion and destroy the 

remnants of the political and intellectual opposition 

within Russia itself. An undemocratic regime worried 

about the prospect of domestic economic social and 

political crises—such as those that now haunt Russia 

amid recession and falling oil prices – is likely to be 

pondering further acts of aggression. The note I end 

on, therefore, is a gloomy one: To me the probability 

that Siloviki Incorporated well be launching new wars 

seems alarmingly high.15

Accordingly, even though no observer expects a 

comparable revolution anytime soon, the signs of crisis are also quite visible for anyone who cares to look 

for them. At the same time, the advent of social and 

information technologies, as well as Russia’s partial 

integration into the global economy, suggests that any 

repeat performance will take even less time than this, 

so it is not inconceivable that within 10-20 years, we 

could see a Russia openly enmeshed in a structural 

crisis from which there is no way out other than largescale transformation, if not revolution.

Given Russia’s strategic weight and military capability, this prognosis poses immense questions, if not 

problems, for the U.S. Government as a whole as it 
12

seeks to grapple with the realities of Russian policy. 

Were this a monograph on the subject of U.S.-Russian 

relations, it would take a long report to work through 

all those issues. But here, we must content ourselves 

with recommendations for the U.S. Army in its activities. To do that, we must view the Army in its current 

strategic context.

ASSESSMENTS AND RECOMMENDATIONS 

FOR THE U.S. ARMY

Any potential Russian crisis within the next generation will inevitably reverberate throughout the global 

system and with special force in Europe, Eurasia (the 

former Soviet Union), and East Asia. Moreover, that 

crisis will similarly and equally inevitably interact 

with indigenous crisis phenomena and trends, mainly 

in what used to be the Soviet south, i.e., the Caucasus 

and Central Asia (and potentially Ukraine and Belarus), if not in Europe. Indeed, a crisis in the former 

Soviet Union could ignite one in Russia. Central Asia 

and the Caucasus are already enmeshed in several 

actual or potential security challenges that can materially affect U.S. interests and partners, if not allies, 

for their own reasons—whether or not a crisis occurs 

in Russia. Furthermore, the advent of these crises in 

the Caucasus and Central Asia, or elsewhere, could, of 

their own accord, embroil the U.S. military and government (not just the Army) in their resolution. If they 

coincide with, trigger, or are the result of a crisis in 

Russia proper, the challenges to the U.S. Government 

and Armed Forces will be magnified commensurately, 

especially if nuclear contingencies come into play.
13

Unfortunately, these prospects, which are more 

likely than many believe, will catch the U.S. Army, 

the Armed Forces, and the government as a whole in 

the throes of a serious and possibly unprecedented 

strategic quandary. As many observers have noted, 

today the U.S. Army faces a situation where it has no 

declared enemy, no priority mission, and no clear concept of operations for any particular contingency that 

may occur. Whereas the Navy and the Air Force do 

have a concept of operations (but not a strategy) for 

overcoming enemy forces’ anti-access and area denial 

strategies (A2/AD), namely air-sea battle, the Army 

has no such concept. 

Moreover, and many commentators have missed 

this point, the air-sea battle concept is not exclusively 

reserved for an Asian-Pacific threat originating from 

China but could be employed, e.g., against Iran in 

the Straits of Hormuz. Or, in the event of a Russian 

attempt to take over one or more Baltic states, the 

United States and the North Atlantic Treaty Organization (NATO) would then have to resort to a European 

version of this concept of operations for the initial 

counterattack against such a Russian thrust. Neither 

is such a contingency purely notional, even though it 

remains a remote possibility for the immediate future. 

Moscow launched the first cyber strike ever attempted 

against a sitting government against Estonia in 2007 

after a year of covert preparation, and Central European governments, particularly in the Baltic region, 

remain apprehensive about Russian intentions and 

capabilities in this region, which are rapidly being increased.16 Neither can we take European or Eurasian 

security for granted. Russia has also admitted that it 

planned the Russo-Georgian war of 2008 beginning in 

2006, thus publicly undermining all the pious state-
14

ments about it having been attacked and was thus 

able to surprise key international actors, including the 

Georgian government.17 Since Russian efforts to subvert European governments through “asymmetric” 

means, the linkage of energy, organized crime, intelligence penetration, political subversion, and military 

threats, specifically recurring nuclear and missile 

threats against all of Eastern Europe from the Baltic 

to the Black Sea states, are constant and unremitting. 

Since Moscow has shown its continuing addiction to 

aggressive actions in its neighborhood, complacency 

about European contingencies in the future is clearly 

unwarranted.18 Such concerns must engage the strategic planner, especially one who is looking to events a 

decade or more from now.

But such observations about the European theater, 

not to mention the ever volatile greater Middle East 

or the increasingly volatile East Asian theaters, underscore the Army’s and the U.S. Government’s abiding 

strategic dilemma, which holds true whether or not 

Russia implodes or explodes a decade or so from now. 

That dilemma has two aspects. First, there is no visible 

strategy for either the Army or the other Armed Forces (merely listing missions and concepts of operations 

cannot, in this context, substitute for a true strategy). 

Second, as innumerable analyses and the current domestic crisis indicate, we are on the brink of strategic 

insolvency, with a defense establishment that cannot 

be maintained in its present form or size without radical and unpopular (to many constituencies) reforms.

While any Russian crisis greatly magnifies the 

challenges to U.S. power and interests, essentially, the 

Army finds itself obliged to say that no matter what 

kind of war ensues, it will go wherever the President 

orders it to fight (as if any other conclusion was think-
15

able) with whatever forces it has at the time. But it has 

no current or preexisting idea what the nature of that 

war is or an a priori concept of what goals it hopes to 

obtain in any particular theater.19 It has no idea of what 

its strategic objectives are or should be, and neither do 

the other Services. All we have is a tactical or operational concept for the initial operation of gaining access to the contested theater. That hardly answers the 

requirement for strategy. This situation represents the 

antithesis of strategy and confirms the critical posture 

of many analysts, e.g., Colin Gray, that “All too often, 

there is a black hole where American strategy ought 

to reside.”20 As a result, critics have charged that the 

Army, in seeking to define for itself a strategic role, is 

“grasping for scenarios.”21 These scenarios comprise 

missions generally regarded as the core capability 

of the Marines or elite special operations forces like 

seabasing (operations that can be conducted without 

relying on infrastructure ashore) and counterproliferation missions.22 To compound the Army’s dilemma, there is a conspicuous lack of enthusiasm among 

political leaders in both parties, despite overblown 

campaign rhetoric, for sending it into another war 

anytime soon.23 So, lacking a mission or a compelling 

strategic rationale or narrative, the Army starts from a 

disadvantage relative to the other Services, who have 

at least a concept of operations. But the Army’s and 

the other Services’ problems do not end here. Indeed, 

at the strategic level, they only begin here.

In the context of the larger framework of U.S. national security strategy, the air-sea battle concept comfortably fits with the concept of deterrence of major 

theater war that has stood at the forefront of U.S. strategy and policy since 1945. It is compatible either with 

the idea of deterrence by denial, i.e., deterring an en-
16

emy by making it clear that we will deny him a victory 

or with the alternative view of deterrence by punishment, namely raining down upon him so destructive 

a military force that, even if some sort of victory was 

temporarily achieved, the destruction wreaked upon 

him would far outweigh any such temporary or local gain. But that makes air-sea battle a concept that 

is optimally shaped for deterrence and for replying 

to a breakdown of deterrence. In other words, it is a 

concept of operations that is admirably shaped for the 

initial phase of a war. But being nothing more than 

a concept of operations, air-sea battle, as publicly described, suffers from serious defects. Given what we 

know about Russian nuclear strategy, the attempt to 

use air and sea power to rain down long-range strikes 

on Russian targets in, around, and immediately beyond the Baltic littoral almost certainly invites a retaliatory nuclear first strike by Moscow that will have 

an immediate and profound strategic effect, and not 

necessarily the one that Moscow counts on, namely its 

attainment of control over the ladder of intrawar escalation and a search for negotiations to forestall any 

further nuclear use. It is not too likely that Moscow 

would, however, opt for such a contingency, knowing 

that it would face this immense destruction for what 

are ultimately marginal gains.

In East Asia, as Ambassador Charles Freeman 

similarly observes:

The evolving U.S. battle plan presupposes that, from 

the outset, any war that occurred (involving China in 

an offensive role—author) would involve U.S. strikes 

on forces and facilities on Chinese territory or immediately adjacent to it, This does not address the obvious 

difficulties of escalation control in these circumstances. Given China’s possession of nuclear weapons, this 

plan is simply unrealistic.24
17

Likewise, Thomas Christsensen and Richard Betts 

wrote several years ago that: 

Thinking over the long term, however, it is hard to 

imagine how the United States could “win” a war to 

preserve Taiwan’s independence against a resolute 

China. . . . Sinking the Chinese navy and defeating 

an invasion attempt against the island would not be 

the end of the story. Unless the U.S. Air Force were 

to mount a massive and sustained assault against 

mainland targets, the PRC would maintain the capability to disrupt commerce, squeeze Taiwan, and keep 

U.S. personnel at risk. As one American naval officer 

put it, “China is a cruise missile sponge.” This will 

be doubly true once China builds more road-mobile 

solid-fuel missiles and learns better ways to hide its 

military assets.25

Thus air-sea battle could easily conceivably lead to 

an unpalatable strategic dead end but in the form of a 

much wider, prolonged, and desperate struggle with 

enormous stakes, where we will have fallen into that 

war with vastly insufficient forethought. The Napoleonic maxim, “On s’engage et puis on voit” (One commits himself and then looks around), hardly suffices 

as a guidance for contemporary strategic action. But 

the Army’s lack of a viable concept of operations or 

mission for a breakdown of deterrence leaves it in precisely this situation, where it has a concept in search 

of a mission and a theater. Therefore, it cannot bring 

anything to the “table” concerning strategic missions, 

operations, or its enduring contributions to grand 

strategy, and the Navy’s and Air Force’s situation in 

this regard is hardly much better.

Neither do U.S. strategic dilemmas end here, for 

we are clearly confronting the overall problem of stra-
18

tegic insolvency, a dilemma that would undermine all 

existing strategic formulations, not to mention operational concepts like air-sea battle. We are already confronting this dilemma, even if there is no sequestration process as is possible as of October 2012.26 Recent 

assessments of the new Asia-Pacific strategy pull no 

punches and state outright that the force structure being readied to implement that strategy is simply not 

sufficient to accomplish the mission. Congressman J. 

Randy Forbes (R-Va), Chairman of the House Armed 

Services Readiness Subcommittee, openly states that: 

The ‘pivot’ toward the Asia-Pacific region is a lofty 

objective, but maritime assets available to execute it—

existing and planned—are simply not enough.27

Rear Admiral David Johnson, who supervises the 

Navy’s submarine construction program, recently admitted that if “the price tag for building the newest 

vessels remains where it is today, there will have to be 

cutbacks to the Virginia-class (submarine) program,” 

even though the Navy has already brought down 

those costs and is doubling its production from one 

to two subs annually.28 Michael Auslin similarly argues that the Air Force’s current budget is insufficient, 

given the range of missions and capabilities it needs 

to execute its strategic missions.29 Likewise, a recent 

article observes that in Korea, we are unprepared for 

the real possibility of having to execute missions connected not just with a war there, but with a potential 

unification scenario. Although former Secretary of 

Defense Robert Gates stated that besides the capability to break down the door and win the air-sea battle, 

we must be able to restore a functioning government 

and society in war zones “and rebuild the house after 
19

war.” The Army and overall U.S. military force required to do that mission is not the force that is either 

currently deployed in South Korea or that the United 

States has trained and ready to deploy, despite all our 

previous experiences in having to confront such requirements.30 Finally, the recent study by the Center 

for Strategic and International Studies in Washington, 

DC, of the rebalancing of U.S. forces to the Asia-Pacific 

theater also pointed to substantial funding problems 

with regard to the new rebalancing.31 These are only a 

few recent indicators of this insolvency in an ocean of 

commentary on this point.

Neither would all our problems be resolved if funding magically appeared. Our problems are as much, if 

not more than, strategic as economic. Arguably, the announcement of air-sea battle has ignited a new round 

in the Asian arms race. One can already see Japan, 

South Korea, and India substantially upgrading and 

modernizing their military capability and ambition to 

become major defense producers and even exporters. 

Russia, too, is already well into a huge modernization 

program of some $716 billion to reshape its entire force 

and develop a substantial conventional high-tech capability by 2020, and its apprehensions about China 

are poorly concealed.32 Thus, it is entirely possible that 

continuing as we have been doing, assuming funding 

remains available, could bring about a continent-wide 

Asian arms race in conventional, and possibly nuclear 

as well, weapons that would merely aggravate the already high level of tensions in Asia and do nothing to 

stabilize the area or reduce the likelihood of military 

conflict. That is assuming funding is available. If it is 

not available, we may achieve a comparable effect but 

deprive ourselves of the means of dealing effectively 

with any violent contingency, if and when it occurred.
20

But beyond that, the Army, if not the other Services, also face deep cognitive challenges to their plans. 

This is a particular dilemma for the Army because 

many writers and authorities here and abroad believe 

that the main centers of future military operations will 

be in the aerospace, cyber, and naval—i.e., long-range 

strike—“theaters” and not land and traditional sea 

forces. Thus General Nikolai Makarov, Chief of the 

Russian General Staff, recently stated that: 

As you see, warfare center has moved to aerospace and 

information spheres, including cyber security, from 

traditional war theatres on land and sea. Concepts of 

network-centric war have made great progress.33

Makarov is hardly alone, either in Russia or here 

or elsewhere. Accordingly, the mantra of boots on 

the ground will hardly be convincing, even though 

the purveyors of short decisive victory through longrange strikes and high-tech have little to show for 

their many promises. Indeed, some adherents of better 

warfighting through technology have begun to realize 

that “our understanding of nonkinetic effects in cyberspace is immature.”34 In that case, a war with a large 

cyber dimension, or even with a significant though not 

preponderant one, could easily become quite unpredictable and even uncontrollable, not unlike the fears 

of what a nuclear war could become. So reliance on 

air, aerospace, naval, and cyber operations can hardly 

provide the basis for a reliable or reassuring warfighting strategy. Indeed, this brings us back to the dilemma postulated previously, namely, that current threat 

assessments fail to capture the highly complex future 

operational environment. Such a void leaves the Army 

(and to be accurate, the other Services, too) bereft of 
21

viable strategies for prosecuting war. Neither can the 

Army take refuge, as some have thought, in the idea 

that its future wars (whatever happens to the other 

Services) will be “murky irregular conflicts.”35 This is 

not just because the future is inherently unknowable. 

It also is true that it is a great fallacy to assume that the 

next war, even if it is an irregular one, will look like 

the current or last war. The Army, like it or not, must 

be ready for everything. Yet the pace of change is so 

swift and deep that the military is finding it difficult 

to understand what future advances in biotechnology 

and other weapons of mass destruction (WMD) scenarios might look like.36 Undoubtedly, the same will 

be true for “murky irregular wars.” 

As one recent article observed, there is a wide 

range of actual or easily conceivable contingencies for 

which we cannot rely on Special Forces:

Douglas Ollivant has also soundly observed that we 

cannot assume that special operations forces will be a 

salve for every security challenge we face. Some scenarios will simply be too big for SOF to handle alone. 

Even if the US does not seek to reconstruct collapsing states, securing weapons of mass destruction, and 

leadership targets in the aftermath of an implosion 

of Syria, North Korea, Libya, or any number of other 

states would be demanding tasks that special operations would have difficulty handling by themselves. 

Some sanctuary-raiding missions would require larger ground forces. Others may simply lend themselves 

better to general purpose forces. Recent African success waging combined land-amphibious operations in 

Somalia suggests that land forces executing amphibious raiding in Africa could inflict substantial damage 

on pirates and other foes. In other situations we may 

not be able to rely on proxies to do the job for us, either because of a principal-agent mismatch or lack of 
22

capability. Finally, SOF and airpower in recent conflicts also depend implicitly on the enemy lacking the 

ability to threaten the bases and supply networks that 

sustain them with ground power, commando forces, 

or long-range weapons. Should Afghanistan’s government lose substantial amounts of territory or collapse 

outright after US withdrawal, the basing arrangements 

upon which we base our proxy warfighting would be 

threatened.37

Moreover, even if the Army and the other Services 

accept the need for comprehensive readiness across 

the spectrum of conflict, it is still quite unclear how 

the Army will operate in WMD contingencies, even 

if it acknowledges their likelihood in the future.38 At 

the same time, the Army must be ready for all manner of combat operations ranging from contingencies, 

where smaller units with fewer but better and betterequipped army and joint forces engage the enemy, 

up to and including large land battles of battalion or 

brigade size, if not larger. Therefore, the Army must 

formulate a compelling strategic argument that is not 

just a service argument for more appropriations (as 

one might suspect air-sea battle is) and that offers a 

compelling enhancement of U.S. and allied security in 

Europe and Asia, if not elsewhere.

TOWARD AN ARMY STRATEGY FOR EURASIA

The Army concept is one where the Army works 

actively in peacetime with allies and partners to reshape their militaries and as part of overall U.S. policy 

to reshape the strategic environment in Europe, Asia, 

Africa, etc., to prevent wars from breaking out. While 

this concept of shaping the theater during peacetime 

to preclude or prevent war and build up allied and 
23

partner capacity fully comports with deterrence by 

denial, as we saw in Georgia in 2008, it does not necessarily preclude a breakdown in deterrence or ensure 

that host country forces will be prepared for actual 

war that is imposed upon them. The Army and the 

U.S. military as a whole now recognize the need for 

more effective responses to the challenges of partnering with other militaries, including those in the former 

Soviet Union, to shape the environment and provide 

the basis for meeting contemporary global strategic 

requirements, as the characteristics of war change rapidly and assume a highly protean and dynamic profile. 

In the recent Capstone Concept for Joint Operations: Joint 

Force 2020, Chairman of the Joint Chiefs Army General 

Martin Dempsey observed that one of the eight key elements of anticipated global integrated operations is:

Fourth, globally integrated operations place a premium on 

partnering. This allows expertise and resources existing outside the U.S. military to be better integrated in 

a variety of operational contexts. The complex security 

challenges of the future almost invariably will require 

more than the military instrument of national power. 

Joint Forces must be able to integrate effectively with 

U.S. governmental agencies, partner militaries, and 

indigenous, and regional stakeholders. This integration must be scalable, ranging from the ability of an 

individual unit to enroll the expertise of a nongovernmental partner to multi-nation coalition operations.39

This requirement, coupled with the other seven 

requirements for jointly integrated forces that are 

capable of conducting scalable operations involving 

multiple stakeholders listed there, comprise a major 

challenge to the Army under stretched budgetary conditions. Nevertheless, crisis denotes both challenge 
24

and opportunity. In the concept of the contingencies 

outlined here of a renewed crisis in Eurasia, if not elsewhere, due to a potential or even likely crisis, if not 

collapse, of Putinist Russia in the future, strategic contingency might open the way for an alert Army and 

other military leadership to see a way out the Army’s 

present quandary. 

What the Army and U.S. governmental elites 

must understand is that the argument presented in 

this chapter provides early warning of an impending, if not imminent, geopolitical crisis that could 

well morph into major strategic challenges. Indeed, 

Russian analysts themselves know well how precarious security is, particularly in the Caucasus and/or 

Central Asia, especially in view of upcoming U.S. and 

NATO withdrawal from Afghanistan in 2014. For example, the Valdai Club, a leading Russian think tank, 

recently wrote that:

The entire Belavezha Accords system of state and 

territorial structure, which took shape as a result of 

the 1991 national disaster (the collapse of the Soviet 

Union in 1991), is illegitimate, random, unstable, and 

therefore fraught with conflict. The entire post-Soviet 

Eurasian space is an area with a complex combination of integration, separatist, and irredentist tendencies. The system has been in a state of permanent 

crisis for almost all of the 20 years since the collapse 

of the Soviet Union, and it is safe to say that in the 

future it is doomed to more or less conflict-ridden 

transformation.40

Such conflicts would almost certainly entail direct 

Russian military intervention, and the most threatened areas are those where the United States has now 

developed serious interests and partners, namely Central Asia and the South Caucasus. This analysis also 
25

naturally highlights the ongoing jihadi insurgency in 

the North Caucasus, for which Moscow has no credible strategy at present, not to mention the possibility 

of a “Falklands” scenario against Japan in the Kurile 

Islands, China’s growing military power and contingencies associated with that trend, and the ever present pressure of the United States and NATO.41 Neither 

is this just an unofficial think tank report. In 2010, the 

joint staff of the Russian-led Collective Security Treaty 

Organization (CSTO) stated that: 

The likelihood of conflicts arising on the basis of political, religious, ethnic, and other contradictions [in the 

former Soviet Union] is high, and it is impossible to 

resolve them without peacekeeping technologies.42

Western writers observe, too, that the peripheries 

of Eurasia like the South Caucasus remain regions at 

risk.43 Given what we know of Russian military policy, 

it is quite unlikely that the CSTO or the Russian Army 

has yet acquired the relevant “peacekeeping technologies.” Thus a crisis could break out here irrespective of 

what happens in Russia, and certainly Central Asian 

governments believe that such an outbreak is all too 

plausible after the International Security Assistance 

Force withdrawal from Afghanistan.44

There are further complicating factors in these 

peripheries, too. First, due to geopolitical and geoeconomic shifts and the continuing, if not rising, criticality of energy and other raw materials, regions like 

Central Asia are increasing in geopolitical and geoeconomic importance.45 Second, in keeping with those 

trends, the peripheries are areas of visible, complex, 

but never ending great power contestation, not the 

least of which is Sino-Russian rivalry and collusion 
26

in constant probes against U.S. power, partners, values, and interests.46 These probes continue in an effort to determine the scope and limits of U.S. power 

to defend partners and interests in the peripheries, 

and, if we fail to respond to these challenges, we and 

the targets of these probes pay the price. Thus Russian probes against Georgia in 2008 that met no U.S. 

resistance led to more threats, as did encroachments 

from the Chinese probes against U.S. naval vessels in 

the Pacific Ocean and South China Sea in 2009.47 In 

addition, many of these probes or threats are not, at 

least initially, capable of resolution by means of U.S. 

conventional, let alone nuclear, weapons. As General James Cartwright, U.S. Marine Corps, then Commander in Chief of the U.S. Strategic Command, testified to Congress in 2007: 

While America possesses conventional capabilities 

second-to-none, we lack the capability to respond 

promptly to globally dispersed or fleeting threats 

without resorting to nuclear weapons. As good as they 

are, we simply cannot be everywhere with our general-purpose conventional forces and use of a nuclear 

weapons system in prompt response may be no choice 

at all.48

Since many of these actual or likely probes or crises that are expected in Eurasia regardless of events 

in Russia cannot and will not simply be met by U.S. 

forces for multiple reasons, we need to understand 

that we have now been given early warning and need 

to act accordingly. Meanwhile, if this is the situation 

in the peripheries as seen by both Russian and foreign 

authorities and experts, Moscow’s own view of its domestic security situation (apart from the unresolved 

insurgency in the North Caucasus) is hardly one to in-
27

spire confidence. Clearly, the regime has good grounds 

for anxiety, as its own behavior shows. Russia’s government labors under an enormous and constantly 

growing apprehension about domestic security that 

can only grow more, as does domestic opposition to 

it. Since 2005, the Russian Ministry of Defence formed 

Special Designation Forces from Spetsnaz brigades 

under the minister’s direct control. They have air, 

marine, and ground components, and conduct peace 

support and counterterrorist operations.49 Since the 

minister answers only to the president, essentially this 

also means putting all Russia under threat of counterterrorist or other so-called operations without any 

parliamentary accountability or scrutiny.

Since then, matters have, if anything, grown worse. 

An April 2009 report outlined quite clearly the threat 

perceived by the authorities. Specifically, it stated that:

The Russian intelligence community is seriously worried about latent social processes capable of leading 

to the beginning of civil wars and conflicts on RF territory that can end up in a disruption of territorial integrity and the appearance of a large number of new 

sovereign powers. Data of an information “leak,” the 

statistics and massive number of antigovernment actions, and official statements and appeals of the opposition attest to this.50

This report proceeded to say that these agencies 

expected massive protests in the Moscow area, industrial areas of the South Urals and Western Siberia, and 

in the Far East, while ethnic tension among the Muslims of the North Caucasus and Volga-Ural areas is 

not excluded. The author also invoked the specter of 

enraged former Army officers and soldiers who are 

now being demobilized because of the reforms might 
28

also take to the streets with their weapons. But despite 

the threat of this unrest, the government is characteristically resorting to strong-arm methods to meet this 

threat. In other words, it is repeating past regimes 

(not least Boris Yeltsin’s) in strengthening the Internal 

Forces of the Ministry of Interior (VVMVD), and now 

other paramilitary forces as well.51

More soberly, this report, along with other articles, 

outlines the ways in which the internal armed forces 

are being strengthened. Special intelligence and commando subunits to conduct preventive elimination 

of opposition leaders are being established in the 

VVMVD. These forces are also receiving new models 

of weapons and equipment, to include armored, artillery, naval, and air defense systems. In 2008, 5.5 billion 

rubles were allocated for these forces’ modernization. 

Apart from the already permitted “corporate forces” 

of Gazprom and Transneft that monitor pipeline safety, the VVMVD is also now discussing an Olimpstroi

(Olympics Construction) Army, and even the fisheries 

inspectorate is going to create a special armed subunit 

called Piranha.52

Since then, even more information about the extent 

of the domestic reconstruction of the VVMVD into a 

force intended to suppress any manifestation of dissent have emerged. As of 2003, there were 98 specialpurpose police detachments (OMONs) in Russia. By 

comparison, during the 1998 crisis of the regime and 

its elites under Mikhail Gorbachev, 19 OMONs were 

created in 14 Russian regions and three union republics. By 2007, there were already 121 OMON units 

comprising 20,000 men operating in Russia. Moreover, 

by 2007, there were another 87 police special designation detachments (OMSNs) with permanent staffing 

of over 5,200 people operating with the internal af-
29

fairs organs, making a total of 208 special purpose or 

designated units with 25,000 well-trained and drilled 

soldiers. These forces, known as OMSNs, have grown 

from an anti-crime and anti-terrorist force to a force 

charged with stopping “extremist” criminal activity. 

All these units train together and have been centralized within the VVMVD to fight “organized crime, 

terrorism, and extremism.” From 2005 to 2006, the financing of these units was almost doubled. By 2009, 

they were also working with aircraft assets, specifically the VVMVD own aviation center, with nine special 

purpose air detachments throughout Russia. Seven 

more such units are to be created. Furthermore, the 

VVMVD has developed a concept for rapidly airlifting 

these forces to troubled areas from other regions when 

necessary. These forces are also receiving large-scale 

deliveries of new armored vehicles with computers, in 

some cases, and command, control, and communications capabilities. Since these are forces apart from the 

regular VVMVD:

On a parallel basis with the OMON empire, a multilevel internal security troop machine is being developed-with its own special forces, aircraft, armored 

equipment, situational-crisis centers, and so forth.53

When one considers this huge expansion of the 

domestic silovye struktury (power organs), it becomes 

clear why, in 2008, Russia announced that it would 

increase funding for the Ministry of Interior by 50 percent in 2010, and it becomes clear where the government’s estimation of the true threat to Russian security lies.54 If anything, things have gotten worse, and 

there also is now a spreading jihadist insurgency in 

the North Caucasus that is out of control and has re-
30

cently launched operations in Russia’s heartland, i.e., 

Tatarstan.55 Therefore, neither the Russian government nor anyone else should take the durability of the 

current state for granted.

What, then, can be done under conditions of economic stringency and a true strategic fog?

ENDNOTES - CHAPTER 1

1. Ariel Cohen, “Putin’s New ‘Fortress Russia,’” New York 

Times, October 18, 2012, available from www.nytimes.com.

2. Simon Sebag Montefiore, “Please Hold for Mr. Putin,” New 

York Times, September 22, 2012, available from www.nytimes.com.

3. The G20 is comprised of Argentina, Australia, Brazil, Canada, China, France, Germany India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the 

United Kingdom, the United States, and the European Union.

4. “Report: Russia Perceived as Most Corrupt Major Economy,” Voice of America (VOA), October 25, 2010, available from 

www.voanews.com/content/report-russia-perceived-as-most-corruptmajor-economy-105774753/170290.html. 

5. Los Alamos National Laboratory in English, September 

20, 2012, Summary of Reporting on Russian & FSU Nuclear Issues– 

09/20/2012, Foreign Broadcast Information Service-Soviet (hereafter 

FBIS-SOV), Los Alamos, NM: September 20, 2012.

6. “Russia Dumps Excessive Money: Capital Outflow Over 

$84bn in 2011–Kommersant,” January 16, 2012, available from 

www.cbonds.info/eng/news/index.phtml/params/id/544307.

7. For example, Stephen J. Blank, “Civil-Military Relations 

and Russian Security,” Stephen J. Blank, ed., Civil-Military Relations in Medvedev’s Russia, Carlisle, PA: Strategic Studies Institute, U.S. Army War College, 2010, pp. 30-42.
31

8. “Global Alternative: The Logical Conclusion of a Major 

Failure of Russian Intelligence,” Moscow, Russia, in Russian, 

November 9, 2009, available from www.forum.msk.ru, FBIS-SOV.

9. Ivan Konovalov, “Ground Forces Reject Pantsir: Antiaircraft system’s Performance Unacceptable to Defense Ministry,” 

Moscow, Russia, Izvestiya Online, in Russian, September 14, 2012, 

FBIS-SOV, September 15, 2012.

10. “The State of Russia: Frost at the Core,” December 11-17, 

2010, available from www.theEconomist.com.

11. Zbigniew Brzezinski, “Putin’s Choice,” The Washington 

Quarterly, Vol. XXXI, No. 2, Spring 2008, p. 109.

12. Ibid.

13. V. I. Lenin, “The Collapse of the Second International,” 

available from www.marxists.org/archive/lenin/works/1915/csi/ii.htm.

14. Lilia Shevtsova, “The Next Russian Revolution,” Current 

History, October, 2012, pp. 251-257, Shevtsova’s paper in this collection; and “The Power Vertical: Russia’s Revolutionary Situation,” Radio Free Europe Radio Liberty, June 12, 2012, available from 

www.rferl.org; Jackson Diehl, “The Coming Collapse: Authoritarians in China and Russia Face an Endgame,” World Affairs Journal, 

available from WorldAffairsJournal.org/print/56631.

15. Andrei Illarionov, “The Siloviki in Charge,” Journal of 

Democracy, Vol. XX, No. 2, April 2009, p. 72.

16. Stephen Blank, “Web War I: Is Europe’s First Information 

War a New Kind of War?” Comparative Strategy, Vol. XXVII, No. 3, 

2008, pp. 227-247; European apprehensions were strongly voiced 

to the author by analysts and political figures during his trip to 

Warsaw and Helsinki in November 2011.

17. “Putin Admits Russia Trained South Ossetians Before 

2008 Georgia War” - Transcript, President of Russia, August 10, 

2012, available from www.kremlin.ru.
18. For examples, see Edward Lucas, Deception: The Untold 

Story of East-West Espionage Today, London, UK: Walker & Company, 2012; Edward Lucas, The New Cold War: Putin’s Russia and 

the Threat to the West, 2nd Ed., New York: Palgrave Macmillan, 

2009; Lada Roslycky, The Soft Side of Dark Power: A Study in Soft 

Power, National Security and the Political-Criminal Nexus With a 

Special Focus on the Post-Soviet Political-Criminal Nexus, the Russian 

Black Sea Fleet and Separatism in the Autonomous Republic of Crimea,

Doctoral Dissertation, University of Groningen, Groningen, The 

Netherlands, 2011; Jakub J. Grygiel, Robert Kron, and A. Wess 

Mitchell, “Conclusion,” Navigating Uncertianty; U.S.-Central European Relations, Washington, DC: Center for European Policy 

Analysis, 2012, p. 91.

19. General Raymond T. Odierno, “The U.S. Army in a Time 

of Transition,” Foreign Affairs, May-June 2012, available from 

www.foreignaffairs.com/articles/137423/raymond-t-odierno/the-usarmy-in-a-time-of-transition.

20. Quoted in Mackubin Owens, “Civil-Military Relations and 

the U.S. Strategy Deficit,” February 2010, available from www.fpri.

org/enotes/201002.owens.civilmilitaryrelations.html.

21. Kate Brannen, “Facing Uncertain Future, Army Reloads,” 

October 4, 2012, available from www.politico.com.

22. Ibid.

23. Ibid.

24. Chas W. Freeman, Jr., “China’s Rise and Transformation: 

Towards Pax Sinica?” Washington Journal of Modern China, Vol. X, 

No. 2, Fall 2012, p. 20.

25. Richard K. Betts and Thomas J. Christensen, “China: Getting the Questions Right,” The National Interest, No. 62, Winter 

2000-01, p. 27.

26. Clark A. Murdock, Kelley Sayler, and Ryan A. Crotty, “ 

The Defense Budget’s Double Whammy: Drawing Down While 

Hollowing Out From Within,” Washington, DC: Center for Strategic and Internaitonal Studies, October 18, 2012, available from 

www.csis.org.
33

27. J. Randy Forbes, “Rebalancing the Rhetoric,” Proceedings of 

the US Naval Institute, Vol. 138/10/1/316, October 2012.

28. Michael Welles Shapiro,” Sub Cost Must continue to Fall, 

Admiral Says,” Newport News Daily Press, October 19, 2012.

29. Michael Auslin, “The Air Force Needs More Dough; 

Make up $30B Tat Goes to Intel Agencies,” AOL Defense, October 

17, 2012.

30. Major Larry Sullivan (USAF), Post-Unification Korea: Capitalizing on Opportunity, Monterey, CA: Naval War College Press, 

2012, pp. 12-13.

31. David J. Berteau et al., U.S. Force Posture Strategy in the Asia 

Pacific Region: An Independent Assessment, Washington, DC: Center 

for Strategic and International Studies, 2012, available from www.

csis.org.

32. Qichao Zhu, “Obama’s Pacific-Pivot: the Coming Arms 

Race,” World Defence Journal, No. 1, 2012, pp. 46-49; Stephen Blank, 

“The Chinese and Asian Impact on Russian Nuclear Policy,” Defense & Security Analysis, Vol. XXVIII, No. 1, 2012, pp. 36-54.

33. “Russia Must Be Ready for Space, Cyber Wars,” Ria Novosti, February 1, 2012.

34. Major General Brett Williams (USAF) “Ten Propositions 

Regarding Cyberspace Operations,” Joint Forces Quarterly, No. 61, 

Spring 2011, pp. 11-17.

35. Major Phil W. Reynolds (U.S. Army) “What Comes Next? 

An Argument for Irregular War in National Defense,” Military 

Review, September-October 2012, p. 35.

36. “U.S. Military Lags in Brainstorming Next-Gen WMD 

Dangers: Official,” Global Security Newswire, September 2012, 

available from www.nti.org.

37. “Reinventing Landpower,” TRADOC Daily News, October 

5, 2012.
34

38. Steven Metz, “Strategic Horizons: Where the U.S. Military 

is Headed,” World Politics Review, October 10, 2012.

39. Chairman of the Joint Chiefs of Staff, Capstone Concept for 

Joint Operations: Joint Force 2020, Washington, DC: U.S. Department of Defense, 2012, p. 6 (Italics in original).

40. Valdai Discussion Club Analytical Report, Military Reform: 

Toward the New Look of the Russian Army, Moscow, 2012, pp. 9-10, 

available from www.valdaiclub.com.

41. Ibid., pp. 10-11.

42. Moscow, Interfax-AVN Online, in Russian, FBIS-SOV, 

September 21, 2010.

43. Richard Giragosian and Sergey Minasyan, “Recent Trends 

in Security and Stability in the South Caucasus,” Connections 

Quarterly Journal, Vol. XI, No. 1, Winter 2011, available from www.

scribd.com/doc/101737289/Connections-the-Quarterly-Journal-Woiner-2011#page=72.

44. Stephen Blank, Central Asian Perspectives on Afghanistan 

After the US Withdrawal, Central Asia Program, Washington, DC: 

George Washington University, 2012.

45. Kent E. Calder, The New Continentalism: Energy and TwentyFirst Century Eurasian Geopolitics, New Haven, CT, and London, 

UK: Yale University Press, 2012.

46. Ibid.; A. Wess Mitchell and Jakub Grygiel, “The Vulnerability of Peripheries,” The American Interest, March-April 2011; 

Stephen Blank and Younkyoo Kim, “Same Bed, Different Dreams: 

China’s “Peaceful Rise” and Sino-Russian Rivalry in Central 

Asia,” Journal of Contemporary China, forthcoming.

47. Mitchell and Grygiel.

48. Statement of General James E. Cartwright, Commander, 

United States Strategic Command, Before the Strategic Forces 

Subcommittee, House Armed Services Committee, March 8, 2007.
35

49. Zoltan Barany, Democratic Breakdown and the Decline of the 

Russian Military, Princeton, NJ: Princeton University Press, 2007, 

pp. 167-168.

