The future of Putinism

Andr Mommen

CEPS Maarssen 2013

In this article1 we shall shortly analyze the factors and circumstances having led to the decay of Putinism as a political system in todays Russia by pointing to several economic and social changes having caused ideological and political transofrmations which came to the fore during the long winter of discontent (2011-2). The middle classes in the Russian big cities are nowadays longing for a thoroughgoing political modernization or westernization of state and society. Meanwhile Putinism still stands, just like in 2000, for imposing law and order in the form now of managed democracy. The policy makers in the Kremlin also stress that the modernization process of the country should be primarily economic and carried out by using a top-down model built on nano-technological and other R&D initiatives. In reality, Putin distrusts western democracy as being a source of political unrest and discord, a vision that is also shared by his political supporters in the State Duma. But since Putins loss of support in society adds another complication to his regime: he may no longer be able to exert the same authority as before to resolve major disputes. What is Putnism? Putin established an authoritarian regime based on the popular vote of broad masses of people. In general, Putinism is a term mostly used in the Western media and by Russian analysts to define the mafia character of the presidential regime installed by Vladimir Putin after the resignation of Boris Yeltsin on 31 December 1999. Like all similar brands of Bonapartism, Putinism trusts on national values and shows in times of hardship and/or prosperity also its social face to the population. Both terms (Putinism and Bonapartism) are always used
1 This article summarizes the last chapter of the book Russias Changing Economic and Political Regimes: The Putin Years and Afterwards, Andrey Makarychev and Andr Mommen (eds), London and New York: Routledge (forthcoming), containing articles by Sergey Akopov, Scetlana S. Bodrunova, Ira Busygina, Ekaterina Demakova, Andrey Devyatkov, Mikhail Filippov, Elena Gndina, Pertti Joenniemi, Anna Litvinenko, Andrey Makarychev, Andr Mommen, Elena Pavlova, Tatiana Romanova, Leyli Rustamova, Alexander Sergunin, Evghenia Sleptsova, Anastasia Stepanovich abnd Hans Van Zon. 2

in an unfavourable sense. However, both systems are certainly not based on doctrinal concepts, but are trusting on national and traditional values and are referring to strong political leadership, the armed forces, populism and plebicitism. As an authoritarian ruler Putin believes in the rectitude of his judgment. Putins strong leadership can, however, always be challenged by waves of popular discontent. This was especially the case during the Russian winter of discontent of 2011-2 when urban masses expressed an increased appetite for political liberalization. Putinism is also related to the reign of the financial oligarchy controlling the exporting basic materials industries and comprises people with a state-security background (the faction of siloviki).2 The latter share Putins career background and they actively supported his political takeover in 1999-2000, although this support was not unconditional. It should be clear that Putin was by no ways the only candidate to succeed Yeltsin. Putins rival was Yuriy Luzhkov, who was Moscows mayor having formed his own nationalist political party Otechestvo (Fatherland) which had the support of powerful regional political leaders and another party called Vsya Rossiya (All Russia). But when Putin rose to power in 2000, he already enjoyed the advantages of incumbency of not only one post but two: as acting president and as Boris Yeltsins former prime minister. The main point in his vague programme was doubling the national income within ten years and improving the living conditions of the population. A lack of transparency in governance combined with cronyism, corruption, electoral fraud and political and ideological repression are other typical characteristics of Putinism. But in the case of Putinism corruption and cronyism are difficult to combat: they have become basic elements of the political system. Hence, Putin regularly announces campaigns against corruption without eradicating the phenomenon. Corruption can therefore also serve as a convenient
2 The similarity with the paternalist regime of Napoleon III in France is striking. Napoleon III was not only aided by the security forces, but also by a financil oligarchy led by the brothers Pereire and their Crdit foncier de France and the banker Achille Fould against James de Rothschild investing in railways and even in the development of the Suez Canal. See P. Milza, Napolon III, Paris: ditions Perrin, 2007, pp. 464-99. 3

accusation to tar opponents and rivals. Pressures for economic reforms and political modernization are nonetheless growing. But they always will meet obstruction by the oligarchs who are still backing Putins regime after having promised to pay their taxes in return for recognition that past privatizations would stand. The essence of Putinism is the constant absorption by the political centre of policy, personnel power in general. Its is a dynamic constellation that seeks to ensure that all major competing policy orientations are given a degree of influence, but strives to guarantee that none can predominate. Thus macroeconomic policy was previously broadly liberal, energy policy dirigiste, social policy welfarist, nationality policy inclusive but with an ethnic Russian face, and foreign policy statist. All the major constituencies in Russia could feel that they had a stake in the system, even though none achieved the full satisfaction of their agendas. Competitive divisions are at the heart of Putins system of rule but they are not easily managed and can thus destabilize his power. Putin is therefore balancing the factions against each other and ruling with the help of a tiny group of key powerbrokers. This so-called Politburo does not meet as a collective. It represents the informal constellation of power. It comprises apart from Dmitriy Medvedev also Igor Sechin, Sergey Chemezov, Gennadiy Timchenko, Yuri Kovalchuk, Sergey Sobyanin, Sergey Ivanov and Vyacheslav Volodin. Mikhail Prokhorov, the businessman who ran as a liberal candidate in the presidential elections of 2012, also apparently belongs to a group of influential people consulted by Putin. The role of the Russian Orthodox Church obtained a preferential treatment with regard to religious and moral affairs. The Orthodox clergy is allowed to enter the political arena in cases where the Church encounters hostility from other faiths and factions. In many respects Putinism resembles to other authoritarian regimes having emerged after profound economic and systemic changes. Gaullism in France or Peronism in Argentina are good examples of populist regimes built around a providential leader establishing his authority by appealing to the masses and distributing the spoils of an economic boom. In both cases, in France and in Argentina, these
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regimes only lasted for a decade, but its historical and ideological influence is still present. Both military leaders and political regimes also enounced a vision for the future: national independency and the end of a divisive party system ravaging the strength of the nation. Though democratically elected by universal suffrage, these strong presidents were unceremoniously expulsed from their palace: general Charles de Gaulle by a lost referendum in 1969, general Juan Domingo Pern by a military coup in 1955. In both cases liberals could regain power by promising the middle classes a more prominent role in governmental policy. In Russia the situation is quite different. Here the army never played an autonomous political role during the Soviet period. Thus in 2000 Putin emerged as a stakeholder of the security services, not as a mouthpiece of the armed forces. When in September 2011 Putin announced his return to the presidency, with Medvedev as his Prime Minister, he only stressed the mystical unity between his person and the Russian people. Putinism is therefore also a historical phenomenon larger than the man named Putin: his person is reflecting and transcending the traditional relations between state and society which are nonetheless undergoing profound qualitative changes. Rising incomes fuelled also rising expectations of a growing urban middle class and created the illusion of social and economic dynamism, while the political language of the authorities degraded heavily. Meanwhile, the state became more and more associated with an ineffective bureaucracy detached from ordinary people. This antagonism in public opinion tracks with Russias recent economic growth. During the first decade of the Putin rule, household incomes rose by 140 percent. The average monthly wage adjusted for purchasing power parity nowadays exceeds already US$1,000; this wealth spread broadly among the masses. In 2011, about 13 percent of the population had still an income of less than US$2 a day. However, poverty was not eradicated and the health situation of many people had even worsened during the Putin years. Notwithstanding their increasing income, most Russians have remained more traditional in their behaviour and attitudes than the
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urban middle classes adhering to western-style values. This may explain the popular support for Putin and his party United Russia at the polls in 2011-2. A nationwide survey of Russia by the Pew Research Centres Global Attitudes Project carried out in March-April 2012 revealed for instance that a majority of Russians still continues to feel that relying on a strong leader is more important than relying on a democratic form of government. The survey also revealed that about 72 percent of the Russians had a favourable opinion of Putin. According to this survey Putins popular base had to be sought among women and people with less than a college education. But mixed feelings about the state of the nation are really persisting and explain why most Russians are unhappy with the actual political and economic situation. About 64 percent of the population even continued to described the economy as bad. A solid majority of 73 percent believed that Russia deserves greater respect from other countries. Strains of ethnic nationalism among Russians persist: 53 percent is saying that Russia should be for Russians only and 44 percent is saying that it is natural for Russia to have an empire. However, against the backdrop of protests over the conduct of elections and the state of democracy, an increasing number of citizens endorse the importance of key civic freedoms and institutions. Especially a fair judiciary, honest elections and uncensored media are very important. But even the quality of the democratic opposition in the big cities should be questioned as well. Protest took the form of demonstrations and marches and were illustrated by various creatively staged protests, with Pussy Riot organizing various spectacles against Putin. In other words, much of the protest against the Putinite system is itself united in character depoliticized, mute and gestural indicating the deep social roots of the present system. With regard to the urban opposition, the Putin administration dismissed the protest movement as an elitist initiative, mostly unrepresentative for the Russian public opinion and unfit to deal with the economic and challenges Russia is facing. Furthermore, the Kremlin denied the suggestion that the country needs substantial economic and political reforms in order to boost economic growth. But as long as oil and gas revenues are still accounting for up to half of state income Putin may hope that he can
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easily meet the rising expectations of his voters. The latter are trusting in Putins redistributive income policy and his ability to finance the welfare state inherited from the Soviet past.

