In September, the Russian government started to actively discuss the country's 2013 draft budget. The key issue is how to reduce the gap between the state's social responsibilities and its financial resources. On the eve of the new political season IMR's Olga Khvostunova spoke with Sergei Guriev, President of the New Economic School, about the government's future economic policies and their impact on the country's political development.



O.Kh: Russia officially joined the WTO at the end of August. What changes will it bring to Russian producers and foreign investors?

S.G.: Russia negotiated the terms of  its accession to WTO in a way that will have little impact on the Russian economy during the several years transition period. Later, there will be no serious game change either. The New Economic School and Ernst & Young have recently published a report on the potential outcomes of Russia's joining the WTO. Our studies have shown that one should not expect catastrophic consequences or significant changes whatsoever either in any sector of the economy, or in any region of Russia. To the contrary, our calculations reveal that accession to the WTO will have a positive impact on the Russian economy and on Russian citizens' welfare. In the long-term, joining the WTO will attract foreign investors to Russia. The WTO is an important tool of predictability that allows them to protect their interest against arbitrary actions by the Russian authorities. The Russian government is known for adopting economic measures that are considered illegal from the WTO’s point of view.

O.Kh: What kind of illegal measures?

S.G.: They are measures that support Russian producers at the expense of foreign ones. An example of such arbitrary action is the automobile use tax for imported vehicles imposed by the Russian government starting from September 1st.

O.Kh: The WTO's opponents point out that low-quality products will flood the country, and Russian producers will be pushed out of the market. Is their argument justified?

S.G.: It’s pointless to fear competition with producers of low-quality products – no one will buy them. The problem of Russian producers is that they will have to compete with cheap high-quality products. Still, negotiations were carried out in a way that hardly reduces import tariffs, so in fact there is nothing to be afraid of. All these fears are based on rumors and lack of information. Most people are just too lazy to read the accession terms.

O.Kh: What is the purpose of this political discussion, then?

S.G.: Accession to the WTO is an important political decision. It is a step forward for Russia, it formally puts Russia back in the circle of civilized countries. The next step should be joining the Organization of Economic Cooperation and Development (OECD). But the discussion is actually pointless: even if someone thinks that Russia is unique, it doesn't mean that it shouldn't follow international trade rules. And the WTO is a key institution that determines these rules. Some people just think that economic laws are not applicable to Russia, and therefore do not want to follow the rules.

O.Kh: Who are these people?

S.G.: They are the people who believe that Russia has its unique path. But they prefer to drive good foreign cars, not the Zhiguli.

Putin's presidential campaign promises are simply impossible to keep.

O.Kh: Both Vladimir Putin and Dmitri Medvedev have made public statements on the modernization of Russia. Now that they have exchanged offices, what kind of economic policies are they more likely to adopt – modernization or conservative development?

S.G.: First the decrees that Vladimir Putin signed on May 7th, right after his inauguration, were quite liberal and very consistent with a modernization course, as well as was his speech at the St. Petersburg [International] Economic Forum. But Putin and Medvedev have both made these public statements before. Today, the business community wants to see actions, not just hear words. Some promises are being fulfilled, like joining the WTO, while many others are being postponed, like the privatization programs. Russian leaders made statements about reducing administrative barriers, which is important for the investment climate, but nothing has been done yet. Moreover, the road maps, developed as a part of the so-called National Entrepreneurship Initiative, were redesigned by the government without taking into account suggestions made by business. Until we see concrete results, it’s impossible to judge the government’s economic policies.

O.Kh: When do you expect to see first results and draw first conclusions?

S.G.: The state budget will be an important indicator. It is being discussed at the moment and will soon be adopted. Another indicator are what measures are being taken to improve the business and investment climate. These would include implementing the privatization program and fighting corruption not just in words, but in practice.

O.Kh: Taking into account Russia's experience to date, do you have any reasons to believe that real actions will actually follow?

S.G.: Let me give you an example from everyday life. If you gain weight, your cholesterol level becomes high, and eventually you start asking yourself if it's time for you to start a healthy lifestyle and go to the gym. Even if you never were into sports before, it doesn’t mean that you never will. It’s the same with government. For two years Russia has been experiencing huge capital flight, but oil prices are still high, while debt, unemployment and inflation rates are very low, and there is economic growth. Still there is capital flight from Russia to Europe and the U.S. where there are plenty of problems such as high debt, lack of growth… It means that the Russian situation is worse in terms of the investment climate.

O.Kh: Financial analysts have recently calculated that capital flight has more than doubled in 2011 and totaled more than $80 billion. What caused this high rate?

S.G.: Capital flight intensified not only in 2011 but also in the first half of 2012. There are several possible explanations for this, but at the moment it's hard to pin-down which is the correct one. One explanation is the high political risk caused by the election period in Russia. But now the uncertainty is over: Putin has replaced Medvedev, and it seems that the protest movement has abated. Also there is a possibility that capital flight will decline. In June, it in fact decreased. On the other hand, it could be a cyclical phenomenon; therefore we have to watch closely what happens in July, August and September. Another explanation is that the investment climate in Russia has deteriorated to the point that despite great economic potential, investors are afraid of losing their investments.