50. “Russia On the Brink of Civil War,” Moscow, Vlasti, in 

Russian, FBIS-SOV, April 19, 2009.

51. Ibid.

52. Ibid.

53. Iriana Borogan, “In Shoulder-Boards: The Kremlin’s 

Anti-Crisis Project: When OMON Rushes to Help,” Moscow, 

Yezhenedevnyi Zhurnal, in Russian, FBIS SOV, December 15, 2009.

54. Moscow, Agentstvo Voyennykh Novostey Internet Version, in 

Russian, FBIS SOV, July 4, 2008.

55. Stephen J. Blank, ed., Russia’s Homegrown Insurgency, Carlisle, PA: Strategic Studies Institute, U.S. Army War College, 2012.

37

CHAPTER 2

RUSSIAN ECONOMIC REFORM 2012:

“DÈJÀ VU ALL OVER AGAIN”

Steven Rosefielde

INTRODUCTION

Russian economic reform is a perennial favorite, “a 

tale of two cities,”1

 where some see only past accomplishment and future glory, and others a “treadmill 

of Muscovite reform.”2

 Therefore, no one should be 

astonished that discussions of contemporary Russian 

economic reform are “déjà vu all over again.”3 This 

does not mean that the two views are equally meritorious interpretations of Russia’s economy and its 

prospects. There is only one correct view, and it is the 

“treadmill of Muscovite reform.” The importance of 

the double vision lies elsewhere in the implacable political will in the Kremlin and segments of the west 

not only to deny the obvious, but also to depict tomorrow’s Russian economy as the bluebird of happiness.

BLUEBIRD OF HAPPINESS

Official Soviet and Russian characterizations of 

economic performance and potential are persistently 

optimistic and used by some Western observers to 

paint rosy assessments of past accomplishments and 

future prospects. A single example will suffice. During the 1980s, official Soviet data (goskomstat) indicated that the Union of Soviet Socialist Russia’s (USSR) 

gross domestic product (GDP) was growing more rapidly than America’s, even though Mikhail Gorbachev 
38

acknowledged that the Soviet economy had been stagnant since 1978!4

After Gorbachev decided to dissolve the Soviet 

Union on December 25, 1991, his successor, Russian 

President Boris Yeltsin, immediately launched a campaign for rapid democratization and economic transition (demokratizatsia and perekhod) aimed at transforming Kremlin rule from Communist party autocracy 

to democracy, and Russia’s economy from central 

planning to free enterprise. Neither happened, but it 

became politically correct to say that they did.5

 Anders Aslund declared that Russia was on the express 

lane to capitalism in 1993,6

 to have become a “market economy” in 19957

 and a “capitalist” system in 

2007.8 In 2004, Andrei Shleifer and Daniel Treisman 

congratulated Russia for becoming a “normal” developing country, including having made substantial 

democratic progress.9 Their judgment was seemingly 

confirmed on December 16, 2011, when Russia agreed 

to join the World Trade Organization (WTO), pending 

formal Kremlin treaty ratification.10

The World Bank today portrays Russia as a democracy,11 despite the objections of Anders Aslund12 

and Michael McFaul,13 American Ambassador to Russia, and categorizes it as a MIC, that is, a “normal” 

middle income market country.14 In its view, Russia weathered the global financial crisis of 2008 admirably,15 and its prospects are favorable due to the 

Kremlin’s “partnership” with the World Bank Group 

(including the International Bank for Reconstruction 

and Development, International Finance Corporation, 

and the Multilateral Investment Guarantee Agency).16

Nonetheless, despite all these accomplishments, Russia’s economy is said to be at risk.17 It is vulnerable to 

budgetary constraints (nonoil fiscal deficit connected 

with expected declines in petroleum revenues) and 
39

long-standing structural issues, including the need to 

improve the investment climate significantly;18 close 

large infrastructure gaps; diversify its export, tax, and 

broader economic base; improve governance; and 

strengthen institutions.19 The World Bank contends 

that Russia’s investment climate is poor, its infrastructure is laggard, its exports are excessively concentrated in natural resources, its tax and economic bases 

are too narrow, and its governance and institutions 

are weak.20

The World Bank asserts that Russia’s leaders recognize these shortcomings and have responded by 

devising four broad economic reform initiatives to address: “Growth and Diversification, Skills and Social 

Services, Russia’s Global and Regional Role, Governance and Transparency.” 

1. Growth and Diversification. Russia’s economy 

is dominated by natural resource extraction undertaken by a few large corporations, a concentration 

reflected in its output and export structures and its 

fiscal dependence.21 Recognizing this, the Kremlin has 

launched economic reforms to encourage “nonstrategic” small- and medium-sized enterprises,22 and to 

increase the size of and modernize Russia’s high-tech 

(e.g., the Skolkovo “innovation city”)23 and financial 

sectors.24 This diversification not only will improve 

the structural balance, but also is intended to spur 

growth through the curtailment of state-owned enterprises and the rapid modernization of underdeveloped activities,25 including innovation (“innovative 

Russia-2020”).26 These goals will be facilitated further 

by regional diversification (“Strategic Projects”),27

improved public management,28 enhanced business 

competition (achieved through better government 

regulation),29 better financial management,30and infrastructural investment.31
40

2. Skills and Social Services. This is the second major category of the Putin regime’s economic reform 

agenda.32 The World Bank contends that Russia has 

made immense strides in the areas of universal primary education, equality for women, eradication of 

extreme poverty and malnutrition, lowering child 

and maternal mortality, and reaching very high levels 

of higher education enrollment. Putin’s reforms will 

build on these accomplishments. Russia will strengthen its social safety net,33 improve demographics and 

public health,34 adjust education to provide a better 

mix of labor skills,35 ameliorate inequality and social 

exclusion,36 and soften interregional disparities.37

3. Global and Regional Role. The third major 

component of Moscow’s economic reform agenda38

includes initiatives facilitating economic integration 

in the Commonwealth of Independent States’ (CIS)39

ecological and environmental defense, especially in 

the Arctic. Globally, Russia is intensifying its international partnerships everywhere.40

4. Governance and Transparency. The fourth 

major element of Moscow’s economic reform agenda41 is important, especially improving self-government,42 fighting corruption,43 and achieving judicial 

efficiency.44 

This survey reveals that Russian economic reform 

from the World Bank’s perspective is mostly about 

routine policy and state regulation that are generically 

appropriate for any MIC, not market economic transformation. There is no core strategy, just a programmatic vision and promise that the government will 

do everything better. The World Bank’s report, which 

parallels the Organization for Economic Cooperation 

and Development’s (OECD) counterpart 2006 study, 
41

provides a valuable inventory of these initiatives45

and makes the case for the proposition that Russia is 

on the fast track to becoming a normal country like 

America from a position of being a normal MIC with 

a fledgling democracy and rapidly maturing markets. 

It forecasts that Russia’s GDP will grow at 3.5 percent 

per annum between 2012 and 2015.46 Others holding 

similar views press this or that aspect of Russia’s reform agenda reflecting diverse parochial interests but 

nonetheless adopt the position that the Vladimir Putin 

administration is moving forward with a progressive 

state regulatory and pro-competitive market agenda.

REALITY CHECK

The World Bank’s inventory of Russian governmental economic reform programs and policies, although descriptively accurate, provides a misleading 

impression of the character and intent of the Kremlin’s 

post-communist regime. Russia’s government is antidemocratic, and its economy is organized for the benefit of privileged insiders, not the Russian people. The 

federation is no longer Communist, but this should 

not be construed as a radical break from Russia’s 

hoary tradition. Its autocratic Muscovite rent-granting 

system has been in force continuously since the reign 

of Ivan III (The Great), Grand Prince of Moscow and 

Grand Prince of all Rus’, in one form or another, since 

the 15th century.

The cornerstone of the paradigm is a particular 

type of autocracy, where the ruler is explicitly or implicitly owner of realm. The Tsar, General Secretary 

of the Communist Party, and now President (like the 

French absolute monarch Louis XIV), “is the law,” 

with the power to act as he chooses, regardless of what 
42

he says. The autocrat can promulgate a constitution 

and impose administrative law (Catherine the Great), 

create a parliament (Nicholas II), install central planning (Joseph Stalin), and rule diversely with a unitary 

economic governance mechanism like rent-granting, 

the market, central planning, and regulation, or with 

a mixed regime. 

Just before the Bolshevik coup d’etat in November 7, 1917, Russia had a tripartite economic governance system combining “rent-granting,” (where the 

nobility and village communes oversaw agriculture, 

natural resources, and some industry in return for service, crop sharing, and taxes), state enterprise (tsar’s 

estates, government enterprises, including weapons 

and luxury goods), and markets (based primarily on 

freehold ownership in low tech activities dominated 

by locals, and high-tech industries dominated by foreign direct investors). 

The Soviets appeared to overthrow this order by 

criminalizing private property business and entrepreneurship (nationalization of the means of production 

and monopolizing state economic control)47 and introducing central planning. However, rent-granting remained a powerful force, allowing “red directors” of 

all types to maintain the authority to use state resources with considerable discretion. On paper, the Soviet 

system seemed to be comprehensively directive, but, 

in practice, red directors were granted the privilege of 

operating the red Tsar’s assets with munificent fringe 

benefits in return for service and a share of the usufruct, profits, and taxes.

Mikhail Gorbachev began the process of reverting 

to Nicholas II’s mixed Muscovite model with his famous “perestroika” reform of 1987 (radical economic 

reform of the command planning system), which al-
43

lowed leasehold proprietorships, markets, and entrepreneurship. Boris Yeltsin accelerated the process with 

his perekhod (transition) initiative, restoring freehold 

property ownership. This was promptly heralded as 

the beginning of a transition from communist authoritarian central planning to democratic free enterprise, 

but the judgment was premature. It was a post-royalist reversion to Nicholas II’s Muscovite market assisted autocratic rent-granting, with a large dollop of 

state ownership in the military and natural resource 

sectors. Oligarchs became the new servitors.

Putin’s government today, like Yeltsin’s earlier, 

is a Muscovite autocracy organized for the benefit of 

privileged insiders, not the Russian people. The “people’s assets” from the Soviet period were granted by 

Yeltsin to his favorites through various subterfuges,48

creating the social foundations for the new post-Soviet 

Muscovy. The regime’s predominant features are oneman rule and rent-granting, not democracy and market competition. This makes the regime intrinsically 

inefficient compared with the popular and consumer 

sovereign (neoclassical democratic competitive) model ascribed to Russia by the World Bank and radically 

alters real economic reform potential. The policies and 

reforms undertaken by the Kremlin and enumerated 

by the World Bank are merely efforts to enhance the 

efficiency of the Muscovite paradigm, not to move 

beyond it to democratic free enterprise. As a consequence, these endeavors can streamline and modernize a retrograde economic governance mechanism 

(including the public sector) but cannot Westernize it. 

They cannot make public programs responsive to the 

electorate or prevent the supply of goods in the private sector being primarily responsive to the demands 

of Putin and his “servitors” (oligarchs).
44

This judgment is confirmed by Russia’s wretched 

economic performance from 1989 to 2012. Although, 

the way the World Bank casts the statistics, Russia’s 

GDP doubled from 2005 to 2008 (18.9 percent per annum),49 in reality, by using OECD data, the federation’s per capita GDP was virtually flat for more than 

2 decades (there was a hyperdepression during the 

interval).50 This dismal assessment is easily confirmed 

by comparing the Central Intelligence Agency’s (CIA) 

estimate of Russian per capita income in 1989 of 

$23,546 (adjusted to a 2011 dollar price base), which 

should be more or less the same today because there 

was little or no real growth point to point during 1989-

2011, with the World Bank’s contemporary figure of 

$10,500.51 Obviously, the World Bank’s picture of postCommunist Russian economic progress is amiss. If the 

CIA was right in 1989, Russian living standards have 

declined substantially since then, using the World 

Bank’s contemporary estimate. Most of the discrepancy between the $23,546 and $10,500 figures is attributable to the CIA’s exaggerated 1991 purchasing power 

parity estimates, but the point remains. Russia has not 

converged toward the developed Western standard of 

living under Yeltsin and Putin from the 1989 benchmark; it has diverged, falling further behind.

MUSCOVY AND THE WASHINGTON 

CONSENSUS

Muscovite rent-granting is a governance strategy 

used by Kremlin autocrats to create a cadre of loyal 

supporters by privileging the few to exploit the many. 

Muscovite rulers are primarily concerned with defending their realm and acquiring sufficient revenues 

to support the court and the power services (secret 
45

police and armed forces). They do not care if their 

servitors (contemporary oligarchs and other insiders), 

those subordinated to them, and peripheral players 

are inefficient as long as revenues are adequate, even 

though everyone is urged to do better. They do not 

care if servitors are overpaid, and everyone else is 

under-remunerated (Gini coefficient 42).52 Servitors, 

for their part, are more concerned with obtaining additional rents from the autocrat than competitively 

maximizing profits. Like their liege, they prefer to 

enrich themselves through insider channels than competitively cost minimize and revenue maximize (profit maximization) in accordance with the neoclassical 

paradigm. Rulers and servitors often appreciate that 

democracy and free enterprise are better for the many 

but place their own well-being above the people’s 

desires. This makes Muscovy intrinsically anti-democratic and anti-competitive, disclaimers to the contrary notwithstanding. History has demonstrated that 

autocratic rent-granting can be combined with state 

ownership, markets, central planning, and economic 

regulation without ceding sovereignty to the people 

or consumers, and this is the way that Putin has chosen to play the game. The approach is the antithesis of 

the Washington Consensus.53 The programs, regulations, and reforms of the Russian government are primarily for the autocrat, not the demos, and improved 

competitiveness insofar as it is permitted serves the 

same purpose.

TREADMILL OF MUSCOVITE REFORM

The policies and reforms undertaken by the Kremlin in partnership with the World Bank Group can have 

positive results. Technology transfer and moderniza-
46

tion in the public and private sectors, together with an 

expanded role for competitive markets, can improve 

productivity. The Tsarist, Soviet, and post-Soviet experiences, however, reveal that benefits are not automatic. The liberalization of Nicholas II’s economy, 

including high tech foreign direct investment (FDI), 

had mixed results, mostly negative, as the Bolshevik 

revolution attests. The Soviet Union tried most of the 

World Bank Group’s economic reform recommendations, including technology transfer and leasehold 

marketization. The result was stagnation and collapse. 

Yeltsin adopted the G7 transition strategy and immediately precipitated a decade-long hyperdepression. 

This time, of course, outcomes may be different.54 Let 

us therefore provisionally accept the World Bank’s 

forecast that Russia’s GDP will grow 3.5 percent during the time frame from 2012 to 2015, a lackluster 

rate of advance given the country’s relative economic 

backwardness. What precisely is there about Muscovite rent-granting that makes it productively inferior, 

unjust, and impervious to energizing reform?

The answer is simple. The Muscovite paradigm encourages rent-grantees to concentrate their attention 

on acquiring unearned incomes rather than creating 

value-added products or services, and it protects the 

privileged from competitive forces that might mitigate the harm rent-grant generates. Rent-granting is 

intrinsically underproductive, immoral, and corrupt 

from a neoclassical perspective, because it allows 

the privileged to receive income and wealth without 

earning them. Today’s Russian “petrogarchs’” fortunes are tied more to currying favor with the Kremlin than efficiently managing companies and adding 

value. Other insiders receive state contracts without 

any obligation to perform, creating the semblance, but 
47

not the substance, of value-added (rent-fabrication).55

The Muscovite system in this way offers an illusion of 

progress that masks its inefficiency and underproductivity. Corruption (privilege granting) in the Kremlin’s scheme of things is not merely a matter of moral 

failure; it is the system’s life blood.

None of this precludes Russia’s privileged from 

trying to enrich themselves doubly by acquiring rents 

and maximizing profits; however, the regime’s culture 

of corruption inhibits constructive impulses. The rentseeking mentality keeps servitors’ attention riveted 

on state handouts, with profit maximizing little more 

than an afterthought.

Adam Smith famously claimed that the potential 

losses caused by corruption, including conspiracies 

in restraint of trade, were less severe than might be 

anticipated due to the positive effects of moral selfrestraint56 and free competition (the invisible hand).57

It is easily supposed that the defects of rent-granting 

are self-correcting, too; however, this does not follow because the Muscovite ethic is predatory, and the 

Kremlin is committed to creating privilege by deliberately suppressing competition. Putin has no objection to ordinary people competing among themselves 

and supplying services to the privileged at least cost, 

but any business that is lucrative can be or is taken 

over by the privileged and absorbed into the protected sphere. The same tactics are used in the Kremlin’s 

dealings with foreign companies at home and abroad. 

Russia’s Muscovite economy, consequently, is woefully inefficient. Labor is miseducated, misallocated, 

and underincentivized. Privileged companies do not 

profit maximize. They underinvest and misinvest, a 

problem exacerbated by the financial sector’s misallocation of loanable funds. Foreign direct investors like 
48

British Petroleum (BP) operate in treacherous waters 

and are routinely bilked.58 Government regulation 

and programs are rent-granting activities, not handmaidens to market competition. The people’s will is 

irrelevant, and consumers merely have limited market 

choice, not consumer sovereignty (their demand does 

not govern competitive supply). 

The problem, of course, can be solved by the Kremlin voluntarily repudiating Muscovy or being forced to 

do so by a popular awakening, as many today seem to 

anticipate, but not otherwise. Better plans and regulations of the sort recommended by World Bank Group 

cannot compensate for the inefficiencies imposed by 

rent-granting, and, as the Soviet experience proved, 

they are inferior substitutes for markets.59 Expanding 

the scope and competitiveness of ancillary markets 

should be beneficial, but this is precisely what Muscovy opposes to the extent that it leashes privilege. 

This is why Gertrude Schroeder’s dictum holds undiminished. Russia is still on a treadmill of fundamentally futile reform.60 Both the Kremlin’s and the World 

Bank Group’s nostrums are “Déjà vu All Over Again.” 

ENDNOTES - CHAPTER 2

 1. Charles Dickens, A Tale of Two Cities, London, UK: 1859, 

Book 1, Chapter 1 - The Period: 

IT WAS the best of times, it was the worst of times, it was 

the age of wisdom, it was the age of foolishness, it was 

the epoch of belief, it was the epoch of incredulity, it was 

the season of Light, it was the season of Darkness, it was 

the spring of hope, it was the winter of despair, we had 

everything before us, we had nothing before us, we were 

all going direct to Heaven, we were all going direct the 

other way—in short, the period was so far like the present period, that some of its noisiest authorities insisted on 

its being received, for good or for evil, in the superlative 

degree of comparison only.
49

2. Gertrude Schroeder, “The Soviet Economy on a Treadmill of ‘Reforms’,” Soviet Economy in a Time of Change, Washington, DC: Joint Economic Committee of Congress, October 10, 

1979, pp. 312-366. 

3. “It’s déjà vu all over again.” Berra explained that this quote 

originated when he witnessed Mickey Mantle and Roger Maris 

repeatedly hit back-to-back home runs in the Yankees’ seasons in 

the early 1960s.

4. Abel Aganbegyan, Inside Perestroika: The Future of the Soviet 

Economy, New York: Harper and Row, 1989.

5. Steven Rosefielde, Russian Economy From Lenin to Putin, 

New York: Wiley, 2007; Steven Rosefielde and Stefan Hedlund, 

Russia Since 1980: Wrestling With Westernization, Cambridge, UK, 

Cambridge University Press, 2008; Steven Rosefielde, Russia in the 

21st Century: The Prodigal Superpower, Cambridge, UK: Cambridge 

University Press, 2005.

6. Anders Aslund and Richard Layard, Changing the Economic 

System in Russia, Hampshire, UK: Palgrave Macmillan, 1993.

7. Anders Aslund, How Russia Became a Market Economy, 

Washington, DC: The Brookings Institute, 1995.

8. Anders Aslund, How Capitalism Was Built: The Transformation of Central and Eastern Europe, Russia, and Central Asia, Cambridge, UK: Cambridge University Press, 2007; Anders Aslund, 

Russia’s Capitalist Revolution: Why Market Reform Succeeded and 

Democracy Failed, Washington, DC: Peterson Institute of International Economics, 2007.

9. Andrei Shleifer, A Normal Country: Russia after Communism, 

Cambridge, MA: Harvard University Press, 2005; Andrei Shleifer and Daniel Treisman, “A Normal Country,” Foreign Affairs, 

Vol. 83, No. 2, 2004, pp. 20–39; Steven Rosefielde, “An Abnormal 

Country,” The European Journal of Comparative Economics, Vol. 2, 

No. 1, 2005, pp. 3–16.
50

10. “Ministerial Council Approves Russia’s WTO Accession,” 

Geneva, Switzerland: World Trade Organization (WTO), December 16, 2011. The Russian Parliament ratified WTO accession on 

July 21, 2012.

11. World Bank, Country Partnership Strategy (CPS) for the 

Russian Federation, Report No. 65115-RU, November 2011, 

p. 2. Another version of the same document is entitled 

Russian Federation - Country Partnership Strategy for the period 

2012-2016 (English).

According to the 1993 Constitution, Russia is a democratic 

federal law-governed state with a republican form of government, comprising 83 federal subjects.

The next parliamentary elections will be held on December 

4, 2011, to be followed by presidential elections on March 4, 

2012. President Dmitry Medvedev came to power in March 

2008 and appointed Prime Minister Vladimir Putin. This 

ruling tandem has operated well since then. According to 

recent polls, the approval ratings for both the president and 

prime minister remain high, albeit lower than in 2010. The 

ruling party, United Russia, dominates the State Duma by 

holding 315 seats. The 2011 parliamentary elections will be 

the sixth in the history of modern-day Russia. Vladimir Putin announced that he will run for president. According to 

latest public opinion polls, the political situation is not likely 

to change significantly after the elections, with the four leading parties retaining their dominance in the Duma.

12. Anders Aslund, group email, December 12, 2011. 

Nonetheless, Aslund remains hopeful that democracy will 

triumph soon. 

Yet, I think Putin and his regime were effectively finished 

on December 10. I do not think it possible for Putin to serve 

as the next president, and I also think that Medvedev has 

no future role to play. Common slogans are directed against 

Putin: ‘Russia without Putin,’ ‘Putin is a thief,’ ‘Putin to 

prison,’ and ‘out with Putin!’ Both the Russian people and 

authorities have shown that Russia is ready for a new democratic breakthrough.
51

13. Obama administration’s Ambassador to Russia, Michael 

McFaul, expressed his view that Putin’s authoritarianism soon 

would give way to democracy. See Michael McFaul and Kathryn 

Stoner-Weiss, “Mission to Moscow: Why Authoritarian Stability is 

a Myth,” Foreign Affairs, January/February 2008. McFaul worked 

for the U.S. National Security Council as Special Assistant to the 

President and Senior Director of Russian and Eurasian Affairs. 

McFaul is one of the architects of the “reset.” See Leon Aron, “A 

Tormenting in Moscow,” Washington, DC: American Enterprise 

Institute, April 12, 2012.

14. World Bank, Country Partnership Strategy (CPS) for the 

Russian Federation.

15. Ibid. 

Russia has weathered the global crisis well despite the massive oil and capital account shocks. This was mainly because 

of the large pre-crisis fiscal reserves and fiscal surpluses that 

allowed the Government to mount a large countercyclical 

stimulus package in support of the financial system, enterprises, and households. Despite a large drop in real GDP 

in 2009 (-7.8 percent), an acute liquidity crisis, and a sharp 

increase in unemployment, the crisis was managed without 

systemic bank failures, and the economic and labor market 

conditions began to improve during 2009 in line with the 

rise in oil prices and the recovery in domestic demand and 

credit. Large increases in public sector wages and pensions 

cushioned the impact on the middle class and the poor, 

making the social impact less severe than it would otherwise have been. With the cyclical demand recovery in the 

global and Russian economies as well as energy commodities, Russia’s real GDP grew 4 percent, and unemployment 

fell 2 percentage points from its peak during the crisis to 7.2 

percent at the end of 2010.

16. Ibid. 

Following a cyclical recovery of oil prices, economic activity, 

and employment during 2010, Russia’s current macroeconomic situation remains favorable. After a 4 percent growth 

in 2010, the Russian economy continues to expand in an environment of declining unemployment (6.5 percent in July 
52

2011) and inflation, rising domestic consumption, and still 

high oil prices. All sectors of the economy are growing, and 

domestic consumption—while less buoyant than anticipated—increasingly acts as an engine of demand growth. With 

good harvest and favorable food price outlook, annual inflation is expected to end at around 7.5 percent in 2011, somewhat higher than the Government’s target of 6-7 percent but 

lower than at any time in recent years. The federal budget 

was anticipated to be in near-balance in 2011. A large current account surplus of almost U.S.$70 billion significantly 

exceeds the deficit in the capital account, which will allow 

the Central Bank to accumulate additional reserves.

17. Ibid.

Yet the risks to the global economy are growing and so are 

risks to Russia’s growth. Reflecting the slowdown in major 

developed economies, and rising risks associated with the 

European debt crisis during the summer of 2011, the WBG’s 

outlook for Russia’s real GDP growth was revised to 4 percent in 2011 (down from 4.4 percent earlier in the year), and 

to 3.8 percent in 2012. This is predicated on the lower oil 

price outlook for Russia (Figure 2) [see original] and the 

global economy growing at more moderate rates, especially 

high income countries.

18. “Economic Policy Reforms 2012: Going for Growth,” Paris, France: Organization for Economic Cooperation and Development (OECD), 2012. 

The narrowing in March 2011 of the list of activities of strategic importance performed by non-state-owned banks removed the need for prior government approval for foreign 

acquisitions in this sector. Tariffs for selected agricultural 

products were reduced in response to the food price shock 

resulting from the drought in the summer 2011.

19. World Bank, Country Partnership Strategy (CPS) for the 

Russian Federation.

Beyond this favorable short-term picture lie heightened 

vulnerabilities of the Russian budget and long-standing 

structural issues. First, there is the large non-oil fiscal deficit 
53

of about 11 percent of GDP, compared with the sustainable 

4.5 percent level. Second, with much smaller fiscal reserves 

than before 2008, Russia’s budget is now more vulnerable to 

a new, sustained drop in oil prices. Third, Russia faces major 

structural problems in the medium term, including the need 

to significantly improve the investment climate, close large 

infrastructure gaps, diversify its export, tax, and broader 

economic base, improve governance, and strengthen 

institutions.

20. Finally, on the structural reform front, the Russian economy is facing multiple, long-term challenges. These include, first 

and foremost, improving the investment climate, addressing the 

large infrastructure gaps, diversifying Russia’s tax, export, and 

broader economic base, and strengthening governance and institutions. In each of these areas, Russia scores comparatively low on 

many measures of performance, especially for a very large middle-income country aspiring to achieve high-income status within 

the next decade. These challenges underpin the Government’s 

broader modernization agenda and the ongoing broad consultative discussions about the country’s revised Strategy 2020. The extent to which these long-term challenges are met will determine 

the longer-term dynamics of the Russian economy, its catch-up 

with developed countries, and its ability to improve the living 

standards of its citizens.

21. World Bank, Country Partnership Strategy (CPS) for the 

Russian Federation.

The dominant concern for Russia’s economic model remains 

the dependency on fossil fuel production and exports and 

the associated challenge of using hydrocarbon revenues effectively and efficiently. Russia is a global energy powerhouse. It is the world’s largest exporter of natural gas and 

the second largest oil exporter. Energy resources combined 

with stronger social and economic policies have resulted in 

rapid social and economic progress during 2002-2008 and 

allowed it to weather the global crisis well. At the same time, 

however, as in many other major hydrocarbon producers, 

these resources are also the source of many of its development challenges. Relative to its structural endowments and 

trade potential, Russia appears to be under-exporting. Only 

approximately 9 percent of total exports in 2009 were ac-
54

counted for by high-tech exports, mainly from the defense 

industry. There has been some shift to services over the years 

but the economic structure is dominated by large corporations with concentration in natural resources and low value 

added industries, while contributions from the SME sector 

are limited. The financial sector remains underdeveloped in 

terms of its capacity to mobilize and intermediate savings 

and is vulnerable to fluctuations in commodity prices and 

capital flows. Capital markets are inadequately developed 

and gaps exist in the oversight of the banking system.

22. Russia has a lengthy list of “strategic” enterprises, both 

military and key suppliers to the military, that prohibit foreign 

participation. Military industrial enterprises are all nationalized. 

“Strategic” enterprises essentially are state controlled. The number of strategic enterprises has not been reduced, nor is there any 

officially stated intention to do so. See OECD, “Economic Policy 

Reforms 2012: Going for Growth.”

23. Ibid.

24. Ibid. “An April 2011 legislative act requires that all draft 

legislation be subject to regulatory impact analysis in order to 

identify the provisions that create unjustified obstacles to investment.” 

25. World Bank, Country Partnership Strategy (CPS) for the 

Russian Federation:

Russian businesses are often inefficient and tend to operate 

at low levels of technology and knowledge. Russia’s product base has narrowed considerably over the past decade. 

In manufacturing, value-added per worker is similar to that 

of workers in China and India, but when labor costs are accounted for, overall productivity is lower. State-owned enterprises are present in more sectors of the economy than 

in any OECD country bar Poland. These enterprises also 

account for around 17 percent of total employment. Competition and the institutional and policy framework provide 

insufficient pressure or incentives to stimulate innovation. 

A difficult environment for the financial system leads to deficiencies in new company formation. External know-how 

transfers are limited with gross FDI inflows from 2005-2010 
55

averaging a low 1.5 percent of GDP, with only 21 percent of 

these funds going to non-energy manufacturing.

26. OECD, “Economic Policy Reforms 2012: Going for 

Growth.”

The Government’s new innovation strategy “innovative 

Russia-2020” emphasizes the importance of private sector 

innovation activity. The creation of the Kolkovo “innovation city” may facilitate innovation, but its special legal and 

tax regimes go against the principles of universally applied 

rules and incentives. 

27. World Bank, Country Partnership Strategy (CPS) for the 

Russian Federation.

Russia, as the largest country in the world by land area, 

faces significant challenges in development of its regions as 

average numbers for the country mask huge regional variations. Large and dynamic cities with high growth rates such 

as Moscow and St. Petersburg are highly congested and create substantial problems for urban transport management, 

while outside these cities poverty levels and unemployment 

can reach significantly high levels. According to Rosstat, 

the average level of unemployment from November 2010 

to January 2011 varied from only 1.4 percent in Moscow to 

47.5 percent in the Republic of Ingushetia. Headcount poverty rates (2008) ranged from 38 percent in Kalmykia (in the 

south) to 7.4 percent in oil-rich Khanty-Mansiysk.

Providing access to infrastructure of comparable quality is 

a principal development objective of the Federation, yet is 

also a significant challenge given its huge size.

Three strategic projects, including a Pacific oil pipeline, a 

drilling rig and an auto plant have been launched in the 

Far East.

See “Strategic Projects to Boost Russia’s Far Eastern Economy,” 

January 5, 2010, available from www.chinaview.cn.

28. World Bank, Country Partnership Strategy (CPS) for the 

Russian Federation.”
56

Russia has a strong interest in continuing to improve efficiency and effectiveness of public financial management. 

Among other measures, the Government already introduced a three year budget framework, implemented legal 

and institutional mechanisms for monitoring sub-national 

public finance and Treasury principles of budget execution, 

created budget authority at the municipal level, and adopted legislation on insolvency of budgets of the regions. In late 

2010 and 2011, Russia experienced large oil windfalls. Rising 

public expenditure commitments—including on the military, public sector wages, and pensions—are threatening to 

undermine fiscal and overall macroeconomic stability. The 

Government needs to substantially improve its long-term 

fiscal position by rationalizing public expenditures, managing the effects on public finances of an aging population, 

creating fiscal space for productive infrastructure spending, returning to an explicit fiscal rule, and broadening the 

tax base.

29. Ibid. 

The Government has renewed and stepped up efforts to improve the business environment. Over the past few years 

these efforts have included the reduction of the burden of 

regulatory compliance on business, particularly in dealing with licensing and inspections at the subnational level, 

systematic monitoring of business environment indicators 

at the level of the regions, strengthening the enforcement 

of competition regulations, automating key administrative processes concerning business (e-filing of taxes), and 

stemming the proliferation of new regulations through the 

introduction of regulatory impact assessments. Despite the 

promising recent initiatives aiming at improving the business climate, perception indicators of the business environment remain poor. Russia ranks 120th among 183 economies 

in the 2012 Doing Business report. Government efforts now 

focus on streamlining key regulatory processes (e.g., issuance of licenses and permits) and monitoring administrative corruption affecting business at the level of the regions, 

where most regulatory processes occur. See further details 

in Annex 3.
57

30. Ibid. 

The Russian Government is prepared to address existing 

weaknesses in the financial system. Prudential and nonprudential supervision requires strengthening through an 

improved regulatory framework in line with the G20 objectives. In particular, the Central Bank of Russia needs supervisory powers for several areas to mitigate banking sector 

risks. Also, financial system assets are concentrated in the 

banking sector where loan quality may be overestimated 

and the level of provisions is still lower than it should be. 

The breadth and depth of the equity, bond and investment 

fund markets remain well below capacity. Russia’s capital markets also face deficiencies in market infrastructure 

(clearing and settlement) and a small institutional and retail 

investor base. The issues in the banking system and capital 

markets mean that there are problems in access to finance. 

The lack of access to finance is an obstacle for micro, small 

and medium firms, but is a particularly significant obstacle 

for medium and large firms. Structural obstacles to an enhanced access to finance remain to be addressed.

31. Ibid. 

The Government regards infrastructure as a key development constraint with estimates for necessary investments at 

about US$1 trillion until 2020. According to a joint Bank/IFC 

study, Russia’s potential energy savings are roughly equal 

to the annual primary energy consumption of France. Russia’s transport infrastructure is generally poor and has been 

declining because of underinvestment in maintenance and 

rehabilitation. Major weaknesses are evident in the quantity, 

quality and institutions of several large infrastructure sectors. Upgrading Russia’s infrastructure would require not 

only significant investments but also a strengthening of the 

country’s institutional framework. Russia’s environmental 

management suffers from poor governance and sometimes 

obsolete management practices. Environmental quality 

and control are poor for a majority of Russians living in the 

country’s population centers. This has detrimental effects 

not only for those peoples’ well-being but also a significant 

negative impact on Russia’s economy.
58

32. Ibid. 

The Russian Federation has made significant achievements 

in social and human capital development. The most notable 

achievements are in the areas of universal primary education, equality for women, eradication of extreme poverty 

and malnutrition, lowering child and maternal mortality, 

and reaching very high levels of higher education enrollment. With these achievements, the Russian Government is 

increasingly focusing its strategies on moving Russia closer 

to the level of achievements of other G8/OECD countries. 

In light of these ambitious goals, despite the impressive 

achievements to date, Russia is facing new challenges that 

will be critical to address if the government goals under the 

updated Strategy 2020 are to be achieved.

33. Ibid. 

While general poverty levels have fallen sharply since the 

early 2000s, vulnerability to poverty remains a concern. 

Poverty rates are declining but remain significant with 

more than 18.5 million Russians living in poverty in 2010. 

Chronic poverty is now at about 7 percent, but the relatively 

high vulnerability to poverty affects about a quarter of the 

population (some 37 million people) 3. Efficiency in social 

spending, better targeting of social programs, as well as new 

transfers will be of critical importance in the future, especially with Russia’s efforts to reduce the fiscal deficit and 

its exposure to changes in oil prices. Social protection is the 

largest budget item (55 percent) within the social expenditures4. Up to one quarter of social support beneficiaries are 

not poor. Furthermore, some of the social programs are suffering from low quality and weak integration with active 

policies that will bring people into jobs and out of poverty 

or social care. As Russia continues to develop, social transfers and programs will take up an increasing share of the 

national budget as in other OECD countries. Thus, enhancing its efficiency will be paramount as will be improving the 

quality of care and social programs.

34. “Since January 2011, citizens have got the right to choose 

a primary care doctor and an insurance company within the mandatory health insurance system,” OECD, “Economic Policy Re-
59

forms 2012: Going for Growth; World Bank, Country Partnership 

Strategy (CPS) for the Russian Federation:

Demographic and health trends are characterized by low 

fertility, high adult mortality and morbidity rates, and inefficient health spending, in addition to a rising pressure 

on pensions. The demographic profile of the Russian Federation shows a shrinking and aging population. Average 

male life expectancy in Russia is only 62.8 years (13.8 years 

less than the EU average), as opposed to 74.7 for women 

(7.9 years less than the EU average). The excess mortality 

is overwhelmingly attributable to cardiovascular diseases, 

cancer, alcohol poisoning, as well as injuries due to traffic 

accidents. According to Rosstat estimates, the working age 

population size will decrease by 10.4 million between 2011 

and 2025, which is a major challenge for the Russian economy. Labor force shortages are expected to be compensated 

through labor immigration. Progress has been made in the 

fight against AIDS/HIV and TB. Still, Russia is among the 

10 countries with the highest multi-drug resistant TB burden in the world. Furthermore, the Russian health system 

suffers from poor quality and inefficient spending with limited resources flowing to preventive care and an excessive 

amount of resources going to the hospital sector. Despite 

these challenges, Russia’s total health expenditures is only 

5.4 percent of GDP compared to an OECD average of 8.8 

percent. Health indicators generally remain low in an international perspective and when compared to countries with 

similar levels of development. Given the relative low retirement age and the aging population, the fiscal burden arising 

from pensions will continue to grow.