Fiscal policy Putins regime depends on its ability to raise enough funds to modernize the economic system and its welfare programmes. Tax reforms and sustained economic growth evenly spread over in all regions are therefore urgent policy issues on Putins political agenda, because they will determinate Putins success or failure during his sixyears presidential term (2012-18). From 2001 until 2007, the Russian economy was constantly growing with more than 7 percent a year. In 2008-09 the world economic crisis hit when global demand for energy and industrial production plummeted, but already in 2010 the Russian economy recovered due to increasing oil prices and later on by stronger domestic demand. The economy expanded 4.8 percent in the second half of 2011, but due to a slowdown in global demand Russian exports economic growth declined in the beginning of 2012. The rapid economic growth in the beginning of the Putin era was an instrument in the war on poverty. However, a more rapid and balanced economic growth is needed in order to develop the welfare state. Non-market services, typically driven by the political authorities in the poorer regions, are still expanding the public sector payrolls to compensate for the absent social safety net. In the first half of 2012, the nontradable sector accounted for around 80 percent of Gross Domestic Product (GDP) growth, similar to 2007.3 Today, natural resources constitute over 80 percent of Russias exports. The importance of the oil and gas industry is so overwhelming that it determines the governments economic and fiscal policy. As Russias economic growth continues to be depending on high world-market prices of hydrocarbons, it has become more and
3 The World Bank in Russia. Russian Economic Report. Reinvigorating the Economy, no. 28, Washington, DC, World Bank, Autumn 2012. 7

