Going From State Capitalism to Pragmatism

The most striking thing about this year’s St. Petersburg International Economic Forum was Russia’s new, pragmatic consensus. President Dmitry Medvedev put it succinctly in the title of his introductory speech: “We have changed.” The pretexts of building state capitalism are gone and replaced by pragmatic problem solving.

The financial crisis has actually had a positive impact on Russia’s economic thinking, and the nation has proven itself. At the same time, however, the cost has been high and future growth does not look all too good. The country appears trapped with an inertia growth of about 4 percent a year, anticipating significant but tolerable budget deficits of 3 percent to 6 percent of gross domestic product for the next four years. Since money has become scarce, a consensus has arisen about the need for new structural reforms.

In the same way that the financial crash of August 1998 ended the liberal period of President Boris Yeltsin, the global financial crisis finished the Vladimir Putin era of dependence on energy rents. Ideologically, the 1990s stood for militant liberalism, while the 2000s represented a partial restoration. The Bourbons had come back, but as the KGB rather than the Communist Party of the Soviet Union. Overtly, an anachronistic triarchy of authoritarianism, nationalism and Orthodoxy had been restored, but it was never more than a Russian search for self-confidence. The oil price boom revived the old Soviet schizophrenia between inferiority complex and megalomania.

Thanks to the impact of the global financial crisis, all that is over. Russians have earned a new respect, and they know it. The current Russian mood reminds me of Sweden in 1993 after the severe banking crisis. Swedes had thought themselves immune to shocks thanks to their excessively protective social welfare society. When they realized that this was an illusion, they opted for rigorous market reforms. Shocks that wake up societies to reality are usually beneficial.

Deputy Prime Minister Sergei Ivanov, a leading silovik, offered one of the clearest expressions of the new Russian mind at the forum. He emphasized that the country’s foreign policy was completely de-ideologized. Instead, it was characterized by pragmatic consideration of Russia’s national interests. Russia did not choose between East and West but pursued a multivector policy favoring fruitful cooperation with everybody. In the words of Dmitry Trenin, director of the Carnegie Moscow Center, Ivanov embraced modernization as opposed to the marginalization of the second Putin term, which culminated in the 2008 war in Georgia.

For two years, Medvedev has criticized his country for corruption and legal nihilism and has pushed strongly for modernization and innovation. Suddenly, even the siloviki have at least overtly adopted his new thinking.

The last big Russian reform wave of 1998 to 2002 was guided by one comprehensive government program — the so-called Gref program adopted in 2000. But no new program has been developed. Instead, an eclectic selection is taking place of specific problems that need to be solved. Reformers complain about lack of priority and cohesion, but after eight years without reforms, it matters little how they are undertaken, while it is vital that they start again.

The favorite topic of both Medvedev and his economic aide Arkady Dvorkovich is innovation. Their greatest manifestation is an elite center of business and engineering education in Skolkovo. They want to engage a major U.S. engineering and business school, preferably the Massachusetts Institute of Technology, and top technology companies, such as Cisco and Google. Given the attention and resources devoted to this project, something good should come out of it. Russia truly needs a top-notch Russian Institute of Technology. Reform of high education needs to start from the top by building small elite institutions. Many outstanding Russian academics work at top institutions abroad. Why not offer some of them such freedom that they would like to return to Russia to create institutions of excellence in their country of birth? A related important endeavor is to facilitate the immigration of qualified workers.

The most important easy reforms are deregulation. Russia carried out a substantial deregulation of small enterprises in 2002 in their licensing, registration, taxation and inspection, but much more needs to be done. Medvedev has also proposed to adopt European Union standards and regulations to improve the enterprise environment, which would be a major regulatory improvement. Some amelioration of tax legislation and corporate governance is also being considered. Russia, as the United States, is intent on reforming export controls.

On Thursday, U.S. President Barack Obama will receive Medvedev in Washington. For Russia, only one thing is really important during this summit: that Russia finally accedes to the World Trade Organization. The outstanding problems are largely between the United States and Russia. In substance they are trivial, but neither the U.S. nor the Russian negotiators trust each other. They fear that the other side will add new problems after any interim agreement, as the long history of these negotiations has shown. Therefore, the two presidents need to make a political commitment to resolve the outstanding problems and not allow new ones to arise. WTO accession will clearly be a big boost to Russia’s modernization efforts.

Yet, the current revival of reforms must not be exaggerated. No big, controversial reforms are likely in the next two years. Major reforms, such as pension and health-care overhauls and the breaking-up and privatization of state corporations, are once again postponed because they concern the very heart of the system that has just failed.

Medvedev is persistently advocating for a decrease in the level of abuses committed by law enforcement agencies. Although little has been done in this regard, a significant first step is a new law prohibiting pretrial arrest of businesspeople accused of tax violations, which reduces the opportunities of the police to extort businessmen.

In his final words at the forum, Medvedev conceded that economic liberalization is not possible without political liberalization. Meanwhile, the booklets written by opposition leaders Boris Nemtsov and Vladimir Milov that criticized the poor results of Putin’s 10 years in power were confiscated before they could be distributed at the forum.