O.Kh: Do you think that the Russian authorities will fight corruption? For a long time it has a leitmotiv of Russian political leaders in their  public discourse, but according to Transparency International’s CPI (Corruption Perception Index), Russia still ranks among the worst countries.

S.G.: The Russian authorities are becoming increasingly aware that corruption is not only an economic or a social issue, but a political one. It's an issue of power. If the current political elite does not fight corruption, very soon it will be replaced, because it is the corruption issue that unites the opposition. If the authorities can win this fight, they can weaken the opposition movement. But if corruption is not overcome, the regime has no future.

In terms of corruption level, Russia is unique.

O.Kh: The paradox of struggling with corruption is that the authorities will have to fight against themselves and against the system they created. Are they capable of doing so?

S.G.: I remind you of my argument about being overweight and sports. When you lose weight, you lose a part of yourself. It’s hard, but not impossible.

O.Kh: Do you think that Putin will send his friends to prison or voluntarily go there himself?

S.G.: If it does not start fighting with corruption, it is not clear how this regime can survive. By the way, Putin had already fought corruption when he first came to power. In 2000 his rhetoric and actions were both anti-corruption. There is no reason to think that he is not capable of change. If the Russian government and Vladimir Putin's friends start to play by the rules, I don't think that Russian citizens will demand anything more from them.

O.Kh: Are you saying that if Vladimir Putin has to make a choice—either to change the rules of the game and keep the regime safe, or not change the rules and face the possibility of being replaced—he will choose the former?

S.G.: It's hard to say at the moment, but he is already facing this choice, even though he might not be aware of it. In democratic countries, the government changes in a predictable manner. In regimes, like Russia, it will be hard to predict. Anything is possible: a peaceful scenario, in which the regime transforms itself into a democracy, a violent scenario, or one in between. History provides various scenarios for the way this type of situation could develop.


O.Kh: The Russian situation is quite unique: in history there are no examples of successful democratization of countries that could be compared to Russia in terms of its vast territory and natural resources.

S.G.: A number of comparisons come to mind. Let's take China, for example. It is a vast country that has undergone a series of transformations after Mao Tse-dung’s death. The size of the country doesn’t really matter: the overthrow of a regime usually takes place in the country’s capital. Yes, Russia is a very rich country. It goes without saying that even the city of Moscow is rich. Russia is a very educated country. We have a high level of internet penetration for a country with such undeveloped democracy, to put it mildly. Russia is unique, in terms of its level of corruption.


Sergei Guriev at the New York opening of Russian Visionaries. Into the Light photo exhibit; November 2011.


O.Kh: In 2012, the analysts of Eurasia Group, a political risks consulting firm, did not include Russia in their annual list of top-10 risks despite the fact that it was published while protests were in full play during winter. What, in your view, could be the catalyst for regime change in Russia?

S.G.: We discussed various scenarios with Eurasia Group President Ian Bremmer. In general, Russian citizens are satisfied with their lives. With Vladimir Putin in power, their standard of living has substantially improved. This is true not only of oligarchs, but of people with low income as well. On the other hand, we see that it's not enough for people living in Moscow, who require something more-dignity, respect, the right to not fear their own government. People, who pay taxes, try to understand how the government spends their money. It's a completely new situation for the Russian government: people protest not because they lack money, but because the level of the government's lying has reached new heights. The latest example is the scandal involving Aleksandr Bastrykin, head of Russia's Investigative Committee. This high-ranking Russian official did not include accurate information regarding his property in his tax declaration form. On the other hand, the authorities try to jail Aleksey Navalny who revealed and published that information about Bastrykin. Last time  [Alexei] Navalny was taken to custody, people spontaneously came to protest at Chistye Prudy. Besides, it is obvious that authorities are poorly informed and lack adequate feedback from the public, which leads to a high probability of their making mistakes. This can become a catalyst for regime change.

O.Kh: But there were no protests after the flooding of the town of Krymsk  in July when hundreds of peopled died.

S.G.: There is difference: it was not Putin who killed these people. But if someone discovered that Putin ordered the opening of the reservoir's sluice gates and released water on Krymsk, everything might be different. But if the \number of officials who work within the Russian government and do not abide by the law reaches a critical mass, any public exposure can be a catalyst for overthrowingf the regime.

O.Kh: Perhaps, the critical number has already been reached, but people don't know about it.

S.G.: Most people who live in Moscow do know. And, as I said, the regime change will take place in Moscow.

O.Kh: Some economists predict a new wave of the financial crisis. Can devaluation of the ruble accelerate the change?

S.G.: A financial crisis would not be catastrophic per se. Yes, there will be budget cuts, which will cause people to question the authorities. Not only Moscovites will be asking those questions, but so will the citizens of other Russian regions, and for them issues of material well-being are more important than the government's stealing and lying.