more integrated into the world economy as well as a provider of hydrocarbons to Central and Western Europe and China. Due to these revenues fuelling state expenditures. Thus one can call Russia a rentier state because a large share of the Russian state budget is provided by external rents provided by the oil and gas sector owning large reserves of hydrocarbons. In 2011 Gazprom produced 513.2 billion cubic meters of natural gas, accounting for 17 percent of worldwide natural gas production and 12.1 million tons of gas condensate. In June 2000, after Putins accession to power, fired Viktor Chernomyrdin from his position as the chairman of Gazprom and voted out CEO Rem Vyakhirev. Putin replaced them by Dmitriy Medvedev and Aleksey Miller, two old friends who had accompanied him from Saint Petersburg to Moscow. Government control was tightened in 2005 when state-owned firm Rosneftegtaz acquired control over Gazprom. In 2006 Gazprom received an exclusive right to export natural gas. These measures enabled Putin to shape a more or less stable oligarchic network of rentier capitalists supporting his presidential regime. In the mean time, the distribution of smaller parts of rents to the population was possible in order to buy popular support. Controlling the Russian firms is difficult, because they use trading companies in order to market their output. They avoid taxes by selling their products to their own trading companies at below-market prices and pocket the difference in tax havens abroad. They use transfer pricing to move unreported revenues from the industrial subsidiary to the trading subsidiary as well. The same trick can be used by firms facing sector-specific taxes: they are moving their profits to their trading subsidiaries if the latter are taxed at lower rates. Transfer pricing thus cuts tax payments for the production companies and inflates revenues of trading companies. The effect is that profits or value added are moved from the industrial sectors to the trade of services sector. This explains why almost one third of Russian GDP and half of all profits in the economy are generated by the trade sector and why the basic prices received by the producing firms are so low. Of course, net taxes on products value added tax (VAT, excises, export taxes) go to the government, but the trade margin goes to the trading firms. In Russia the trade margin is ten times larger than the
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reported transport margin, it accounts for about one fifth of GDP and is especially large in oil refining, oil extraction and natural gas trade. Types of transfer pricing concern transactions between related firms, barter, cross-border transactions and transactions with important price fluctuations for identical goods or services within a short period of time. Given the fact that transfer pricing rules in force since 1999 were almost inoperable because of their vague wording, poor court practices on this matter and a lack of knowledge from the Russian tax authorities forced the Russian authorities to close several legal loopholes. As a result, the per-capita tax revenues of the three principal oil-producing regions exceeded in 2001 by almost five times the average tax revenues of other Russian regions. Until 2002, 60 percent of taxes were levied on mining operations (about US$1.3 billion). They went to the budgets of the mineral-producing regions. The federal government decided to alter the sharing arrangement between the Kremlin and the regions in its advantage. Nowadays the federal government is keeping all oil and gas taxes for itself, the government can use them to decrease regional disparities and to equalize the budgetary revenues of the regions. The share of the Mineral Extraction Tax (MET) on oil accruing to regional budgets fell from 60 in 2002 to 20 percent in 2004. This share declined to 15 percent in 2005 and dropped to zero in 2010. Nowadays the federal government is keeping all oil and gas taxes for itself. Hence, the government can use these revenues to decrease regional disparities and to equalize the budgetary revenues of the poor regions. Part of these equalization grants is effectuated by means of a sophisticated formula limiting the possibility of the regions to influence resource allocation. Stabilization Fund instituted in 2004 was collecting the volatile revenues from the export of raw materials. The fund accumulated revenues derived from export duties on oil and from MET on oil production exceeding US$27 per barrel. Because considerable amounts of resource revenues had been accumulated, the impact of the 2008-9 global financial crisis on the national economy could be limited. In 2008 the Stabilization Fund was split in two. The Fund was replaced by a new budgeting procedure. Oil and gas
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revenues (export duties and MET on hydrocarbons) are thus separately accounted from other revenues in the federal budget. A Reserve Fund is collecting a share of the tax oil and gas revenues in order to compensate the federal budget for revenue losses in a period of low oil and gas prices. Residual oil and gas revenues are flowing to the National Wealth Fund which has to keep the pension system afloat. Today there are 100 workers for every 87 pensioners as a result of declining birthrates in the 1980s and 1990s.4 By 2020, that figure will be 100 workers for 100 pensioners.5 The Stabilization Fund is thus a financial cushion created for - pensioners - hard times. Its accumulated liquidities are thus not used for financing investment, but transferred in the form of liquidities to (foreign) bank accounts. In 2004 the right of local authorities to concede profit tax concessions was also restricted. However, industries were still using transfer pricing as a legal means in combination with shell trading companies to avoid VAT and general taxes. Transfer pricing of vertically integrated companies shifts tax revenues to downstream regions. Multi-regional companies offset profits of well performing branches against losses of poor performing branches in other regions. Firms moving their large profits to tax havens had a very strong interest in maintaining this non-transparent system of book keeping. Exporting firms had a major interest in exporting their produce at a low price in order to dodge taxes. About 80 percent of the countrys 100 million metric tons of annual export of coking coal sales were made via transfer pricing schemes. The mighty lobby of the exporting industries could successful postpone any thoroughgoing reform until in February 2010 the State Duma adopted a draft law on transfer pricing being applied by 1 January 2012. These new tax rules are now supposed to follow the
4 The Economist, 6-12 October 2012, p. 29. 5 The only way a Russian citizen can maintain a relatively comfortable life is continuing to work after reaching retirement age. According to a poll conducted by employment web portal Work@mail.ru in April 2012, only a third of Russians counts on governmental support after retirement, i.e. pensions. This poll illustrates the same trends observed by other researchers, such as the Levada Center in Moscow. The Voice of Russia. Radio. 19 April 2012. Online. Available HTTP: < http://english.ruvr.ru/radio_broadcast/25950828/72268934/html> (accessed on 6 January 2012). 10

Organization for Economic Co-operation and Development (OECD) standards. The approach of the OECD is based on the concept of the arms length price, i.e., the price that has been or would have been freely negotiated between independent parties. But it still remains unclear whether the government will be prepared to properly implement the new rules and whether the fiscal authorities will gain the necessary knowledge and experience in making transfer pricing adjustments under the rules. Moreover, the burden of proof lies with the taxpayer. The current transfer pricing rules refer to prices prevailing on the basis of the interaction of supply and demand on the market for identical or similar goods under comparable conditions. The tax regime for oil and gas underwent in the past several modifications since its establishment. Currently, the tax regime includes a MET and an export duty calculated on any ton of crude oil or cubic meter of natural gas. A number of tax benefits were, however, introduced to firms extracting oil that is exceeding a certain level of sulfur content. Those fields are mostly concentrated in East Siberia. Resistance to the new tax bill of 2010 came from the exporting monopolized sector. In a letter to Prime Minister Putin Gazproms CEO Aleksey Miller asked for exempting his firm from the transfer pricing law, but Deputy Finance Minister Sergey Shatalov (a former World Bank economist) opposed this request. The transfer pricing control will be exercised on cross-border transactions with oil and oil products, ferrous and non-ferrous metals, mineral fertilizers, precious metals and stones and cross-border transactions with foreign entities registered in certain low-tax jurisdictions according to a list established by the Russian Finance Ministry, provided that the total revenues under these transactions exceed 60 million roubles (approx. US$2.1 million) in total in a given calendar year. This does not mean a heavier taxation of big firms. General tax rates continue to be relatively low, because Russia primarily uses flat tax rates. Corporate income tax rates are not higher than 20 percent and possibly they will be reduced to 15.5 percent. The personal income tax rate is 13 percent for residents and VAT rates 18, 10 and 0 percent. Russias budget revenues can immediately fall short when export earnings decline because of falling world-market prices. Because of its
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high export earnings, the Russian state remains financially weak and depending on its hydrocarbon business. The latter requires, however, also huge investment in exploration and exploitation facilities the state-controlled firms are unable to finance. For many years, the Russian government has therefore adjusted taxation to foreign demand and price changes or investment requirements in the hydrocarbon sector. The Russian government is therefore attracting Foreign Direct Investment (FDI) by promising tax holidays. In 2011, Russia was seventh in the world in terms of attracting FDI, mainly in the hydrocarbon sector.6 New natural gas fields, which are currently under development, could be entitled to MET. Here, the Russian government could opt to follow the same path as with oil tax cuts or a universal formula could be worked out, Deputy Finance Minister Sergey Shatalov pointed out at a press conference on 15 October 2012 in Moscow.7 Taxing oil and gas exports is therefore a hazardous exercise because it may endanger budget revenues. For instance, at a news briefing during the Ninth Asia-Europe Meeting (ASEM) Summit in November 2012 hosted by the Laos government in Vientiane, Shatalov told reporters that tax earnings had fallen by US$1.6 billion since the transition to new crude and product export duties in October 2011. The Russian government originally expected that the new system would not affect budget revenues, but the government was not ready to revise it in time.8 The Russian state is also threatened by the extreme weakness of its overall economic structure. In periods of an export boom the rouble will easily appreciate which raises the value of the exports, but weakens the competitive strength of a major part of the Russian economy. On the one hand, lower oil and gas prices will cause serious problems in the economy as a whole and to the state budget in
6 K. Borisov and T. Frye, Perspectives of Russian-American investment cooperation: tendencies, mechanisms of support, recommendations, Russian Analytical Digest, no. 119, 21 October 2012, pp. 17-24. Online. Available HTTP: <http://www.isn.ethz.ch/isn/DigitalLibrary/Publications/Detail/?id=17933.html> (accessed on 1 December 2012). 7 RBC News, 16 Oct 2012. Online. Available HTTP: <http://www.rbcnews.com.html> (accessed on 1 December 2012). 8 Mr. Sergey Shatalov, zoominfo. Online. Available HTTP: <http://www.zoominfo.com/people/Shatalov_Sergey_167726739.aspx.html> (accessed on 6 January 2013). 12