35. World Bank, Country Partnership Strategy (CPS) for the 

Russian Federation:

Skill mismatches in the labor market are turning into an 

increasingly important development constraint. Professional education and the renewal of skills for labor market 

entrants as well as existing workers are critical for adopting 

new technologies, diversifying the economy, and improving 

productivity levels. The latest EBRD-World Bank Business 

Environment and Enterprise Performance Survey (BEEPS) 

ranks skills as the number one concern for businesses in Russia. This is further exemplified by the fact that excess labor 
60

market capacity appears to have been exhausted. Combined 

with the changes to the demographics of the Russian population, this indicates a serious and tightening bottleneck in 

the economy with regard to the provision of skilled workers, the quality of higher education and the renewal of skills 

within the existing labor force. Labor force shortages resulting from demographic trends make the Russian economy 

dependent on immigrant labor. The Russian Government is 

undertaking steps to attract more highly skilled immigrants 

to the country and is currently developing a scheme of organized recruitment of migrant workers. During 1999-2007, 

Russian GDP grew by an average of 7 percent annually with 

labor productivity growing an average of 6 percent per year 

accounting for 2/3 of the expansion in per capita GDP. Both 

female and male employment rates are below the EU average. The Russian Government is aware of the challenges 

which are to be addressed in the updated Strategy 2020. See 

further details in Annex 4.

36. Ibid. 

The country’s strong economic recovery and downward 

poverty trends belie significant challenges of inequality and 

social exclusion. Since Russia began its transition from a 

planned economy to a market economy some 20 years ago, 

economic growth has been steady and GDP per capita has 

increased threefold. Inequality as measured by the Gini 

coefficient rose significantly, however, from 28.9 to 42.2 

between 1992 and 2009. Social stresses have been similarly 

magnified. Given that federal spending on social services in 

2007-2008 already accounted for about 17 percent of GDP, 

or half of total federal spending 6, and was further increased 

by around 1.3 percent of GDP in 2009 and 2.2 percent of 

GDP in 2010, effectively addressing the issues of inequality 

and social exclusion will require an alternative preventative 

approach that can tackle the root causes of these issues.

37. Ibid. 

The sharp disparities in development and living standards 

among Russia’s regions require a differentiated policy approach. Russia’s achievements conceal huge variations 

among regions in the level of social spending and poverty 

rates. For example, 82 percent of preschool education is fi-
61

nanced through local government budgets, and therefore 

poorer regions will be more disadvantaged in their capacity 

to finance preschool education than richer regions. Substantial differences among Russia’s regions are also apparent in 

per student spending and in the quality of education at the 

primary and secondary education level. Finally, vulnerable 

children including those with mental or physical disabilities 

and those who are infected with HIV suffer from educational exclusion. Addressing these variations among the regions 

across the human development spectrum will be critical for 

maintaining the path of achievements and calls for a more 

differentiated approach to policies and interventions.

38. Ibid. 

Russia’s national choices have critical impact on regional 

and global challenges. Russia is one of ECA’s regional engines of growth, both as the major destination of exports 

and migrant labor from the CIS countries. The Russian Government wants to support economic integration within the 

CIS, including the creation of a common migration space 

and common labor market, but also has to grapple with 

social integration and adaptation of labor immigrants. The 

Russian territory contains about 22 percent of the world’s 

undisturbed ecosystems. These have global value and significance for biodiversity protection, carbon storage and 

sequestration, and other critically important environmental 

functions. Strengthening forestry governance and management is particularly critical. The country’s forests are at risk 

from forest fire, pest and disease outbreaks, and low rates of 

reforestation. Further strengthening of the national system 

for weather forecasting, hydro-meteorological services and 

climate monitoring remains a high priority for the Government as the impact of climate change is expected to increase 

the frequency of extreme and hazardous weather events. 

Due to the large-scale economic development and climate 

warming in recent decades, Russia’s remote Arctic areas 

have become more accessible, resulting in a significant increase in human activities. This has led to more pressures 

on the pristine but fragile environment in the Arctic zone.

39. Ibid. 

At the ECA regional level, Russia has become a prominent 

emerging donor. Over the last CPS period, it has imple-
62

mented an ambitious development assistance program with 

significant contributions. With the approval of 75 percent of 

the population according to a 2010 WBG-managed opinion 

survey by the Levada Center, Russia will focus its assistance 

on LICs and lower-income MICs in ECA where it has many 

social and economic ties, and will also become active in other 

LICs. As a member of the Eurasian Economic Community, it 

initiated the establishment of a regional multilateral mechanism (EurAsEC Anti-Crisis Fund) administered by EDB to 

help deal with crisis related challenges in affected EurAsEC 

countries. Russian lead agencies have developed an understanding of the complexity of development aid communications and a sense of urgency for more active work in 

ensuring adequate information in support of Russian development aid. The Russian Government now plans to create 

a stronger institutional framework for development aid. It 

wants to set up a new bilateral development aid agency and 

enhance capacity within existing public agencies through 

better staffing, increased staff training, and development of 

expert potential.

40. Ibid. 

At the global level, Russia has made important steps toward 

deeper integration into the international community. Russia 

is already a member of the G8, G20, and APEC. It is also 

making significant progress toward becoming a member 

of the OECD and the WTO. To reach its full potential as 

a prominent member of these global institutions, the Russian Government would like to employ the whole array of 

available policy instruments. Yet, with regard to the area of 

global public goods, where Russia is showing special interest in decisive issues like financial stability and food security, the Department for International Financial Relations in 

the Ministry of Finance is understaffed and the Government 

needs to strengthen the institutional structures and technical expertise necessary to provide effective leadership. 

41. Ibid.

In recent years, the Government of Russia has completed 

or initiated a number of major reforms in the public sector. 

These efforts were intended to ensure sound management of 

public resources, create a more favorable business environ-
63

ment, and enhance public service delivery. Still, many challenges remain. Annex 5 analyzes recent developments and 

their impact, the main challenges, and the Government’s 

current strategies for improving public sector governance.

42. Ibid. 

Improving effectiveness and efficiency of public administration has been a high priority for the Russian Government in 

the last decade. The Government has undertaken a major 

effort to clarify and delineate functions between levels of 

executive government and establish local self government. 

The Government also launched a broad set of public sector reforms in areas such as civil service, budget process, 

and public administration. Some of these reforms, however, 

were only partially implemented and are not fully visible 

to the average citizen. The reforms are yet to translate into 

tangible and noticeable improvements in the quality and 

effectiveness of public administration in the eyes of the 

citizens and businesses. Government functions and civil service staff kept growing between 2004 and 2010. Government 

regulation is seen as excessive and often ineffective. Public 

services are heavily embedded in traditional administrative 

arrangements, which often encourage corruption and are 

burdensome for citizens and businesses.

43. Ibid. 

Corruption has been recognized as one of the major obstacles for investments and growth. In response, the Government has embarked on a comprehensive anti-corruption program. Anti-corruption efforts have received new 

impetus in recent years under the leadership of President 

Medvedev. A Federal Anti-corruption Law and National 

Anticorruption Plan have been adopted and civil servants 

are required to declare their assets. Surveys of corruption 

perceptions show that Russia continues to lag relative to 

the ECA region and in global terms. The Government has 

made reform of the state contracting systems a key priority. 

Reported unofficial payments to obtain public procurement 

contracts were relatively high (BEEPS 2008), with 30 percent 

of firms reporting having made such payments, amounting 

to an average 11.5 percent of the value of the contract. Some 

improvements have been made, including introducing 
64

e-procurement through a single government portal, and according to Rosstat, competition in public procurement tenders has increased (average number of bidders in electronic 

auctions increased from seven in 2007 to 26 in 2009).

44. Ibid. 

The judiciary is viewed as weak despite some improvements in recent years. Some high profile court cases have 

caused international concern about the full independence of 

the criminal justice system. However, according to surveys 

by the Levada Center, citizens’ confidence in the courts rose 

from 45 percent in 2006 to 64 percent in 2010. According 

to the latest Business Environment and Enterprise Performance Survey (BEEPS), the share of firms using the legal 

system increased from 27 percent in 2005 to 43 percent in 

2008, while only 3 percent of the companies surveyed reported corrupt practices. Two areas stand out for continued 

state attention in the judicial system: (i) continuing the trend 

towards greater transparency and efficiency in the functioning of courts (through investments in information technology and disseminating information to citizens on judicial decisions and the functioning of courts), and (ii) strengthening 

the enforcement of judicial and administrative procedures 

through the bailiff system, ensuring efficiency, transparency 

and integrity.

45. OECD. Economic Surveys: Russian Federation 2006, 2006.

46. World Bank, Country Partnership Strategy (CPS) for the 

Russian Federation, p. 52.

47. Private freehold property was criminalized throughout 

the Soviet period. Leasehold property was briefly permitted from 

1921 to 1929 under the New Economic Policy for businesses employing 20 or fewer workers, and then reintroduced with few restrictions under Gorbachev after 1986.

48. Rosefielde and Hedlund, Russia Since 1980.

49. “In the period since 2005, the per capita GDP of Russia 

doubled to approximately $10,500 in 2010.” The year 2008 is used 

as the endpoint in the text because Russian per capita GDP was 
65

lower in 2010 than 2008. World Bank, Country Partnership Strategy 

(CPS) for the Russian Federation, p. 47.

50. West Europe includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden, 

Switzerland, and the United Kingdom. GDP for West Europe 

and Russia is calculated in 1990 international Geary-Khamis dollars. See Angus Maddison, Historical Statistics, Groningen, The 

Netherlands: Groningen Growth and Development Centre, available from www.ggdc.net/maddison/Historical_Statistics/horizontalfile_03-2009.xls.

51. Steven Rosefielde, Efficiency and The Economic Recovery

Potential of Russia, Surrey, UK: Ashgate, 1998, Table S1, p. xxii; 

CIA, Handbook of International Economic Statistics, CPAS92-10005, 

September 1992. Russian per capita income valued in 1991 dollars was 15,631. The inverse of GDP deflator 1991-2011 is 1.5. 

Russian 1989 GDP in 2011 U.S. dollar prices is $23,546. See www.

economagic.com/em-cgi/data.exe/fedstl/gdpdef+1.

52. Russia-CIA World Factbook, 2012.

53. John Williamson, “Democracy and the ‘Washington Consensus’,” World Development, Vol. 21, No. 8, 1993, pp. 1329–1336.

54. Carmen Reinhart and Kenneth Rogoff, This Time is Different: Eight Centuries of Financial Folly, Princeton, NJ: Princeton 

University Press, 2009.

55. This was an aspect of the notorious phenomenon of hidden inflation during the Soviet era.

56. Adam Smith, The Theory of Moral Sentiments, London, UK: 

A. Millar, 1759. His attitude reflected the values later called the 

protestant ethic and an enlightenment reverence for the righteousness of pure reason. Muscovite autocrats would have scoffed.

57. Adam Smith, Wealth of Nations, London, UK: W. Strahan 

and T. Cadell, 1776.

58. Stephen Blank, “Is Russia Riding to BP’s Rescue?” Huffington Post, October 25, 2010.
59. Steven Rosefielde, The Impossibility of Russian Economic Reform: Waiting for Godot, Carlisle, PA: U.S. Army War College, 2012.

60. Schroeder.
67

CHAPTER 3

ECONOMIC REFORM UNDER PUTIN 2.0:

WILL PETRODOLLARS SUFFICE 

TO KEEP THE SHIP AFLOAT?

Stefan Hedlund

During his brief stint as caretaker of the Kremlin, 

Dmitry Medvedev succeeded in inspiring a great deal 

of hope about a different future for Russia. He went 

on record saying most of the right things, and he demonstrated his modernity by doing so in the country’s 

new-fangled social media. If nothing else, Medvedev 

will surely be remembered as Russia’s first genuine 

Twitter president. 

With Vladimir Putin back in the Kremlin, however, a distinct sense of familiarity is again beginning to 

spread. Medvedev is fading into the background and 

may soon have dissolved completely, akin to a lump 

of sugar thrown into a cup of coffee. It is tempting to 

suggest that the impact of his one-term presidency 

will turn out to have been no more profound than that 

of his Twitter postings. But would that be correct?

The true test of the quality of Medvedev’s legacy 

will rest in whether the dreams and visions that were 

associated with his modernizing rhetoric have left a 

mark or will evaporate together with their originator. 

More specifically, we may ask if Russia under Putin 

2.0 will turn out to be a different place from that of 

Putin 1.0. Many of those who took part in the wave of 

open protests that followed in the wake of the rigged 

December 2011 Duma election certainly hoped and 

perhaps still believe so. 
68

One of the most eloquent exponents of a belief in 

the possibility of change is Aleksei Navalnyi. Having 

emerged as a crusading young lawyer, he morphed 

from ubiquitous anti-corruption blogger to opposition leader and to a public relations nightmare for the 

Kremlin. His famed branding of United Russia, Putin’s erstwhile “party of power,” as a “party of crooks 

and thieves” quickly went viral and may have utterly 

destroyed the brand as such.1

 Navalnyi was arrested 

on December 5, the day after the Duma election. When 

subsequently released from a Moscow police station, 

he told a waiting crowd of supporters that, “We were 

arrested for 15 days in one country and released in 

another one.”2

Cynics may smile and adopt a condescending attitude. They may admit that the uproar that followed in 

the wake of the election was real enough. It was novel, 

both in its reliance on social media, such as Twitter 

and Live Journal, and in bringing large sections of the 

country’s urban elites into the streets. There can be 

little doubt that it did send shockwaves through the 

country’s ruling elite. But can this really be construed 

as change, or even as a trigger for change, in any sense 

that would entail a revival of much-needed economic 

and political reform? 

At a casual glance, the answer to this question will 

have to be negative. For all their fervent cyber activity 

and for all their loud claims that Putin must leave, the 

protesters in the end could not prevent him from winning a landslide first-round election victory. Although 

the initial wave of calls for honest elections did result 

in demotion and reassignment for Vladislav Surkov, 

the grey cardinal of the Kremlin, his creation of the 

brand and practice of “managed democracy” did 

prove its resilience. 
69

Putin’s return to the Kremlin may not have been 

accompanied by the anticipated fanfare. But it did 

provide yet another firm demonstration that supreme 

power in Russia will be undivided and unaccountable. With Medvedev humiliated, previously heated 

speculation over who was really in charge within the 

“tandem” came to an abrupt halt. Fearful of consequences for their own positions and for their associated revenue streams, members of the praetorian 

guards scrambled to adjust accordingly. 

The bottom line is that predictability has returned. 

The next scheduled Duma election will not be held 

until 2016, and Vladimir Putin may be expected to remain as president at least until 2018. The prospects for 

a return any time soon to the path of radical reform 

that marked Putin’s first term as president, in consequence, do not look good.

At the height of the rallies, members of the liberal 

opposition voiced hopes for early elections to a new 

Duma, which might re-energize the reform process. 

But it is hard to see how that can be arranged, within 

the rules of the constitution. The president does have 

a right to dissolve the Duma, but only in cases where 

his nominee for prime minister has been rejected three 

times by a majority of the deputies or where there has 

been a vote of no confidence in the government.3

 In 

either case, this would require Duma deputies to vote 

for an outcome where many presumably would lose 

their seats and associated perks. This does not seem 

very likely to occur. An alternative could be to simply 

invalidate the results of the December election. But 

since this would require admission by the president 

that widespread fraud had, indeed, taken place, it 

would seem to be even less likely. Assuming that all 

have been aware of these basic realities, the clamoring 
70

for early elections may be reduced to simple posturing 

and publicity seeking.

All of this is certainly true, and the tentative conclusions, as just mentioned, are not encouraging. A return to much-prized political stability may well turn 

out to entail stagnation, perhaps even to the point 

of fossilization, recalling the latter part of Leonid 

Brezhnev’s rule. The reason why this must be taken 

so seriously derives from the fact that, in today’s globalized economy, even standing still is tantamount 

to sinking. 

A continued inflow of massive earnings from energy exports may keep the federal budget in order and 

Russia free of sovereign debt, but this constitutes little 

more than artificial life support. The sheer weight of 

evidence regarding what needs to be done in order to 

breathe new life into the Russian economy is simply 

overwhelming. If the price of oil should take another 

steep nosedive, then the consequences would be dire, 

indeed. The sharp decline that began in March 2012 

provided a warning of what may come.

This said, we cannot ignore that something has 

snapped and that the regime will have to adapt. The 

immediate response by then President Medvedev to 

the initial outburst of anger from below was to announce that important political reform was in the 

making. Specific items on the list concerned legislation to facilitate registration of political parties and a 

return to direct elections of governors.4

 (These promises have since been acted upon, albeit with varying 

speed, determination, and dilution.) The question is 

what the implications of such changes in the formal 

rules of the game may be. 

Will this turn out to have been no more than new 

twists in a familiar old game with predictable out-
71

comes? Or, may it be construed as evidence that Putin 

2.0 will, indeed, represent something qualitatively different from Putin 1.0? The Kremlin may certainly be 

suspected of being less than sincere in its proclaimed 

ambition to allow more political freedom. Yet the genie has now been let out of the bottle, and it may prove 

hard to get back in again. So, are we then looking at 

prospects for change that may be of consequence for 

the quality of governance and thus for the performance of the Russian economy? 

This question goes to the very heart of what theories on institutional change are designed to capture, 

namely, the contrast between changes in formal rules 

and changes in informal norms. While the former 

may be achieved by direct agency, the latter will come 

about only indirectly, and the interplay is of core importance. Changes in values, beliefs, and expectations 

may trigger changes in the formal rules and be triggered by such changes. For a good outcome to occur, 

there must be mutual support and reinforcement. 

If rules are made that deviate too far from underlying norms, then a counter reaction will follow. The 

same will hold if values, beliefs, and expectations 

evolve away from existing systems of formal rules. 

It is against this analytical background that we shall 

proceed to look at the prospects for Russian economic 

development under Putin 2.0. The argument will be 

built in five consecutive steps.

The first will take a closer look at the Medvedev interlude, probing for changes in underlying systems of 

informal norms that may turn out to have lasting importance. More specifically, we shall look at responses 

to the nature and sudden termination of the ruling 

tandem, at the possible emergence of elements of civil 

society in Russia, and at effects of the high-profile 
72

campaign against corruption. This will set the stage 

for questioning the inherent stability of the regime.

The second step aims to show just how vulnerable the Russian economy is to swings in hydrocarbon 

prices. It will focus on how mounting fears of discontent from below have caused the Russian government to engage in lavish fiscal spending and, in consequence, to abstain from using the recent period of 

high energy export revenues to rebuild precautionary 

reserve funds. This will be shown to have aggravated 

the inherent vulnerability of the country’s fiscal policy 

and foreign debt exposure to changes in energy prices.

The third step will approach the much-discussed 

question of imperative needs to undertake modernization of the Russian economy. It will outline why 

the challenge is so crucially important, discuss what 

it would take for a working solution to be found, and 

argue that, for all the huff and puff that emanated 

from the Medvedev Kremlin, the campaign in the end 

boiled down to little more than empty talk. This will 

provide important input for our concluding discussion on where the Russian economy may be headed.

The fourth step will argue that an important obstacle to change rests in the fact that the Russian 

economy has been made hostage to the fortunes of the 

energy complex. It will address the counterintuitive 

suggestion that resource-rich countries may be somehow “cursed” by those riches. It will show how the 

Putin regime has benefited both from an inflow of petrodollars, which has helped reduce debt and prop up 

the federal budget, and from being provided with an 

“energy weapon,” which may be wielded in support 

of claims to regain respect as a great power.

The fifth and final step will expand on the negative 

impact that the energy riches have had on the Russian 
73

economy. This discussion will move beyond the academic debate on the possible presence of a “resource 

curse” and focus instead on how inherent institutional 

problems have combined to produce a form of “Russian curse,” which is deeply rooted and rather distinctive. It will be seen to cast a long shadow over the 

prospects for serious reform to be implemented that 

may improve governance and thus promote both efficiency and much-needed modernization. Let us proceed now to look at the Medvedev interlude.

THE MEDVEDEV INTERLUDE

The main importance of the Medvedev presidency 

lies not so much in what was actually achieved, which 

was precious little, but rather in what was revealed. 

In retrospect, it may be tempting to conclude that it 

was all no more than a ruse. It was, arguably, a ploy 

devised by Putin to ensure that he could have his cake 

and eat it, too. Within the tandem, he could hold on 

to power while respecting the letter of the law, which 

prevented him from serving more than two consecutive terms as president. If we look simply at intentions, 

there would be an element of truth in this write-off. 

But if we turn to look also at consequences, matters 

are not so simple. 

The cohabitation of two political leaders at the highest level of power at first seemed to belie the deeplyrooted belief that power in Russia must be undivided 

and unaccountable. The country was suddenly ruled 

by two men with very different agendas and personalities. It appeared for a time to be an open question 

as who was really in charge. Those who so preferred 

could pin their hopes on pending changes in the direction of increased legality, decreased corruption, a 
74

more cooperative foreign policy, and a more favorable 

investment climate. Others could look to Putin for reassurance that nothing much would change. 

An important consequence of this deliberately introduced confusion was that widely different expectations were being formed. In some quarters, such 

expectations caused underlying liberal values and 

beliefs to be re-energized, in support of a hoped-for 

movement towards legality and accountability. It was 

the deep frustration of people who subsequently felt—

justifiably so—that they had been simply deluded that 

triggered the protest movement against Putin. The 

chickens were, quite simply, coming home to roost.

By far the most important single lesson to be 

learned from the Medvedev interlude concerns how 

a political system in general approaches questions 

of succession at the top. The essence of a democratic 

system is that incumbents may face the prospect of 

loss of office without fear. The mantra of the transitology literature has been that we may speak of consolidated democracy only after elections that have 

brought peaceful and orderly changes in government. 

In Russia, none of this has much, if any, relevance. The 

potential consequences of being voted out of high office have remained dire, ranging from loss of income 

and assets, to prosecution and incarceration, or even 

worse. Problems concerning succession at the top 

have consequently not been taken lightly.

Towards the end of Boris Yeltsin’s second term 

in office, health reasons alone made it clear that no 

amount of further manipulation could prolong his 

time in power. It also became obvious just how keen 

he was on finding a successor who could ensure his 

security. Having appointed and fired a number of 

prime ministers, who were deemed either to be too 
75

weak or not to be trusted, he finally settled on Putin. 

In keeping with the agreement, one of the latter’s very 

first acts in power was to provide his benefactor with 

immunity against prosecution.5

As Putin’s second term in power was, in turn, 

drawing to a close, considerations of security again 

came to the fore. Handing over the reins of power 

would be something of a gamble. There were distinct 

risks that new men in power might move to prosecute 

for alleged malfeasance during Putin’s time in St. Petersburg.6

 There was also the question of his alleged 

personal fortune of maybe $40 billion, to which he 

has no formal (official) ownership title.7

 A successor 

would have to be strong enough to provide protection but also loyal enough not to get ambitious on his 

own account.

There were two leading candidates for the post of 

successor: Dmitry Medvedev and Sergei Ivanov. The 

former had served with Putin in St. Petersburg, had 

no power base of his own, and could be relied upon 

to remain loyal. The other was well connected within 

the power structures and could clearly be trusted to 

remain strong. But would he also be able to resist the 

temptation of usurping power for himself? Putin’s 

choice of Medvedev turned out to be a good one. He 

did remain loyal, allowing his patron to ensure his 

own protection from behind the scenes. 

The bottom line is that, during his first two terms 

in power, Putin was successful in ensuring that all 

such formal institutions that might have served to 

provide accountability in government were drained 

of all real content. By the time he opted to retreat into 

the tandem, power had been made entirely personal. 

He could, in consequence, hand over the keys to the 

Kremlin without running the risk of either prosecu-
76

tion or expropriation. There was, however, also a price 

to be paid.

What Putin had achieved may be usefully contrasted against what James Madison once wrote about 

political factions, in his perhaps most classic contribution to The Federalist: “There are two methods of curing the mischiefs of faction: the one, by removing its 

causes; the other, by controlling its effects.” Noting 

that “liberty is to faction what air is to fire,” Madison 

clearly rules out the former option. All men cannot be 

made the same, nor would it be wise to suppress their 

right to express different points of view. The solution 

was seen to lie in the creation of a republican form 

of government that allows factions to be organized 

and to compete within the framework of established 

constitutional rules.8

Turning to Russia under Putin, factional struggles 

during the 1990s had threatened to literally tear the 

state apart. But the solution when Putin assumed power was not seen to lie in working to improve institutions, whereby passions and interests might have been 

articulated and vetted against each other in an orderly 

manner. The essence of Putinism instead would be a 

de facto suppression of all such formal mechanisms 

whereby discontent may be channeled and whereby 

conflicts may find an open and orderly resolution. In 

the absence of such mechanisms, mounting pressures 

of discontent, which will build up in any type of political system, will have to find other outlets. Open street 

protests such as the mass rallies that began shaking 

Moscow towards the end of 2011 constitute the most 

visible illustration. But, as we shall argue here, the 

threat of a hostile takeover of power from within is of 

greater concern. 
77

The second lesson to be drawn from the one-term 

Medvedev presidency concerns the associated question of the existence of civil society in Russia. By the 

time Medvedev moved into the Kremlin, conventional 

wisdom held that, during the first two terms of the 

Putin presidency, civil society had been simply beaten 

into submission. Subjects had been offered to engage 

in material self-enrichment, at the price of abstaining 

from any and all such forms of activity that are normally associated with a vibrant civil society. 

During Medvedev’s time in office, there were 

growing indications that some form of civil society 

might be returning to life. Yet, few, if any, were prepared for the mass mobilization that was to follow. 

The watershed arrived on September 24, 2011, when 

President Medvedev told a United Russia congress 

that he and Prime Minister Putin had agreed to simply 

swap jobs. Medvedev would step down, and Putin 

would run for the presidency. Accepting the nomination, Putin added insult to injury by saying that this 

was a decision the two had reached in 2007 but kept 

a secret.9 The sheer arrogance of it all apparently was 

too much for many to stomach.

What made the ensuing wave of protests so difficult for the elite to “manage” was that this time, the 

protesters were neither pensioners nor other vulnerable groups complaining about hardship. Those who 

took to the streets were those that had stood to gain 

the most from the economic upturn under Putin. They 

were the winners, and they were not showing due 

gratitude. They were, on the contrary, making demands for public goods, such as honest elections, that 

the elite simply could not deliver. They conducted 

their protests in a peaceful, nonprovocative manner. 

They could not be appeased with additional fiscal 
78

spending. Ordering the riot police to beat the capital’s 

cultural and entrepreneurial elite into pulp would 

have looked bad indeed.

The bewilderment of those in power was clearly 

manifested in Putin’s initial reactions, which ranged 

from attempting to blame then U.S. Secretary of State 

Hilary Clinton for having inspired the protests, to 

denigrating the protesters as “Bandar-logs,” the chattering monkey people in Rudyard Kipling’s Jungle 

Book, whose incoherent behavior causes them to be 

scorned by the rest of the jungle.10

These reactions were quite in line with Putin’s established way of badmouthing both foreign leaders 

and domestic opponents. But this time round, his demeanor was no longer viewed as a sign of strength. 

He was viewed instead as being utterly disconnected 

from reality. When Putin ran for re-election in 2004, 

his refusal to take part in public debates could be construed as the arrogance of power, of not condescending to even talk to his opponents. Now it was viewed 

as simple fear of having to answer pointed questions 

and perhaps even of being booed.11

It may certainly be argued that the Kremlin does 

not have any serious grounds for worry about the 

large protest rallies, or indeed about the vibrant activities that are taking place in various social media. 

There is little to indicate that Russia will experience 

rebellions from below that are similar in kind to the 

famed “Arab Spring” or even to the “color revolutions” that transformed Georgia in 2003 and Ukraine 

in 2004. As mentioned, the real cause for concern lies 

in a different direction: in a threat that emerges from 

within the elite.

In a comment on his own role as officially approved presidential candidate, billionaire Mikhail 
79

Prokhorov claimed that he abhorred the prospect of 

a revolution from below and remained hopeful that 

divisions within the elite would force the regime to 

accommodate at least some demands for reform: “I 

think that the liberal part of the elite is bigger and bigger from day to day, because I have a lot of calls from 

different levels, and they really express their support 

for my candidacy.”12

The importance of this observation lies in the fact 

that there may, indeed, be support from within the elite 

for proceeding with cautious reform. Some, like Russian political commentator Stanislav Belkovsky, have 

even suggested the advent of a second “perestroika.”13

The presumed reasons vary. Some may have developed genuine sympathies for the need to reform. Others may view reform as a simple necessity to avoid 

being swept away by a tidal wave of discontent from 

below. The bottom line is that formal changes in the 

rules may be expected. The challenge to the regime 

will be similar to that encountered during Putin’s first 

term as president: to allow some formal changes in 

the rules of the game to proceed while ensuring that 

such changes will not in any fundamental way alter 

the game as such. 

The third, and by far the most striking, lesson to 

be drawn from the Medvedev interlude is a direct 

corollary of the president’s ambition to appear as a 

champion of legality. By projecting an image of himself as a crusader against corruption, he provided an 

implicit carte blanche from the very top for striking 

revelations. With the president taking the lead in castigating corruption, hard line officials were unable 

to crack down against people like Aleksei Navalnyi,

who made a name for himself as a fearless anti-corruption blogger. Nor was it possible to prevent other 
80

members of officialdom from speaking out of school. 

On the contrary, doing so may even have been perceived by some as a sign of loyalty. Under a different 

president, one would, for example, not have expected 

to hear Russia’s top military prosecutor, Sergei Fridinsky, tell the Rossiyskaya Gazeta that at least 20 percent 

of the defense budget is being siphoned off every year 

via various forms of fraud.14

The main importance of these revelations lies not 

so much in the revelations as such, as in what they 

say about the political system that Putin has built. His 

regime has often been accused of being authoritarian, 

and parallels have been drawn both to the Soviet order and to the autocracy of the Russian imperial order. This is at least partly misleading. It is true that the 

Kremlin does project an authoritarian image and that 

there have been cases of conduct that recall memories 

out of Russia’s dark past. One need only mention here 

the destruction of Yukos; the kangaroo trials against 

its Chief Executive Officer Mikhail Khodorkovsky; the 

spate of unresolved killings of journalists, notably but 

not exclusively Anna Politkovskaya; and the beating 

to death in a prison cell of the promising young lawyer, Sergei Magnitsky.

Yet, if Putin’s regime had, indeed, been truly authoritarian, it would have had little trouble dealing 

with at least the most egregious forms of self-enrichment and diversion of funds that are so clearly detrimental to the interests of the state. To be specific, it is 

hard to see how an authoritarian agenda of rearmament and force projection can be made to agree, with 

allowing a fifth and possibly more of the defense budget to be simply stolen every year.

There has to be a reason, and that reason, we shall 

argue, goes to the very heart of the political order of 
81

Putinism. Assuming that the Kremlin remains in firm 

control of the security services, it should have little 

problem tracking down the main culprits that have 

been robbing the state blind. It is, indeed, very likely 

that extensive documentation has already been collected. But no serious action is taken, and for good 

reason. Allowing members of the elite to tap into the 

resources of the state and to move the loot into safe 

havens abroad has become the linchpin of the implicit 

contract between the ruler and his boyars. Cracking 

down might trigger a veritable civil war within and 

among the elites, and, in the end, perhaps even a hostile takeover of power.

We shall have reason to return to the systemic 

implications of these observations in our concluding 

discussion on the prospects for reform. Here we shall 

proceed to look at how Russia was affected by and 

emerged out of the global financial crisis. This is done 

in order to emphasize the crucial role of hydrocarbon 

prices and the inherent weakness of the nonenergy 

sectors of the Russian economy.

GLOBAL FINANCIAL CRISIS

The global financial crisis struck Russia hard, albeit with some delay. During the fall of 2008, when the 

subprime mortgage crisis was sending shock waves 

through the global economy, Russia remained outwardly unperturbed. It was held, or at least pretended, that the crisis was U.S.-made and would have little 

impact on Russia. As late as at the World Economic 

Forum in Davos in early 2009, Minister of Finance 

Alexei Kudrin could still famously claim that Russia 

was “an island of stability.”15 Reality, however, was 

about to catch up. 
82

Over the first two terms of the Putin presidency, 

the Russian economy had grown by on average 7 percent per annum, and the federal budget had been kept 

solidly in the black. In 2008, Russian gross domestic 

product (GDP) was still growing at 5.2 percent, and 

the federal budget still turned in a surplus, corresponding to 4.1 percent of GDP. In 2009, Russian GDP 

contracted by 7.9 percent, and the federal budget recorded a deficit corresponding to 5.9 percent of GDP.16

The drastic nature of this transformation calls for three 

important observations to be made.

The first brings home just how prudent the Russian 

government had been in accumulating precautionary reserves while the going was still good. Central 

Bank foreign currency reserves peaked on August 8, 

2008, at $598.1 billion; and on September 1, the “rainy 

day” Reserve Fund reached its peak of $142.6 billion.17

When the budget swung into deficit and when calls 

were made on the Central Bank to provide crisis support, there was ample room for such intervention.

The second observation concerns how the crisis 

measures were formulated. There is broad consensus 

that the government implemented an anti-crisis program which, in the words of Pekka Sutela, “rightly 

earned accolades” from several international organizations: one “has to agree with the IMF [International 

Monetary Fund] and the World Bank’s assessment 

now that Russia’s anti-crisis policy was a major success overall: timely, consistent, and effective.”18 Closer 

inspection, however, will reveal that the authorities 

placed a heavy premium on measures that were clearly designed to preserve systemic stability. The main 

priority was to bail out the country’s highly leveraged 

oligarchs. This was done by the government, offering 

an immediate credit line allowing debts coming due 
83

to foreign banks to be paid. It was done by the Central Bank, spending about $100 billion of its reserves 

on market interventions to ensure a gradual devaluation of the ruble. While the first move offered wellconnected oligarchs to escape immediate margin calls, 

which might have pushed them into bankruptcy, the 

latter offered them ample time to convert rubles into 

dollars at favorable rates of exchange.

As Sutela puts it, the latter was tantamount to a de 

facto privatization of a good part of the nation’s foreign currency reserves.19 It was, however, also quite 

consistent with what Clifford Gaddy and Barry Ickes 

have presented as Putin’s “protection racket.”20 While 

the going was good, the oligarchs acted as loyal clients 

of Putin. When they fell on hard times, the patron had 

to live up to his part of the bargain, which was to offer protection. Although there was blatant favoritism 

involved, it cannot be denied that by saving banks and 

oligarchs, the regime also prevented a slide into mass 

unemployment and possible social unrest.

Our third, and by far most important, observation 

concerns the impact of the crisis on Russian prestige. 

During Yeltsin’s time in power, the Kremlin was 

becoming ever more insistent that Russia must be 

granted access to all those international “clubs” where 

other great powers regularly meet. A case in point 

was the G7 group of leading industrialized nations.21

Although Russia was far, indeed, from qualifying for 

membership on its economic merits, political considerations caused the others to occasionally grant Russia 

informal membership in an expanded G8.22 In effect, it 

meant that Russian delegates were welcome at cocktails and photo ops but not at closed discussions on 

matters of global economic policy.
84

At the outset of the first Putin presidency, there 

emerged another, and to the Russian elite, far more 

palatable frame of reference: the BRICs. Introduced by 

Goldman Sachs analyst Jim O’Neill in 2001, this catchy 

acronym denoted a group of fast-growing economies 

that included Brazil, Russia, India, and China. At their 

first formal summit meeting, held in the Russian city 

of Yekaterinburg on June 16, 2009, the leaders of the 

four BRIC economies had much to say about the importance of their group as a whole, as an emerging 

challenge to the established world economic order, 

and about their prospects to take a joint lead in achieving global economic recovery.

Remaining within the world of finance, it was striking to note how quickly Russia’s financial markets 

rebounded. Investors could derive pleasure from the 

fact that, over 2009, the Russian Trading System (RTS) 

index of the Moscow Stock Exchange rose from 632 

to 1,445, with market capitalization rising from $55.3 

to $146.7 billion. The rise would continue over 2010, 

albeit at a slower pace, with the index ending the year 

at 1,770 and market capitalization at $186.6 billion.23

Having looked set for extinction “as a class” in 

2009, in 2010, Russia’s famed oligarchs would be back 

in the game. Or, at least most of them would. According to Forbes, in 2010, the number of Russian billionaires had risen to 62 from merely 32 in 2009, and their 

joint worth had more than doubled, from $142 billion to $297 billion.24 The market rebound was clearly 

driven by a rapid rise in the price of oil. Over 2009, 

the price of Urals crude, which is Russia’s main export blend, increased from $34.20 to $72.08 per barrel, and it continued climbing in 2010, ending the year 

at $90.94 per barrel.25 The immediate impact was felt 

on the current account, where hydrocarbon revenues 
85

are of paramount importance in generating a muchneeded surplus. Having dropped from $103.5 billion 

in 2008 to a mere $48.6 billion in 2009, the surplus rose 

to $70.6 billion in 2010.26 Given that every $1 change 

in the price per barrel is generally estimated to translate into a change of about $2 billion in federal budget 

revenue, the rebound also had a profound impact on 

federal budget performance. 

