Invest in Russia Conference
Washington, DC
May 15, 2007
Thomas Graham
Senior Director
Kissinger McLarty Associates
This year, as you know, we are celebrating the 200th Anniversary of the establishment of U.S-Russian relations. To be sure, the relationship has had its ups and downs since John Quincy Adams set off for St. Petersburg and Andrey Dashkov come to Washington to set up their respective missions nearly 200 years ago. During the past century alone, the United States broke relations as the Bolsheviks took over Russia and created the Soviet Union. The United States and the Soviet Union then worked as allies in the Second World War, only to become bitter enemies during the Cold War. The demise of communism and the liberation of Russia in 1991 led to great euphoria about the possibilities of strategic partnership, which was disappointed by the harsh realities of the 1990’s in Russia.
Over the past five years we have completed another cycle of great expectations and deep disappointment. I know. I joined the National Security Council to manage U.S. Russia policy shortly after the Moscow/St. Petersburg summit of May 2002, perhaps the high point in U.S.-Russian relations under Presidents Bush and Putin, and departed twenty-four hours before President Putin’s remarks in Munich this past February. At that summit five years ago, the Presidents agreed on a framework for partnership that called for broad engagement on counterterrorism and non-proliferation; commercial relations, especially energy; regional issues, such as Afghanistan, Central Asia, the South Caucasus, and the Middle East; the NATO/Russia Council; people-to-people contacts; and strategic stability. Senior government officials in both countries talked as if strategic partnership were a reality. By contrast, in Munich, three months ago, President Putin basically said that the United States by its allegedly unilateralist policies posed the gravest threat to Russia’s security, and the rhetoric has only gotten worse since. So much for strategic partnership.
The two sides have stepped up high-level engagement since those remarks, and President Putin met with Secretary of State Rice today. The initial reports on that meeting do little to dispel the prevailing pessimism about U.S.-Russian relations in both countries. In part, this pessimism reflects great disappointment that relations have repeatedly fallen short of the high expectations and aspirations articulated by every American and Russian President since Presidents George H.W. Bush and Mikhail Gorbachev put an end to the U.S.-Soviet confrontation nearly twenty years ago. In larger part, however, the pessimism is the consequence of a deepening sense that the two countries are parting ways, as reflected in concrete policies over the past few years. Americans are concerned by what they see as Russia’s accelerating backsliding on democracy, more aggressive behavior towards its neighbors, a greater willingness to use energy resources for geopolitical gain, and more assertive policies abroad, particularly in the Middle East, that appear aimed at undermining U.S. positions. Russians are concerned by what they see as the United States’ great rush to expand NATO and deploy U.S. military forces into Russia’s neighborhood, mounting steps to squeeze Russia out of the former Soviet space, and continued undue interference in Russia’s domestic affairs, all policies which Russians believe reveal an unwillingness on the part of the United States to accept and respect Russia as a major world power.
Yet it is important to remember that much has changed for the good in U.S.-Russian relations since the breakup of the Soviet Union fifteen years ago, and we are not on the verge of a new Cold War, however much certain circles in the United States and Russia might wish for that. Neither the United States nor Russia poses a strategic threat to the other. During the past fifteen years, the two countries have worked together effectively on some major issues, especially strategic stability, counterterrorism, and non-proliferation. Moreover, a strong case remains for seeking genuine strategic partnership, but we need to accept that that is a long-term project that will require hard work and some calculated risk-taking on both sides and that there will always be issues on which our national interests diverge.
It is a cliche, but nevertheless true, that we live in a world of great flux, of historic challenges and historic opportunities, as a new international order is born. The North Korean nuclear test last fall, the deepening concerns surrounding Iran’s nuclear program, the growing terrorist threat, volatile markets, and the threat of pandemic diseases underscore the dangers. Revolutionary technologies – in information, communications, and genetics – and the absence of great-power confrontation provide the historic opportunities. Both the United States and Russia have considerable resources to help shape and manage the emerging international environment for the good of both countries and the rest of the world. Each remains a key country for the other. Again, this is well-known, but we need to remind ourselves of this reality, given the state of the public debate. Russia is important to the United States by virtue of its rich scientific talent; its vast resources; its deep experience in nuclear matters, both military and civilian; and its geographical location astride Europe, the Middle East, and Northeast Asia, three areas of vital concern for the United States. Even if many times it can manage without Russia, the United States will find it easier to deal with the challenges of the 21st Century when Russia is working as a partner and not at cross purposes. At the same time, the United States – if only because of its immense wealth and power and central role in global security and economic affairs – is critical to Russia.