particular. On the other hand, cheap domestic energy resources permit the government to postpone structural changes in the energy-intensive Russian industry and housing sector and to provide the consumer market with imported goods. High oil prices are also responsible for a lack of foreign direct investment. In order to develop new oil and gas fields in remote Siberian areas, the government introduced tax holidays. The government may even reduce to zero the export duty on crude oil from Eastern Siberia and impose a Tax on Additional Income (TAI) instead of MET. Enlarging the tax base of the Russian state is still a key issue in Russias fiscal policy, but until now little progress has been made. For several years, the Russian authorities have been discussing the issue of the introduction of a luxury tax. Initially, the State Duma decided to decline this initiative coming from the Communist Party and Just Russia, but in 2011 the idea of the luxury tax was nonetheless approved by Prime Minister Putin. Officials of the Finance Ministry then said that the rate for such a tax would make up one percent. Should luxury be taxed in Russia, the economic effect from the new tax would nonetheless be minimal, thus not increase the state budget considerably. As for the notion of luxury, it goes about the property worth more than 300 million rubles (US$10 million). Increasing the tax on luxury cars and expensive real estates is an idea defended by officials of the Ministry of Finance as well. The new tax would touch some 20,000 owners of luxury cars. The reform of the welfare state is a second important issue also linked to sustained economic growth. However, the Russian welfare state will only be able to ensure social solidarity and political stability under condition of sustained oil-led growth and high hydrocarbon prices. Because of its aging population and the growing pension burden the Russian government has to reform the pension system. With an aging population of about 145 million people, the Russian government has to support more than 40 million pensioners and some 18 million disabled persons, war veterans or other beneficiaries of state benefits. Compared to most European countries, the retirement age in Russia is
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nonetheless very low, with men retiring at the age of 60 and women at the age of 55. Raising step by step the retirement age to 65 year is a project the government has already in mind. As the average life expectancy of men in Russia is not more than 63 years old, this would create the possibility of increasing the average monthly pension by 30 percent. On 1 October 2012 prime minister Medvedev signed a preliminary plan for reforming the pension system that would nearly eliminate (from 6 percent to 2 percent) the funded component of the overall pension system. The money freed up from this plan is supposed to plug the US$50 billion hole in the pay-as-you-go system. At the moment, those funds are just 1.8 trillion roubles (US$58 billion) and are supposed to fill the gap in the Russian market for long-term financing, which is necessary for infrastructure development. This dependency on the central government may explain why the Putin regime can still trust on the confidence of a majority of the voters. But in de provinces, the population is also depending on local initiatives and patronage networks. This may explain why the erosion of the support for Putin is more important in the big cities. But, on the other hand, most citizens are also looking for political leaders solving their everyday problems. They remain immune to abstract rhetoric praising new political values or ideological changes. Especially in the poor regions, where government transfers are of a crucial importance, conservatism is deeply rooted. Together with the pensioners the population of the poor regions have become of decisive importance to any candidate running for the Presidency. Today, only nine of the countrys 83 regions together are producing more than half of Russias wealth. In 2010, 41 of the regions received more in federal aid than the combined net profits of all their local enterprises. This also means that pressure coming from the poor regions for obtaining a larger share of national wealth will grow in the near future. The Putin regime will also depend for its popular survival on its capacity of mobilizing funds for the poor regions. It is estimated that the total amount of transfers passed on from the federal budget into the regional budgets comprises roughly half of the total federal revenues from oil and gas. Grants are

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also covering a fixed share of regional social expenditures.9 Only about 20 percent of regional governments are considered to be self sustainable. Before the slump of 2008-9, the Russian economy grew at more than 7 percent, but since then growth has slowed to less than 4 percent against a background of strongly fluctuating world-oil prices due to revolutions and upheavals in the Middle East. In 1978 nominal oil price went from US$14 in 1978 to US$35 per barrel in 1981 as a result of the Iraq-Iran War and Organization of Petroleum Exporting Countries (OPEC) measures. Prices then plummeted because of nonOPEC production (especially from the Soviet Union - SU) increases. In mid-1986 crude oil prices were already below US$10 per barrel. The Gulf War after Saddam Husseins invasion of Kuwait in 1990 led to a price increase, but in 1994 inflation adjusted oil price reached the lowest level since 1973. The Asian boom and declining Russian production contributed to a price recovery in 1997. The Asian crisis of 1997-8, however, caused a sharp price fall and also to the Russian financial crisis of 1998 which would also lead to Yeltsins fall in 1999 and the Putins rise to power. From 2000 to 2007 Russian production increases would then dominate non-OPEC production growth. The long-term outlook is even less advantageous. Russia faces grim prospects, because oil prices are triggered by concerns about the euro and an economic slowdown in China. This could lead to a further flight of capital and a drop in tax revenues, a weaker current account and lower economic growth. Even during the recent oil boom of 2011capital outflows from the country reached a total of US$84.5 billion or about 5 percent of GDP. The reasons for capital outflow from Russia is investment abroad by Russian individuals and businessmen actively taking their money onto offshore accounts. Moreover, investors are afraid of declining oil prices and thus they want to avoid a possible ruble devaluation. But due to disturbances in the Middle East the price for Urals crude oil rose in March 2012 above US$125 per barrel. Meanwhile, the deterioration of the financial
9 G. Kurlyandskaya, G. Pokatovich and M. Subbotin, Oil and gas in the Russian Federation, Framework Paper, Conference on Oil and Gas in Federal Systems, March 3-4, 2010, World Bank, Washington, DC. 15

situation of Greece and the weakening of the euro compelled Russian businesses to revert to the US dollar. The exacerbation of the recession in the European Union (EU) will also stimulate an outflow of capital from Russia. But as long as oil prices were to remain high, this would boost economic growth and help to maintain a fiscal surplus. Bolstering economic growth will also require a raise in productivity in order to strengthen the competitiveness of the Russian economy against the backdrop of a shrinking labour force. Together with a greater exchange rate flexibility discouraging speculative capital inflows and banking supervision, the economy can be made more stable and bolster economic growth. Though Russia made a substantial economic progress during the Putin era, it has nonetheless to ensure more macroeconomic and fiscal stability. Russias vulnerability to adverse external shocks can be limited by a policy of low inflation and a more robust financial sector. In addition, strengthening public sector governance and raising the quality of public spending can create the room to invest in growth-enhancing infrastructures.10 However, Russias increasing dependency on hydrocarbon exports hampers the countrys development. This is often referred to in the literature as a resource curse, or also the Dutch disease. Russia displayed, indeed, some symptoms of the Dutch disease, i.e. the appreciation of the rouble in real terms and the rise in the services sector. Several theories have been proposed in order to explain this phenomenon. High resource exports distort the price of tradables relative tot non-tradables in a way that non-resource sectors are placed at a competitive disadvantage. In the long run the natural resources industries will drain away financial and human resources from the other sectors which are assumed to have higher potential spillovers.11 Because of a lack of backward and forward linkages to the rest of the economy, these growing exports are not constituting an engine of diversification. Moreover, the gas and oil industry has limited
10 The World Bank in Russia. Russian Economic Report. Moderating Risks, Bolstering Growth, Washington, DC: World Bank, 27 April 2012, p. 29. 11 D. De Rosa and M. Iootty, Are Natural Resources Cursed? An Investigation of the Dynamic Effects of Resource Dependence on Institutional Quality, Policy Research Working Paper, Europe and Central Asia Region, Financial Sectors Development, The World Bank, Washington DC, July 2012. 16