All told, we may conclude that what rode to the 

rescue for the Russian economy was a broad recovery 

on global energy markets. The surprising speed of the 

turnaround would be reflected also in a drastic transformation of Russian moods, from a deep sense of crisis in the midst of 2009 to renewed complacency by the 

end of 2010. It may be useful to recollect just how deep 

it was believed at the time that Russia would sink.

During the first half of 2009, the Reserve Fund was 

being depleted at such a rate that in April, Finance 

Minister Kudrin predicted that it would be “practically exhausted” in 2010.27 By the end of July, the government announced that it was expecting federal budget 

deficits corresponding to 9.4 percent of GDP for 2009, 

to 7.5 percent for 2010, and to 4.3 percent for 2011.28 In 

order to cover the shortfall, sales of Eurobonds of up 

to $20 billion was envisioned for 2010 alone, and more 

was expected to follow.29

As it turned out, the budget deficit for 2009 stopped 

at 5.9 percent of GDP. For 2010, the number was kept 

to 4.1 percent, and the federal budget actually ended 

with a surplus of 0.8 percent for 2011.30 In tandem 

with this improvement in budget performance, reserves also stabilized and began rising again. From a 

low point of $383.8 billion at the end of April 2009, 

by the end of August 2011, Central Bank reserves had 

reached $545.0 billion, closing in on the record high 
86

of $598.1 billion that was achieved on August 8, 2008. 

The number has since remained at or slightly above 

$500 billion.31 The Reserve Fund, meanwhile, continued to shrink, but at an orderly pace, from $60.5 billion at the outset of 2010, to $25.4 billion at the outset 

of 2011. In February 2012, a large one-time deposit out 

of 2011 energy earnings caused it to rise again, to $61.4 

billion.32 As the crisis in the euro zone deepened, the 

world of finance came up with another suggestive acronym: PIIGS, denoting the crisis-ridden euro economies of Portugal, Ireland, Italy, Greece, and Spain. If 

compared to the members of this sordid group, Russia 

looked positively inspiring. With a debt-to-GDP ratio 

of less than 10 percent, Russia looked good, even if 

compared to the northern group of less crisis-ridden 

European Union (EU) member states. 

Following the downgrade of U.S. sovereign debt 

in August 2011, which was triggered by congressional 

gridlock over the debt ceiling, it was even becoming 

questionable how much longer the EU and the United 

States would remain as global economic leaders and 

role models. It was surely tempting to join O’Neill in 

wondering how long it would take investors to “accept that the growth markets are actually fiscally more 

prudent and financially in better shape than in the 

Western world.”33

If, however, Russia were to be compared to the 

other members of what is now known as the BRICS 

following the April 2011 inclusion into the group 

of South Africa, then a completely different picture 

emerges. During 2009, the main year of the crisis, 

both China and India maintained solid growth, with 

GDP increasing by, respectively, 9.1 and 5.7 percent, 

and Brazil just barely managed to hold the line, with 

a drop of merely 0.2 percent.34 In a provocative commentary, Dmitry Trenin concluded that:
87

Moscow ought to forget about trying to undermine 

America’s global hegemony and concentrate instead 

on retaining its place in the ‘top league’ of world powers. China, India, and Brazil are candidates for membership in it. Russia is a candidate for exit.35

In a speech at a Global Policy Forum in the Russian city Yaroslavl in early September 2011, economist 

Paul Krugman, winner of the 2008 Nobel Prize in economics, had even harsher words to offer: “Russia really doesn’t belong in the group. It’s a petro-economy 

in terms of world trade.” While Krugman notes that 

Russia does have potential to become a part of the 

group, at the moment it is not even close. India and 

China come across as labor-abundant, rapid-growth 

economies, and although Brazil relies on raw-materials oriented exports, it does have a strong manufacturing sector: “Russia doesn’t fit at all.”36

Keeping in mind Krugman’s observation that Russia does at least have the potential to become a highgrowth economy based on drivers other than energy 

exports, let us proceed now to look at how that potential has been mismanaged, at how empty talk of 

modernization has come to serve as a substitute for 

serious action.

EMPTY TALK OF MODERNIZATION

Looking beyond financial markets and macroeconomic stabilization, we may ask what lessons the Russian leadership was ready and able to learn from the 

financial crisis. Did it absorb the implications of depending so heavily on the global market for hydrocarbons? Did it realize the imperative need to diversify 

away from this dependence and to build precaution-
88

ary reserves while the flow of petrodollars remained 

high? Or, was it, on the contrary, bent on simply digging in, on reaping the benefits while possible and 

deferring any type of change that might threaten 

systemic stability? The latter would very clearly turn 

out to be the case, much to the detriment of the future 

development of the Russian economy and of Russian 

society at large.

The main challenge to Russian economic policymaking surely remains that of securing global economic competitiveness. Given the tremendous brain 

power that was housed in the old Soviet “military 

industrial complex” and the fact that Russia on the 

whole has a highly skilled and educated work force, 

it is rather sad to note that the country presently has 

an almost zero presence on global high-tech markets. 

The contrast against China and India in this regard is 

highly sobering.37

There can be little question that those in power are 

well aware of the problem. While there has been considerable complacency about swings in capital flows, 

the very real risk of being relegated to the rather ignominious status as a mere raw materials appendix 

to the developed nations, notably including China, 

has been taken very seriously. The need to modernize 

was, in consequence, to become something of a mantra or a hallmark of the Medvedev presidency. 

In a much cited article titled “Go, Russia!” published in September 2009, President Medvedev was 

quite frank: “Should a primitive economy based on 

raw materials and endemic corruption accompany us 

into the future?” Making his case for the need to modernize, he spoke about a “humiliating dependence on 

raw materials,” about how “finished goods produced 

in Russia are largely plagued by their extremely low 
89

competitiveness,” and about the need to stamp out 

“bribery, theft, intellectual and spiritual laziness, and 

drunkenness.”38

It was a powerful statement, which did inspire 

hope for serious action to follow. There also did seem 

to be an awareness of what would need to be done. In 

a major speech just before he was elected president, 

Medvedev had outlined what would become the main 

priorities of his presidency. Advancing a long list of 

priorities, he emphasized that the road to modernity 

must be paved with the “four I’s” of innovation, institutions, infrastructure, and investment.39 If we ignore 

for the moment the rather obvious need to upgrade 

the country’s seriously dilapidated infrastructure, the 

key to understanding Russia’s future may be seen to 

lie in the interplay between the remaining three.

At the face of it, it may all seem so very simple. 

Good institutions will promote increased investment, 

which in turn will promote innovation and global integration. But the chain works equally well in the opposite direction: bad institutions will depress investment 

which in turn will hamper innovation and lead to isolation. The question of modernization must be viewed 

against precisely this background. It is not sufficient 

that Russia has come to look like a modern society. 

It is true that the townscapes of major cities like Moscow and St. Petersburg are presently very similar to 

those of other big cities around the world. The sheer 

density of very up-market shopping gallerias may be 

as high as in any other big metropolis. But this is all 

largely deceptive. 

The core question concerns how decisions are 

made behind the modern façades. Are decisionmakers confident that legal and economic institutions are 

of sufficient quality to ensure that investment will 
90

yield adequate return? Do they feel safe from predation by interests protected by the government, or 

indeed by the government itself? If we look at how 

little is being achieved despite the massive inflow of 

revenues from hydrocarbon exports, the answer to the 

latter questions must be firmly negative. 

For lack of a better measure, we shall argue that the 

share of fixed capital investment in GDP constitutes 

a good predictor of the prospects for future growth 

and technological change. According to World Bank 

numbers for 2010, that share was 45 percent (and rising) for China and 22 percent (stagnant) for Russia.40

If, moreover, we were to take into account that investment goods in the Russian economy are predominantly bought from monopoly producers charging inflated 

prices, the share of investment in Russian GDP, measured at world market prices, would drop to below 

10 percent.41 The reasons are as simple as they are 

troublesome.

In the context of an economy where contracts and 

property rights are shaky at best, where government is 

unaccountable and prone to discretionary imposition 

of what Clifford Gaddy and Barry Ickes have referred 

to as “informal taxes,”42 and where members of the 

bureaucracy are always on the prowl for extortionary 

bribes, the rational strategy will be one of short-term 

spot-market trading and of ensuring that profits and 

capital flows are kept well below the radar screens of 

predatory government agencies. In addition to depressing the overall level of fixed capital investment, 

this environment will also give rise to what has come 

to be known as “round tripping,” i.e., that a substantial share of capital flowing into and out of Russia is 

made up of Russian capital leaving and returning, following a brief stay in some foreign account. 
91

The importance of this latter phenomenon may be 

reflected in the fact that Cyprus tends to be among 

the top foreign investors in the Russian economy.43 It 

is also significant that single events of a mainly political nature have left big marks in the charts, such as 

when Rosneft and Gazprom purchased Yukos assets 

in the first half of 2007 by allegedly securing foreign 

credits of, respectively, $25.1 billion and $5.8 billion.44

Much of the heavy inflow of capital that was recorded 

in 2007 could also be explained by Gazprom Netherlands investing to buy out Shell from Sakhalin. From 

a perspective of modernization and global integration, the latter should probably be counted with a 

negative sign.

The reason why all of this is so important rests in 

highlighting the bogus nature of capital flows to and 

from Russia. Given that “round tripping” capital will 

be logged as capital flight on departure and as foreign 

direct investment (FDI) on arrival, it follows that both 

these flows will be greatly inflated in importance. 

While the numbers as such may be correct, they will 

generate a warped understanding of Russia’s integration into the global economy. What the Russian economy so desperately needs is technology and management skills that may promote serious modernization. 

The hallmark of “true” FDI is that it embodies precisely these contributions. Returning Russian money 

does not. 

Numerous reasons may be advanced to explain 

why Russian actors engage in the practice of “round 

tripping.” Ranging from tax evasion to money laundering and to outright criminal activity, they all have 

one feature in common: investors prefer to keep their 

activities out of sight of potential predators. This may 

be taken as firm evidence in support of the general 
92

understanding that the “climate” for productive investment in the Russian economy has come to be so 

widely perceived as being simply appalling. 

Financial market analysts have routinely advanced 

numbers on what the capitalization of the Moscow 

Stock Exchange would have been if Russia had been 

judged on its purely economic merits. An excellent illustration is that of Gazprom. In 2000, it had a market 

value of $13.8 billion, which was tiny compared to 

ExxonMobil ($299 billion), Shell ($121 billion) or even 

Texaco ($38 billion). In a suggestive comparison from 

the time by Bill Browder of Hermitage Capital Management, if Gazprom had been optimistically valued 

at the same level as Exxon per barrel of hydrocarbon 

reserves, it would have been worth $1.8 trillion, or 

132 times the current market price. The government’s 

stake would then have been worth $698 billion, or 4.6 

times the entire Russian national debt.45

In addition to the discount applied by markets to 

Russian stock, simply because it is Russian, we may 

add that the role of the stock market in the Russian 

economy has been set in decline. In the run-up to the 

2012 presidential election, Dmitry Pankin, head of the 

Federal Service for Financial Markets, bemoaned the 

poverty of financial markets in Russia. The market 

capitalization of the stock market, which used to be 

100 percent of GDP, had fallen to less than 50 percent 

of GDP. Domestic initial public offerings in 2010 were 

minuscule at 0.1 percent of GDP, and the volume of 

corporate bonds was extremely small, amounting to 

only 6 percent of GDP. Mutual funds, which are so 

important in mature economies, barely existed at 0.3 

percent of GDP. The causes of this dearth of financial 

markets are, according to Pankin, to be found in poor 

law enforcement and judicial services. His verdict is 
93

not a happy one: “The road to render Moscow a financial center is very long.”46

What makes it so hard to inspire confidence in 

investors is that the Russian government routinely 

engages in forms of behavior that cause investors to 

demand a very large discount. Although admittedly 

extreme, the campaign to destroy Yukos Oil has often 

been advanced as an illustration of the price that Russia is forced to pay for the behavior of its government. 

A more recent illustration of the same concerns the 

tragic case of Sergei Magnitsky, a promising young 

Russian lawyer who was employed by Browder’s 

Hermitage Investment fund. In November 2009, he 

was battered to death in police custody. His gruesome 

fate has become an international issue of major proportions, and his friends, led by Browder, have even 

succeeded in persuading President Barack Obama to 

impose restrictions on a number of officials implicated 

in his death.47 At the 2012 World Economic Forum in 

Davos, Browder took the opportunity to ask why the 

guilty parties were not being prosecuted. 

In the pointed words of journalist Gideon Rachman, blogging from the event for the Financial Times, 

the response from Russian Deputy Prime Minister 

Igor Shuvalov was (presumably) meant to sound 

reasonable and reassuring: “He described the case as 

‘horrendous’ and said that some people had already 

lost their jobs and been charged over it.” But it was 

very difficult to get to the bottom of the case, “because 

the ‘system’ was protecting some guilty people.” The 

clear implication was that nothing would happen. 

Most importantly, Rachman reports having been told 

by one participant that based on Shuvalov’s answer 

alone, he had decided not to proceed with a big potential investment in Russia.48 It was somehow symptom-
94

atic of this general atmosphere of “untouchables” that, 

towards the end of 2010, while Judge Victor Danilikin 

was busy reading the 250-page verdict in the second 

“kangaroo” trial of Mikhail Khodorkovsky, Medvedev was addressing a business council on modernization, bemoaning the fact that so few Russian companies had opted to issue equity during the year: “Part 

of the problem, of course, is our investment climate, 

which is bad. Very bad.”49

The only tangible measure that was taken during 

Medvedev’s time in the Kremlin, in an effort to make 

up for Russia’s lagging position in the sphere of global 

high-tech development, was the creation of a technopark in the Moscow region town of Skolkovo. Designed to become a Russian version of the American 

Silicon Valley, the hype around this project has been 

intense. Substantial efforts have been made to attract 

companies, foreign as well as domestic, and many 

have responded, at least in name. President Medvedev also made a point of being filmed visiting the real 

Silicon Valley, where he could tout his new iPad and 

meet all those brilliant young Russians who prefer to 

pursue their ventures outside Russia.

For all its rhetorical efforts, it remains questionable 

if the Russian regime is capable of understanding that 

the real Silicon Valley is not about geography. It is 

about a state of mind, one, moreover, that is anathema 

to everything that Putinism has stood for. Talented 

young Russians are responding to this realization by 

voting with their feet. According to numbers released 

by the Federal Audit Chamber in February 2011, 

about 1.25 million Russians, many of whom likely 

were young entrepreneurs, had emigrated over the 

past 3 years.50
95

An oft-cited case in point is that of Andre Geim, 

a brilliant young Russian-born scientist, now residing 

in Manchester, England, with a Dutch passport. Following the announcement that he and his collaborator Konstantin Novoselov had won the Nobel Prize in 

Physics for 2010, it was immediately announced that 

the two would be invited by the Skolkovo leadership 

to join the venture. This was an offer they had little 

problem refusing, claiming that: 

the Kremlin could throw money at science, but research would still be stymied by corruption, red tape 

and a lack of the vital international teams and facilities 

needed to engage in groundbreaking work.

 When asked specifically by a Russian journalist 

what it would take for him to return, Geim responded 

curtly: “Reincarnation.”51

Let us turn now to the core question of how it can 

be that a country that is simply awash in theoretically 

investable funds, and that has such an impressive pool 

of talent to draw on, succeeds in achieving so little. 

The first part of the answer calls for a closer look at 

the source of the financial wealth, i.e., the country’s 

energy complex.

HOSTAGE TO THE ENERGY COMPLEX

The rise to power of Putin was intimately intertwined with a spectacular rise in income from hydrocarbon exports. In the wake of the meltdown on the 

country’s financial markets in August 1998, the prevailing sentiment was doom and gloom. Most of 1999 

was marked by expectations that it would take a very 

long time for Russia to recover. But behind the scenes, 
96

a powerful recovery was under way. A massive devaluation of the ruble had caused imports to plummet, making room for domestic producers with spare 

capacity to respond rapidly. During the second half of 

1999, the Russian economy was already expanding at 

double digits.52

When Putin moved into the Kremlin following 

his landslide election victory in March 2000, the general sentiments about the Russian economy remained 

grim. Then the hydrocarbon cavalry rode to the rescue, helping boost the image of Putin as an efficient 

economic manager. The price of Urals crude had bottomed at $8.73 per barrel on December 4, 1998. When 

Yeltsin resigned at the end of 1999, it was still at $24.71. 

By the time of Medvedev’s inauguration in May 2008, 

it had risen to $120.01.53 It was still a couple of months 

shy of its peak. The spike in the price of oil, moreover, 

was only part of the story. Putin’s image was further 

enhanced by the fact that both prices and volumes 

were rising in tandem, which is unusual indeed.

Due to the general dislocation of the 1990s, Russian oil production had slumped from a high of 11.48 

million barrels per day (bpd) in 1987 to an annual 

average of around 6 million bpd. In 2000, it was still 

at no more than 6.54 million bpd. Then output began 

to climb, driven by improved efficiency in operations 

by the privatized Russian oil companies. Much was 

for short-term gain, “creaming” reservoirs that had 

been neglected during the Yeltsin era. But it did bring 

a rise in output. By 2008, when Putin moved out of 

the Kremlin, Russian oil production had risen by more 

than half, to 9.88 million bpd.54 In the latter year, Russia was tied with Saudi Arabia for the role as the largest producer of oil in the world. 
97

It was the combination of these two trends that 

drove the transformation of the Russian economy. 

As outlined previously, it generated a huge current 

account surplus, allowed foreign debt to be almost 

eliminated, and made room for precautionary reserves to be built within the federal budget. By the 

time the global financial crisis struck, Russia had a 

most inspiring track record of successful fiscal conservatism. But the hydrocarbon bonanza also had a dark 

side, one that would taint the image of Russia as a 

reliable partner.

As the Russian energy complex began rising in 

prominence, accounting for about two-thirds of exports and half of federal budget revenue, the Kremlin found that it could be of use not only in achieving 

macroeconomic stability. The export of gas in particular offered the opportunity of wielding an “energy 

weapon.” At the outset of Putin’s presidency, Russia 

was generally viewed as an economic basket case and 

as politically irrelevant. As the energy riches caused 

Russian confidence to rise, foreign imagery was also 

being transformed. Pictures of an emerging “energy 

superpower” were projected.55 Harkening back to the 

days of Ronald Reagan and the Cold War, warnings 

were again issued to European nations about the dangers inherent in becoming reliant on Russian gas.56

Even the specter of a resumption of the Cold War 

itself was brought back.57

Barring the Cold War rhetoric, which is so wide of 

the mark as to be simply ludicrous, there were serious 

grounds for worry. The reasons related mainly, if not 

exclusively, to Russian pipeline policy and to the export of gas. Oil has been important to Russia as a revenue source, but oil is fungible. It can be transported in 

many different ways, and it can be bought and sold on 
98

spot markets around the world. As amply evidenced 

by the flamboyant but essentially empty rhetoric of 

Venezuelan President Hugo Chavez, threats of ceasing oil deliveries carry little weight unless backed by 

a large cartel. 

Gas is very different. To the extent that gas is 

transported via pipeline, which has long been the predominant mode, the two sides will be locked into mutual dependence, and there can be no serious talk of a 

global market for gas. The arrival of liquid natural gas 

(LNG) and shale gas is transforming this picture, but 

it has had very little impact on Russian policymaking 

to date. Close to 100 percent of Russian export of gas 

goes to Europe and to neighboring Commonwealth 

of Independent States (CIS), and it is all via pipeline. 

There is some gas being exported from Sakhalin as 

LNG, but, for the present purpose, it may be safely 

ignored. The evolution of Russian gas export policy 

during the first two terms of the Putin presidency was 

marked by three important features, all of which gave 

rise to serious conflict. 

The first concern is that undertaking a transition 

from central economic planning to market economy 

entailed a drastic break with the old practice of heavily subsidized prices on domestic energy consumption. 

For political reasons, the Russian government made 

sure that harmonizing domestic gas prices would proceed slowly—so slowly, in fact, that the process still 

remains to be completed. For national gas giant Gazprom, this implied that losses on the domestic market 

had to be compensated via profits on foreign markets. 

It offered a great deal of leeway in discriminating between different foreign customers. While countries 

that were deemed as friendly to the Kremlin would see 

their prices rise slowly, those considered less friendly 
99

could be slapped with drastic increases. Conflicts over 

such price hikes could also be laced with supply shutoffs, all of which combined to give the Kremlin an 

image as an energy bully.

The second and equally contentious area of conflict derives from the fact that Russia inherited a gas 

pipeline infrastructure that transports gas to Europe 

across territories that are now independent states, 

mainly Ukraine and Belarus. As Gazprom got locked 

into pricing conflicts with such transit states, it rapidly discovered that its own highly lucrative export 

to the EU could be held hostage. Deliveries of gas to 

Ukraine could, for example, not be shut down without also shutting down deliveries to EU member 

states. The conclusion that the transit states must 

be sidelined was done by building bypass pipelines 

such as the Nord Stream, which already transports 

gas directly from Vyborg in Russia to Greifswald in 

Germany, and the South Stream, which is to transport 

gas from the Caspian Basin via the Black Sea to southeastern Europe. Both Poland and the Baltic states responded vehemently to what they viewed as a project 

designed to shut down their energy supplies without 

disrupting the flow to Germany.

The third and potentially most serious area of 

conflict is a form of collateral damage. When pricing 

conflicts between Gazprom and Ukraine led to major 

supply shutoffs in 2006 and again in 2009, several EU 

member states found that their supplies were also shut 

off, causing them to freeze in the dead of winter. Although ambitions were not to take sides on who was 

mainly to blame, Moscow or Kiev, it was inevitable 

that the reputation of Gazprom, and by implication 

that of the Kremlin, as a reliable partner and supplier 

suffered a great deal of damage. This fed into ongoing 
100

European ambitions to formulate a common energy 

policy based on competition and diversification of 

the sources of EU energy imports. The “third energy 

package” introduced explicit demands for ownership 

“unbundling,” i.e., that Gazprom must divest itself of 

its pipeline assets. 

As Russia began to profit from the rapid increase 

in earnings from hydrocarbon exports, another and 

more academically slanted issue came to the fore: 

“Dutch disease” or a possible “resource curse.” The 

“Dutch disease” is a standard term in economics, once 

coined by The Economist to describe the consequences 

for the Dutch economy of opening up the Groeningen 

gas field in the North Sea. In short, it says that a rapid 

rise in commodity exports causes upward pressure on 

the exchange rate, which in turn stimulates imports 

and makes life harder for noncommodity exporters. 

As domestic resources are drawn into the commodity 

sector, other sectors suffer compounded damage, and 

the final outcome will be a seriously warped economic 

structure. The Netherlands in the end did not fall prey 

to this disease, nor are there any signs that Russia has 

suffered more than mild symptoms of the same. 

A more complex set of consequences of the broader 

“resource curse” hold that economies with a dominant 

resource sector will tend to be less democratic and 

will suffer lower rates of growth than more diversified economies. The latter are features that we shall return to, in a qualified form, in our concluding discussion. First, however, we shall round off the portrayal 

of Moscow as hostage to its own energy complex by 

looking at the question of sustainability. Again, this 

shall be focused more on gas than on oil. 

As the Russian economy emerged out of the global 

financial crisis, the reasons why gas is so important 
101

were made plain. It is true that recovery was greatly 

assisted by a rise in the price of oil. The annual average price of Urals crude, received from non-CIS states, 

peaked at $95.27 in 2008. During the crisis year 2009, 

it dropped by 40 percent to $57.47. It then began to 

rise to $76.24 in 2010 and $107.30 in 2011.58 With some 

delay, this also fed into rising prices for gas. 

The problem for Moscow is that relying on a steady 

growth in prices will be fraught with danger. There 

will come a point where the price grows so high that 

it triggers another global recession, the implication of 

which would be another massive “correction” for Russia. Sustainability must be sought in increased output 

and in making more room for export by promoting 

domestic energy efficiency. Neither presently offers 

much inspiration. 

The Russian oil sector is stagnating, and its reserves are being depleted. Its glory days were associated with the discovery of a number of supergiant 

fields in Western Siberia, such as the Samotlor, all of 

which have long since passed their peak. It is true that 

the post-crisis years have seen further expansion in 

Russian oil production. In 2009, it rose to 10.04 million bpd. This allowed Russia to actually bypass Saudi 

Arabia, which had cut back its production from 10.84 

to 9.89 million bpd. But in 2010 and 2011, Russian production leveled off at about 10.3 million bpd.59

The substantial additions to output that were recorded during Putin’s first two terms were chiefly 

due to better management of existing fields. That low 

hanging fruit has now been plucked, and exploration 

for new fields will take place in less accessible and geologically less favorable areas. When announcements 

are made of new record levels having been reached, 

the added volumes are measured not in millions, but 

rather in tens of thousands of bpd.
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At the end of 2009, the total proven reserves of oil in 

the Russian Federation were 74.2 billion barrels, or 5.6 

percent of the global total. The reserves-to-production 

ratio, which defines the number of years the remaining reserves will last at current levels of production, 

was no more than 20.3 years. In comparison, the total 

proven reserves for Saudi Arabia stood at 264.6 billion barrels, and its reserves-to-production ratio was 

74.6 years.60 The much publicized fact that Russia has 

overtaken Saudi Arabia as the largest producer in the 

world must be viewed against this background.

Natural gas offers a completely different and potentially more inspiring picture. At the end of 2009, 

Russia had proven reserves of 44.38 trillion cubic 

meters (tcm), or 23.7 percent of the global total. Its 

reserves-to-production ratio was 84.1 years. Iran and 

Qatar, by contrast, had proven reserves of, respectively, 29.61 tcm and 25.37 tcm. Russian production 

of natural gas also far outstripped that of its rivals. 

In 2009, Russia produced 527.5 billion cubic meters 

(bcm). Iran was second, at 131.2 bcm, and Qatar was 

third, at 89.3 bcm.61

The problem here is that despite, or perhaps due 

to, its dominant position, Gazprom has not been managing its reserves very well. Its output over the past 

decade has been essentially flat. In 2001, it produced 

512.0 bcm of gas (excluding gas condensate). In 2006, 

output had risen to 556.0 bcm; but during the crisis 

year 2009, it fell back to 461.5 bcm. In 2010, it recovered to 508.6 bcm.62 Estimates for 2011 show a further 

rise to 513.2 bcm, which is about the same as in 2001.63

Part of the reason is that Gazprom has an equally 

poor track record in exploration. It has long depended 

on a handful of supergiant fields in Western Siberia, 

all of which have long since passed their peak. It has 
103

also been slow in developing existing finds, such as 

the giant offshore Shtokman field and the Kovytka 

field in Eastern Siberia that it wrested from TNK-BP 

in 2007 and then placed on hold. Pressure from the 

Kremlin has caused the company to step up its exploration efforts, and 2011 saw a record 686.4 bcm gas 

reserve increment.64 But there is much past neglect to 

make up.

Gazprom’s legal monopoly on exports, and its 

control over the country’s huge “Unified Gas Supply 

System,” has also been holding back more efficient 

independent producers such as Itera and Novatek. 

Again, pressure from the Kremlin is forcing change. 

Gazprom was slapped with a major tax increase in 

2011, and parts of its assets have been taken over by 

the independents. The hands of “friends of Putin” 

have clearly been at work behind the scenes.65

But by far the greatest challenge both to Gazprom and to Russia is the arrival of “unconventional 

gas,” notably shale gas, which has caused a complete 

change of scenes. In November 2011, the International 

Energy Association (IEA) prophesied that we may 

now be entering a “Golden Age of Gas.” Under this 

scenario, gas demand grows by 2 percent a year between 2009 and 2035. Even in a less upbeat scenario, 

the IEA sees annual gas demand rise by 1.7 percent, or 

by 55 percent for the period as a whole.66 In its latest 

Energy Outlook, BP similarly anticipates that by 2030, 

gas may have come to rival coal and oil as a primary 

energy source.67 Since gas is cleaner than other fossil 

fuels, this is positive news for the environment, and it 

should be positive news for Moscow. But is this really 

the case?
104

At the end of 2009, the United States had no more 

than 6.93 trillion centimeters (cm) in proven reserves 

of natural gas. But in that same year, it still bypassed 

Russia to become the largest gas producer in the 

world, with an output of 593.4 bcm.68 While Moscow 

could delight in having replaced Saudi Arabia as the 

largest oil producer in the world, it had to accept being 

bypassed by the United States as the largest gas producer in the world. In 2010, U.S. output rose further, 

to reach 611 bcm, compared to 589.9 bcm for Russia.69

Both Gazprom and the Kremlin are poorly positioned to respond to this new challenge. The Russian understanding of energy security has long been 

marked by a perceived need to control energy flows 

and to lock in its customers. This has generated an obsession with pipeline construction, to the detriment of 

investment in LNG. Russia’s first terminal for LNG was 

built by Shell on Sakhalin and came on line in 2009. It 

was long thought that the supergiant Shtokman field 

had been earmarked for LNG, to be transported to the 

United States. But now Gazprom has wrested control 

over Sakhalin from Shell, and Shtokman no longer is 

destined for LNG.

Gazprom may have thought that LNG could be 

safely ignored. It is expensive and does not offer 

control to the extent that pipelines do. The shale gas 

revolution, or simply the “shale gale,” changed all 

that. Following years of massive investment by Qatar, in particular in export terminals for LNG, and by 

the United States in import terminals for the same, the 

United States suddenly was no longer in need of imported gas. With its import terminals standing idle, 

LNG was instead rerouted to Europe, where a gas glut 

emerged. Gazprom suffered doubly, both from a loss 

of market shares to the cheaper LNG and from having 
105

to agree to demands from its customers that oil-price 

linkage must give way to spot-market pricing.

Although the Kremlin remains obsessed with 

building pipelines, the wisdom of this policy is coming under serious doubt. Its aggressive pipeline diplomacy has already antagonized China, which may no 

longer have much interest in piped Russian gas, and 

it has caused a scramble by other actors ranging from 

China to Turkey and the EU to build rival pipelines 

that bypass Russia. If the combination of LNG and 

exploration for shale gas resources in other places, including Poland, Ukraine, and China, should lead to 

the emergence of a global market for gas, then Russia 

will be faced with a whole new ball game, one where 

it will no longer be the unquestioned lead player.

The EU and other outside observers have long 

been harping on the need for diversification of the 

Russian economy. There is presently very little in the 

Russian economy that is worth sinking serious money 

and effort into, outside the energy complex. But this 

does not mean that Russia should rest content with 

pumping and piping.

The way forward should proceed via a wager on 

high-tech development inside the energy sector. Russian operators should invest heavily in acquiring advanced drilling technology that may unlock offshore 

riches in the Arctic. They should invest in mastering 

LNG and thus be in position for the arrival of a global 

market for gas. They should be thinking seriously 

about unconventional gas. But none of this is high on 

the agenda. 

Nor do we see any serious efforts to promote efficiency and conservation in domestic energy use, 

which could make room for expanded exports even at 

constant levels of production. A case in point is hybrid 
106

technology and fuel-efficient cars. China is investing 

heavily in high-tech battery development for electrical cars; Russia is not. Also, huge amounts of gas are 

being flared by Russian operators every year simply 

due to poor coordination between oil and gas producers. According to a report from the World Bank, the 

amount flared in 2008 was 40 bcm, causing losses to 

the state of $13 billion and exceeding the total volume 

of gas flared by Nigeria, Iran, Saudi Arabia, Algeria, 

and Indonesia combined.70

In conclusion, Russian energy policy would seem 

to leave quite some room for improvement. Retaining 

our understanding of energy as critical to the future 

development of Russia, let us look at how a “Russian 

curse” is hanging over the prospects for serious reform to be undertaken under Putin 2.0.

THE FUTURE OF ECONOMIC REFORM

The main question for the future concerns not only 

what needs to be done, but also and more importantly 

what can be realistically expected to be done. The 

answer to the former part of the question has been 

so often repeated that it has taken on an air of mere 

cliché. The core of the problem is that fixed capital 

investment is way too low, and the reason given, as 

indicated previously, is that the investment climate is 

simply abysmal. Unless there is a change for the better, investors will not commit their money, and enterprises will stand little to no chance of succeeding in 

the global marketplace. Russia will then be reduced to 

the ignominious role of a raw materials appendix to 

the more developed economies, notably so to China. 

There are eminent grounds for such worry. The 

times when export of raw materials could serve as a 
107

driver for economic growth are long gone. The same 

can be said for the classic belief that the mere presence 

of a development gap in relation to the more highly 

industrialized economies could serve to drive catchup growth. If Russia is to achieve true integration into 

the global economy, its rulers need to realize that sustainable economic growth and technological progress 

must be driven by endogenous factors. A whole set 

of what Mancur Olson once referred to as “marketaugmenting” institutions must be put into place and 

be secured.71 These include not only credible enforcement of contracts and property rights, but also incentives for human capital development.

The main reason why both the United States and 

the EU have good reasons indeed to worry about competition from countries like China and India lies in an 

ongoing narrowing of the educational gap. European 

governments in particular have long cherished a belief 

that European economies may continue thriving in 

the face of competition from low cost manufacturing 

countries, simply because of the superiority of their 

human capital. There is a strong element of denial 

here. Following decades of heavy human capital investment in India, China, and elsewhere, it is becoming increasingly debatable to what extent European 

knowledge-intensive production may be kept safe 

from outside competition. As President Putin moves 

back into his old digs inside the Kremlin, he needs to 

ponder this trend. What seems threatening to the Europeans should be simply frightening to Russia. 

The magnitude of the challenge that lies before Putin 2.0 may be brought home via a comparison of the 

respective growth records of Russia and China. Over 

the nearly 2 decades from 1989 until 2007, the former 

being the last year of positive economic growth in the 
108

Union of Soviet Socialist Republics, Russia recorded 

about zero average annual growth. The high rates of 

growth that made so much media noise during Putin 

1.0 actually achieved little more than make up for the 

hyperdepression during the Yeltsin era. In sharp contrast, China had meanwhile been chalking up close to 

10 percent annual growth since 1978. 

The most obvious reason behind this stark difference in performance is that investment intensity in 

the respective cases has been so very different. As we 

have noted, China invests well over 40 percent of GDP 

and Russia less than half of that. The core reason why 

fixed capital investment in Russia remains so low may 

be explained by the frequent reference to the country’s appalling investment climate, which, in turn, is 

little more than shorthand for the presence of massive corruption. Perhaps the most discouraging lesson 

from the 4 years of the Medvedev presidency is that, 

despite much talk about campaigns to root out corruption, this scourge has actually gotten worse, even 

much worse.

Towards the end of January 2012, the Russian Interior Ministry’s economic security department reported 

that the size of the average bribe in Russia had more 

than tripled in 2011: “The size of the average bribe 

and commercial payoff in reported crimes increased 

more than 250 percent to 236,000 rubles ($7,866).”72 A 

couple of weeks later, Interior Minister Rashid Nurgaliyev told a Ministry board meeting that “The average size of a bribe and commercial palm greasing 

in identified crimes almost quadrupled and reached 

236,000 rubles.”73

At about the same time, the Russian Central Bank 

reported that net private sector capital outflow for 

2011 had reached $84.2 billion. This must have come 
109

as something of a shock to the Kremlin, which in July 

had predicted capital outflow for the year as a whole 

at $35 billion. Capital flight had peaked at $133.7 billion in 2008, when the global financial crisis erupted, 

and dropped to $56.1 billion in 2009, when Russia was 

coming out of the crisis. In 2010, it had been reduced 

further, to $33.6 billion, and hopes had been that 2011 

would stay at about the same level.74

The sharp deterioration provided a clear indication of the sensitivity of investors to political uncertainty. Close to half of the total outflow for 2011, or 

$37.8 billion, left in the fourth quarter, following the 

announcement that Putin would return to the Kremlin.75 The outflow continued in the new year, with $35 

billion leaving in the first quarter and an additional 

$8 billion in April.76 Although the Russian economy 

is fundamentally very healthy, with positive growth 

and an insignificant debt burden, markets clearly remain wary of political risk.

Compared to Russia’s GDP of close to $1.5 trillion, the numbers, as such, are not very large. It may 

be argued that capital outflow is positive in the sense 

of relieving inflationary pressures. But if the Russian 

current account should turn negative in 2013, as many 

expect, then something will have to be done in earnest 

to ensure that capital remains and is invested within 

the country. The question is what should be done.