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The prevailing downbeat assessment of U.S.-Russian relations overlooks or discounts the important work the two countries have done as partners during the past few years to advance global security, particularly in the area of nuclear security. Russia and the United States, for example, have accelerated the provision of security upgrades to Russian nuclear material and weapons storage sites by two years, with completion now scheduled for the end of 2008. The two countries are working together to repatriate spent and fresh fuel from U.S.- and Russian-designed research reactors in third countries and to develop new fuels that will allow additional research reactors to convert to low enriched fuel. The two countries are leading a multilateral effort to prevent terrorists from gaining access to nuclear materials. The two countries are well advanced in negotiating a framework agreement that will allow for expanded cooperation in civil nuclear energy. That agreement will facilitate current efforts to link President Bush’s Global Nuclear Energy Partnership and President Putin’s proposal on multinational nuclear fuel centers, two initiatives aimed at realizing the promise of civil nuclear energy while reducing the risks of proliferation. Finally, the two countries have also been cooperating, along with partners from Europe and East Asia in dealing with North Korea’s and Iran’s nuclear programs.
While cooperating on these critical security issues, Russia and the United States have expanded and deepened bilateral commercial relations. Bilateral trade volume more than doubled from 2001 through 2006, from $9 billion to $24.5 billion. Cumulative American direct investment in Russia now amounts to $11 billion and is growing rapidly, as firms already on the ground expand operations and others consider entering the Russian market. Moreover, investment has moved well beyond the earlier concentration in the energy sector, particularly into retail trade and services. At the same time, Russian companies are beginning to make significant investments in the United States. The cumulative total is now $3 billion. Granted, these sums are small given the size of the American and Russian economies, but the direction is important and the situation should continue to improve. Last fall, after intense, tough negotiations, the United States and Russia signed a bilateral market access agreement, one of the last major hurdles in Russia’s pursuit of WTO membership. Although difficult multilateral negotiations remain, with a concerted effort on its part, Russia could join within a year.
The growth in bilateral commercial engagement is a consequence of the positive economic developments in Russia, which are widely known, but often downplayed, in the heated rhetoric surrounding U.S.-Russian relations. Russia’s economy has recovered at an unexpectedly rapid rate from the financial collapse of 1998, regaining the ground it lost after the breakup of the Soviet Union while growing retail and service sectors largely absent during the Soviet period. Deep structural problems remain, but this is a generational problem that the Russian government has slowly begun to address. The Russian government has ably managed the vast inflows of petrodollars over the past few years to create a stable macroeconomic environment by growing foreign reserves (from $12.5 billion in 2000 when Putin took over from Yeltsin to over $315 billion today), creating a Stabilization Fund (now over $100 billion) to hedge against the inevitable decline in commodity prices, and paying down foreign debt. Wealth has flowed down and beyond Moscow, creating a vast consumer class across Russia (estimated at 20-40% of the population), which itself is making a major contribution to economic growth. A rising generation is mastering the attitudes and skills necessary for Russia to thrive in the increasingly competitive global economy. Russians have welcomed the political stability of the Putin presidency and look more confidently to the future than they have at any time in the past fifteen years. Because President Putin’s successor is likely to continue his policies in broad terms, the transition of power in Russia next spring is unlikely to reverse this positive evolution in the short run. Under these circumstances, it is hardly surprising that American businesses want to be in Russia, despite the well-known problems, including corruption, excessive and arbitrary government regulation, the expanding definition of “strategic sectors” and the expanding state role in those sectors, politicized courts, and inadequate physical and institutional infrastructure.
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A looming question is whether Russia’s political evolution will constrain its economic advance. And this question leads to perhaps the most troublesome issue in U.S.-Russian relations, that of Russian democracy. The concentration of power in the Kremlin, diminished public space for political debate, and decreased governmental accountability before the public all threaten to deprive the Kremlin of the reliable information, flexibility, and creativity it will need to deal with the challenges of the 21st Century. They raise questions in the United States about the Kremlin’s commitment to democracy, which Americans believe is essential to broad-based, sustained U.S.-Russian partnership. Growing state involvement in the strategic sectors of the economy raises questions about how willing the Kremlin is to open up the economy to the entrepreneurial talent, but Russian and non-Russian, that is critical to sustaining Russia’s economic advance. Against these short-term developments are longer-term societal trends, especially among young people who are much more open to the outside world and, thanks to modern technologies, much more in touch with it, that should create pressure - and the basis - for a more open and pluralistic political system and innovative society. How the competing forces and trends will play themselves out over the long run is unclear. What is clear is that the Russians themselves will determine the quality of their own society. When we disagree, Americans should not shy away from expressing our views, but we must do that with respect for Russian choices and preferences and in a way that demonstrates that we understand the complexities of Russian reality. Too often, however, that is not the case.