spillover effects to the other sectors.12 As the Russian oil and gas sector still show double-digit annual export growth and represents about 65 percent of Russias exports value, export growth outside this sector should be a target. Export diversification is thus hard to obtain. Russian firms having emerged from non-oil sectors have huge difficulties to establish a foothold in a market outside of Russia. During the period 1999-2009 their export survival rate13 was 57 percent, while in the case of China the export survival was over 70 percent. Even Brazil and India performed better than Russia. Russias total exports therefore remained stagnant at around 4-5 percent in the 1998-2008 period. Economic policy The Russian government is well aware of all these bottlenecks. Already in the mid-2000s, the Kremlin started four so-called national economic modernization projects to be financed with hydrocarbon revenues. These oil revenues were also used to compensate for investment costs and to reduce state debts or to accumulate financial funds. A group of independent World Bank advisors presented on 16 March 2012 a report on economic reforms. Then, President Putin signed on 18 June 2012 the Executive Order on long-term economic policy in order to step up the rate of sustainable economic growth, which also means increasing labour productivity and making of Russia a leader in science-intensive sectors. A Council presided over by Putin was established to facilitate economic modernization and innovative development in Russia and improve state management in this area. Meanwhile the Presidential Commission for Economic Modernization and Technological Development was abolished.14
12 Russian Federation. Export Diversification through Competition and Innovation: Overview, World Bank, Washington, DC, April 2012. 13 On the export survival rate, see P. Brenton, Chr. Saborowski and E. von Uexkull, What Explains the Low Survival Rate of Developing Country Export Flows?, Policy Research Working Paper no. 4951, Washington, DC: The World Bank, June 2009. 14 President of Russia, Executive Order on Council for Economic Modernization and Innovative Development, 18 June 2012. Online. Available HTTP: <http://eng.news.kremlin.ru/acts/4043.html> (accessed on 1 December 2012). 17

Tatiana Romanova and Elena Pavlova remark in their text that economic modernization has gained prevalence over political reforms and democratic development. This is characteristic not only for the actual political elite, but also for scholars and political analysts believing that new industrialization will be necessary to reverse the overall decline of Russias economic structures. Hence, a Partnership for Modernization initiated during the EU-Russia Rostov-On-Don summit in June 2010 should to facilitate the modernization of the Russian economy. The Putin regime is in the first place defending the status quo in order to protect the property distribution. Policy decisions on energy issues are made by a small group of individuals, usually associates of Putin who have direct access to him. Top managers of leading companies often play a role in this process. Under Putin, who acts as a supreme arbiter or mediator, rivalries and conflicts often take place in public so that they can be overseen and controlled by Putin. This form of divide and rule underlines Putins considerable personal importance to the functioning of the system and it constitutes a source of his power. The natural resources-based economy requires a tight control of all levies of state power ensuring that there is no economic base for political pluralism. Meanwhile, many reformers and modernizers have quit the Putin administration. Among them are previous ministers such as former minister of Finance Aleksey Kudrin or minister of Economy German Gref. There are still reformers left, but their influence during Medvedevs four-year presidency (2008-12) was, after all, rather limited. The main reason behind President Putins decision to remove Defence Minister Anatoliy Serdyukov and the subsequent firing of Chief of Staff General Nikolay Makarov and other senior defence officials and military officers in Russias Ministry of Defence in November 2012 was an other example of purges regularly carried out in the power structure. The shake-up was not only due to corruption, but rather to a power struggle over who should control the distribution of the US$700 billion that Putin pledged in February 2012 to spend on new
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weapons purchases by 2020. The Russian military-industrial complex wants these funds without impediment. Throughout his years in office, however, Serdyukov along with other Defence Ministry officials constantly castigated the defence-industrial sector for producing outdated and overpriced weapons. Under his reign, Russia bought Israeli drones, French amphibious assault vessels and Italian armoured vehicles. He also refused to sign defence contracts without guarantees of higher quality and cheaper prices and declined to buy Russian weapon systems that had not been fully tested or for which no identified military requirement existed. As long as the hydrocarbon exports can generate enough financial resources, economic growth will continue and make it possible that state spending on defence is not endangered. If energy prices drop, it will become more difficult for Putin to finance his social programmes. Meanwhile the current opposition of well-educated people in the big cities cannot present a realistic alternative to Putinism as long as the mainstream media are firmly controlled by the Kremlin.15 However, reforms currently on the agenda are technically and politically difficult to implement as long as they meet resistance of powerful vested interests in the hydrocarbon and raw material sectors which are also financing the expansion of the domestic manufacturing and services sectors. Hence, the reported increase in activities outside the natural resource sectors did not mean an independent revival of Russias domestic industries, but has to be considered as a secondary effect of high hydrocarbon prices. Sustained economic growth in the different sub-sectors of the industry can only by obtained by investment in production facilities for new consumer and capital goods. Though Russia hydrocarbon exports were booming after 2000 and Putin was using natural gas monopolist Gazprom as his preferred instrument for acquiring political and economic influence in the near abroad, especially in Belorussia and Ukraine, this strategy largely failed. Ukraine has for a long time after independence remained dependent on Russia, mainly for its supply of oil and gas, while Russia is the main market for Ukraines export of machinery,
15 R. Orttung, Can Putinism evolve?, Russian Analytical Digest, 16 March 2012, no. 110, pp. 4-7. 19