The most immediate needs for action are felt in the 

realm of fiscal policy. Over the short term, a policy 

of cautious borrowing, careful spending cuts, and 

increased taxes may serve to postpone an inevitable 

return to fiscal prudence. But all are fraught with danger. Given Russia’s low ratio of debt to GDP, markets 

will be only too happy to lend even substantial sums. 

But a return to mounting debt will also bring increased 
110

political dependence, which is clearly not to Putin’s 

liking. Spending cuts would also be welcomed by 

markets but carry the risk of antagonizing important 

groups that voted for Putin, who may need their support again before too long. Increasing taxes is clearly 

in the cards, especially given what Putin has said 

about a pending “tax maneuver.”77 As noted earlier, 

Gazprom has already been targeted, and more may 

follow for the energy sector at large. Yet, raised taxes 

carry the risk of choking off badly needed growth and 

must hence be approached with caution.

While undoubtedly important, the question of 

getting Russia’s fiscal house in order is only part of 

the greater picture. If more money is going to be invested in the Russian economy, by Russians as well 

as by outside investors, and if entrepreneurial young 

Russians are to remain in their native country, serious 

measures need to be taken to achieve improved governance. This is where we need to return to Olson’s 

call for “market-augmenting” government and to ask 

what it would take for serious change to result. 

The good news from an institutional perspective 

is that the recent wave of protests from below has created yet another window of opportunity. Important 

elements of civil society have openly emerged, emboldened by new means of communication that are 

entailed in various social media. The old social contract between Putin and the emerging middle class 

has broken down, and demands for formal changes in 

the rules of the game are being met. The core question 

concerns whether this may be viewed as the beginning of successful collective action, demanding public 

goods that go beyond material self-enrichment. The 

answer is not a promising one.
111

As so many have already pointed out, the opposition is fragmented. It lacks a both a common cause and 

a common leader. The remnants of the liberal movement from the Yeltsin era—people like Boris Nemtsov 

and Grigory Yavlinsky—no longer have the credibility needed. There is a strong risk that when, and if, 

truly charismatic leaders emerge, they will be driven 

by a strongly nationalist message. It is true that demands for change in a liberal direction have emerged 

and will have to be met by the regime. While this is 

necessary for true change in the nature of the game to 

result, it is clearly not also sufficient. 

Belkovsky may well be right in his claim that we 

are at the beginning of a new “perestroika,” but we 

should not forget how the old one ended. The main 

message of institutional analysis is that changes in 

the formal rules will be successful only when backed 

up by a corresponding transformation of informal 

norms—and of enforcement mechanisms. The latter is 

crucial. The core of the challenge to prospective Russian reformers remains linked to improving economic 

governance, which in essence boils down to ensuring that there is credible enforcement of the rules of 

the game. 

An important part of the reason the track record 

to date has been so poor may go back to the beliefs 

of the early reformers in the role of deregulation as a 

panacea that would bring about a rapid transition to a 

high-growth market economy. By focusing so one-sidedly on government failure, on getting the “grabbing 

hand of government” into the “velvet glove of privatization,” the reformers blinded themselves to the fact 

that inattention to the broader challenges of sweeping 

institutional transformation would produce serious 

cases of market failure. In the absence of a government 
112

that may credibly commit to upholding contracts and 

property rights, it will make little sense to even talk 

about “market economy.” Self-interest seeking, which 

is the core of the market mechanism, will then be decidedly short-term, often value detracting rather than 

value adding, and, on the whole, detrimental rather 

than supportive of the common good.

The persistent failure of the Russian government to 

appear as a credible third-party enforcer of contracts 

and of property rights is deeply rooted in Russian 

tradition. There is no predetermination here, indicating that this will always have to remain the case. But 

the prominent role of the country’s energy complex 

has served to activate rather than phase out deeply 

ingrained patterns of behaviour.

In a high-performance market economy, the 

overwhelming share of all transactions will crucially 

depend on impartial enforcement of contracts and 

property rights. In the Russian economy, transactions 

within the energy complex, and within the raw materials sector more generally, have assumed a clearly 

hierarchical nature, where enforcement is informal 

and basically devoid of transparency. What is known 

in Russia as “authoritarian market economy” has 

thus evolved into little demand for accountability in 

government, or indeed for the rule of law.

A central feature of governance in this “market” 

economy rests in its inability to actually enforce what 

it dictates. The true test of economic authoritarianism 

lies in whether the rulers are able to produce by command from above what liberal market forces produce 

by horizontal coordination. In this crucial test, the Putin regime has proven to be woefully inadequate, and 

for good reason.
113

In a political culture where the bureaucracy has 

wide latitude to obstruct and evade any and all types 

of proposals for change that go against its own vested interests, the only serious impetus for change can 

come from heavy government priority and attention. 

Since the government is not able to credibly maintain 

more than one priority at the time, the overwhelming focus on the energy complex by the government 

has entailed a complete lack of attention to other and 

arguably more important tasks.

The Putin regime has surely been quite happy with 

its rapid accumulation of wealth from hydrocarbon 

exports. It may have derived even greater satisfaction 

from the sense of power and prestige that has been 

associated with its status as an emerging “energy superpower.” But these achievements have not come 

without a price. 

The main conclusion to be drawn here is that pervasive corruption has assumed the role of a veritable 

linchpin for the system of power. Despite all the authoritarian rhetoric, Russia is not ruled by a strong 

man, or even by a strong regime. It is ruled by a 

conglomerate of rent seekers, whose members place 

short-term personal enrichment above any form of 

longer-term interest of the state. In a long-term Russian perspective, this is something essentially new, 

and it may turn out to be deeply destructive.

The role model for the “vertical of power” that 

Putin has been so fond of was housed in the Communist Party of the Soviet Union (CPSU). It ensured that 

commands from the center would be acted upon and 

prevented corruption from developing into a serious 

threat against the main priorities of the system. The 

“party of power” that Putin built is none of this. In 

contrast to the CPSU, which was feared by all, “Unit-
114

ed Russia” has been subjected to so much public ridicule that, in the end, it had to be kept out of Putin’s 

presidential election campaign. The very absurdity of the thought of publicly branding the CPSU as 

a “party of crooks and thieves,” and getting away 

with it, may serve to drive the message home. Fake 

authoritarianism will, in the end, come up short, as 

will all substitutes.78

The essence of the Kremlin conglomerate is that 

it may be kept together only for as long as the appointed rent manager succeeds in maintaining the 

balance among and within the predatory elites. This 

is where we arrive at what some have referred to as 

a “Russian curse.” The role of the country’s energy 

complex has not been to introduce a “resource curse.” 

The problems of Russian authoritarianism, corruption, and poor economic governance were well entrenched long before the arrival of the hydrocarbon 

bonanza. It would also seem hard to argue that Russia 

today is poorer than it would have been without its 

energy riches.

The reason the hydrocarbon wealth may yet be 

viewed as a nemesis of sorts is that the immense 

riches that have been up for grabs have not only aggravated the inherent forces of greed but promoted 

rent-seeking behavior that is often value detracting. 

In important ways, it has also constrained the regime. 

Despite the low rate of domestic investment and the 

high rate of capital outflow, the Russian government 

cannot close borders or even restrict capital flows. 

This would cause a rebellion within the elite. Despite 

the sheer size of energy incomes that are diverted into 

private pockets, the Russian government is equally 

unable to enforce the state interest in cracking down 

on corruption. In these senses, the regime is arguably 

more fragile today than ever before.
115

The ills are well known, and continued harping on 

what should be done in terms of formal changes in 

the rules of the game will be of little value. Some of 

these changes may indeed be introduced, but likely 

to little avail. A serious economic improvement will 

require a new agreement between the country’s ruling 

and entrepreneurial elites, and that is presently not in 

the cards. Although the main demand during the big 

Moscow rallies was for honest elections, what really 

galvanized the opposition was anger over the brazen 

way in which the elites have been feathering their own 

nests. But meeting the call for a serious crackdown 

on corruption would entail a head-on confrontation, 

which could trigger a hostile takeover of power.

Returning to the question of what likely will be 

done, we may, in consequence, not realistically expect 

that there will be much change at all beyond cosmetic 

redesign. For as long as the price of oil remains high, 

or even very high, and for as long as the “shale gale” 

does not rise in force to sweep aside Gazprom, then 

the Kremlin conglomerate may be kept alive and well. 

The price to the Russian economy will be measured 

in increasing “primitivization” and marginalization 

from global markets. Even the hitherto so important 

production and export of armaments will soon peak 

and be eclipsed by other countries, again notably so 

by China. 

Perhaps this is where we may view at least a ray 

of hope for change. If key members of the elite begin 

to worry that their own sources of wealth and revenue are under threat, then demands for change may 

perhaps emerge from within. It was in this light that 

some preferred to view the presidential candidacy 

of Mikhail Prokhorov—as a way of championing the 

case for better governance without radically altering 
116

the configuration of power. China may perhaps serve 

as a role model here.

The key to the economic successes of China lies in 

having found a way of combining an expanded role for 

the market with retaining a pervasive role for the state. 

Corruption in China is in every bit as deeply rooted in 

history as it is in Russia, and it is certainly not to be 

taken lightly. Yet, the Chinese form of cohabitation between party, state, and private entrepreneurship has 

clearly prevented corruption and predatory instincts 

from eroding the prospects for economic growth and 

technological change. While self-enrichment has been 

allowed, the state has kept the predators in line and 

made sure that the common good of the country’s economic development is kept in focus. Rent seeking on 

the whole has been successfully combined with value 

adding rather than value detracting behavior.

The pronounced Russian ideology of neoliberal 

deregulation and hard core individualism has been 

the very opposite of the Chinese way. By allowing a 

free rein for the predators, it has sacrificed the interests of the state and placed the economic future of the 

country in jeopardy. The highly short-term nature of 

the games that are played in Russia, and the essential 

lack of cohesion both within and among different segments of the elites, combine to lock the Russian economy into a downward spiral. The fundamental lack of 

security that so clearly marks the regime is manifested 

not only in reckless fiscal spending but also in a fear of 

embarking on any form of much-needed change that 

might trigger counter reactions.

Perhaps the more business oriented members of 

the ruling elite will, indeed, come to a realization that 

even their own revenue streams may soon come under 

threat. Perhaps this will cause them to lobby for action 
117

to be taken, and perhaps this may result in a working 

cohabitation of private interest in self-enrichment with 

the state or collective interest in value-added longerterm sustainability. But it will all depend crucially on 

Putin’s acquiescence, and there is little to indicate that 

he is contemplating anything but to stay the course 

and to hope for continued life support from world 

energy demand.

If it does not happen, then the real crunch will 

come when and if the price of oil takes another steep 

nosedive. This time round, the magnitude of the fall 

would be far greater than in 2008-09. There would 

be little to no reserves available and consequently no 

room for bailouts from the Russian state. The result 

would be a scramble for safe havens, to save whatever personal assets can still be kept out of the hands 

of creditors. With the elites in serious turmoil, this 

could be the trigger for yet another “time of trouble,” 

at the other end of which we would find a hard core 

nationalist revival.

ENDNOTES - CHAPTER 3

1. The epithet was first introduced in a February 2011 talk 

show on the Russian radio station finam.fm, where Navalnyi engaged in debate with United Russia Duma member Evgeny Federov. The debate is available from www.youtube.com/watch?v=ccEzCR1ej4. (In early March 2012, it had received close to a 

million views.)

2. Available from navalny-en.livejournal.com/3401.html. 

3. This is laid down in Articles 111 and 177 of the Constitution 

of the Russian Federation. 

4. Available from en.rian.ru/russia/20111222/170427189.html. 
118

5. Only hours after being appointed, Putin signed a decree 

offering Yeltsin immunity from prosecution, a lifetime pension, 

a government country home, and bodyguards and medical care 

for him and his family. The wording was formulated to cover 

“former presidents of the Russian Federation.” The Duma subsequently voted to limit the immunity, reintroducing liability for 

serious crimes committed in office.

6. Allegations about Putin’s corrupt past have resurfaced regularly over the years. In the run-up to the March 2012 presidential 

election, they again came to the fore. His main accuser, democratic politician Marina Salye, died on March 28, 2012, at the age 

of 77. Her passing caused the issue to take another spin through 

the global media. See, e.g., www.guardian.co.uk/world/2012/mar/28/

marina-salye. 

7. The claim was originally made by Russian political expert 

Stanislav Belkovsky in an interview with the German newspaper 

Die Welt. For details, see www.guardian.co.uk/world/2007/dec/21/

russia.topstories3. 

8. Quoted from thomas.loc.gov/home/histdox/fed_10.html.

9. Available from www.reuters.com/article/2011/09/24/us-russiaidUSTRE78N0RH20110924. 

10. The latter comment was made on December 15, 2011, during Putin’s 4.5-hour-long annual televised call-in show, available 

from en.rian.ru/russia/20111215/170273019.html?id=. 

11. This happened when he made an appearance at a martial 

arts event in Moscow on November 21, 2011. It was a harbinger of 

things to come and left him visibly taken aback. It has been a big 

hit on YouTube, see www.youtube.com/watch?v=QzOhEFU2yFw. 

12. Available from www.nytimes.com/2012/01/20/world/europe

/20iht-letter20.html. 

13. Available from www.washingtonpost.com/opinions/a-newperestroika/2012/01/26/gIQAB4aWYQ_story.html. 
119

14. Available from rt.com/news/prime-time/russia-defense-budget-corruption/. 

15. St. Petersburg Times, April 17, 2009.

16. Available from www.suomenpankki.fi/bofit_en/seuranta/

venajatilastot/Pages/default.aspx. 

17. Numbers are available at the respective websites of the 

Central Bank, see www.cbr.ru/eng/hd_base/mrrf/) and of the Ministry of Finance, seewww1.minfin.ru/en/reservefund/statistics/amount/

index.php?id4=5817. Central Bank reserves include funds in the 

Reserve Fund.

18. Pekka Sutela, “Forecasting the Russian Economy for 2010-

2012,” Russian Analytical Digest, No. 88, 2010, p. 1.

19. Ibid., p. 3.

20. Clifford G. Gaddy and Barry W. Ickes, “Russia after 

the Global Financial Crisis,” Eurasian Geography and Economics, 

Vol. 51, No. 3, 2010.

21. Composed of the United States, UK, France, Germany, 

Italy, Canada, and Japan.

22. Ibid.

23. Available from www.rts.ru/s618. 

24. Available from www.france24.com/en/20100416-russianbillionaires-double-2010-rich-list. The full list is available from www.

forbes.com/lists/2010/10/billionaires-2010_The-Worlds-Billionaires_

Rank.html.

25. Available from www.eia.doe.gov/dnav/pet/hist/LeafHandler.

ashx?n=PET&s=WEPCURALS&f=W.

26. Available from www.cbr.ru/eng/statistics/?Prtid=svs. 

27. Moscow Times, April 23, 2009. 
120

28. Moscow Times, July 28, 2009.

29. Moscow Times, July 27, 2009.

30. Available from www.suomenpankki.fi/bofit_en/seuranta/vena

jatilastot/Pages/default.aspx. 

31. Available from www.cbr.ru/eng/hd_base/mrrf/?C_mes=01&

C_year=2009&To_mes=02&To_year=2012&mode=&x=31&y=5. 

32. Available from www1.minfin.ru/en/reservefund/statistics/

amount/index.php?id4=5817. 

33. Moscow Times, August 2, 2011.

34. Available from www.imf.org/external/pubs/ft/weo/2010/

update/02/index.htm. 

35. Dmitri Trenin, “Cost of the Matter,” Kommersant, May 

14, 2010.

36. Moscow Times, September 12, 2001.

37. Julian M. Cooper, “Of BRICS and Brains: Comparing Russia with China, India, and Other Populous Emerging Economies,” 

Eurasian Geography and Economics, Vol. 47, No. 3, 2006.

38. Available from eng.kremlin.ru/speeches/2009/09/10/1534_

type104017_221527.shtml. 

39. Available from dimitri-medvedev.com/.

40. Available from data.worldbank.org/indicator/NE.GDI.

FTOT.ZS. 

41. Clifford G. Gaddy, “The Russian Economy in the Year 

2006,” Post-Soviet Affairs, Vol. 23, No. 1, p. 45, 2006.

42. Clifford G. Gaddy and Barry W. Ickes, “Russia’s Virtual 

Economy,” Foreign Affairs, September/October 1998.
121

43. At the end of 2010, the accumulated stock of direct investment into Russia emanating from Cyprus had reached an 

outstanding $179.2 billion. Next in line was Bermuda at $52.6 billion, and British Virgin Islands at $51.0 billion. Then followed the 

Netherlands at $40.2 billion, Bahamas at $24.6 billion, and Germany at $23.1 billion. The pattern of returning Russian capital, 

as opposed to FDI by major industrialized economies, is rather 

striking. See www.cbr.ru/eng/statistics/print.aspx?file=credit_statistics/dir-inv_in_country_e.htm&pid=svs&sid=ITM_14544. 

44. Shinichiro Tabata, “The Influence of High Oil Prices on the 

Russian Economy: A Comparison with Saudi Arabia,” Eurasian 

Geography and Economics, Vol. 50, No. 1, 2009, p. 90, fn. 29.

45. Available from hermitagefund.com/newsandmedia/index.

php?ELEMENT_ID=65. 

46. Moscow Times, January 25, 2012.

47. Available from www.nytimes.com/2011/07/27/world/europe/

27russia.html. 

48. Available from blogs.ft.com/beyond-brics/2012/01/27/russiadavos-and-the-rule-of-law/#axzz1p4k4H4oQ. 

49. Available from www.csmonitor.com/World/Europe/2010

/1229/After-Khodorkovsky-verdict-Russia-s-Medvedev-bemoans-business-climate.

50. Available from www.rferl.org/content/emigration_blues_russias_sixth_brain_drain/2294463.html. 

51. St. Petersburg Times, October 22, 2010.

52. Compared to the same period in the previous year, the 

third and fourth quarters of 1999 came in at, respectively, 11.4 and 

12.0 percent, available from www.cbr.ru/eng/archive/.

53. Available from large.stanford.edu/publications/coal/references

/oilprice/urals/. 
122

54. Available from www.bp.com/liveassets/bp_internet/globalbp/

globalbp_uk_english/reports_and_publications/statistical_energy_review_2011/STAGING/local_assets/pdf/oil_section_2011.pdf. 

55. Fiona Hill, “Russia: The 21st Century’s Energy Superpower?” The Brookings Review, Vol. 20 No. 2, 2002, pp. 28-31.

56. Available from news.bbc.co.uk/2/hi/8090104.stm. 

57. Edward Lucas, The New Cold War: How the Kremlin Menaces

both Russia and the West, London, UK: Bloomsbury, 2008.

58. Available from www.cbr.ru/eng/statistics/print.aspx?file=

credit_statistics/crude_oil_e.htm&pid=svs&sid=vt1. 

59. Available from www.bp.com/liveassets/bp_internet/globalbp/

globalbp_uk_english/reports_and_publications/statistical_energy_review_2011/STAGING/local_assets/pdf/oil_section_2011.pdf. 

60. BP Statistical Review of World Energy, June 2010, p. 6, available from www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_

english/reports_and_publications/statistical_energy_review_2008/

STAGING/local_assets/2010_downloads/statistical_review_of_world_

energy_full_report_2010.pdf.

61. Ibid., pp. 22, 24.

62. Available from www.gazprom.com/about/production/

extraction/. 

63. Available from www.gazprom.com/about/today/. 

64. Available from www.lngworldnews.com/gazprom-added-record-gas-reserves-in-2011-russia/. 

65. Available from www.osw.waw.pl/en/publikacje/osw-commentary/2012-02-23/gazprom-s-position-russian-gas-market-weakening.

66. Available from www.iea.org/weo/docs/weo2011/WEO2011_

GoldenAgeofGasReport.pdf.
123

67. BP Energy Outlook 2030, London, January 2012, available 

from www.bp.com/liveassets/bp_internet/globalbp/STAGING/global_

assets/downloads/O/2012_2030_energy_outlook_booklet.pdf. 

68. BP Statistical Review, pp. 22, 24.

69. BP Statistical Review of World Energy, June 2011, p. 22, 

available from www.bp.com/assets/bp_internet/globalbp/globalbp_

uk_english/reports_and_publications/statistical_energy_review_2011/

STAGING/local_assets/pdf/statistical_review_of_world_energy_full_

report_2011.pdf. 

70. Available from www.jamestown.org/single/?no_cache=1&tx_

ttnews%5Btt_news%5D=35735. 

71. Mancur Olson, Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships, New York: Basic Books, 2000.

72. Available from en.rian.ru/crime/20120127/170981823.html.

73. Available from www.cdi.org/russia/johnson/russia-averagebribe-up-390.cfm.

74. Available from en.rian.ru/business/20120113/170734989.

html. 

75. Available from www.cbr.ru/eng/statistics/print.aspx?file=

credit_statistics/capital_e.htm&pid=svs&sid=cvvk. 

76. Available from www.rferl.org/content/russia_capital_outflow

/24580379.html. 

77. Available from en.rian.ru/business/20120209/171232785.

html. 

78. Stephen Holmes, “Never Show Weakness: How Faking 

Autocracy Legitimates Putin’s Hold on Power,” Per-Arne Bodin, 

Stefan Hedlund, and Elena Namli, eds., Power and Legitimacy—

Challenges from Russia, London, UK: Routledge, 2012.

125

CHAPTER 4

AUTHORITARIANISM AND MODERNIZATION 

IN RUSSIA: IS RUSSIA KA-PUTIN?

Harley Balzer

Russia’s leaders have repeatedly proclaimed the 

importance of modernizing the nation’s economy and 

stimulating innovation. Yet, despite a dozen years of 

laudable rhetoric and, more recently, significant increases in spending for education and science, Russia’s 

economy still overwhelmingly depends on commodity exports. While other BRIC (Brazil, Russia, India, 

and China) countries have introduced global brands 

reflecting their growing participation in the global 

knowledge economy, Russia’s global brands are in the 

natural resources sector. The Soviet Union’s highly 

uneven achievements in education, science, and technology are being dissipated, and it will be exceptionally difficult to reverse the decline. Intensifying global 

competition in education and science means that Russia’s academic community will have to exert a tremendous effort merely to avoid falling further behind. 

Invoking the reminder that “We launched Sputnik” 

rings quite hollow after more than 6 decades.

Inside Russia, blame for the decline in education and science is placed squarely on the chaos of 

the 1990s, inadequate funding from the government, 

and the difficulty of reforming the Soviet system. 

The achievements of the Yeltsin era—a modest shift 

to competitive grant funding, programs to integrate 

higher education and research, and far greater freedom to travel and interact with foreign colleagues—

are dismissed as insignificant.
126

The argument here is that the problems are due far 

more to political failures and corruption that reinforce 

the intransigence and self-interest of Russia’s epistemic communities than to the Soviet legacy or the difficulties of the transition. Comparison with China and 

with the former communist countries of Central Europe undermines the Soviet legacy argument: Having 

begun with a nearly identical system—in the 1950s, 

the Chinese copied the Soviet Union’s education and 

science institutions quite closely. Yet in just 3 decades, 

the Chinese have overtaken Germany and Japan to 

rank second to the United States in publishing articles 

in international peer-reviewed scientific journals. 

Russian scientists in 2010 published about the same 

number of articles in international journals as they did 

in 1990. China’s experience also demonstrates the important effects of openness and internationalization. 

Chinese who have spent considerable time abroad 

and then return to China have begun to exert a positive influence on the nation’s scientific community, 

demanding international standards and competition 

in hiring, promotion, and publishing. In Russia, resistance to internationalization remains fierce.

The organizer of the conference asked us to address three questions: What must be done? What 

are the obstacles? What will be done, and with what 

consequences?

The overwhelming priority among a plethora of 

things that must be done is to diversify the economy. 

After 12 years of the Vladimir Putin-Dmitry Medvedev tandem, Russia’s economy depends more on 

hydrocarbons that it did in 1999. Russia now needs a 

price of somewhere between $110 and $130 per barrel 

of oil to balance its budget.1

 If the price of oil were to 

drop to $80 per barrel, the Reserve Fund would last 
127

1 year. Diversifying the economy requires changes to 

the political system (incentives and term limits), reforming educational institutions and research organizations to promote more competition and greater 

internationalization, and changing the incentive structure for epistemic communities in ways that promote 

greater competition and internationalization.

The most serious obstacles are corruption and 

self-interest in the political system, educational and 

research institutions, and Russia’s epistemic communities. Change is almost always demonic, and professionals who achieved secure careers before 1991 have 

little desire to alter the basic elements of their model. 

Many of those who wished to live under a different 

system have left the country. The Chinese experience, 

and that of most Central European countries, demonstrates that reorienting a Soviet-style system is challenging but not impossible. Russia demonstrates that 

unless political leaders alter the incentive structures, 

epistemic communities will continue to do what they 

are used to doing.

The record of the past 12 years suggests that not 

much will be done to impose significant reforms on the 

system but that an enormous amount of money will 

be spent in the name of reform. Much of this money 

will be stolen or wasted. Creative people will continue 

to leave Russia to work elsewhere. Russia will continue to decline as a center of education and research 

and development (R&D). There will be some notable 

exceptions, but, overall, the picture is bleak.

This chapter discusses of some of the important differences between the authoritarian regimes in China 

and Russia. It then turns to the knowledge economy 

prospects of both countries, focusing on higher education, scientific research, and innovation. The conclu-
128

sion contrasts Chinese accomplishments in education 

and science with the continuing decline in Russia. 

Even if Putin’s return as President produces meaningful change in the Russian performance, intense global 

competition means that modest improvements will 

not alter Russia’s relative position. The changes that 

are most needed—competition, internationalization, 

and integration—will require both political change 

and reorientation of Russia’s epistemic communities.

AUTHORITARIANISMS

While Russia and China both remain authoritarian 

regimes, the character of the authoritarianism differs 

significantly. Russia’s system is highly personalized, 

with Putin now occupying the sort of position Deng 

Xiaoping achieved in China in the 1980s and early 

1990s. While Deng never codified his status with a corresponding title, Putin has been dubbed Russia’s “national leader.” Neither system is transparent, but the 

Chinese system obscures how decisions are reached 

among a collective leadership,2 while Russia’s system 

obscures how the top leader determines policy.3

The political science community has generated a 

large body of work on authoritarianism and recently 

on “upgrading” authoritarianism. The two major conclusions from comparative studies of authoritarian regimes are that 1) single-party regimes perform better 

and last longer when well institutionalized; and 2) a 

unified opposition is more likely to defeat incumbents 

in an electoral democracy.4

 Neither finding is a surprise. But these findings do help explain why incumbents devote significant resources to co-opting a “loyal 

opposition” and fostering conflict among opponents.5
129

The literature on “authoritarian upgrading” examines in detail the various ways nondemocratic regimes have sought to perpetuate their rule. Much of 

this literature has been generated by scholars focusing 

on the Middle East and North Africa,6

 but scholars of 

China have made significant contributions,7 as have 

analysts examining other regions.8

 The menu of policies adopted by these regimes includes:

• containing or crowding out civil society,9

• managing political contestation,

• selective economic reforms,

• controlling new media and communication 

technology

• diversifying international linkages, in particular

relying on China as both a model and patron, 

that provide an alternative to Europe, America, 

or international financial institutions that impose 

various forms of conditionality.

A paired comparison10 of Russia and China allows 

us to examine differences in authoritarian regimes 

more closely. The comparison is particularly valuable because 1) China modeled so much of its original 

political and economic system on Soviet institutions; 

and 2) China is now performing better in the political 

realm, in economic development, and in education, 

R&D, and innovation. China’s epistemic communities 

are integrating with their international peers to a far 

greater extent than those in Russia.11

Relative economic performance can be seen in 

a comparison of economic output growth in the 

past 5 years (see Table 4-1):
130

Table 4-1. Economic Output Growth.

China has conducted a major evaluation of the 

causes of Soviet implosion and examined authoritarian regimes elsewhere.12 This stunning example 

of a regime learning how to improve its authoritarian institutions has resulted in significant changes, 

including:

• A form of “market-preserving federalism that 

has allowed enormous leeway for (at least 

some) regions to find their own paths to successful economic development.13

• Term and age limits constraining how long political leaders may serve.

• Expansion and improvements in education,

with a major emphasis on internationalization.14 When the new Central Committee is 

announced in 2012, some 20 percent of the 

members will have foreign higher education 

credentials (overwhelmingly advanced degrees, though this will change over time to increase the proportion with foreign bachelor of 

arts degrees.)15

• Merit plays growing role in cadre selection. It is

not the sole criterion, and family and guanxi relationships continue to be extremely important. 

But the Chinese appear to have established a 

Russia China

2008 5.6 9.6

2009 -9.0 8.7

2010 3.6 10.0

2011 3.4 9.7

2012 (projected) 3.5 7.5
131

“floor” of basic competence for officials, with 

intense competition forcing them to produce 

results.16

• Party discipline continues to play a role, 

providing a way to keep corruption within a 

poorly defined but nevertheless enforced set of 

limits.17

• Finally, the leadership is not only aware of the

major challenges facing the regime (regional 

and sectoral economic imbalances, demography, information society, and corruption), but 

has been adopting specific measures to confront 

these difficulties. The process has been slow 

and uneven, with tremendous resistance from 

those reaping benefits from the existing system. 

Much will depend on the willingness of the 

new leadership to push for needed changes.18

In contrast, Russia’s leaders have done little to institutionalize the post-Boris Yeltsin system. Rather, 

Putin (like his Soviet and Tsarist forebears) seems to 

have determined that institutional strictures impose 

limits on his political power. While abiding by the letter of Russia’s laws, he rejects their spirit. The system 

is reminiscent of Fyodor Dostoyevskii’s Grand Inquisitor dream sequence, which suggested that people 

would always exchange freedom for bread, miracle, 

mystery, and authority. It is codified in Vladislav 

Surkov’s (Putin’s so-called grey cardinal and the architect of much of the regime’s ideology and domestic 

policy in 2000-08) writings about “sovereign democracy.” Those writings state that Russia must never 

be in a position where other countries could dictate 

what sort of political, social, or economic system the 

country would have.19 Hence, any time sovereignty is 
132

limited, the country could not possibly be a democracy. One of many major problems with the concept of 

sovereign democracy is that it was developed with no 

public input. It reflects one individual’s assessment of 

what the country needs or wants.

Putin’s system may be described as increasingly 

managed pluralism.20 In various realms, the government endeavors to keep up (technology and the Internet); crowd out (civil society); and blame “others” 

(“democrats,” Yeltsin, the West). This approach came 

close to failing during the 2011-12 election cycle and 

is now undergoing some revision, mostly in the direction of legislative changes that limit freedoms, 

changes in electoral laws that are designed to maintain the advantages enjoyed by the “party of power,” 

new and repressive police measures and laws against 

dissidents, and new controls over the media, including new media.

One way in which the relative success of Chinese 

“upgrading” may be measured is by comparing the 

perceived legitimacy of the two regimes. Both societies experience significant amounts of protest. But in 

China, blame is focused overwhelmingly on local officials, NOT on the Chinese Communist Party (CCP) 

or the regime. The Chinese version of authoritarian 

upgrading has managed some degree of both capitalism and accountability without democracy. In contrast, Russia’s “power vertical” creates a situation 

where it is nearly impossible to shift blame to others: 

Moscow makes all the significant decisions and controls the distribution of rents. It is difficult to blame 

others when the “national leader” is a self-proclaimed 

control freak. The system produces rigidity but not 

accountability.

Russia was the worst-performing member of the 

G20 during the economic crisis after 2008. By 2011, 
133

the problems were clear, and more serious difficulties were avoided only by a modest (and perhaps 

temporary) recovery in oil prices. Meanwhile, other 

associated symptoms of decay are visibly manifesting 

themselves:

• Food prices are rising.

• Agriculture is suffering.

• The natural resource model of economic development is viewed as defunct.

• The Putin-Medvedev “tandem” is considered

to have been just a show.

• There are tangible signs of real elite concern.21

However, it is not clear that differences among 

Russia’s elites are genuine:

• A popular joke in Moscow during Medvedev’s

Presidency was that each leader had a strong 

team of advisors, that these advisors had both 

personal and substantive differences of opinion, and that the differences could translate 

into quite different policies. The one thing that 

was not clear was to which team Medvedev 

belonged.

• The alleged difference of opinion between Putin and Medvedev over Libyan policy could 

have been staged, allowing Russia to keep lines 

open to both sides.

• The tandem appears to have been designed to

appeal to different audiences both inside and 

outside Russia: Medvedev to the educated and 

the new middle class; Putin to nationalists and 

blue collar workers. Medvedev developed a 

good relationship with Obama; Putin focused 

on the near abroad and China.

• The difficulties and protests provoked some 

splits in the elite, but serious questions remain 
134

regarding how independent “opposition” figures like Alexei Kudrin and Mikhail Prokhorov 

really are.

It is evident that at least some portions of the elite 

view Putin’s economic model as having reached a 

dead end. The broader public has been less motivated 

or mobilized, but even before the election campaign 

began, the regime was subjected to increasing criticism 

and satirized with growing sharpness. Corruption, in 

particular, has been a target. Opposition blogger Aleksei Navalnyi’s characterization of United Russia as the 

“Party of Thieves and Scoundrels” acquired a life of 

its own. Groups within the elite generated a number 

of reports critical of the political and economic system.

For example, Medvedev’s own think tank, INSOR, issued a report that, not surprisingly, called 

for Medvedev to remain in the presidency. The Center for Strategic Development produced a document 

covering many of the same concerns and ended by 

invoking the need for a “third man” to assume the nation’s leadership. Vladimir Milov, Boris Nemtsov, and 

Mikhail Kasyanov published a report called “Putin. 

Corruption,” demanding change at the top. What is 

striking about all of these critiques is that they focus 

on personalities rather than institutions.22

Lilia Shevtsova is correct that only pressure from 

below will force real change.23 But pressure from below alone is more likely to produce violent/revolutionary change. A peaceful transition to democracy requires a balance of supply and demand: pressure from 

below must demand democracy, and some effective 

portion of the elite must be willing to supply it. This is 

why consolidated, as opposed to electoral or illiberal 

democracy, remains the exception among political regimes. Michael McFaul got it badly wrong when he 
135

wrote about democrats creating democracies and authoritarians establishing authoritarian regimes.24 The 

key is devising institutional structures that force even 

“sham” democrats to continue to behave according to 

democratic rules. This requires both an institutional 

structure that precludes absolute power and an opposition willing to enforce the rules. 

The Russian protests in late 2011 and early 2012 

were a surprise to just about everyone. But there were

warnings that the population had become less complacent. Most observers missed or dismissed these warnings. This was easy to do when Putin’s regime consistently emphasized the absence of alternatives, and the 

protests that occurred remained focused on specific 

issues rather than more general political demands. 

This changed on September 24, 2011, when Putin let 

it be known that he was returning to the Presidency. 

Even if he could claim that he would win an election 

against any possible opponent (and, of course, serious 

opponents were barred from becoming candidates), 

the manner in which this was done made it clear that 

a “selectorate” of one had taken the decision. To many 

Russians, this was an insult. Putin’s behavior was illadvised, given the changes in Russia’s political landscape over the previous 8 years.

Studies of the 2003-04 election cycle generally have 

emphasized the greater margin of victory for both 

United Russia and Putin.25 United Russia did, indeed, 

increase its majority in the Duma in 2003, and in March 

2004, Putin won by a far more comfortable margin 

than in 2000. But turnout declined when compared to 

the 1999-2000 electoral cycle, and the vote “against all” 

was notably greater in both December 2003 and March 

2004.26 This induced the regime to change the electoral 

rules, abolishing minimum turnout requirements and 

removing the “against all” option from ballots.
136

Monetization of social benefits produced protests in 80 of Russia’s then 89 regions during January to March 2005. Russian motorists staged protests 

in Vladivostok over limits on auto imports. After a 

speeding car carrying the governor of Altai rammed 

another vehicle and killed the governor, the driver 

of the car that was struck was put on trial, provoking protests in Altai and many other regions. Similar 

incidents elsewhere of cars using official blue lights to 

evade traffic jams and causing accidents generated the 

“migalki” (blue bucket) protests, with people wearing 

buckets on their heads.

In late-2010, protests in Samara, Irkutsk, and 

Kaliningrad demanded removal of governors and 

local governments. The protest in Kaliningrad by 

“Spravedlivost’” on January 30, 2010, was the largest 

public demonstration in Russia since 1991. In Moscow, Strategy 31 activists staged protests on the 31st 

day of each month with a “31st” to protest violations 

of Article 31 of the Russian Constitution guaranteeing 

freedom of assembly.27

One of the most direct warnings about popular dissatisfaction came in two reports from Mikhail 

Dmitriev’s Center for Strategic Research, the first in 

March and the second in November 2011.28 Based on 

focus groups, Dmitriev and his colleagues found significant resentment of both personalities and policies. 

Dmitirev’s claims for the superiority of focus groups 

over survey research are rejected by many behavioral 

sociologists, and his team did not recruit focus groups 

outside major cities. Nevertheless, he did sound an 

important warning.