Beyond the issue of democracy, there are other serious problems in the relationship, all routinely raised in public commentary in both countries. The United States and Russia, for example, often seem to work at cross purposes in the Middle East, with Americans disturbed by Russia’s ties to regimes in Syria and Iran and organizations like Hamas that foster terrorism and are intent on countering U.S. policies in the region. Competition has sharpened in the former Soviet space, especially since the Orange Revolution in Ukraine in 2004. Russia’s often ham-fisted behavior toward its neighbors, particularly Georgia, feeds long-standing doubts about its commitment to their sovereignty and independence. Energy cooperation has fallen fall short of its potential, after the launching of a bilateral commercial energy dialogue with much fanfare in 2002. Although American energy firms have made significant investments in Russia, and all see a need to be there, concerns are mounting as the Russian government arbitrarily employs tax, environmental, and other regulations to squeeze foreign energy firms, often in support of Gazprom, the national champion in the energy sector, and delays necessary investment in the exploration and development of its vast reserves. These actions have raised doubts that Russia is committed to being a reliable supplier of energy on commercial terms.
All these problems can and should be dealt with calmly and pragmatically. That the public mood complicates such an approach points to a fundamental problem, that is, the lack of broad-based constituencies for good U.S.-Russian relations. The cooperation that exists – however critical it might be for each country - engages only a narrow segment of the elites in both countries, and neither government has made a concerted effort to highlight the benefits of that cooperation. In neither country do broad segments of the population depend for their own well-being directly on good U.S.-Russian relations. As a result, there is no political cost for sharp, even hyperbolic, criticism of the United States in Russia and the same holds true in the United States for comments on Russia; in neither country is there much pressure for a more balanced assessment of relations.
If we are to halt and reverse the current deterioration in relations, one urgent task is to build – and then energize - constituencies for improved relations. The business community has an immense interest in this and a great responsibility, as it has had in other key U.S. relations, most notably with China. Expanded U.S. business activity in Russia and Russian investment in the United States will naturally help build the needed constituencies and foster positive change in Russia. That’s, perhaps, the easy part. But the Russian and American business communities need to be more active in educating government officials and opinion-makers in both countries to the opportunities of U.S.-Russian relations and the policies needed to pursue them and in calling for pragmatic approaches to the very real problems that remain. The business communities need to be more vocal in the public debate to ensure more balanced assessments of the overall relationship, of Russian domestic and foreign policy, and of U.S. global strategy, and a greater focus on pragmatism. The need for engagement will only grow as the United States nears what promises to be a tough public debate on overall Russia policy when Congress considers graduating Russia from the Jackson-Vanik amendment (a debate that could occur before the end of this year). American business clearly has a major stake in this debate, and preparations are already underway. But so does Russian business, and it needs to engage rather than pass this off as an American problem, as many Russian business leaders and government officials are prone to do.
One final comment on this matter: Many observers have remarked on the stark contrast between the business community’s view of Russia and U.S.-Russian relations and that of the political establishment. The differences are indeed stark. That is worrisome, but what is more worrisome is the easy assumption on the part of many in the business community that business and politics can exist in two separate dimensions over the long term. The reality is otherwise. Either the business community will help lay the basis for improved political relations, or the politics will poison the business relationship. In this regard, I hope Marx turns out to be right that the economic base determines the political superstructure and not the other way around. But this will not happen automatically. The business community must be proactive in defending and advancing its interests.
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So, to sum up, there are challenges and opportunities as we move forward in U.S.-Russian relations. Those who care about the future of the relationship – both Russians and Americans – need to ensure that the problems do not overwhelm the promise, as they are close to doing today. We do that by working hard on areas of cooperation to broaden and deepen them and to build trust that can be extended to other issues. We do that by maintaining dialogue on those issues where we disagree in an effort to minimize their negative impact on the overall relationship. And we do that by building constituencies that have a vital stake in good relations. This is not always an easy task to carry out, but with time and energy it is far from impossible. As we make this effort, we should never lose sight of the great benefits to both countries that will come from getting U.S.-Russian relations right.