equipment and transport means. But Russias influence soon would wane from the moment on Ukraine sought a closer relationship to the EU. However, this rapprochement was brought to a halt after Viktor Yunokovych had been re-elected as president in 2010. Relations with China improved, but the Kremlin was reluctant to open up the Siberian area for Chinese investors or to favour large-scale gas and oil exports to China, mainly due to huge investment costs in drilling and transport facilities. Despite being the largest country in the world in terms of surface and its more than 140 million inhabitants, in terms of trade it is just between the Netherlands and Belgium. In addition, Russia is unable to stop capital flight to tax havens like Cyprus, Gibraltar, the British Virgin Islands and the Netherlands. Foreign affiliates of Russian forms, established in these offshore financial centres, invest back to the Russian Federation. Some 50 to 60 Russian multinational enterprises account for a large part of Russian assets abroad. Among them are giants like Gazprom, Lukoil, Sberbank, AFK Systema, Norilsk Nickel, Evraz, Rusal (a part of the Basic Element Group), and Severstal. All of them are global players diversifying their investments abroad.16 This international drive is in part due to the desire to mitigate the economic risks at home through holding a large part of the assets offshore. Outward FDI was a second factor. Hence, Russian firms are behaving just like other multinationals. The financial crisis of 2008 did not stop them from seeking investment opportunities abroad. However, during the 2008 crisis the naturalresources based Russian multinational were nonetheless relying on financial help of the government.17 In the mean time anxieties about Russian FDI increased in several European countries. Not all such concerns are over security or possible political interference. But the penetration of Russian oil and gas companies in the Central European markets has nonetheless engendered some suspicion, because local politicians see the long hand of the Kremlin behind these deals and are fearing the misuse of market power for political ends. In the mean time, however, Russia has become one of the EUs major energy provider after the construction of the Nordstream pipeline supplying
Russian Analytical Digest, 2008, no. 34. Online. Available HTTP: <http://www.css.ethz.ch/publications/RAD_EN.html>(accessed on 1 December 2012). 17 A. Panibratov and K. Kalotay, Russian outward FDI and its policy context, Columbia FDI Profiles, 13 October 2009, no. 1, Vale Columbia Center.
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Germany with natural gas. Not natural gas, but oil has become Russias main export product. Membership of OPEC never appeared on the Kremlins agenda. After having lost a foothold in the oil business during the unholy Yeltsin years, the Kremlin could regain control over the sector in the beginning of the 2000s. That membership of OPEC was not a solution to Russias oil trade is easily understandable because the country is also a large consumer of oil products and not only an exporting producer. Russian production increases dominated even non-OPEC production growth from 2000 to 2007 and was responsible for most of the non-OPEC growth since 2000. Since 2002 Russia became nonetheless a follower of OPECs quota policy. In that year OPEC reduced its quota by 1.5 million barrels per day and was joined by Russia which promised production cuts as well. In reality, Russia exports the produce of its excess capacity. Major Russian oil companies try therefore to acquire production facilities in other countries and even gas stations. Lukoil, the world leader in oil reserves, is spreading its gas stations all over the USA and in different European countries and acquired refineries in Bulgaria, Ukraine and Romania. Lukoil controls now, together with Austrian MV and Hungarian MOL the oil market in Central and Eastern Europe. Lukoil was also interested in purchasing facilities in Poland and Lithuania, but withdrew because of political antagonism. However, Russian oil interests in the region are growing. In March 2009 Russian Surgutneftegaz purchased the 21 percent holdings of Austrian oil company in MOL. Although the transaction went through, MV was accused in Hungary of being a front company for Russian interests. Maybe more than natural gas, oil has become Russias spearhead in trade with Western Europe. Today, the Port of Rotterdam, which is by far Europes largest harbour, is handling about 40 percent of fuel oils transshipped via Baltic ports (Saint Petersburg, Vysotsk and Tallinn) to Rotterdam. Lukoil operates here a tank terminal (Service Terminal Rotterdam). Refineries owned by Lukoil/Total (Flushing) and Rosneft/BP (Gelsenkirchen) are connected via pipelines to the Port of

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Rotterdam.18 Russian investment group Summa and VTTI (a branch of oil trading company Vitol) won a tender to build an oil loading terminal in Rotterdam in order to gain better access to global markets for the Urals blend supplied by tankers from the port of Primorsk (oblast Leningrad).19 In contrast to some Central European countries, no protests were heard from the part of the Dutch government concerning the increasing commercial activities of Russian firms or their offshore-banking activities in the Netherlands. Globalization Two decades after the fall of communism Russia is still under the socalled tandem of Putin and Medvedev on its way to fuller integration into global capitalism. Forgotten is Boris Yeltsin who created them, but had failed to establish political and economic stability in a country that had just lost its status of superpower. Meanwhile Putin and Medvedev succeeded in giving Russia that much needed stability by centralizing state power and by redistributing a part of the oil and natural gas gains. They reconciled themselves with the Orthodox Church and Soviet traditions. Nationalist rhetoric and even chauvinism is resonating in their speeches. But this nationalist rhetoric has failed to resonate with the urban middle classes having become enthusiast for Western-style consumption models and democratic procedures and disappointed with Putins authoritarian style and ineffectiveness. This sensibility is largely caused by the rising standard of living in the major Russian cities. The 2011-2 elections also marked the growing social and political divide between the middle-class voters in the cities more concerned by self-expression values and most provincial and impoverished
Energy gateway to Europe. Oil of Russia magazine talks to Hans Smits, CEO of the Port of Rotterdam Authority, Oil of Russia, 2011, no. 2, pp. 70-72. Online. Available HTTP: <http://www.portofrotterdam.com/en/News/pressreleases-news/Documents/oil_of_ %20russia3.pdf.html> (accessed on 1 December 2012). 19 Russian investors win right to develop Rotterdam oil terminal, rt.com, 20 October 2011. Online. Available HTTP: <http://rt.com/business/news/russia-oil-rotterdam-port-279/html> (accessed on 1 December 2012).
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Russians still struggling for their daily existence. The former group is more open to the global world with its new patterns of consumption and communication, while the latter group with a more traditional style of living has just gained access to the consumer markets in their region or city. Meanwhile, Moscow and Saint Petersburg have become, more than the big cities elsewhere in Russia, access to the outside world. Although Moscow does not yet belong to Saskia Sassens category of the global city,20 Richard Florida categorizes Moscow just after the five first-tier cities New York, London, Tokyo and Paris as a first-tier city (together with Chicago, Los Angeles, Frankfurt, Hong Kong, Milan, Singapore, San Francisco, Sydney, Toronto, Zrich, Brussels, Madrid, Mexico City, So Paulo, Seoul, bet well before cities like Boston, Washington, DC, Dallas, etc.21 However, cities are not only competing for talent, but they are also creating wealth in an ever-more-stratified global economy. In addition, the world is also becoming more integrated through the explosion of cross-border networks, while these global cities are increasingly becoming laboratories form social and political change. Their citizens are believed signing petitions, starting boycotts, creating art, breaking copyright laws, filesharing, blogging, and engaging in elite challenging activities as well. However, big Russian cities like Moscow and Saint Petersburg still differ from their counterparts in the West. Moscow may be a better place to live than in any other Russian town, given the amount of finances circulating here. The socioeconomic development of the city up to 2025 is excellent and the Russian capital has the capability to become a city with a high quality of life. The problem, Moskovskiy Komsomolets notes, is however that Moscow is unique in its huge disparity between the economic potential and citizens prosperity. For example, Moscow is placed 21 out of 26 metropolises worldwide in terms of economic development, but drops to the range of 70 out of 140 in quality of life.22 There is a
20 S. Sassen, The Global City, New York, London and Tokyo: Princeton UP, 1991. 21 R. Florida, The Flight of the Creative Class. The New Global Competition for Talent, New York: Harper Business, 2005, p. 168. 22 The Voice of Russia. Radio. 19 April 2012. Online. Available HTTP: <http://english.ruvr.ru/radio_broadcast/25950828/72268934/.html > (accessed on 6 January 2013). 23