Survey data from the Levada Center also should 

have provided a warning regarding any effort to manipulate the legislative elections. Its poll in August 
137

of 2011 found that 64 percent of Russians wanted to 

see “significant” or “complete” turnover in the Duma. 

(See Figure 4-1.)

Figure 4-1. Percentages of Desired Turnover 

in Russian DUMA.

Given the spread of dissatisfaction, it is legitimate 

to ask why and how the regime has managed to remain 

intact through the economic crisis that began in 2008. 

Analysts have pointed to Putin’s popularity, oil rents, 

and the overwhelming weight of regions and population groups that depend on the government’s redistribution policies. Natalia Zubarevich’s discussion of 

multiple Russias has become extremely popular.29 My 

concern with this analysis is that it treats regions and 

population groups as monolithic, rather than exploring their diversity. Even in the company towns that 

depend most on the government, some individuals 

have expressed alternative opinions. Mayoral elections in four cities in early 2012 produced outcomes 

that rejected the United Russia incumbents.30 Even if 

many smaller towns are overwhelmingly pro-Putin 

Remain essentially the 

same as now

Significant turnover

Complete turnover

No response

Levada Center, August 2011
138

and inclined to seek support from Moscow rather than 

challenge the government, not everyone adheres to 

this view. The Levada Center data showing that nearly two-thirds of Russians wanted to see “significant” 

or “complete” turnover in the Duma should give us 

pause in assuming that the overwhelming majority of 

Russians accept the status quo.

A second prevalent myth is that protest is entirely rooted in economic conditions.31 This makes oil 

prices the key to regime survival. This view, rooted 

in Soviet-era materialism, ignores the impact of at 

least four other factors: dignity, fatigue, ideology, and 

specific policies. 

The Arab Spring began in Tunisia not because 

of bread riots or price shocks, but because Mohammed Bouazizi immolated himself after being humiliated by a female police officer. People who feel that 

their basic dignity has been assaulted may, at times, 

behave in ways that political scientists or sociologists 

would consider irrational. Dignity is one of the crucial 

common elements in both the Arab Spring and the 

protests over Russia’s elections.

Fatigue with long-serving leaders is another important trigger. Hosni Mubarak lasted 3 decades before 

Egyptians decided that they had had enough. Putin 

was less fortunate: a significant share of the Russian 

population did not welcome his return to the Kremlin. Ideology got a bad name from the Union of Soviet 

Socialist Republic’s (USSR) use and abuse of Marxism, 

and liberalism suffered from the economic decline in 

the 1990s. Nevertheless, human rights remain a powerful mobilizing force. Some Russians have learned 

enough about the world to demand legality, an end to 

corruption, and, in some cases, even democracy. 

Russians across the country have shown a willingness to protest against specific policies. If leaders 
139

emerge who are able to connect these specific grievances to more general issues of the political system, 

the chemistry could be combustive. Khimki, migalki, 

l’goty, and other protests could ignite a wider fire. If 

the case is made that each of these represents not an 

isolated instance, but rather is the product of a system 

that does not permit adequate societal input regarding important policy decisions, the system itself could 

be called into question.

Epistemic Communities.

In addition to lack of leadership, an important reason why the local protests have not (yet?) generated 

effective demands for change in the political system 

involves the role of Russia’s epistemic communities. 

While criticism and attention have focused on political 

and economic policies and top-level leaders, many of 

the most intractable problems in Russia involve professional groups and individual professionals that, for 

reasons of self-interest and investment in Soviet practices, continue to reject genuine internationalization. 

This can be seen in demography, education, science 

and medicine, and innovation/R&D.32

Professional demographers have long warned 

that Russia faces a serious population decline. Yet 

Putin’s regime continues to rely on the projections of 

critics of “Western” demography, who assert that the 

government’s combination of propaganda and “maternity capital” payments has successfully reversed 

Russia’s population decline.33 A more sober analysis 

of the situation notes that the increase in births over 

the past 5 years is due to an increase in the number of 

women aged 20-29, the cohort most likely to have children. The maternity capital program appears to have 
140

encouraged women to have children sooner, to make 

sure they can take advantage of the program before 

economic conditions change, but has not had a significant impact on the total fertility rate (TFR), the indicator that is key to reversing population decline. In one 

of his election campaign articles, Putin stated that his 

regime would raise the TFR to 1.73 by 2015. It is not 

clear just how this will be accomplished, and offering 

a number to three decimal places raises eyebrows.

The majority of Russian professionals, or at least 

their leadership, continue to adhere to belief systems 

and incentive systems inherited from the Soviet era. 

The result is a growing divorce from international 

professional communities. It is not total separation. 

Many Russian specialists keep up with global developments and collaborate with foreign colleagues. But 

a significant share of the professionals prefer the comfort and apparent security of doing things the way 

they have done them for decades. This is particularly 

the case for leaders of “legacy” organizations carried 

over from the Soviet era.

The consequences of Russia’s “thin” internationalization are apparent in education, science and technology, and innovation/R&D. The situation is thrown 

into particularly stark relief if Russia’s performance 

since 1991 is compared to China’s since 1978. In the 

1950s, China adopted the Soviet systems of education, science, and technology almost completely, and 

received significant assistance from the USSR in doing 

so.34 If China, starting from a much lower base, has 

succeeded in reorienting the components of its knowledge economy to become a major player in global science and education, while Russia continues to dissipate the Soviet legacy in education and science, this 

suggests that policy, rather than the systemic legacy 

or path dependency, is the key factor. The epistemic 
141

communities in both countries continue to play an important role in the policies that have been adopted.

Starting points of reform, rather than history, mentality, or institutions, may be the key factor explaining 

the difference. China began “reform and openness” 

following the disastrous decade of the Cultural Revolution. Epistemic communities were fragmented, with 

many individuals “sent down” to the countryside. 

Professional groups in China were not in a position 

to assert claims to expertise when Deng initiated reform. In contrast, Mikhail Gorbachev introduced perestroika when the USSR could claim to be a co-equal 

superpower. Soviet/Russian professionals believed 

that their practices, knowledge base, and skills were 

as good as (or better than) any in the world. Where 

Chinese specialists sought to learn as much as possible from the developed countries, with the goal of 

eventually learning enough to become leaders, many 

Russian professionals felt that there was little the foreigners could teach them. Many who did value foreign 

models have left the country, a trend Putin continues 

to encourage. While the Chinese embraced globalization as a way to catch up and overtake the developed 

countries, many Russians view globalization as an 

American project designed to inhibit their development. The result is that China has internationalized in 

stunning ways, while Russia has resisted international 

integration in equally stunning ways.35

Education.

In creating a modern knowledge economy, Russia is stymied by myths about its Soviet past. All the 

rhetoric about the “scientific-technical revolution” 

obscured serious problems in education, science and 
142

technology, and innovation. In education, Soviet 

achievements in a few fields produced complacency 

rather than a sense that the world is highly competitive and requires constant effort just to avoid falling 

further behind. Since the demise of the USSR, Russia 

has become a world leader in the proportion of the 

population enrolled in higher education. Unfortunately, the quality of that education remains uneven, 

and the standards for awarding degrees have been 

seriously compromised.36

Both Russia and China have significantly increased the number of students receiving higher education. Growth in China has been tremendous, though 

starting from a much lower base. Russia now has a 

larger share of its population receiving higher education than any other country in the world. Annual 

admissions to higher education exceed the number of 

high school graduates.37 However, about half of the 

students are enrolled in correspondence divisions of 

higher education institutions, and another 10 percent 

are in evening divisions. Less than half study full time. 

(See Table 4-2.)

 Table 4-2. Higher Education Enrollments.

Russia has probably reached the peak of higher 

education enrollments, given that the number of high 

school graduates will decline each year until 2017. 

China announced a target of 30,000,000 students to 

be enrolled in higher education by 2010, though this 

Russia China

1990 2,824,500 (2 percent) 1997 1,000,000

2008 7,513,000 (5 percent) 2006 5,500,000
143

figure undoubtedly includes secondary specialized as 

well as higher education institutions.

Rapid expansion in any education system raises 

questions of quality, and this is a serious concern in 

both countries. One significant issue is that in both 

systems, the number of faculty has not kept pace with 

the increases in enrollments. As Table 4-3 shows, the 

number of faculty has grown by 66 percent, while student enrollments have increased by 165 percent. (The 

faculty data includes sovmetitelstvo, the practice of individuals teaching at more than one institution. This 

was a common practice in Tsarist Russia, due to low 

salaries. Stalin banned it. It returned after 1991, again 

due to low salaries.)

Source: Rossiia v tsifrakh, 2010.

Table 4-3. Russian Higher Education 

Faculty Resources.

In both the Chinese and Russian systems, the response to concerns about quality and poor perforYear State Private

1993-94 239,800 3,800

1995-96 240,200 13,000

2000-01 262,200 42,200

2005-06 322,100 65,200

2007-08 340,400 78,800

2008-09 341,100 63,400

2009-10 342,700 54,800
144

mance in an environment of finite resources has been 

to focus on a limited number of “elite” institutions. 

China’s 211 program has identified 106 higher education institutions, with nine of them receiving top priority. In Russia, the government has chosen 29 research 

universities through competitions and selected an additional 10 federal universities. The Research University project began with two pilot institutions, and the 

government then conducted two open competitions, 

selecting 27 more universities. The Federal University 

program also began with two pilot projects, one in 

Krasnoyarsk and one in the Southern Federal District. 

The Russian government subsequently named an 

additional six institutions. Moscow State University 

and St. Petersburg State University have maintained 

their special status, bringing the number of federal 

universities to 10.38

The difference in the selection process for the two 

types of institutions reflects an effort to balance competing priorities. In selecting the research universities, 

quality was supposed to be the main consideration. 

However, the author’s personal experience participating in several rounds of competitions for special status 

and funding for universities indicates that it is nearly 

impossible to eliminate the issue of regional distribution from consideration.39 The federal universities 

were selected on the basis of regional needs. The absence of any competition, or even a requirement that 

the institutions provide a plan for what they would 

do differently with their new status, raises concerns 

that reform is not on the agenda. Even if some administrators have thoughts about significant change, the 

process of amalgamating several previously independent institutions with their own physical plant, faculty, administration, and traditions will occupy their 

attention for several years.
145

A great deal of money is being spent, but much of 

it for construction, equipment, and other infrastructure. In Russia, this process rarely involves competitive bidding, and opportunities for corruption and 

waste are widespread. Inefficiency in using the new 

funding also derives from rigid bureaucratic controls 

over how money is allocated and what it may be used 

for. Often, funds are provided late in the fiscal year 

but must be spent before the year’s end. In one case, a 

rector of a university sent practically every member of 

the university faculty on a business trip (komandirovka) 

to use funds that arrived late in the calendar year. This 

probably did more to help Aeroflot and Russian Railways than to improve higher education.

Among the most striking differences between Russian and Chinese higher education is the character of 

internationalization. The Chinese have embraced educational globalization; Russia’s academic community 

remains more wary. Russian concerns were clearly visible in discussions about the Bologna Process (a series 

of ministerial meetings and agreements between European countries designed to ensure comparability in 

the standards and quality of higher education qualifications) in the late 1990s and early 2000s. The rector of 

Moscow University, Viktor Antonovich Sadovnichy, 

initially stated that Russia had the best universities in 

the world and therefore should eschew involvement 

in Bologna. Liudmila Alekseevna Verbitskaia, rector 

of St. Petersburg University, shared the evaluation of 

Russia’s world leadership, but her interpretation of 

its meaning was that Russia should participate in the 

Bologna process in order to have maximum influence 

over the project. Press accounts in the 2000s and several dozen personal interviews with university administrators suggest that Sadovnichy’s opinion is widely 

shared, though he has altered his view over time.
146

Results of the Chinese embracing internationalization, while the Russians remain hesitant, may be seen 

in international rankings, treatment of faculty with 

foreign degrees, and the role of returnees. Russian 

higher education has nearly vanished from international rankings. In 2009, The Times of London included 

five institutions from Hong Kong (ranked 24, 35, 46, 

124, and 195) and six from mainland China (ranked 

49, 52, 103, 153, 154, and 168) in its ranking of the 

world’s top 200 higher education institutions. Russia 

placed only two on the list, Moscow State University 

(155) and St. Petersburg State University (168). After 

The Times altered its criteria to accord less weight to 

reputation beginning in 2010, Russian institutions 

vanished from the top 200. In 2012, Moscow University had dropped into a tie with 25 other institutions at 

276; St. Petersburg University was tied with 49 other 

institutions at 351.40

One response has been for Russians to produce 

their own rankings. A first effort in this direction produced much more satisfactory results for Russian institutions: Moscow and St. Petersburg ranked in the 

top 100 (Moscow at 5); no Chinese institutions ranked 

in the top 100; the second 100 included two Russian, 

two Chinese, and two Hong Kong institutions. The 

truly stunning data came in the ranking of numbers 

300-430. Here, 45 Russian higher education institutions were included among the 130 on the list. Overall, the Russian ranking system included 52 Russian 

institutions among the world’s top 430, or 12 percent. 

These results reflect the criteria used for the rankings, 

which included the number of specialties, number of 

students, and number of alumni. Small, specialized, or 

liberal arts institutions were clearly not going to rank 

well in this system. 
147

The Russian government has announced plans to 

establish an “official” ranking system, using its own 

criteria. This fits a pattern of Russia reacting to globalization by insisting on different rules, rather than 

endeavoring to mesh with the global trends. Scholars 

at the Moscow State Institute for International Relations developed an alternative to the Davos rankings. 

Russia’s Finance Ministry has its own criteria for identifying global financial centers. The Russian Academy 

of Sciences insists on its own methodology for determining scientific productivity. 

The Chinese, too, have begun to publish their own 

rankings. In contrast to Russia, they downplay their 

own institutions. While Moscow University ranked in 

the top 100 higher education institutions in the Chinese Jiao Tong rankings, no Chinese institutions were 

included. In interviews, Chinese academics have offered contradictory explanations for downplaying the 

quality of Chinese higher education institutions. Some 

have stated that it is a budget game, permitting administrators to demand more funds to raise the quality of 

Chinese institutions. Others say that it is a combination of modesty and a desire to show results over a 

longer period of time: if in 5-10 years their institutions 

begin to rise in the Chinese global rankings, this will 

be evidence of their good performance.41

Another measure of internationalization is the 

number of foreign-trained faculty teaching at universities and institutes. Chinese higher education institutions welcome both Chinese and foreigners with postgraduate degrees from foreign institutions. In Russia, 

it has been difficult to overcome a legacy of not recognizing foreign degrees. Russian rules prohibited 

anyone from teaching for more than 3 years unless the 

person earned a Russian credential (Kandidat or Doktor 
148

Nauk-DR. of Sciences). These rules have been relaxed 

for scholars chosen in the two recent competitions for 

“mega grants” at Russian universities, but resistance 

to recognizing foreign degrees remains strong. It is 

one of the intensely debated issues in Russia’s participation in the Bologna process.

A large number of students from both China and 

Russia go abroad. Deng insisted that China had to allow students to go abroad, even if some of them would 

never return. Despite consistently over-estimating the 

proportion that would return, he did not waver from 

the policy. Estimates of the number of Chinese who 

went abroad for higher education vary, since many 

paid their own way and were not involved in official 

Chinese study abroad programs. Beginning around 

2005, there was a shift from the dominant group being graduate students to a larger number of undergraduates, reflecting interest in foreign training and 

the greater capacity of Chinese families to fund the 

education.42

The majority of Chinese students who have studied abroad have not returned. Estimates suggest that 

perhaps 20-30 percent have opted to work in China. 

Even that relative small proportion of returnees had 

exerted a significant impact on the Chinese education and research systems. The process has not been 

free of problems. China has encountered conflicts between the “sea turtles” who go abroad and the “land 

turtles” who remain in China.43 Yet a growing body 

of evidence suggests that the returnees have exerted 

a significant positive effect on Chinese institutional 

development, standards, and internationalization. 

Koen Jonkers describes a “virtuous circle” in the life 

sciences,44 and Dan Brenitz and Michael Murphree 

note positive contributions in the information technol-
149

ogy (IT) sector (even if this has not yet generated new 

product innovation).45

In Russia, the returnees have thus far exerted 

little impact. A new program to offer mega grants to 

about 200 leading Russian and international scholars 

has conducted two rounds of competition and a third 

round in 2012. Thus far, the program has made fewer 

than 100 awards. For the first time, Russian higher 

education institutions (VUZy) are allowing leading specialists to copy the model of China’s “swallows,” spending 4 months in Russia and the rest of 

their time in their home countries. How much impact 

these 200 scholars will be able to have remains an important open question. Once again, a large amount 

of money is being spent with little guarantee of 

measurable results.

Foreign student enrollments are another indication 

of the degree of educational internationalization. Russia enrolls about 100,000 foreign students. About 40 

percent come from former Soviet republics (half from 

Kazakhstan), and another 40 percent from Asia (the 

majority from China). China enrolls more than three 

times as many foreign students, with the top sending 

countries being South Korea, Japan, the United States, 

Vietnam, and Thailand.

China is not only sending more students abroad, 

but is also reaping greater benefits from those who 

return. In 2001, neither Russia nor China ranked as a 

major donor nation in the number of students studying abroad (defined by the Institute for International 

Education as those on official programs that implied 

eventual return to the home country). By 2006, China 

was ranked 6th in the world in the number of students 

studying abroad, with 6 percent of the total global 

flow, behind Australia with 7 percent and Germany 
150

with 8 percent but ahead of Canada and Japan (both 

with 4 percent). Russia continued to be absent from 

the list of top sending nations. A growing number of 

Russian young people studying abroad enroll directly 

in foreign institutions, rather than participating in 

official exchange programs.

The shift to mass tertiary education in Russia has 

placed a growing burden on students. About twothirds of the students enrolled at state institutions now 

pay tuition.46 Competition for the “budget” places that 

offer free tuition and a stipend has become so thoroughly corrupted at some VUZy that parents question 

whether it might be less expensive for their children 

to enroll in the “commercial” division and pay the 

tuition rather than spending even more money on tutors and side payments to gain a “budget” place (personal communications). While educational services 

have become marketized, there is not yet much price 

competition among VUZy.47 This may change in the 

coming decade, as the number of potential applicants 

continues to decline. The cost of tuition is increasing, due to inflation and also due to a formula that 

ties the amount a VUZ may charge for tuition to the 

amount spent on budget students. As the government 

has increased the funding for state VUZy, this raises 

the amount of spending per student and therefore the 

price for those paying tuition. Greater monetization 

inevitably generates more corruption and fraudulent 

behavior. Data indicate that Russian families spend 

even more on side payments for education than for 

medical care.48

The new economics of higher education in Russia 

is not sustainable. The demographic situation means 

that VUZy will increasingly need to compete for students. Weaker institutions will have difficulty as the 
151

applicant pool shrinks. The key question is whether 

all institutions will try to survive with a smaller enrollment, which means less funding from tuition, or 

whether the number of institutions will contract.49

Decline in the education system, despite (or because of) the greater number of students presages continuing difficulties in science and technology (S&T), 

and in R&D. These challenges, in turn, will make it 

difficult for Russia to play a role in global systems of 

production and innovation.

Science and Technology.

One of the most stunning changes of the past 

2 decades has been the rapid and unexpected loss 

of scientific capacity in Russia.50 The Soviet Union’s 

achievements in science and technology may have 

been overstated, but there is no question that, in some 

fields, the USSR made major contributions to world 

science.51 This has changed markedly since the 1980s. 

In part, it reflects the disruptions and lack of funding 

in the 1990s—the explanations that leaders of Russia’s 

scientific community prefer to emphasize. But it also 

stems from significant losses of personnel and a failure 

to reorient the Soviet system to function in the global 

knowledge economy competition that dominates education and S&T in the 21st century. The two factors 

are related: an exodus of many of the best younger 

scholars in the 1990s removed people who were both 

the rising stars of Russian science and a major force for 

greater international integration. Those who remained 

in Russia were those who were less able to compete 

in the global market for science talent or those who 

genuinely preferred the Soviet system. Certainly not 

all the talented scientists emigrated. But enough of 
152

the “best and the brightest” did depart to cede control 

over science to researchers and administrators with 

less interest in changing the system. 

In the global competition in education and S&T, 

Russia confronts many challenges that are similar to 

other nations: these include the costs of mass tertiary 

education, demands of the knowledge economy, and 

constraints on available resources to fund competing 

priorities. But Russia is also an outlier in important 

ways: the demographic crisis; the continuing role of 

the Academy of Sciences; bureaucratic obstacles; failure to confront fraud and corruption; and, most striking, resisting internationalization. In many of these areas, and particularly in resisting international norms, 

epistemic communities play a crucial and often detrimental role. The combination of the Soviet knowledge base and self-interest (institutional, career, and 

financial) induces many Russian scientists and science 

administrators to resist a Russian version of “reform 

and openness.”

Other former socialist countries have encountered 

similar dilemmas. In Hungary, Poland, and other 

Eastern members of the European Union (EU), the 

Academies of Science continue to play a major and 

sometimes disruptive role. But each of these countries 

has managed to move toward a greater role in global 

innovation processes.52 In China, the battle has been 

long and difficult. But in most of the other former 

communist countries, a combination of government 

policy, professional self-interest, and international 

influences have produced a shift to competition and 

internationalization. In Russia, the process has been 

halted and, in many places, reversed.

The data on Russian decline is overwhelming. 

Whether in terms of peer-reviewed scientific publi-
153

cations, number of researchers, number of advanced 

degrees, patent filings, or the related realms of utility model and industrial design applications, Russia’s 

performance has stagnated or declined since 1990. 

China’s rankings have shot up to the point where China now ranks second to the United States in scientific 

publications in international peer-reviewed journals.53

When presented with these data, the president of Russia’s Academy of Sciences responded by stating that 

Russia publishes many good journals and suggested 

foreign researchers should learn Russian so that they 

could read this valuable literature (personal communication). In early 2012, Russian science officials announced that they were developing their own version 

of a science citation index that would include the inhouse publications favored by Russian institutes and 

the summaries of reports given at professional meetings (tezisy dokladov—Thesis Report). 

Peer review, which increased in prevalence in the 

1990s, has become less used and is not a factor in the 

new index. (In 1993, when the author directed George 

Soros’s International Science Foundation, several 

rounds of grant competition based on peer review 

were conducted. At the time, Boris Saltykov, Minister 

of Science of the Russian Federation, mandated that 

peer review would be the way to distribute any new 

funds that became available to his Ministry. The Academy of Science has resisted the switch from administrative allocation to competition, and in the 2000s has 

been successful at cutting back on peer-reviewed competitions as a way to award research support.)
154

Innovation.

The weakening Russian capacity in education and 

research is exacerbating a serious innovation deficit 

inherited from the Soviet era. Despite incessant invocation of vnedrenie (innovation), the Soviet system 

performed poorly in developing new technology. The 

widely heralded success in launching Sputnik was, 

we now know, neither a major technological breakthrough nor a result of a long-term state.54 Accounts 

of Soviet technology demonstrate two important lessons. First, the military did perform better, but it accomplished this due to priority rather than overseeing a separate, more advanced R&D complex.55 Some 

highly talented individuals did seek the rewards of 

working for the Soviet military industrial complex; 

other highly talented individuals consciously sought 

to avoid the security restrictions and constraints military work involved, knowing that secrecy would cut 

them off from their international colleagues. Second, 

the Soviet Union did export technology, but what it 

exported consisted overwhelmingly of basic instruments. In machine tools, for example, the USSR exported a much larger number of units than it imported, but the value of the imports far exceeded that of 

the exports. Exports consisted of first and second generation basic metal cutting and grinding equipment; 

imports were expensive, sophisticated, numericallycontrolled tools (e.g., the famous case of the Toshiba 

machines and submarine propellers that allowed the 

Soviets to manufacture quiet propellers).

Many now assert that Russia has switched from being one gigantic military industrial complex to being 

a petrostate. Innovation in resource-producing countries is most successful when it begins in the natural 
155

resource sectors.56 While there is some evidence that 

this is beginning to happen in a few Russian regions, 

the government’s emphasis has been overwhelmingly 

on the high-technology realms that Putin mistakenly 

believes were the Soviet Union’s crown jewels.57 To 

focus on IT, high technology, and nanotechnology in 

a country that never achieved serial production of a 

personal computer is a tall order.

The Soviet Union had three separate systems of 

R&D: the Academy of Sciences, higher education, 

and industrial facilities. There was little integration 

among them. The industrial R&D system has largely vanished, as most enterprises either do not make 

a profit or earn too little to be able to support R&D 

activities. In data regarding spending on science, Russia does not rank badly in terms of government support (29th in world in share of gross domestic product 

[GDP]), but Russian industry lags seriously in what 

it contributes. In Organization for Economic Cooperation and Development (OECD) countries, about twothirds of R&D is funded by industry; in Russia, the 

figure is just 27 percent.58 One relative bright spot has 

been a significant increase in support for research at 

higher educational institutions, but the new equipment and grant programs have not yet produced 

significant returns.

The Academy of Sciences remains in a serious 

crisis. In the Soviet Union, science is viewed as “a 

system for generating knowledge,” rather than as a 

realm with serious real-world applications. The purview of “science policy” did not include technology 

or innovation.59

Personnel have become a significant problem in the 

Academy and in academia, with a rapidly aging scientific community. Due to emigration, scientists in the 
156

40-59 age group are a far smaller cohort than would 

normally be expected (one-half the proportion in the 

United States, while those over 60 are three times the 

share among American scientists). The extensive and 

continuing brain drain, both internal and external, 

remains a serious problem. Stifling bureaucracy and 

rampant corruption are major reasons for this exodus 

and have a significant impact on those who remain 

in Russia. Here again, the processes are mutually reinforcing: the scientists most likely to demand better 

management, competition, and honesty in attributing 

work to authors are often the ones most inclined to 

leave the country.

Russia is hardly the only country to experience a 

significant brain drain, but it reaps far less of a “brain 

gain” than most other developing or developed 

economies and participates less in global “brain circulation.” The vast majority of Russian scientists who 

have left the country are not inclined to return (recent 

Nobels). Compared to China, the programs to attract 

talent from abroad, whether returnees or foreigners, 

are modest and insulated. Russia has generally resisted the “swallow” model of researchers spending 

a few months each year in the country, something the 

Chinese regard as unavoidable.

The new competitive grants that have been introduced are small. The funds often are paid late in the 

fiscal year. Some scientists who have returned to Russia describe having had to pay their staffs out of their 

own bank accounts because federal funds were held 

up for half a year or more. Grant funding still has an 

ambiguous legal status. The federal programs to support R&D are not transparent, and the criteria often 

are vague. A plethora of administrative regulations 

limit the size of awards and the purposes for which 
157

funds may be used. Research projects are evaluated 

on the basis of their cost and length rather than the 

quality of such outputs as publications and patents.60

A host of restrictions limit flexibility in carrying 

out projects. Customs officials routinely delay the 

delivery of equipment, including basic necessities 

like petri dishes or reagents. Holding these supplies 

for half a year to extort bribes for releasing them may 

result in expiration of their useful life. Competitive 

bidding is rarely used in acquiring equipment. (Basic 

research and higher education [BRHE] did implement 

this, and the reaction of university administrators and 

researchers was astonishment.) The cost effectiveness 

of funds spent for R&D in Russia is about 10-15 percent of what it is in Europe or the United States.61 In 

part, this is because administrators emphasize travel, 

equipment, and large infrastructure projects. These 

categories are the ones acceptable to the Ministry of 

Finance and are also the realms most susceptible to 

kickbacks, side payments, and other forms of corruption. Resistance to competition is thus both a professional and financial advantage.62

One way to encourage cost efficiency is by setting clear priorities. Russia consistently has too many 

priorities. One government study identified Russian 

priority sectors (to 2020) as: information and telecommunications, nanotechnology, life sciences, biotechnology, transportation and space; clean energy; security and counterterrorism; and advanced weapons. In 

November 2011, then President Medvedev identified 

five priority sectors: medical technology, energy and 

energy efficiency, information technology, space and 

space science, and telecommunictions.

Nanotechnology emerged as one of Putin’s top 

priority programs. The reasons for this remain some-
158

thing of a mystery. In 2008, a group of physicists at 

one of our BRHE conferences joked that it is an Emperor’s New Clothes analogy: when officials come to 

inspect results, the nano-products will be too small 

for them to see. While it is a major focus of science 

worldwide, nanotechnology does not play to Russia’s 

traditional strengths. Much of the work in nanotechnology is done at the intersection of different disciplines: biotechnology and physics, biochemistry and 

medical devices, etc. The Soviet system “stovepiped” 

scientific work in individual disciplines, with research 

across disciplines being much harder to accomplish. 

Not only is Russia’s effort dwarfed by U.S. spending, 

but China has a significant program that was introduced with little fanfare. In 2004-06, the United States 

was the clear leader in nanotechnology development, 

garnering 43 percent of world nanotechnology patents. China received 1 percent of the world’s nanotech 

patents, to rank 13th; Russia, with less than one-half of 

1 percent, ranked 22nd.63

China has developed a strikingly successful model 

of production innovation and reworking technology 

for the domestic market, while thus far doing little in 

new product innovation.64 Beijing has been the focal 

point of the IT industry, a somewhat surprising development. In most countries, the high-technology corridor/center is not in the political capital. Adam Segal 

attributes Beijing’s success to the relative weakness of 

the local government in the national capital. Not having the power to dominate technology businesses, the 

Beijing government adopted a relatively liberal approach to networks, while providing some financial 

support. Segal describes this as “the good mother-inlaw” model.65 Lacking the power to control standard 

operating environments (SOEs) or their spin-offs, the 
159

local officials established supportive, nonhierarchical 

relationships. Over time, Beijing’s IT sector outperformed Shanghai, Xian, and Guangzhou, all regions 

with stronger production sectors.

Both Segal and Brenitz and Murprhee emphasize 

that China’s indigenous companies learned from multinational corporations (MNCs) but focused their efforts on China’s domestic market.66 These studies also 

reinforce David Zweig’s emphasis on the key role 

played by returnees. Recent analyses of MNCs in the 

two countries illustrate the differences in their approaches: Chinese firms have sought to learn and integrate; Russian firms focus on reaping profits, gaining 

control of enterprises in neighboring countries, and 

continuing to play by Russian rules at home.67

Why has Russia performed less well than China 

in reorienting a Soviet-style system from autarky to 

global competition? The existing literature provides a 

number of misleading answers:

• The Soviet system was overrated. This is correct but does not help us understand why some 

countries were able to overcome the obstacles 

more rapidly.

• Money. As we have seen, Russia now spends

quite a bit on research, with surprisingly poor 

returns on the investment.

• The resource curse. Hydrocarbons create dangers of Dutch disease, crowd out domestic 

industry, and create excessive dependence on 

world prices for oil and gas. With the development of shale gas, hydrocarbon producers 

appear increasingly vulnerable to changes in 

technology. However, rather than precluding 

the diversification of an economy, income from 

natural resources should make it possible to 
160

invest more in the diversification effort. When 

this fails to happen, it suggests that funds were 

either misallocated or misappropriated.

• Flawed privatization. The Russian variant of

privatization was certainly a problem, but it 

did not preclude R&D.

• Poor policy advice. Russian officials generally 

blame the bad advice offered by foreigners for 

many of their difficulties. But countries like Poland, Slovenia, and Slovakia that implemented 

the foreign-designed programs more quickly 

and completely have achieved results that make 

it difficult to attribute Russia’s economic performance to flawed policies forced upon them 

by foreign advisors. Failure to follow through 

with reforms on the part of “winners” is a more 

convincing explanation.

• “Mentality” is another favorite culprit: if only

Russians thought differently, it would be possible to implement reforms more effectively. 

Again, the experience of other nations renders 

this argument questionable. It is hard to think 

of two nations with more “unique” orientations 

than Japan or China. Yet, both have managed 

to retain their unique attributes (everything 

seems to come with “Chinese characteristics”) 

while participating in global economic and 

technological systems.

• A favorite explanation among Russian officials 

is that China’s success represents the achievements of state programs implemented by an 

authoritarian regime. This explanation ignores 

the story of the first 2 decades of China’s economic rise, when success came in sectors outside state control (technical and vocational 
161

education and special economic zones with foreign investment). The SOEs were long the dead 

weight holding back economic development. It 

was only after major reforms in state enterprises in the late 1990s that some of them began to 

perform less poorly. Some continue to attribute 

their success to a continuing soft budget constraint, underwritten by state-owned banks.68

More promising answers focus on incentive structures and competition, epistemic communities, and 

institutions (including corruption). This is good news 

for Russia: None of these is a genetic trait or an irreversible condition. Rather, all of them can be altered 

by a package of wise government policies that offer 

adequate incentives, foster institutional development 

and competition, and punish malfeasance.

The truly important lessons from China are that 

embracing competition and globalization both reflects 

and reinforces economic and social interests. When 

reforms are successful, self-interested actors allied 

with supporters of reform oppose retrenchment. As 

Zweig emphasizes, the key is partial loss of control: 

the government has to be weakened/limited enough 

that it cannot be a major obstacle, while still retaining 

sufficient capacity to provide basic public goods like 

education, patent and Internet protocol protection, 

medical care, and security.69

Epistemic communities play a crucial role, but 

they must be encouraged to reform and to compete 

by a combination of incentives and sanctions: rewards 

for compliance, salary and career trajectory penalties 

for resistance. Peer pressure can help enormously in 

encouraging positive behavior patterns, with returnees in a position to play a unique role.70 When scien-
162

tists and educators have the option of receiving state 

subsidies and support, many find this preferable to 

competition in the free market. 

The relationship between Russian academics and 

officials is complicated by an extreme variant of what 

might be called “the Scott Thompson factor.”71 Beginning in the Soviet era, it became common practice for 

government officials to receive academic credentials, 

and, in some instances, to gain election to the Academy of Sciences on dubious grounds. In the Putin era, 

about one-third of top Russian government officials 

hold kandidat of science or doctoral degrees that were 

purchased. Putin, Igor Sechin, and Viktor Zubkov all 

defended kandidat dissertations at the Mining Institute 

in St. Petersburg from 1997 to 1999. Some 18 pages of 

Putin’s thesis, the core of his chapter on “Scientific 

Planning,” were plagiarized from an economics textbook written by two University of Pittsburgh Business 

School professors and subsequently issued in a Russian translation by Mir publishing house.72

Following the wave of protests against Putin’s return to the presidency and fraudulent elections, some 

observers thought there might be significant changes 

in the Russian political system. However, indications 

in the first months of Putin’s third term as President 

make it difficult to be optimistic about reform. Putin 

has been weakened by the protests and the massive 

wave of satirical images produced by his opponents. 

Ironically, his weaker position may make it more difficult for him to introduce reforms that would be detrimental to Russian elites and epistemic communities. 

The changes promised in December have been skewed 

in ways that make them appear to have little impact: 

governors will be elected, but the choice of candidates will involve filters that preclude real opposition 
163

figures from running; rules for registering political 

parties have been relaxed, but in ways that are producing a plethora of competing parties that are likely 

to divide the opposition vote so that none of them 

reach the 5 percent threshold required for representation; nongovernmental organizations that receive 

foreign support will be required to register as foreign 

agents; and limits on the Internet, introduced as a 

way to preclude child pornography, open the door to 

censorship.

The protests have not ceased, though organizers 

did announce a pause for the summer. The next major demonstrations were scheduled for September 15, 

2012. The mayoral, gubernatorial, and regional legislative elections in October were quite interesting. If 

plans to reduce subsidies for gas and other key commodities in July were carried through, higher heating 

costs will not be noticeable during the summer. By 

October, however, the higher payments would add 

economic issues to the political grievances of Putin’s 

self-appointed candidacy and electoral fraud.

The changes that have been adopted for the electoral system thus far appear to be largely cosmetic. Restoring elections for governors removes the Kremlin’s 

responsibility for both selecting and answering for 

the behavior of regional chief executives. At the same 

time, the process of approving candidates promises to 

guarantee that real opponents of United Russia will 

have a difficult time getting on the ballot.

Scientific research and innovation are not likely to 

experience a renaissance without more serious reform 

of educational and research institutions. The epistemic 

communities continue to resist reform, and a weakened government is not in a position to push them 

harder. Without greater social demand, and especially 
164

demand on the part of the academic community, the 

ongoing decline is likely to continue.

CONCLUSION

Return to the three questions posed by our conference organizers:

1. What must be done is diversification of the 

economy, which will generate demand and financial 

support for innovation. This also requires substantial 

changes to the political system (incentives, term limits, 

and feedback mechanisms); educational and research 

institutions (internationalize and foster competition); 

and epistemic communities (incentives and competition, which are preferable to sanctions). 

2. What are the obstacles? Change is demonic, 

and therefore never easy. But beyond the common 

difficulties in altering any established system, in 

Russia, the most serious obstacles to accomplishing 

needed changes involve corruption and self-interest 

on the part of the agents involved. The problem is 

the winners, not the losers. China demonstrates that 

reorienting a Soviet-style system is challenging but 

not impossible. Russia demonstrates that, unless political leaders alter the incentive structures, epistemic 

communities will continue to do what they are used 

to doing.