Putin's answer is, if you don't like this country, you're free to leave.

Ruble devaluation is an absolutely reasonable measure. The government has to let the ruble fall along with oil prices in order to avoid the mistakes of 2008 when the Central Bank supported an  overvalued ruble. Decreasing the rate will help restore the competitiveness of the Russian economy should oil prices drop. What is Greece’s problem? It cannot devalue the euro because it’s not the Greek government that defines the euro rate. And this is the root of all their problems. Russia needs to take advantage of having national currency.

O.Kh: Devaluation could be viewed negatively by the public, it can be viewed as a flashback to the 90s. Do you think that government can is prepared to take such an unpopular measure?

S.G.: It is an unpopular measure, of course, but today the unemployment rate is at its lowest point in the 20 years of modern Russia's existence. But if oil prices drop to the level of $40-50 per barrel and  remain there for two years, we will have a different government by then. It's not the $10 per barrel that we had in 1998, but in terms of the current Russian budget, $40 today will be worse than $10 in 1998, because the budget was drafted based on $100 per barrel.

O.Kh: What will happen to the promises that Vladimir Putin generously made during his presidential campaign? Will he be able to keep them? Experts calculate that they will cost the Russian budget billions of rubles.

S.G.: His promises are impossible to keep.

O.Kh: Doesn't this give to anyone who voted for Putin the right to ask him about the inconsistency between his words and actions?

S.G.: Yes, but Putin's answer is, if you don't like him, vote for a different candidate. Or, another possible answer could be: if you don't like this country, you're free to leave. But since the majority votes for a candidate who lies, what can be done? This is our democracy. If you think that the elections were rigged, go to the court. If the court decides that they were not, that's it, sorry.

O.Kh: It all sounds logical, but with Putin in power, the Russian judiciary has become very selective. There are many examples, from the YUKOS case and to the Magnitsky case. When it’s necessary, the courts make decisions that the government wants them to make.

S.G.: Selectivity is not the biggest problem. A while ago, when the [Russian] Presidential Council on Human Rights was conducting an expert examination of YUKOS’ second trial, they asked independent experts, including me, to evaluate the case. After reading all the documents, I realized that there was no case whatsoever. I have not read the documents of the first YUKOS case in detail, as I did with the second case, but to me it was obvious that the court made a mistake in the second trial. And it’s not the problem of selectivity. Some other cases raise questions, too. But one should not be surprised – this is how all non-democratic regimes function.

O.Kh: The absence of rule of law is one of the major complaints that  U.S. politicians have against Russia.

S.G.: They are free to say so. We cannot restrict freedom of speech in the U.S.

O.Kh: But in his turn, Putin retorts by saying that the U.S. should not interfere with Russian domestic affairs.

S.G.: This is Putin's position,  and this is one of his major foreign policy priorities. You can read the first decrees that Putin signed on May 7th. It is clearly stated there that Western countries should stop interfering. Russian diplomats are instructed to “to take active measures to prevent  U.S. unilateral ex-territorial sanctions against Russian legal entities and natural persons.” In general, Russians support Putin’s foreign policy.

O.Kh: Do you think that Putin will last till 2018?

S.G.: First, authorities can make many mistakes. Second, the opposition can make many mistakes. Third, oil prices can change in either direction. If they increase, there will be no opposition at all. But I wouldn't bet my money on it. I think that by 2018 we'll have another presidential election. Or there might be something like the Arab Spring. Problems with capital flight will not go anywhere. The government can say that we are doing fine as many times as they want, but people emigrate, money is withdrawn, scientists leave and never come back. All these facts contradict the government's claims that Russia is modernizing.

In general, Russians support Putin’s foreign policy.

O.Kh: There is a gap between the government and average citizens in Russia. Tragic events in Krymsk have once again demonstrated that people are used to dealing with their problems on their own. They don't expect any help from the government. Two years ago people fought the forest fires in the suburbs of Moscow, also on their own. This gap is growing wider. Is there any way to overcome it?

S.G.: Your observations are correct. In Russia, there is a great mistrust between authorities and the public. In this respect, Russia is similar to Greece where budget cuts hardly work, because citizens and officials find themselves "in different boats [going in different directions]." Can anything be done here? I think that fair elections can help the situation.

O.Kh: Do you think that the current authorities are capable of conducting fair elections?

S.G.: Here, we return to my argument about being overweight. If you only eat fois-gras, you can end up having a heart-attack.

O.Kh: How real is this «heart-attack scenario»?

S.G.: Quite real. Last year, Peruvian writer Mario Vargas-Llosa was awarded a Nobel prize for literature. Among other books, he wrote The Feast of the Goat. It's a novel about Rafael Trujillo, the man who ruled the Dominican Republic for 30 years. Despite being popular in the country, he was murdered as a result of a coup. Anything is possible. Actually, ruling the country without fair elections is difficult and dangerous work.