widespread skepticism with regard to human security and a lack of appreciation of the freedom of public articulation and political participation in Russia in general. In addition, widespread corruption and a lack of political pluralism make that Russian society is less receptive of social modernization as well. Global cities promote economies of scale, they are socially modernizing centres of technology and innovation and match human capital to new economic opportunities.23 The are becoming creative hotbeds that draw talent from all over including your city and mine.24 But they are also centres of political opposition and protest or they transmit messages to new audiences via online media which are challenging established authorities during periods of political tensions. One also can point to the formation of a public counter-sphere since the financial crisis of 2008 and hypothesize the formation of a fullscale public counter-sphere across the hybrid media system. The political relevance of national television and national newspapers as the main traditional politically influential media segments shifts today to new media and that the use of international communicative platforms fosters today political spill-over to a bigger extent than those of national-language and nation-branded ones. The new media and the globalizing economy are, in addition, creating new attitudes against the enemy-based militarized patriotism of the Putin regime. Young Russians are enjoying today the internet as their comfort zone where their personal freedom is guaranteed. Obviously, all these tendencies in society fed by Russias growing GDP are weakening the hegemony of Putinism and preparing for a profound change of the political system in accord with the interests of the creative class having become ideologically dominant in a Gramscian sense.25 Hence, Putin has lost in the eyes of his urban public opinion such features as dynamism and innovativeness. Putins statements about the protest movement, for instance about group sex practized by Pussy Riot, are no longer appreciated by a large part of the Russian urban voters
23 Florida, op. cit., p. 259. 24 Ibid., p. 169. 25 S. Gill, Gramsci and global politics: towards a post-hegemonic research agenda, in S. Gill (ed.) Gramsci, Historical Materialism and International Relations, Cambridge: Cambridge UP, 1993, pp. 1-18. 24

although the official media kept on stressing traditional values. Thus, notwithstanding the dispersed character of the Russian opposition, the crisis of Putinism is certainly a fact although the opposition movement has not yet formulated a powerful alternative. However, the growth of Moscow as a global city is not politically uncontested. There is also the popular image of Moscow as a giant sucking all financial resources of over centralized Russia. Global cities are not only producing wealth, they also strengthen and produce inequalities. Moscow is importing people from many regions and peripheral countries. This ethnic diaspora is actively using the existing corruptness of city authorities as well and engenders xenophobic reactions of the local population. Moscow is, furthermore, also a symbol of growing social and economic disparities and uneven economic development in Russia. Hence, globalization and international capital are also promoting interregional inequalities and political polarization in a period that the Russian state is still struggling with its own inefficiency and wide-spread corruption. Modernization of the Russian governance model would, however, require more thoroughgoing political reforms going beyond the cosmetic changes introduced after the Yeltsin years. But little of all Putins plans was realized. Modernization is mainly interpreted as a technocratic operation allowing the state to intervene more efficiently un the accumulation process of capital, not in creating a more liberal political and social environment for change. Economic modernization Many interpretations of the essence of modernization are competing. They all refer to the collapse of the SU. The SU had not in time recognized the vital importance of diversifying the technological base of the economy. Hence, one is now focusing on computers and nanotechnology. According to professor Sergey Medvedev of the Higher School of Economics in Moscow, the SU collapsed partly because the state was unable to transit to the information age. The USSR became complacent a victim of its own success. Bigger was no longer better. Russia stayed the modernization course at full speed ahead, while the rest of the world transitioned to new technology
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based on knowledge and to new organizational schemes based on networks.26 Indeed, as Saskia Sassen remarks, new network technologies strengthen electronic transfers of specialized services among firms or internet-based communications among the members of globally dispersed diasporas and interested groups. [] Nonstate actors can gain visibility of aggregate membership in a nation-state exclusively represented by the sovereign.27 Though a Partnership for Modernization was initiated by the leaders of Russia and the EU at the summit in Rostov-on-Don (June 2010)28, little progress was made since then in the field of energy efficiency and renewable energy sources. Liberalization of the visa regime is still pending. The EU countries are visibly afraid of opening their frontiers to Russian citizens. The EU-Russia Civil Society Forum should enable regular, systematic and sustainable contacts among non-state actors on both sides,29 but due to Putins move against foreign NGOs accredited to Russia, this process is also frustrated. It is clear that there is a gap between rhetoric and action, as Alexander Voloshin, chairman of Norilsk Nickel, said during a REP Roundtable discussion at the Chatham House (Royal Institute for International Affairs), London, on 5 March 2010. Moreover, Russia is discussing about modernization, but had not yet come to a conclusion when signing the agreement with the EU. In Russia, modernization was often confused with developing a high-tech knowledge economy rather than improving the manufacturing industry. Some believe that modernization has to come form aero-space projects, nuclear power or computers, but a lack of a specialized workforce is frustrating this development. On the other hand, Russian officials and businessmen think that buying assets in Western Europe would suffice in order to supply Russia with technology. This does, however, not mean that
R. Thonock and W. Whitaker, Skolkovo: Russias emerging Silicon Valley. Online posting. Available e-mail: Knowledge@Wharton (1 December 2012). 27 S. Sassen, Territory Authority Rights. From Medieval to Global Assemblages, Princeton and Oxford: Princeton UP, 2006, p. 340. 28 EU-RUSSIA Partnership for Modernization. Online. Available HTTP: <http://formodernization.com/en/info/html> (accessed on 1 December 2012). (accessed on 1 December 2012). 29 EU-RUSSIA Partnership for Modernization. Online. Available HTTP: <http://formodernization.com/en/info/work_plan.php.html> (accessed on 1 December 2012).
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foreign capital is not interested in investing in Russia, but mainly in the oil and gas sector, or in the case of German firms in infrastructures. Social-Democrat politician Frank-Walter Steinmeier, who represented as a German Foreign Minister the influential lobby of the German manufacturing industry,30 frequently used the term modernization partnership to help Russia modernizing such areas as healthcare, science and public administration. German industrialists welcomed this idea because they are holding stakes in the Russian economy. But in general, the Russian government is attaching greater importance to the positive role of the state in its economic development than the West which is emphasizing the role of the market and the private sector. Russias foreign trade is largely based on bilateral agreements. Especially in the nuclear and military sector, the Russian government follows the path of the former Soviet diplomacy. Moscow has maintained close ties with its traditional ally India. India-Russia relations are intensive. When on 24 December 2012 Putin arrived in New Delhi for the 13th annual bilateral summit, during which India and Russia were expected to ink a host of important bilateral agreements, Putins intention was to strengthen the strategic nature of partnership between India and Russia and to establish a joint development of advanced armaments rather than just purchasing military products.31 However, Russia is also worried by Indias recent preference for western arms supplies, especially after Boeing was chosen over Russias MiL for a major helicopter contract. India and Russia share nonetheless a multidimensional strategic partnership which spans traditional strategic sectors like defence, nuclear and energy.32 Meanwhile, Moscow tries to regain lost ground by developing joint projects. Tie-ups are expected to involve Russias Sukhoy aircraft manufacturer for 42 Su-30MKI fighters and a deal to
30 Belonging to the business wing of the German Social-Democratic Party, Steinmeier also backed the initiative of the Austrian-Canadian manufacturer Magna and Sberbank (led by German Gref) in order to take over Opel from General Motors. 31 Putin targets arms deals, doubling trade on India visit today. The Times of India, 24 December 2012. Online. Available HTTP: <http://articles.timesofindia.indiatimes.com/201212-24/india/35991331_1_russian-president-bilateral-trade-admiral-gorshkov.html>(accessed on 25 December 2012). 32 Putin to visit India December 24, Orissa Post, 16 December 2012. 27