3. What will be done, and with what consequences? 

Without a significant change in the signals and policies from the top, little will change. However, as long 

as oil rents supply adequate budget funding, a great 

deal of money will be spent. The most tragic result is 

that a large number of creative people will leave Russia. In terms of economic development and security issues, Russia will continue to be a declining power able 
165

to influence global affairs primarily through negative 

rather than positive actions.

ENDNOTES - CHAPTER 4

1. At a conference at the Center for Strategic and International Studies (CSIS) in 2012, Alexei Kudrin cited the $130 figure. 

In a presentation at a fund-raising meeting at the Hermitage in 

June 2012, he cited a figure of $115, which corresponded to what 

President Putin and others had been giving at the St. Petersburg 

Economic Forum. 

2. Richard McGregor, The Party: The Secret World of China’s 

Communist Rulers, New York: Harper Collins, 2010; Ezra F. Vogel, 

Deng Xiaoping and the Transformation of China, Cambridge, MA, 

and London, UK: Harvard University Press, 2011; Kate Zhou, 

China’s Long March to Freedom: Grassroots Modernization, New 

Burnswick, NJ, and London, UK: Transaction Publishers, 2009.

3. Edward L. Keenan, “Muscovite Political Folkways,” Russian Review, Vol. 45, No. 2, April, 1986, pp. 115-181. Russian colleagues have pointed out that we probably know less about who 

makes decisions in the Putin system than we did in the Brezhnev 

era, when Central Committee assignments and Politburo responsibilities were relatively clear.

4. Barbara Geddes, “What Do We Know About Democratization after Twenty Years,” Annual Review of Political Science, 1999, 

Vol. 2, pp. 115-144.

5. Andreas Schedler, “The Menu of Manipulation,” Journal of 

Democracy, Vol. 13, No. 2, April 2002, pp. 36-50.

6. Steven Heydemann, “Upgrading Authoritarianism in the 

Arab World,” Saban Center Analysis Paper, Washington, DC: 

Brookings Institution, 2007 available from www.brookings.edu/

papers/2007/10arabworld.aspx. 

7. W. Martin King Whyte, The Myth of the Social Volcano, Stanford, CA: Stanford University Press, 2010; Theresa Wright, Accepting Authoritarianism: State-Society Relations in China’s Reform Era, 

Stanford, CA: Stanford University Press, 2010.
166

8. Jennifer Gandhi and Adam Przeworski, “Authoritarian 

Institutions and the Survival of Autocrats,” Comparative Political 

Studies, Vol. 40, No. 11, 2007, pp. 1279-1301; Jennifer Gandhi, Political Institutions Under Dictatorship, New York: Cambridge University Press, 2008.

9. The recently completed doctoral dissertation by Leah Gilbert at Georgetown University provides detailed evidence of the 

effects of the crowding-out phenomenon. “State Mobilization 

Strategies and Political Competition in Hybrid Regimes,” p. 2, 

Ph.D. Dissertation, Georgetown University, 2012.

10. Sidney Tarrow, “The Strategy of Paired Comparison: Toward a Theory of Practice,” Comparative Political Studies, Vol. 43 

No. 2, 2010, pp. 230-259.

11. Jonathan Unger, ed., Associations and the Chinese State: Contested Spaces, Armonk, NY: M. E. Sharpe, 2008; Richard Komaiko 

and Beibei Que, Lawyers in Modern China, Amherst, NY: Cambria 

Press, 2009; Harley Balzer, “Obuchenie Innovatsiiam v Rossii i v 

Kitae” (“Learning to Innovate in Russia and China”), Pro et Contra, Vol. 14, No. 3, May-June 2010, pp. 52-71.

12. David Shambaugh, China’s Communist Party: Atrophy and 

Adaptation, Berkeley: University of California Press, 2008.

13. Gabriella Montinola, Yinyi Qian, and Barry R. Weingast, 

“Federalism, Chinese Style: The Political Basis for Economic Success in China,” World Politics, Vol. 48, No. 1, October 1995, pp. 

50-81; David Zweig, Internationalizing China: Domestic Interests and 

Global Linkages, Ithaca, NY, and London, UK: Cornell University 

Press, 2002.

14. Balzer, “Obuchenie Innovatsiiam.”

15. Li Cheng, “China’s Fifth Generation: Is Diversity a Source 

of Strength or Weakness?” Asia Policy, No. 6, July 2008, pp. 53-93.

16. Ibid., and Shambaugh, China’s Communist Party.
167

17. McGregor, The Party: The Secret World of China’s 

Communist Rulers.

18. One of my Georgetown University colleagues presented 

his book to an audience at the Communist Party School in Beijing in 2012. The presentation provoked an animated discussion 

among the Chinese analysts about both the imperative for reform 

and the difficulty of combating entrenched interests.

19. Mäkinen Sirke, “Surkovian Narrative on the Future of 

Russia: Making Russia a World Leader,” Journal of Communst 

Studies and Transition Politics,” Vol. 27, No. 2, 2011, pp. 143-165.

20. Harley Balzer, “Managed Pluralism: Vladimir Putin’s 

Emerging Regime,” Post-Soviet Affairs, Vol. 19, No. 3, JulyAugust-September 2003, pp. 189-226.

21. Some of the best documentation of concerns among 

the Russian elite has come from Mikhail Dmitriev’s Center for 

Strategic Development. Three reports have documented growing unease with Russia’s economic and political trajectory. The 

most recent is Center for Strategic Development, “Obshchestvo 

i vlast’ v usloviiakh politicheskogo krizisa. Doklad ekspertov 

TsCR Komitetu grazhdanskikh initsiativ” (“Society and Power 

in Conditions of Crisis: Report of the Experts at the Center for 

Strategic Development for The Committee for Civic Initiative”), 

Moscow, Russia: May 2012. Also see Mikhail Dmitriev and Daniel Treisman, “The Other Russia: Discontent Grows in the Hinterlands, Foreign Affairs, Vol. 91, No. 5, September/October 2012. 

Also see Alexei Kudrin and O. Sergienko, “Posledstviia Krizisa i 

Perspektivy Sotsialno-Ekonomicheskogo Razvitiia Rossii” (“Consequences of the Crisis and Perspective For the Social-Economic 

Development of Russia”), Voprosy Ekonomiki, No. 3, 2011, pp. 4-19.

22. INSOR, Obretenie Budushchego. Strategiia 2012 (Acquiring 

the Future: Strategy 2012), Moscow, Russia: Institut Sovremennogo 

Razivtiia (Institute for Contemporary Development) 2011, available from www.insor-russia.ru/files/Finding_of_the_Future; Sergei 

Balanovskii and Mikhail Dmitriev, Politicheskii Krizis v Rossii i

Vozmozhnye Mekhanizmy Ego Razvitiia (The Political Crisis in Russia and Possible Mechanisms for its Development), Washington, DC: 

Center for Strategic Development, 2011; V. Milov, B. Nemtsov, 
168

V. Ryzhkov, and O. Shorina, eds., X Putin. Korruptiia. Nezavisimi

ekspertnyi doklad (Putin. Corruption. Independent Ekspert Report), 

Moscow, Russia: Partiia Narodnoi Svodody, 2011, available from 

www.putin-itogi.ru/f/Putin-i-korruptsiya-doklad.pdf.

23. Lilia Shevtsova, “Putinism Under Siege: Implosion, Atrophy or Revolution?” Journal of Democracy, Vol. 23, No. 3, July 2012, 

pp. 19-32.

24. Michael McFaul, “The Fourth Wave of Democracy and

Dictatorship: Noncooperative Transitions in the Postcommunist 

World,” World Politics, Vol. 54, No. 2, January 2002, pp. 212-244.

25. Henry E. Hale, Michael McFaul, and Timothy J. Colton, 

“Putin and the ‘Delegative Democracy’ Trap: Evidence from Russia’s 2003-04 Elections,” Post-Soviet Affairs, Vol. 20, No. 4, OctoberDecember 2004, pp. 285-319.

26. Derek S. Hutcheson, “Protest and Disengagement in the 

Russian Federal Elections of 2003-04,” Perspectives on European 

Politics and Society, Vol. 5, No. 2, 2004, pp. 305-330.

27. Alfred B. Evans, Jr., “The Framing of Discontent by Protest Movements in Russia,” Paper Presented at the Association for 

Slavic, East European, and Eurasian Studies (ASEEES) National 

Convention, November 17-20, 2011.

28. See Endnote 22. All of the reports are available from 

www.csr.ru.

29. ZN. V. Zubarevich, Sotsial’noe razvitie regionov Rossii: 

Problemy I Tendentsii Perekhodnogo Perioda (Social Development 

of Russian Regions: Problems and Tendencies in the Transition Period), 

Moscow, Russia: Knizhnyy dom “Librokom,” 2012; and Natalia 

Zubarevich, “Four Russias: Rethinking the Post-Soviet Map,” 

March 29, 2012, available from www.opendemocracy.net.

30. In the Chernogolovka Mayoral election, physicist Vladimir Razumov won a majority. The result was overturned; but following protests, this was reversed, and the officials responsible 

for rejecting the results were dismissed. In Yaroslavl, Yevgeny 

Urshalov, a candidate running in opposition to United Russia, 
169

won with 70 percent of the vote. In Astrakhan, opposition candidate Oleg Shein staged a hunger strike to protest the falsification of election results. Ombudsman Lukin and other Moscow 

figures expressed support. In Togliatti, Sergei Andreev, known 

as a liberal, defeated the United Russia candidate General 

Alexander Shakhov.

31. June 4, 2012, available from www.opendemocracy.net.

32. These topics are discussed in Harley Balzer, “Russia and 

the Limits of Authoritarian Resilience,” Richard Weitz, ed., Can 

We Manage a Declining Russia? Washington, DC: Hudson Institute, 

November 2011, pp. 85-116.

33. At the June 12, 2012, celebration of Russia’s National Day 

at the Russian Embassy in Washington, Ambassador Kislyak 

repeated the claim that Russia has overcome its demographic 

decline. Author’s personal observation.

34. Thomas P. Bernstein and Hua-Yu Li, eds., China Learns 

from the Soviet Union, 1949-Present, Lanham, MD: Lexington 

Books, 2010.

35. Harley Balzer, “Russia and China in the Global Economy,” Demokratizatsiya, Vol. 16, No. 1, Winter 2008, pp. 37-48. For 

a good summary of Russian views of globalization, see Andrei 

P. Tsygankov, “Globalization: A Russian Perspective,” Arlene 

B. Tickner and David L Blaney, eds., Thinking International Relations Differently, London, UK: Routledge, 2012, pp. 205-217. Lilia 

Shevtsova has suggested that members of the Russia elite globalize quite readily in their personal lives, sending their children 

abroad to study, purchasing real estate, and keeping money in 

foreign bank accounts. But they do not fully integrate. See Bobo 

Lo and Lilia Shevtsova, A 21st Century Myth—Authoritarian Modernization in Russia and China, Moscow, Russia: Carnegie Moscow 

Center, 2012.

36. This section draws on Harley Balzer, “Obuchenie innovatsiiam v Rossii i v Kitae” (“Learning to Innovate in Russia and 

China”), Pro et Contra, Vol. 14, No. 3, May-June 2010, pp. 52-71.
170

37. The “excess” of higher education enrollees over high 

school graduates consists primarily of students who attended secondary specialized institutions and then sought higher education.

38. Balzer, “Obuchenie innovatsiiam”; Igor Fediukin and Isak 

Frumin, “Rossiiskie VUZy-Flagmeny” (“Russian Flagship Higher 

Education Institutions”), Pro et Contra, Vol. 14, No. 3, May-June 

2010, pp. 19-31.

39. From 1998 to 2009, the author was a member of the Governing Council for the Basic Research and Higher Education Program funded by the John D. and Catherine T. MacArthur Foundation, the Carnegie Corporation of New York, and the Russian 

Ministry of Education and Science. The program established 16 

research and education centers at universities across Russia. In 

each of the four rounds of competition, our Russian colleagues 

from the Ministry expressed serious concerns about issues of 

regional distribution.

40. See www.timeshighereducation.co.uk/world-university-rankings. Other rankings have been kinder to Russian institutions. The 

Shanghai Jiao Tong Top 100 put Moscow University in 77th place 

in 2009, but dropped it to 80 in 2012. St. Petersburg fell to a tie 

with 99 other institutions for 401-500. Information available from 

www.shanghairanking.com.

41. In the most recent Shanghai Jiao Tong rankings, for 2011, 

Moscow University had dropped to 80 from 75 in 2009. St. Petersburg University was in a tie for 401-500. No other Russian institutions made the top 500. In mathematics, Moscow University 

ranked 35 in 2011, down from 23 in 2009. Information available 

from www.shanghairanking.com. As many expected, Chinese institutions showed substantial progress. Four Chinese institutions 

were in the 50-way tie for 151-200 (Peiking, Shanghai Jiao Tong, 

Tsinghua, and Zhejiang). Three Chinese universities were in the 

tie for 201-300; seven for rank 301-400, and 14 among the 100 ranking 401-500. That placed 28 Chinese institutions in the top 500. 

Somewhat astonishingly, Hong Kong institutions fare almost as 

poorly as do Russian universities: Two are tied for 151-200, and 

three more are in the group at 201-300. Whereas The Times rankings of Russian institutions are similar to the Shanghai Jiao Tong 

numbers, The Times ranks Hong Kong universities and institutes 

far higher.
171

42. The Institute of International Education in New York publishes annual figures on the numbers of foreign students. Information available from www.iie.org/.

43. David Zweig and Donglin Han, “‘Sea Turtles’ or ‘Seaweed’? The Employment of Overseas Returnees in China,” 

France/ILO Symposium, Paris, France, May 2008.

44. Koen Jonkers, Mobility, Migration and the Chinese Scientific

Research System, Abington, UK: Routledge, 2010. 

45. Dan Breznitz and Michael Murphree, The Run of the Red 

Queen: Government, Innovation, Globlization, and Economic Growth 

in China, New Haven, CT, and London, UK: Yale University 

Press, 2011.

46. T. L. Kliachko, “Main Tendencies of the System of Education of the Russian Federation in 2007,” Russian Education and 

Society, Vol. 51, No. 7, July 2009, pp. 35-57.

47. N. V. Popravko and A. Iu. Rykun, Stanovlenie i Razvitie 

Rynka Dopolnitel’nykh Obrazovatel’nykh Uslug na Territorii Tomskogo Regiona. Analiz Povedeniia Potrebitelei. (Creation and Development 

of the Market for Supplementary Educational Services in the Tomsk 

Region. Analysis of Consumer Behavior), Tomsk, Russia: Izdatelstvo 

Tomskogo Nniversiteta, 2002.

48. Georgii Satarov, Diagnostika Rossiiskoi korruptsii: Sotsiologicheskii Analiz (Otchet Podgotovlen Fondom INDEM (Disgnostics 

of Russian Corruption: A Sociological Analysis—A Report Prepared 

by the INDEM Foundation), Moscow, Russia: May 2002; Popravko 

and Rykun.

49. In the United States, the response to a much less dramatic 

demographic shift was to seek a greater number of nontraditional 

students. While this is possible in Russia, it does not appear likely 

that the numbers would be adequate. Russia already enrolls nearly 5 percent of the population in higher education, and as the population ages and the number of high school graduates declines, 

the pressure to augment the labor force will be enormous. Harley 

Balzer, “Demography and Democracy in Russia: Human Capi-
172

tal Challenges to Democratic Consolidation,” Demokratizatsiya, 

Vol. 11, No. 1, Winter 2003, pp. 95-109. 

50. For more detail on this reversal, see Balzer, “Obuchenie 

innovatsiiam.” An English translation is available as Mortara 

Working Paper 2011-17, from www12.georgetown.edu/sfs/docs/

mwp_2011_17.pdf.

51. Soviet success was mainly in theoretical fields that required little experimental work, though, of course, there were exceptions in nuclear research, biological weapons, and some other 

military-related specialties. See Thane Gustafson, “Why Doesn’t 

Soviet Science Do Better than it Does?” Linda Lubrano and Susan 

Gross Solomon, eds., The Social Context of Soviet Science, Boulder, 

CO: Westview Press, 1980; and Harley Balzer, Soviet Science on the 

Edge of Reform, Boulder, CO: Westview Press 1989.

52. Richard Connolly, “Climbing the Ladder? High-Technology Export Performance in Emerging Europe,” Eurasian Geography 

and Economics, Vol. 53, No. 3, 2012, pp. 356-379.

53. Balzer, “Obuchenie innovatsiiam.’

54. Asif Siddiqi, The Red Rockets’ Glare: Spaceflight and the

Soviet Imagination, 1857-1957, Cambridge, MA, and New York: 

Cambridge University Press, 2010. Siddiqi shows that there was 

no Soviet program to launch a satellite until after Joseph Stalin’s 

death. The interest in space was kept alive by Sergei Korolev and 

other fanatics. Korolev finally was given the chance to strap together a bunch of relatively simple booster rockets to launch the 

first Sputnik.

55. Balzer, Soviet Science on the Edge of Reform.

56. Gavin Wright and Jesse Czelusta, “Mineral Resources and 

Economic Development,” MS Paper, Stanford, CA: Stanford University, October 2003.

57. The journal EKO, No. 1, 2002, published a set of articles 

on innovation in the Tatarstan oil industry. For Putin’s views, see 

Harley Balzer, “Vladimir Putin’s Academic Writings and Russian 

Natural Resource Policy,” Problems of Post-Communism, Vol. 53, 

No. 1, January-February 2006, pp. 48-54.
173

58. Alexey Prazdnichnykh and Kari Liuhto, “Can Russian 

companies innovate? Views of some 250 Russian CEOs,” Turku, 

Finland: Electronic Publications of Pan-European Institute No. 21, 

2010; Irina Dezhina, “Na Lifte, Chrez Platformu—v Klaster: Soedinit’ Biznes I Nauku—Poka Nerazreshimaia problema v Rossii” 

(“On the Elevator, Across the Platform—To the Cluster: Bringing 

Together Business and Science—Thus Far an Unresolved Problem in Russia”), Nezavisimaia gazeta, April 25, 2012.

59. Irina G. Dezhina, “Otsenka Mer Gosudarstevnnoi Politiki 

Rossii Oblasti Nauki” (“Evaluating Measures of State Policy in 

the Sphere of Science”), EKO, No. 2, 2012, pp. 145-163.

60. These comments have been collected by the author from 

multiple visits to Russian universities and from the annual conferences convened by the basic research and higher education 

(BRHE) program.

61. Dezhina, “Evaluating Measures of State Policy in the 

Sphere of Science.”

62. In 2010, Alexander Blankov of the Interior Ministry Department of Economic Security estimated corruption in Russian 

education to total $5.5 Billion. Some $1.5 billion was spent on 

the admission process. (Itar-Tass, May 25, 2010). The same day, 

Itar-Tass quoted Viktor Panin of the Russian society for the protection of rights of educational services consumers on the prices 

for specific educational credentials: Secondary school certificates 

cost $500; VUZ diplomas cost $700-$1,000; Kandidat degrees are 

priced at $20,000 to $50,000, while Nauk credentials cost $30,000 

to $70,000. Panin estimates that about 5,000 Nauk credentials are 

sold annually.

63. Balzer, “Obuchenie innovatsiiam.”

64. Harley Balzer, “Russia and China in the Global 

Economy,” pp. 37-48; Breznits and Murphree, The Run of the 

Red Queen.

65. Adam Segal, Digital Dragon: High-Technology Enterprises in China, Ithaca, NY, and London, UK: Cornell University 

Press, 2003.
174

66. Segal, Digital Dragon; Breznitz and Murphree, The Run of 

the Red Queen; also see Zhou Yu The Inside Story of China’s HighTech Industry: Making Silicon Valley in Beijing, Lanham, MD: Rowman & Littlefield, 2008.

67. Andrei Panibratov, Russian Multinationals: From Regional 

Supremacy to Global Lead, London, UK, and New York: Routledge 

Contemporary Russia and Eastern Europe Series, 2012; Jean-Paul, 

Larcon, ed., Chinese Multinationals, Singapore and Hackensack, 

NJ: World Scientific, 2009.

68. Huang Yasheng, Capitalism with Chinese Characteristics: 

Entrepreneurship and the State, Cambridge and London, UK: Cambridge University Press, 2008.

69. Zweig, Internationalizing China.

70. David Zweig, “Returnees, Technology Transfer, and 

China’s Economic Development,” Hong Kong University of Science and Technology, Center on China’s Transnational Relations, 

Working Paper No. 28, presented June 2009; David Zweig, Chung 

Siu Fung, and Wilfried Vanhonacker, “Rewards of Technology: 

Explaining China’s Reverse Migration,” Center on China’s Transnational Relations, Working Paper No. 11, The Hong Kong University of Science and Technology, September 2006.

71. Scott Thompson, the CEO of Yahoo, was forced to resign 

in May 2012 when it became known that he had “padded” his 

resume. For many years, Thompson had claimed that his undergraduate degree was in both accounting and computer science, 

when it was only in accounting. 

72. Harley Balzer, “The Putin Thesis and Russian Energy Policy,” Post-Soviet Affairs, Vol. 21, No. 3, 2005, pp. 210-225; Allison 

M. Heinrichs, “Putin Plagiarized from Pitt Professors,” Pittsburgh 

Tribune-Review, March 28, 2006.
175

CHAPTER 5

RUSSIA AS A POLE OF POWER:

PUTIN’S REGIONAL INTEGRATION AGENDA

Janusz Bugajski

With the return of Vladimir Putin to Russia’s 

Presidency, the Kremlin is reinvigorating its regional 

assertiveness, and several former Soviet republics are 

under increasing pressure to participate in Moscow’s 

integrationist initiatives. No longer a credible global 

superpower, Russia aims to become the preeminent 

Eurasian power and not simply a junior partner of 

the United States or any other large state. Even before 

his re-election in March 2012, Putin underscored the 

Kremlin’s ambitions in Russia’s immediate neighborhood and outlined the concept of a Russian-led Eurasian Union (EurU) that will evidently remain central 

in his efforts to forge a legacy as a gatherer of postSoviet lands.1

Among the top priorities that Putin set for his 

third presidential term is the reintegration of the former Soviet republics, based on tighter economic links 

and culminating in a political and security pact with 

Russia at its center. Moscow is evidently fearful lest 

the territory of the former Soviet Union permanently 

divides and drifts into European and Asian “spheres 

of influence.”2

 Hence, Putin seeks to create a new Eurasian bloc that will balance the European Union (EU) 

in the West and China in the East. Economic linkages 

will create political ties and mesh with interstate security structures, thus making it less likely that Russia’s neighbors can join alternative military, economic, 

and political alliances. Russia would thereby be able 
176

to strengthen its geopolitical position as a “pole of 

power” in a multipolar world.

To achieve its grand ambitions, Moscow needs to 

assemble around itself a cluster of states that are loyal 

or subservient to Russian interests, and it has been 

encouraged in this endeavor by several favorable 

developments in recent years. First, as a by-product 

of President Barack Obama’s administration “reset” 

policy toward Moscow launched in early 2009, Washington has curtailed, if not completely discarded, its 

campaign to enlarge the North Atlantic Treaty Organization (NATO) and secure the post-Soviet neighborhood within Western structures. This has left the East 

European states bordering Russia more exposed and 

vulnerable to Moscow’s pressures and integrationist 

maneuvers. Moreover, Belarus, Moldova, and Ukraine 

are not priority interests for the current American administration, whether in terms of democratic development, national sovereignty, or their strategic location.

Second, the financial crunch, economic downturns, and political stresses within the EU have diminished Brussels, Belgium’s outreach toward the postSoviet countries. This has decreased the momentum 

of the EU’s Eastern Partnership (EaP), an initiative 

launched in May 2009 and designed to harmonize the 

European post-Soviet states with EU standards. Moscow has concluded that the EU is in serious disarray 

and decline and will be preoccupied with its internal problems for several years, if, indeed, it does not 

actually fracture.

Third, there is visible disillusionment with the 

EU in many of the post-Soviet capitals. They do not 

possess the roadmap, direction, or commitment to 

full integration with the West, unlike the vision and 

promise that was given to the Central Europeans after 
177

they liberated themselves from Moscow in the early 

1990s or to the Western Balkan countries through 

the EU’s Stabilization and Association Agreements 

after the collapse of Yugoslavia. Conversely, in the 

case of Belarus and Ukraine, there is tangible frustration in several EU capitals over their ongoing political regression, human rights abuses, and stilted 

economic reforms.

Fourth, the return of Vladimir Putin to the Kremlin is re-energizing Russia’s neoimperial ambitions 

through such comprehensive geostrategic objectives 

as the formation of a EurU. As an added bonus, an assertive foreign policy helps distract attention from domestic opposition and the convulsions inside the Russian Federation. Putin’s renewed presidency has been 

presented as vital to Russia’s national security in two 

ways. It will allegedly protect Russia from internal 

turmoil generated by disruptive public protests, and it 

can rebuild Eurasia under Russia’s management and 

remove unwanted Western influences that purportedly challenge the security of the Russian Federation.

MULTIPOLAR GOALS 

A principal objective of Moscow’s foreign policy 

is to restore Russia as a major regional power.3 In 

this equation, the Kremlin’s overarching goal toward 

the West is to reverse U.S. global predominance by 

transforming “unipolarity” into “multipolarity,” in 

which Russia exerts increasing international leverage through its Eurasian centrality. Kremlin officials 

believe that the world should be organized around 

a new global version of the 19th century “Concert of 

Europe” in which great powers balance their interests 

and smaller countries orbit around them, essentially 
178

as satellites or dependencies. Moscow favors multipolarity over multilateralism. In the latter, its voice becomes diluted in various multinational formats; in the 

former, its role is raised as an important global player.

Moscow’s “multipolar” concept is based on two 

geopolitical premises—the decline of the United 

States and the emergence of new “poles” or centers of 

international power, among which Russia becomes a 

significant player. Conventional wisdom presupposes 

that the world has entered the era of multipolarity, in 

which regional influence is maintained by a few select powers. In reality, the future will be much more 

irregular and unpredictable. There are at least three 

conceptual problems with the notion of multipolarity. 

First, it assumes that a large country has substantial 

attractive influence to become a legitimate magnetic 

force vis-à-vis its neighbors. Instead, an ambitious 

government may simply cajole and pressure its neighbors to grudgingly recognize its temporary dominance. However, such a pole of power will generate 

little loyalty; on the contrary, it may become inherently unstable by increasing regional resentments and 

stoking interstate tensions. Russia presents a stark example of such a destabilizing pole of power aspiring 

to regional dominance.

Second, the concept of multipolarity underestimates the interests and aspirations of smaller and 

medium-sized countries by placing them within the 

confines of the ambitions of larger regional powers. 

It can thereby be used as a smokescreen and even a 

justification for neoimperial dominance that places 

limitations on the national independence of numerous subordinated states, including Ukraine, Belarus, 

and Moldova.

Third, nonpolarity, the converse of multipolarity, does not automatically presuppose international 
179

chaos as the multipolar proponents claim. The idea of 

chaos assumes that we would witness a life and death 

struggle for survival between and within competing 

states. Although this could be the case in some specific 

regions, such as parts of the Middle East or Central 

Africa, the self-appointed polar powers may themselves be the source of conflict, either with each other 

or by following a policy of “divide and rule” toward 

their numerous neighbors. 

In other regions, the absence of a regional hegemon could actually encourage countries to cooperate 

around common interests to avoid both chaos and 

outside dominance. As a result, instead of ensuring 

stability and security, the struggle for multipolarity can itself engender conflict, especially where two 

or more powers compete for predominant influence, 

while smaller states resist their pressures or actively 

seek to embroil them in conflicts in order to gain various national advantages. More than likely, over the 

coming decade, we will witness a mixed picture of polarities. The United States will remain the single strongest power but is not capable of always acting unilaterally or deploying its forces globally. Meanwhile, 

several multipolar aspirants will compete for regional 

influence with varying degrees of success in attracting 

neighbors into their orbit. 

In seeking to more rapidly diminish American 

power, Russia’s leaders support the creation of a 

“counter-hegemonic bloc.”4

 This is a modernized version of the anti-American or anti-Western alliance 

that was pursued by the Soviet Union throughout the 

Cold War and ultimately failed. As the Russian case 

has demonstrated, expressions of strategic opposition 

to the West are driven largely by political leaders fearful of losing domestic power and international influ-
180

ence. However, no constructive or all-encompassing 

ideology has emerged that can unite and mobilize 

disparate states, which often possess contrary ambitions in overlapping regions. Moreover, such a strategy faces three core problems: it will stimulate new 

conflicts with the West, including the EU and NATO; 

it is unlikely to lead to meaningful or durable cooperation between such diverse countries and competitors 

as China, India, and Russia; and it will be resisted by 

states and governments that either aspire to be part of 

the West, look to the West for protection, or admire 

the liberal democratic model. 

Future geopolitical configurations will not be 

neatly “multipolar,” a concept that Moscow supports 

as it divides the world into regions where specific 

countries dominate and their influence is considered 

legitimate. Much more likely, we will witness a continuing struggle for zones of influence by larger states, 

together with resistance by smaller powers against 

subservience to larger and assertive neighbors. In 

sum, any theory of international relations, such as the 

multipolar concept, needs to account for a complex 

and changeable reality; if it cannot explain that reality, 

then it should be defined primarily as a tool of foreign 

policy pursued by particular capitals.

INTERESTS, AMBITIONS, AND STRATEGIES

In assessing Putin’s integrationist agenda, it is useful to distinguish between Russia’s realistic national 

interests and its grander state ambitions. For instance, 

Moscow’s security is not challenged by the NATO accession of neighboring states. However, its ability to 

control the security and foreign policy orientations of 

its post-Soviet neighbors is certainly undermined by 
181

their accession to NATO and through allied protection of their national independence.

While its goals are imperial through its multipolar orientation, Kremlin strategies are pragmatic, and 

its tactics are elastic. The authorities employ flexible 

methods, including enticements, threats, incentives, 

and pressures, where Russia’s national ambitions are 

seen as predominating over those of neighbors. Moscow engages in asymmetric offensives by injecting 

itself in neighbor’s decisionmaking, capturing important sectors of local economies, subverting vulnerable 

political systems, and corrupting or discrediting national leaders. Russia’s neoimperial project no longer 

relies on Soviet-era instruments, such as ideological 

allegiance, military control, or the implanting of proxy 

governments. Instead, the primary goal is to exert predominant influence over the foreign and security policies of immediate neighbors so they will either remain 

neutral or support Russia’s international agenda.

The word “pragmatic” has been loosely applied in 

describing Russia’s foreign policy by implying moderation and cooperation, and by counterposing it to 

an ideologized imperial policy characteristic of the 

Cold War. Paradoxically, “pragmatic imperialism” is 

a useful way to describe Russia’s foreign policy, particularly in the strategies and tactics employed to realize specific state ambitions. These ambitions are twofold with regard to Russia’s neighbors: foreign policy 

subservience to Russia and integration in Moscowdirected security and economic organizations. The 

major multinational organizations promoted by Moscow to enhance integration and centralization include 

the Commonwealth of Independent States (CIS), the 

Collective Security Treaty Organization (CSTO), the 

Eurasian Economic Community (EEC), the Customs 
182

Union (CU), the Common Economic Space (CES), and 

the recently announced EurU.5

Created in December 1991, the CIS has had limited 

impact, and several former republics joined primarily 

to ensure Moscow’s economic assistance or, in the case 

of Armenia, permanent military protection. Several 

post-Soviet countries have maintained their distance 

from Russia despite their CIS membership. Ukraine, 

Moldova, Georgia, and Azerbaijan are focused on 

maintaining their independence and have viewed the 

CIS as a potential threat. Georgia joined the CIS in 

1993 and left in August 2008 after its short war with 

Russia. Uzbekistan maintains a distance from Russia, 

although it joined the EEC and the CSTO briefly between 2006 and 2008, while Turkmenistan has been 

fully isolationist. Ukraine and Turkmenistan never 

ratified the CIS statutes and consider themselves only 

observers or participants.

The CSTO, a military alliance that includes Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan, is designed to counter NATO 

aspirations in Eurasia. Its main charters are currently 

being revised, specifically in the arena of decisionmaking, for possible deployments.6

 The current charter requires unanimity to pass a decision, but under 

the planned revisions, only states with an interest in a 

given decision would be allowed a vote, thus curtailing any potential opposition to Kremlin policy in case 

a military mission is deemed necessary by Moscow. 

The EEC was created in October 2000 at a summit in Astana, Kazakhstan, from the prior CU and 

is viewed in Moscow as a stepping-stone toward the 

proposed EurU. It includes Russia, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. In July 

2011, Russia, Belarus, and Kazakhstan launched a CU 
183

to remove all trade barriers between the three states. 

In practice, Belarus and Kazakhstan have been forced 

to adopt the higher Russian import tariffs, and both 

capitals have demanded direct payments from Russia

as compensation. Joining the Russia-focused CU may 

also preclude involvement in a free trade zone with 

the EU for the East European countries.

In October 2011, Putin hosted a meeting of prime 

ministers from Armenia, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, and Ukraine in St. Petersburg and announced an agreement to form a free 

trade zone after years of fruitless negotiations. On 

January 1, 2012, a formal agreement was signed to create the CES, an undivided common market embracing 

the three CU economies, together with Ukraine and 

open to other post-Soviet countries. On the eve of accession to the CES, the Presidents of Belarus, Russia, 

and Kazakhstan also signed the Declaration of Eurasian Economic Integration. President Dmitry Medvedev invited all other EEC members to join the CES, 

including the three EEC observer states of Armenia, 

Moldova, and Ukraine. 

Business entities of the three CES countries are 

guaranteed freedom of movement of goods, services, 

capital, and labor. Thus far, Kiev has resisted these enticements, fearful that they would subvert Ukrainian 

sovereignty. All these plans called for the ultimate establishment of a euro-like single currency system. The 

transition to the EurU has been described as the final 

goal of economic integration. It envisaged a free trade 

regime; unified customs and nontariff regulation measures; common access to internal markets; a unified 

transportation system; a common energy market; and 

a single currency. The Moscow summit of the EEC on 

March 19, 2012, charted a detailed integration strategy, 
184

with a view to having the EEC reshaped into a fullyfledged economic union by 2015.7

 These integrative 

economic measures would also become undergirded 

by a tighter political alliance. 

Within the first 2 weeks of his renewed presidency in May 2012, Putin hosted an informal CIS summit with most of the former Soviet states, as well as 

a CSTO extraordinary session with Armenia, Belarus, 

Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. 

In all these meetings, the goal of the EurU has featured 

prominently. Putin’s notion of a EurU is of a powerful supranational association capable of becoming one 

of the poles in the modern world and of serving as 

an efficient bridge between Europe and the dynamic 

Asia-Pacific region.8

Putin believes that the EurU should be built on the 

inheritance of the Soviet Union, including: infrastructure, a developed system of regional production specialization, and a common space of language, science, 

and culture.

How successful any of these integrationist projects 

will prove in practice remains debatable. For instance, 

some analysts believe that the EurU is likely to be costly 

and unsuccessful and will result in trade disruption.9

Nevertheless, the pursuit of supranational integration 

is itself damaging to the security and independence 

of states neighboring the Russian Federation, as they 

will be prevented from fully expressing their sovereignty by freely choosing their international alliances. 

In calculating the impact of Russia’s pressure politics 

revolving around its integrationist projects, it is useful 

to examine in more detail Moscow’s policies toward 

its immediate European targets—Ukraine, Belarus, 

and Moldova—and then to assess the impact on the 

broader Central-Eastern European region.
185

TARGET UKRAINE

Few Russian politicians accept the permanent 

independence of Ukraine, a country viewed as the 

historic origin of Russian statehood.10 Russian elites 

deny Ukraine a separate history and view its national 

independence as a temporary aberration. Their ideal 

scenario for Ukraine is a close political, economic, 

and military alliance. The internal characteristics of 

the Ukrainian government have been of lesser interest as long as Kiev follows Russia’s foreign and security policies and does not succeed in gaining NATO 

membership. 

Throughout the January 2010 presidential election campaign in Ukraine, the Kremlin did not overtly 

favor any specific candidate in case the candidate 

was defeated. It also calculated that growing public 

frustration with political infighting would lead to 

disillusionment with liberal democracy and growing 

support for a more authoritarian leader close to Moscow. Indeed, Ukrainian citizens became increasingly 

embittered with the results of the 2004 Orange Revolution, particularly with the political battles between 

former Orange coalition partners and subsequently 

elected Victor Yanukovych, the anti-Orange leader, 

as President.

Although Ukraine was one of the founding members of the CIS, which was styled as a loose multinational association among the newly independent 

states, it raised reservations on issues such as a single 

currency, military affairs, and foreign policy in order 

to prevent the new structure from becoming a Soviet 

replica. Kiev proved successful in thwarting Kremlin 

designs to construct a unified economic and security 
186

policy. However, power struggles between political 

interest groups and industrial lobbies in Ukraine have 

provided ample opportunities for Moscow to pursue 

its agenda of reintegration.

In order to return Kiev more firmly under its control, Moscow has engaged in various forms of pressure and subterfuge. These include energy blackmail, 

economic buyouts, media propaganda, the discrediting of pro-Western politicians, the manipulation of 

ethnic and regional grievances, and lingering territorial claims. Russia’s new military doctrine also bestows 

Moscow with the right to intervene in neighboring 

states containing large Russian populations.

The Russian or Russophone minority, constituting 

about a third of the Ukrainian population, has been 

exploited by Moscow to apply political pressures on 

Kiev. Russian officials have demanded dual citizenship for co-ethnics in Ukraine and initially used this as 

a pretext to delay signing a bilateral state treaty. Kiev 

rejected such proposals, as they would allow Moscow 

to claim informal jurisdiction over regions where Russian-speakers predominated. Moscow also raised the 

specter of creeping “Ukrainianization” allegedly directed against Russian ethnics, implying attempts by 

West Ukrainian nationalists to oust the Russian language from official communications, thwart Russian 

cultural influences, and limit the role of the Russian 

Orthodox Church. 

Moscow registered success in its external language 

policy on June 5, 2012, when Ukraine’s parliament 

approved, in a preliminary reading, a law that would 

allow the use of Russian as a second official language 

in 11 Ukrainian regions where over 10 percent of inhabitants use Russian as their first language, together 

with the cities of Kiev and Sevastopol.11 The law needs 
187

to be approved in two more readings and signed by 

President Yanukovych to take effect. The governing Party of Regions sought to consolidate its voting 

base among Russian speakers before the October 2012 

parliamentary elections and succumbed to persistent 

pressures from Moscow. Once approved, the “regional language” law will affect schooling and citizens’ 

interactions with local authorities. Observers fear that 

it will discourage Russian-speakers from learning the 

official state language and decrease their loyalty to the 

Ukrainian state. It could also increase ethnic tensions 

and aggravate social and regional divisions.12

Kiev remains concerned about possible Kremlin 

support for separatism on the Crimean Peninsula and 

in eastern areas of the country. Until now, it has not 

served Russia’s interests to provoke a full-scale separatist conflict, as this would have a destabilizing impact along Russia’s borders. However, the Crimean 

issue has been manipulated by Russian nationalists 

to prevent the Ukrainian government from moving in a pro-Western direction. Officials repeatedly 

refer to Crimea as “ancient Russian land.” This autonomous region remains a potential flashpoint of 

separatism if relations between Ukraine and Russia 

seriously deteriorate.

Control over Ukraine’s internal security is also 

an important component of Russia’s oversight. In 

March 2012, President Yanukovych agreed to the introduction of Russian advisers in the Security Service 

(SBU) and joint consultation with Moscow over future 

government appointments.13 Russian influence over 

Ukraine’s security forces is evident in the appointment 

of Russian citizens Igor Kalinin and Dmitri Salamatin 

as SBU Chairman and Minister of Defense, respectively. Kalinin maintains close ties to Russia and headed 
188

the Directorate on State Protection (UDO), the former 

Soviet KGB 9th Directorate. His appointment will also 

lead to enhanced cooperation between the SBU and 

Federal Security Service (FSB). 

Energy supplies have been persistently manipulated as economic tools of Russian policy. Ukraine 

depends on Russia for more than 70 percent of its oil 

and gas needs and is heavily indebted to Russia’s energy monopolies. Moscow’s ability to injure Ukraine’s 

economy through energy blackmail, the raising of 

prices, or calling in debts challenges the country’s independence. Russia has periodically engaged in “energy wars” with Ukraine, during which cuts in energy 

deliveries crippled sizable parts of the economy. The 

gas war of 2005-06 highlighted the use of energy to 

apply political pressure on a government seeking to 

move permanently out of Russia’s orbit.

Moscow has focused on acquiring Ukraine’s energy infrastructure, as this ties the country into statecontrolled Russian interests. Gazprom has sought 

a majority stake in pipelines crossing Ukraine. Its 

schemes were initially blocked, as the Ukrainian parliament prohibited the privatization of the oil and gas 

industries. Prime Minister Putin pushed for a merger 

between Gazprom and Naftogaz of Ukraine. Naftogaz 

controls the natural gas system and retail market in 

Ukraine. Russia uses the pipeline network to transport 

about 80 percent of its gas to the EU, or approximately 

20 percent of the EU’s total gas needs. Although Kiev 

may resist a full Gazprom takeover of Naftogaz pipelines and storage facilities, it could eventually accede 

to a joint venture between the two companies.14
189

Russia and Ukraine are also embroiled in a dispute 

over the price and volume of Russian gas. Kiev insists 

the current price is too high and wants to renegotiate 

the 2009 gas deal, while Moscow is pushing for control of Ukraine’s gas transit system to Europe as part 

of a deal to cut prices.15 Three elements of the agreement are problematic: the price Ukraine pays for gas, 

the volume of Russian gas that Ukraine is obliged to 

buy annually, and the fee Russia pays to use Ukraine’s 

gas transit system.16 Kiev feels that the first two figures should decrease dramatically, while the third 

should increase. At over $400 per thousand cubic 

meters, Ukraine pays one of the highest prices for 

Russian gas in Europe, while the transit fees Russia

pays to Ukraine are low in comparison to other 

transit countries.

Moscow has supported and exploited political disputes in leaders, as they weaken Kiev’s Western aspirations and reinforce “Ukraine fatigue” in the West. 

The election victory of Viktor Yanukovych in February 

2010 signaled that Ukraine remained divided on the 

question of Western integration as the new President 

favored state neutrality. On July 1, 2010, Ukraine’s 

parliament ratified a new law on “The Fundamentals 

of Domestic and Foreign Policy” that dropped the goal 

of acquiring NATO membership. This has also suited 

several NATO and EU leaders who remain hesitant in 

bringing Ukraine into either organization. 

Moscow has induced Kiev to integrate more closely with Russia and into its multinational formats. In 

April 2010, a new deal was signed by Medvedev and 

Yanukovych and ratified by the two parliaments, extending the lease on Russia’s Black Sea Fleet by 25 

years until 2043. The presence of the Black Sea Fleet 

restricts Ukrainian sovereignty and can be used as a 
190

pressure point if intergovernmental relations deteriorate. Both Ukraine and Moldova are now in a similar 

position of having declared their neutrality while Russian troops remain on their territories.

Since assuming the presidency, Yanukovych has 

initiated policies to speed up security cooperation 

with Russia, while downgrading the importance of 

Kiev’s ties with NATO.17 Ukrainian-Russian security 

cooperation has developed in three areas. First, Moscow and Kiev have reduced their rivalry in the international arms market. Yanukovych has established a 

new arms export agency, Ukroboronprom, which increased presidential control over arms export policies 

and tightened integration with the Russian militaryindustrial complex.

Second, joint ventures between Ukrainian and 

Russian companies have grown, especially in aircraft 

and shipbuilding. The Russian Navy’s stationing 

along Ukraine’s Black Sea coast is being extended, and 

Moscow plans to supply new vessels to the Black Sea 

Fleet. Third, Ukraine and Russia have increased their 

cooperation in countries that were traditional markets for Soviet arms, such as India, and new Russian 

markets, such as Iran.

Russia’s Deputy Prime Minister Igor Shuvalov has 

asserted that Ukraine needs to economically integrate 

with Russia. The chairman of Russia’s parliamentary 

Committee on Economic Policy, Yevgeny Fyodorov, 

proposed that Ukraine join the Russia-Belarus Union, 

and Putin himself has invited Ukraine into the Russiacentered CU. Medvedev also invited Kiev into the 

CSTO, despite its declaration of nonbloc status. Kiev 

has thus far ruled out CSTO membership and was not 

prepared to alter its CIS status from observer to full 

member. Membership in the CU or any of the other 

economic initiatives has also been resisted, as it would 
191

curtail Kiev’s control over the country’s trade and 

economic policy.

Some analysts believe that Ukraine’s choice is not 

between Russia and the West, but whether Ukraine 

joins the European mainstream or is relegated to the 

European periphery. It may not be Ukraine’s preference to move closer to Russia, but Moscow’s choice 

will prevail if Ukraine fails in its gradual integration with the EU. The ultimate choice facing Kiev is 

between the “shared sovereignty” model of the EU 

and the “surrendered sovereignty” model of the Eurasian bloc. Ukraine is unlikely to devise and survive 

an effective “third way” through its self-declared 

nonbloc status.

In the long term, the Kremlin seeks to permanently 

alter Ukraine’s foreign policy, guarantee a Russiafriendly regime, stifle the country’s aspirations to join 

Western institutions, and ensure Ukraine’s permanent 

neutrality. Putin may be satisfied with the Belarusanization of Ukraine as long as this does not precipitate 

a destabilizing social upheaval. But unlike with Belarus, in Ukraine public opinion, anti-authoritarianism 

and counter-Kremlin sentiments are more visible, 

and a tightening Russian corset is likely to provoke 

a strong reaction against President Yanukovych and 

against Moscow, whether through elections or extraparliamentary revolt.

TARGET BELARUS

The tug of war between Russia and the West over 

the future of Belarus appears to be reaching a climax. 

Instead of performing a balancing act between Russia and the West, President Alyaksandr Lukashenka 

has been slipping from the tightrope and heading 
192

toward a hard landing in the Russian net. While the 

West demands democracy and does not guarantee Lukashenka the levers of power, Moscow pursues control over key sectors of the economy and tolerates his 

remaining in power. As EU sanctions have intensified 

because of political repression, Minsk depends even 

more on Russian loans and purchases.

Russia’s economic buy-out of Belarus has been accelerating during the past year. The sale of state assets 

was a key condition of a bailout package that helped 

Belarus avoid economic collapse after the 2011 currency crisis. In return for subsidized gas, the cheapest 

in Europe ($164 per 1,000 cubic meters in 2012), Minsk 

has lost full control over the country’s pipeline to Russia. Belarusian authorities have sold industrial assets 

worth $2.5 billion in order to receive the third tranche 

of the $3 billion stabilization loan issued by the EEC in 

June 2011. Moscow and Minsk have also signed deals 

for approximately $20 billion in Russian purchases, 

price concessions, and credits between 2012 and 2015, 

a figure that amounts to nearly half of Belarus’ gross 

domestic product (GDP).

The privatization plan entails a complete or partial selling of key Belarusian companies to Russian 

tycoons, even though Minsk continues to resist major 

acquisitions of its prized assets.18 Nonetheless, Europe’s largest refinery, Belarus’s Naftan, may soon be 

sold to Russia’s Lukoil. Minsk has been offered fullscale Russian support in the event of tighter Western 

sanctions, while Lukashenka has called for intensifying military-political cooperation within the CSTO.19

Such developments may actually suit Brussels and 

Washington, which prefer that Belarus become a Russian concern and no longer a Western problem.

Moscow, especially with the triumphal return of 

Putin to the Kremlin and his vision of a EurU, will 
193

certainly not want Lukashenka replaced with an unpredictable and unruly democrat. Ideally, the Kremlin 

would welcome a more amenable and less abrasive 

government in Minsk that can help Putin, while providing lucrative benefits for Russia’s FSB tycoons. But 

short of that, Moscow will tacitly support a Lukashenka presidency if Putin continues to keep the West at 

a firm distance. 

At the same time, the military union between the 

two capitals is being consolidated.20 In February 2009, 

Moscow and Minsk signed an agreement on the joint 

protection of the Russia-Belarus Union State’s airspace 

and the creation of an integrated regional air defense 

network. The network is expected to comprise five air 

force units, 10 air defense units, five technical service 

and support units, and one electronic warfare unit. 

Political planners in Moscow are fearful of Arabtype revolutions anywhere in their neighborhood, as 

they could prove contagious in Russia. In claiming 

an “area of responsibility” that coincides with the 

defunct Soviet Union, Moscow is developing several 

contingencies where military intervention would be 

warranted. For instance, the organization may become 

directly involved if the head of the state is cornered 

by the domestic opposition and requests CSTO assistance. In such a scenario, the CSTO could intervene 

to protect the “constitutional order,” in other words, 

to help subdue social or ethnic unrest. The Russian 

General Staff is reportedly accelerating preparations 

for creating CSTO forces on standby for possible intervention, and such missions would not require approval by the United Nations (UN) Security Council. 

Belarus would be an obvious target of Moscow’s 

plans and may welcome a brotherly CSTO intervention if President Lukashenka’s position is endangered. 
194

Even more troublesome, some EU members may actually favor CSTO involvement and a Russian-led 

peacekeeping force to stabilize Belarus. Additionally, 

the replacement of Lukashenka by a more pliable proRussian leader could be acceptable in Brussels, and 

Moscow is unlikely to be ostracized for replacing the 

often-described “last dictator in Europe.”

TARGET MOLDOVA

While the overriding priority of the current Moldovan government is European integration, Moscow 

wants to keep the country outside both NATO and the 

EU and to enroll it in its own integrationist structures. 

The Kremlin uses several factors to maintain pressure 

on Chisinau; above all, it manipulates the separatist 

Transnistrian conflict.

International negotiations over Transnistria recently restarted after almost 6 years. However, Russia’s Foreign Minister Sergei Lavrov made it clear that 

any reunification of Moldova would be conditional.21

Any “federal” setup would require Russian arbitration, agreement, and troop presence, with a guaranteed special status for Transnistria, enabling it to veto 

Chisinau’s foreign and security policymaking. According to Lavrov, Moldova’s foreign policy decisions 

should reflect its permanent neutrality as inscribed in 

its constitution. Moldova’s EU integration is allegedly 

incompatible with the country’s permanent neutrality 

and its close relations with Russia. Indeed, such interpretations of neutrality are the major condition for 

any resolution of Transnistrian separatism.

Yevgeny Shevchuk’s election as President of 

Transnistria in December 2011 may actually strengthen Moscow’s hand during a new cycle of international 

negotiations over the territory. Shevchuk believes that 
195

Transnistria is a separate state and favors its integration with the Russian Federation. During Russia’s 

presidential elections, Shevchuk urged Transnistria’s 

residents with Russian citizenship to vote for Putin 

and supported his idea to create a EurU. Additionally, 

Russia has issued an estimated 150,000 passports to 

residents of Transnistria.

Russia seeks to legitimize Transnistria’s leadership, while Shevchuk’s track record is one of consistent loyalty to Russia, the country of his citizenship.22

Although he has been hailed in Brussels as a potential 

reformer, Moscow’s approach will leave Shevchuk 

with little room to maneuver. On March 21, 2012, Medvedev appointed Russia’s former envoy to NATO, 

Dmitry Rogozin, as Special Representative of the Russian President for Transnistria.23 Meanwhile, Prime 

Minister Putin also appointed Rogozin as chairman 

of the Russian side of the Russia-Moldova intergovernmental cooperation commission. Rogozin’s assignment will cover both local issues and the international 

negotiating process; he will apparently be reporting to 

Putin on Transnistria and to Russia’s new Prime Minister Medvedev on Russia-Moldova issues. 

Rogozin’s dual appointment seems designed to 

treat the two parts of Moldova separately and contribute to legitimizing and institutionalizing the country’s division and heighten its dependence on Russia. 

Rogozin has revealed that Moscow is not only planning to keep its peacekeeping forces in Transnistria, 

but it also intends to rearm and upgrade them.24 It 

may also deploy a radar system in Transnistria, establish a military base, and position Iskander missiles as 

an alleged response to U.S. missile defense plans and 

the creation of U.S. bases in Romania.25 Moldova will 

thereby become more closely entwined in Russia’s 

integrationist agenda.
196

IMPACT ON CENTRAL-EASTERN EUROPE

Since the collapse of the Soviet bloc, Russian leaders envisaged post-communist Central-Eastern Europe 

(CEE) as a string of neutral and weak states, regardless of their internal political structure and economic 

makeup. A primary Kremlin objective was to prevent 

these countries from moving into NATO and further 

diminishing Moscow’s strategic maneuverability. 

The Kremlin sought the region’s demilitarization and 

neutralization so that it would form a buffer between 

NATO and the CIS. Once Moscow understood that 

it could not prevent NATO’s absorption of the CEE 

countries, it embarked on a three-pronged approach: 

containment, division, and marginalization.

First, Russia’s administration focused on building a firewall around the former Soviet republics of 

Ukraine, Belarus, and Moldova to restrict CEE influence and undercut any aspirations among the three 

capitals to join Western institutions. Second, the 

Kremlin sought a role in alliance decisionmaking by 

influencing governments in key states and promoting divisions to weaken NATO’s effectiveness. Third, 

Russia’s leaders endeavored to marginalize the CEE 

states by creating bilateral disputes and depicting 

them as disruptive “Russophobes” within both NATO 

and the EU.

In recent years, Moscow has courted Poland as a 

regional partner, and Warsaw has reciprocated for 

several reasons. For the Polish government, cordial 

ties with Moscow boost Poland’s stature inside the 

EU, whose major states such as Germany and France 

seek closer relations with Russia regardless of its poor 

human rights record, democratic reversals, and impe-
197

rial approach toward post-Soviet neighbors. Poland 

no longer wants to be perceived as a “Russophobic” 

troublemaker, an image that reduces its influence 

within the EU. Lessened U.S. involvement with NATO 

enlargement and with European affairs more generally under the Obama presidency has also contributed to convincing Polish policymakers that Warsaw 

needs to primarily strengthen its position within the 

EU. Russia is also seen a sizable market for growing 

Polish exports and a potential destination for Polish 

investments. 

Moscow views Poland as a rising power within 

the EU and has therefore offered closer business and 

energy connections to increase Russia’s influence. The 

Kremlin calculates that improved contacts will prevent Warsaw from blocking EU-Russian initiatives as 

it has in the past. It would also constrain Warsaw in 

pushing for the incorporation of the post-Soviet states 

in Western institutions. Additionally, the prospective 

importance of Poland as a shale gas producer may 

transform it into a potential energy competitor with 

Russia. Hence, Moscow seeks to be part of the development process for new sources of energy and to more 

closely tie Warsaw into its energy exporting networks.

Paradoxically, Poland’s aspirations to become a 

major EU player and to develop ties with Russia have 

created an appearance of detachment toward smaller 

neighbors. Critics of Poland’s foreign policy perceive 

the government of Prime Minister Donald Tusk as intent on placating Russia, Germany, and France to the 

detriment of other neighborhood relations. If Warsaw 

significantly reduces its attention toward bordering 

states, this could prove strategically counterproductive and would serve Moscow’s interests.26 For instance, the ongoing dispute between Warsaw and 
198

Vilnius over the linguistic and educational rights of 

the Polish minority in Lithuania clearly benefits Moscow’s regional “divide and rule” strategy.

In addition, the EU’s EaP program toward the European post-Soviet states has lost momentum during 

the past 2 years. Partnership countries complain that 

the funds allocated by the EU have not been serious 

and fail to focus on specific and practical projects. 

The EaP is in danger of losing the attention of political elites, despite Warsaw’s attempts to raise it to the 

top of the EU agenda and to involve a broad array of 

EU capitals.

Unresigned to full Baltic sovereignty, Russia’s 

leaders have sought to place Estonia, Latvia, and Lithuania in an undefined “neutral zone” between NATO 

and the CIS and between Central Europe and Russia. 

In this way, NATO influences would be minimized, 

and Russia’s expansive national interests safeguarded. During the past 20 years, Moscow has experienced 

several disappointments in its Baltic policy. It failed to 

draw the three independent states into a Russian security orbit, and it proved unable to prevent them from 

moving westward politically and establishing close 

relations with the United States. The Kremlin was left 

with a defensive policy of curtailing the influence of 

the Baltic States on other former Soviet republics. The 

Kremlin’s policy of marginalization and isolation continues. Numerous forms of pressure within Russia’s 

foreign policy arsenal have been applied against the 

three Baltic countries.

As the major energy supplier to the region, Moscow has periodically sought to disrupt the Baltic economies in order to apply direct pressure and gain political advantage. As a result, each government has tried 

to limit its dependence on Russia and its susceptibility 
199

to blackmail. Moscow also endeavors to control energy transit routes, as this is both financially and politically profitable. Energy supplies are used as leverage 

to purchase shares in local refining and transportation 

systems. Periodic threats to reduce or halt supplies are 

a means of extracting concessions to allow for Russian 

investments in the local economies.

Moscow aims to convert overwhelming dependence on Russian energy supplies and economic 

investments into long-term intergovernmental influence. This can provide Moscow with substantial 

involvement in a targeted country’s financial, trade, 

and investment policies. Russian enterprise officials 

also gain political influence through engagement with 

government officials, political parties, interest groups, 

and media outlets in targeted states.

Russia’s officials periodically threaten the Baltic 

countries, claiming that Estonia, Latvia, and Lithuania were positioning themselves as alleged launching 

pads for NATO aggression against Russia.27 Frequent 

unauthorized military overflight over Baltic airspace 

indicates that the Kremlin seeks to intimidate its 

neighbors and to demonstrate that NATO will not ultimately defend their interests in an armed confrontation with Russia. However, in the past 2 years, NATO 

has drawn up more concrete defense plans for Poland, 

Estonia, Latvia, and Lithuania, including guarantees 

of a NATO military response in case of outside attack. 

The Baltic governments have also gained more regular 

NATO military exercises in the region. Deliberations 

have also intensified over the potential hosting of U.S. 

and NATO military infrastructure, following the Polish, Romanian, and Czech acceptance of components 

of the new U.S. missile defense system. Some capitals 

have also proposed NATO army, air force, and naval 
200

bases, together with the reorientation of force structures, to cope with conventional threats. 

There have been several reported cases of political 

subversion in the Baltic region, in which influence has 

been purchased by Russian businessmen tied to the 

Kremlin’s intelligence services. This policy unseated 

Lithuania’s President Rolandas Paksas in April 2004 

and placed other officials under suspicion of collaboration. In Latvia’s September 2011 elections, the 

Kremlin supported the Russian ethnic Harmony Party, calculating that, by entering government, it could 

sway Latvia’s policies in a more pro-Moscow direction. However, although Harmony gained a majority 

of votes among the Russian-speaking minority, it was 

left out of the new governing coalition by a combination of ethnic Latvian parties because of fears that it 

could veer Latvia away from its Western orbit. Russian organizations in Latvia also gathered enough 

signatures to initiate a referendum on making Russian an official second language, but the initiative was 

defeated on February 18, 2012, by over 74 percent of 

Latvian voters.28

Moscow has tried to benefit from local political, 

ethnic, subregional religious, and social turbulence in 

order to keep each Baltic country off balance. It has 

exploited the Russian minority question to depict the 

Baltic governments as failing to meet European standards for minority protection and human rights. The 

Kremlin claims the right to represent and defend the 

interests not only of Russian ethnics, but also all “Russian speakers” in order to raise the number of alleged 

victims of Baltic repression. Claims by officials that 

the Baltic governments actively discriminated against 

Russians, despite the conclusions of international human rights organizations, contribute to heightening 
201

international tensions. Moscow continues to manipulate the ethnic issue at convenient venues, including 

UN Human Rights Commission sessions. This raises 

concerns that a more expansionist regime in Moscow 

could employ aggressive means to support secessionist movements in all three Baltic states. 

CEE also provides opportunities for Russian inroads toward the pan-European and transatlantic institutions through economic, political, and intelligence 

penetration. Russian officials focus on influencing political decisions in these capitals through a combination of diplomatic pressure, personal and professional 

contacts, economic enticements, energy blackmail, 

and outright bribery. Reports regularly surface in Slovakia, Hungary, Bulgaria, and other CEE states that 

“old comrade” networks continue to operate, based 

on financial and friendship connections rather than 

on any steadfast ideological or political convictions. 

Some socialist and social democrat parties in the CEE, 

where many of the ex-communists have gravitated, 

have provided the most beneficial opportunities for 

Russian penetration. Lucrative business contracts, 

donations to political campaigns, and the purchase 

of media outlets enable Moscow to exert political influence and convince key politicians to favor Russian 

business investments and strategic interests. 

During the unfolding Putin presidency, one can 

expect that an aggressive integrationist approach by 

Moscow toward the post-Soviet states will be mirrored 

by a more assertive policy toward the CEE countries 

based around economic entrapment and political neutralization. Any successes registered in reintegrating 

the European post-Soviet countries within a Eurasian 

economic, political, and security alliance will also encourage Moscow to pursue a more intrusive policy 
202

toward its former CEE satellites in seeking to maneuver them closer to a Russian orbit. This will, in turn, 

heighten tensions and exacerbate conflicts between 

Moscow and several Central European capitals.

ENDNOTES - CHAPTER 5

1. Konstantin von Eggert, “Due West: Putin Signals Foreign 

Policy Shift,” RIA Novosti, May 18, 2012.

2. Nikolas K. Gvosdev, “The New Russian Empire,” The National Interest, April 16, 2012, available from nationalinterest.org/

commentary/the-new-ussr-6783.

3. Previous analyses of Russia’s neoimperial ambitions during the first two Putin presidencies can be found in Janusz Bugajski, Georgian Lessons: Conflicting Russian and Western Interests in

the Wider Europe, Washington, DC: Center for Strategic and International Studies (CSIS) Press, 2010; Janusz Bugajski, Dismantling the West: Russia’s Atlantic Agenda, Herndon, VA: Potomac 

Books, 2009; Janusz Bugajski, Expanding Eurasia: Russia’s European 

Ambitions, Washington, DC: CSIS Press, 2008; and Janusz Bugajski, Cold Peace: Russia’s New Imperialism, Westport, CT: Praeger/

Greenwood, 2004.

4. For debates on questions of multipolarity and hegemony, 

see, among others, the website of Russia’s International Eurasian 

Movement and the author’s interview on May 14, 2012, available 

from evrazia.org/article/1980.

5. Available from telegraf.by/en/2012/04/putin-pogovoril-s-lukashenko-ob-integracii-v-ramkah-eep.

6. “Russia Remakes the CSTO,” Stratfor: Geopolitical Diary, 

February 16, 2012, available from www.stratfor.com/geopoliticaldiary/russia-remakes-csto.

7. Available from sudevrazes.org/en/main.aspx?guid=18021&

detail=67083.
203

8. “Does Putin’s Return To Kremlin Breathe New Life Into 

Eurasian Union Project?” Radio Free Europe/Radio Liberty, 

March 6, 2012, available from www.rferl.org/content/putin_eurasian_union_cis/24506282.html.

9. See Anders Aslund, “Putin’s Eurasian Illusion Will Lead to 

Isolation,” The Moscow Times, June 21, 2012.

10. For a valuable analysis of Russia’s imperial mindset toward Ukraine, see Alexander Bogomolov and Oleksandr 

Lytvynenko, “A Ghost in the Mirror: Russian Soft Power in 

Ukraine,” London, UK: Chatham House, January 2012, available from www.chathamhouse.org/sites/default/files/public/Research/

Russia%20and%20Eurasia/0112bp_bogomolov_lytvynenko.pdf.

11. Available from www.bloomberg.com/news/2012-06-05/

ukrainian-parliament-approves-language-bill-amid-protests.html.

12. Oleksandr Kramar, “Russification Redux?” The Ukrainian 

Weekly, International Ed., No. 9, Issue 32, Kiev, Ukraine, June 

2012, p. 5. Since this writing, the language law has become accepted as part of Ukrainian law by the Rada.

13. Taras Kuzio, “Russia Takes Control of Ukraine’s Security 

Forces,” Eurasia Daily Monitor, March 19, 2012, Vol. 9, Issue 55.

Khoroshkovsky, long regarded as a Russian agent of influence in 

the Yanukovych administration, moved from the Ukrainian Security Service (SBU) to serve briefly as Finance Minister and to 

the important position of First Deputy Prime Minister. Khoroshkovsky was believed to be behind numerous scandals in 2010-11, 

when he headed the SBU that undermined Ukraine’s European 

integration. The appointments have removed the security forces 

from under the control of the oligarchs and placed them directly 

under President Yanukovych and Moscow’s supervision. Their 

primary responsibility will be to defend Yanukovych and ensure 

his re-election. With Yanukovych acquiescing to Russian influence over the security forces, Putin evidently has a personal stake 

in maintaining Yanukovych in power.

14. Kateryna Choursina, “Ukrainian Parliament Backs Bill to 

Ban Sale of Gas Pipelines,” April 13, 2012 , available from www.

bloomberg.com/news/print/2012-04-13/ukrainian-parliament-backsbill-to-ban-sale-of-gas-pipelines.html.
204

15. “Ukraine to Reduce Gas Purchases from Russia - Yanukovych,” RIA Novosti, Kiev, Ukraine, March 6, 2012, available 

from en.ria.ru/business/20120306/171791981.html.

16. Olga Shumylo-Tapiola, “Ukraine and Russia: Another 

Gas War?” February 21, 2012, Washington, DC: Carnegie Endowment, 2012, available from carnegieendowment.org/2012/02/21/

ukraine-and-russia-another-gas-war/9roh.

17. Taras Kuzio, “Growing Ukrainian-Russian Arms Export Cooperation,” Eurasia Daily Monitor, May 15, 2012, Vol. 9, 

Issue 92.

18. Grigory Ioffe, “Belarus: A Death Penalty, A Standoff 

With The EU And A Drift Toward Russia,” Eurasia Daily Monitor, March 21, 2012, Vol. 9, Issue 57. Among the 19 enterprises 

are BelAZ (which produces heavy trucks for mining operations, 

controls 30 percent of the world market for these trucks), MAZ 

(trucks), and MKZT (heavy-duty tractor-trailers to transport 

ballistic missiles).

19. “Belarus, Russia Need to Step up Military-Technical Cooperation - Lukashenko,” Russia & CIS Military Newswire, March 

1, 2012.

20. “Russia to Deliver More Air Defense Systems to Belarus,” 

Minsk, Moscow, April 18, 2012, RIA Novosti, available from en.ria.

ru/world/20120418/172899923.html.

21. Vladimir Socor, “Lavrov Squashes Hope For Constructive 

Restart Of Transnistria Negotiations,” Eurasia Daily Monitor, November 29, 2011, Vol. 8, Issue 216.

22. Vladimir Socor, “Too Early For A Political Investment In 

Transnistria’s Shevchuk,” Eurasia Daily Monitor, March 9, 2012, 

Vol. 9, Issue 49. Shevchuk’s statements have called for preparing 

Transnistria’s accession to the Commonwealth of Independent 

States (CIS) Customs Union (CU), and the Eurasian Union (EurU), 

adopting the Russian ruble for parallel circulation with the Transnistrian “ruble,” and pursuing the “Eastern vector of Transnistria’s development.” 
205

23. Vladimir Socor, “Dmitry Rogozin Appointed Special Presidential Representative For Transnistria,” Eurasia Daily Monitor,

March 23, 2012, Vol. 9, Issue 59.

24. Dan Peleschuk, “The Patron State,” Russia Profile, April 

17, 2012, available from russiaprofile.org/international/57617.html. 

Russia maintains a motorized infantry battalion in Transnistria as 

part of the Collective Peacekeeping Forces in addition to a number of troops guarding several Soviet-era ammunition depots.

25. “Russia to Deploy Missile Defense Radar in Transnistria,” 

Sofia News Agency, April 17, 2012, available from www.novinite.

com/view_news.php?id=138577.

26. See Janusz Bugajski, “Poland’s Progress: Where Warsaw 

Fits in Europe,” Current History: A Journal of Contemporary World 

Affairs, Vol. 110, Issue 734, March 2011.

27. For an overview of Russia’s pressures on the Baltic states, 

see Bugajski, Dismantling the West, pp. 96-99.

28. “Latvians Say No in Russian Language Vote,” February 

19, 2012, available from www.euronews.net.

207

ABOUT THE CONTRIBUTORS

HARLEY BALZER is a Professor in the Department of 

Government and School of Foreign Service, and an Associated Faculty member of the History Department at 

Georgetown University. In 1992-93, he served as Executive Director and Chairman of the Board of the International Science Foundation, George Soros’s largest 

program to aid the former Soviet Union. Dr. Balzer’s 

research interests include comparative authoritarianism, focusing on Russia and China; science and technology; education; and social history. His publications 

include Soviet Science on the Edge of Reform (1989); Five 

Years That Shook the World: Gorbachev’s Unfinished Revolution (1991), which was named a CHOICE outstanding academic book; and Russia’s Missing Middle Class: 

The Professions in Russian History (1996). Current writing projects include a comparative study of Russian 

and Chinese interaction with the global economy; a 

book on current Russian politics; a monograph on the 

expansion of Russian higher education in the Tsarist 

era, Soviet Union, and Post-Soviet Russia; and a study 

of the middle class after communism.

STEPHEN J. BLANK served as the Strategic Studies Institute’s expert on the Soviet bloc and the postSoviet world from 1989 to 2013. Prior to that, he was 

Associate Professor of Soviet Studies at the Center for

Aerospace Doctrine, Research, and Education, Maxwell Air Force Base, AL; he taught at the University of 

Texas, San Antonio; and he taught at the University of 

California, Riverside. Dr. Blank is the editor of Imperial 

Decline: Russia’s Changing Position in Asia, coeditor of 

Soviet Military and the Future, and author of The Sorcerer as Apprentice: Stalin’s Commissariat of Nationali-
208

ties, 1917-1924. He has also written many articles and 

conference papers on Russia, the Commonwealth of 

Independent States, and Eastern European security issues. Dr. Blank’s current research deals with proliferation and the revolution in military affairs, and energy 

and security in Eurasia. His two most recent books are 

Russo-Chinese Energy Relations: Politics in Command, 

London, UK: Global Markets Briefing, 2006; and Natural Allies? Regional Security in Asia and Prospects for 

Indo-American Strategic Cooperation (Carlisle, PA: Strategic Studies Institute, U.S. Army War College, 2005).

Dr. Blank holds a B.A. in history from the University 

of Pennsylvania, and an M.A. and Ph.D. in history 

from the University of Chicago.

JANUSZ BUGAJSKI is a policy analyst, author, lecturer, columnist, consultant, and television host based in 

the United States. His current positions include Senior 

Associate at the Center for Strategic and International Studies and host of the television show “Bugajski 

Hour,” broadcast on Albanian Screen from Tirana, 

Albania. Mr. Bugajski is the author of 18 books on Europe, Russia, and transatlantic relations; is a regular 

contributor to various U.S. and European newspapers; 

publishes in international journals; and is a columnist 

for media outlets in Albania, Bosnia-Herzegovina, 

Bulgaria, Croatia, Georgia, Kosova, and Ukraine. 

Mr. Bugajski’s forthcoming book is entitled Conflict

Zones: North Caucasus and Western Balkans Compared

(Washington DC: Jamestown Foundation, 2014).

STEFAN HEDLUND is Professor at the Centre for 

Russian and Eurasian Studies at Uppsala University, 

Sweden. Trained as an economist, he has specialized in 
209

Russian affairs since the final days of Leonid Brezhnev 

in the early 1980s. Over the years, his research interests have branched far outside economics to include, 

above all, a great interest in Russian history. He has 

traveled and lectured widely, in academic as well as 

business contexts, enjoying two sabbatical semesters 

at Harvard University and shorter stays as visiting 

scholar in academic institutions that range from Stanford University, California, to Hokkaido University, 

Japan, and various places in Washington, DC. Mr. 

Hedlund has published extensively on matters ranging from the Soviet system, to post-Soviet transition, 

and institutional dimensions of the interaction between state and market in a modern economy, including more than 20 books, 200 journal and magazine articles, and well over 300 reviews and op-ed pieces. His 

latest monograph is Invisible Hands, Russian Experience 

and Social Science: Approaches to Understanding Systemic Failure (Cambridge University Press, 2011). He 

is currently finishing a book on Russian energy policy, 

which will be published by Lynne Rienner Publishers.

STEVEN ROSEFIELDE is Professor of Economics at 

the University of North Carolina, Chapel Hill, a member of the Russian Academy of Natural Sciences and 

former Director of the Japan foundation Project on the 

Global Financial Crisis’s Impact on Asia. His most recent books include Russia in the 21st Century: The Prodigal Superpower (Cambridge University Press, 2005); 

Masters of Illusion (with Quinn Mills, Cambridge University Press, 2007); Russian Economy (Wiley, 2008); 

Russia Since 1980: Wrestling With Westernization (with 

Stefan Hedlund, Cambridge University Press, 2009); 

Red Holocaust (Routledge, 2010); Two Asias: The Emerging Postcrisis Divide (ed. with Masaaki Kuboniwa and 
210

Satoshi Mizobata, World Scientific, 2012); Prevention and Crisis Management: Lessons for Asia from the 

2008 Crisis (ed. with Masaaki Kuboniwa and Satoshi 

Mizobata, World Scientific, 2012); Democracy and its 

Elected Enemies (with Quinn Mills, Cambridge University Press, 2013); and Asian Economic Systems (World 

Scientific, 2013).
U.S. ARMY WAR COLLEGE

Major General Anthony A. Cucolo III

Commandant

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Dr. Stephen J. Blank

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Ms. Rita A. Rummel

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Mrs. Jennifer E. Nevil
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