produce the fifth generation Sukhoy fighter jointly. Russias modernization programme focuses on high-tech development and the establishing of innovation cities although experts in the West maintain that this approach is ineffective due to changes in the global economy requiring an open economy and international networks, ventures, efficiently working courts dealing with bankruptcies, protection of property rights, etc. Anatoliy Chubays, nowadays heading the Russian Nanotechnology Corporation (Rosnano),33 pointed out that about 70 percent of the investment in R&D in Russia is provided by the state, while the private sector is reluctant to invest in these activities. Hence, Rosnano is buying technology abroad, also in the USA, where Chubays bought two biotechnological firms (BIND Biosciences Inc. and Selecta Biosciences). They must open laboratories in the Skolkovo Innovation Centre, technology park near Moscow.34 Meanwhile, Rusnano works with US venture funds such as Draper Fisher Jurvestor from Silicon Valley, bought a stake in BIOptix Diagnostics in Colorado, in Cleveland BioLabs, Quantenna Communications, NeoPhotonics, etc. Skolkovo Innovation Centre was announced by President Medvedev in November 2009 and the complex is now headed by oligarch Viktor Vekselberg and co-chaired by former Intel CEO Craig Barret. Meanwhile the government worked out special legal and tax regulations for Skolkovo. The main elements of the site are a technopark and a university annex congress centre. Collaboration agreements were signed in 2012 with IBM, Rusnano, Rostelecom, Russian Venture Company and ITFY to foster R&D and to attract investors from around the world. It is also clear that economic modernization is prevalent to
Kremlin appoints Chubais nanotechnology corporation chief-2, Rianm.ru, 6-8 October 2009. Online. Available HTTP: <http://en.rian.ru/russia/20080922/117029726.html> (accessed on 1 December 2012). During a visit to Russia in 2008 Steinmeier also criticized Russias top-down model. Online. Available HTTP: <http://russland.ru/ruwir0010/morenews.php?iditem=18446.html> (accessed on 1 December 2012). 34 S. Kravchenko and O. Kharif, Russias Chubais eyes US tech firms with Putin blessing, Bloomberg.com, 24 August 2012. Online. Available HTTP: <http://www.bloomberg.com/news/2012-08-23/russia-s-chubais-eyes-u-s-tech-firms-withputin-blessing.html> (accessed on 1 December 2012).
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institutional democratization. Hence, finding a pathway to a deeper and closer collaboration between EU and Russia will be difficult, because the current international economic and financial crisis makes the neoliberal development model highly questionable. Hence, the Partnership for Modernization will necessitate a better mutual understanding, a point the EU Institute for Security Studies also touched in its report A Strategy for EU Foreign Policy published in 2010: The focus on bilateral relations has made it difficult for the Union to act as a mediator in the unresolved conflicts in the region. If it wants to take on this role in the future, it should seek for ways to engage constructively with all parties to the conflicts. The second point is that the Eastern Partnership has, for the first time, introduced a multilateral dimension in Brussels policy towards the eastern neighbourhood. This is a step in the right direction which needs to be elaborated further in order to give the eastern partners more and stronger incentives to engage in multilateral cooperation. Last but not least, the EU has to look for ways to reconcile its relations with the eastern neighbours and its relationship with Russia. While deeper EU engagement in the neighbourhood is not negotiable, it is important to reflect on how to accommodate this with the Unions wish to develop a strategic partnership with Russia. An open dialogue between the EU, the eastern neighbours and Russia about potential synergies between the different policies applied in the region could help foster greater coherence both in the region and in EU policy.35
. de Vasconcelos (ed.), A Strategy for EU Foreign Policy, Brussels: European Union Institute for Security Studies, European Union, Institute for Security Studies, 7, June 2010, p. 43. Online. Available HTTP: <http://www.iss.europa.eu/uploads/media/A_strategy_for_EU_foreign_policy.pdf.html> (accessed on 1 December 2012).
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Russia is probably the EUs most controversial partner, because Russia brings discord in the EUs policy. Several reasons can be enumerated for some controversies or misunderstandings Russia creates in the European capitals. Russia has a long history of everchanging rules and provisions regulating property rights and tax laws. In most cases these changes refer to business deals related to the Russian oil and gas companies and the conflicting interests of the class of the oligarchs monopolizing the natural resources and the manufacturing industry. Rival groups are constantly fighting for control of Russias vast energy reserves. On the one hand the siloviki or Putin associates who played a vital role in restoring state ownership of the Russian oil business through Rosneft in 2003-5, are opposing the faction of technocrats and businessmen favouring a greater liberalization and privatization of the energy sector by using the state holding company Rosneftegaz as a vehicle for their plans. The latter faction is led by deputy Prime Minister Arkadiy Dvorkovich (a Medvedev loyalist), while the siloviki are led by Igor Sechin, his predecessor as deputy Prime Minister. After having lost ground under the presidency of Medvedev, Sechin was returned by Putin as CEO of Rosneft and to the board of Rosneftegaz and he was appointed to the influential position of secretary of the presidential energy commission, while Dvorkovich received the chair of a government commission on the energy sector. All these infightings contribute to complicating the decision-making system, but they also strengthen Putins role of a manual controller reconciling competing interests of financial and industrial groups. Meanwhile Putin can mediate between the progressives pleading for liberalization of the markets and conservatives favouring more state control.

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