U.S.-Russian Relations and the Stepashin Visit

Meeting Report
July 29, 1999

On the occasion of Russian Prime Minister Sergei Stepashin?s visit to the United States this week, the Russian and Eurasian Program hosted a panel discussion on July 26 featuring Carnegie Senior Associates Tom Graham, Michael McFaul, and Anders Åslund, who spoke, respectively, about the state of the U.S.-Russian relationship, the prospects for Stepashin becoming a contender in the presidential election in June 2000, and recent positive developments in the Russian economy. We provide below excerpts from each of their presentations.

Tom Graham -- The State of U.S.-Russian Relations

Sergei Stepashin?s meetings with Vice President Gore provide the opportunity to take a close look at Stepashin, to take measure of his character and determine whether he could become the next president of Russia, as Anatoly Chubais clearly hopes he will. The Clinton administration is going to praise him, although they will do this discretely, so that they do not arouse Yeltsin?s jealousy. The last Russian prime minister to come to Washington ? Viktor Chernomyrdin ? looked so presidential that Yeltsin felt compelled to sack him a few weeks after he returned to Moscow.

Stepashin?s visit is going to be a "success." The question is: Why do we care? Why do we need Russia? I don?t think the answer is obvious; after all, Russia is a country that has been in decline for well over a quarter of a century. Moscow now oversees an economy that is, by my calculation, one-third of the economy that Moscow controlled in the mid-1980s, just fifteen years ago.

Moscow?s capacity to mobilize the resources of Russia has eroded steadily and drastically over the last decade, which is well illustrated by its continuing inability to collect taxes. Some of Moscow?s power has devolved out to the regions; most of it has simply dissipated. In a world where trade and investment are now top priorities, Russia is certainly not going to become a major trade partner, nor a major region for investment, anytime soon. In short, this is a Russia that can help us very little as we try to manage the global economy and build enduring security relations, whether it be in Europe, East Asia, or the Middle East.

In fact, Moscow can do very little to thwart our activities. If you look at the options available to Moscow, any steps that Moscow might take to undermine us in fact work to their disadvantage more than to our own.

So I come back to the question: why do we care? In the short run, our concerns arise out of the consequences of Russia?s weakness, coupled with the Russian elite?s difficulties coming to terms with its reduced circumstances in the world. We worry about the breakdown of command and control of nuclear weapons, of loose nukes, about proliferation.

We should, if we do not already, worry about the consequences of Russian weakness for the United Nations system. There is a growing disparity between Russia?s real weight in the world and its veto in the UN. This is going to tempt us, as it did in Kosovo, to circumvent the UN on increasingly frequent occasions.

This administration?s rhetoric of partnership cannot cover up the fact that over the past decade Russia has not transformed itself from a dangerous enemy of the United States to a constructive partner. Rather, it has become a troublesome problem. However, the rhetoric of Russia?s greatness has been a central part of the Clinton Administration?s policy in dealing with Russia as a problem. Indeed, I would argue that the Administration has been aware for some time of the growing gap between its rhetoric and the reality of Russia. The rhetoric has been a way of giving Moscow what it wants in symbols, without the Administration being compelled to yield much in substance. Over the past several years the Administration has flattered Yeltsin?s ego and vanity to soften his position on a number of issues that are important to us, whether it be NATO expansion, or the recent crisis in Kosovo.

The problem with this tactic, even though it has been successful in many regards for some time, is that it is reaching the end of its useful life. To be sure, there was always a cost. The Administration felt compelled to talk about Russia?s greatness when it was clear that Russia was no longer a great power. It presented a much rosier version of what was happening in Russia domestically than was warranted by the facts on the ground. The Administration continually exaggerated what Yeltsin could and had delivered in the relationship. As a result, domestic support in the United States for the Administration?s policy has eroded, as it became clear that Yeltsin could not deliver on his promises, such as START 2 ratification, and as events in Russia fell too far out of sync with the Administration?s rhetoric.

Any plausible successor to Yeltsin -- whether it be Primakov, Luzhkov, or Stepashin -- is not going to be as susceptible to Washington?s rhetoric. He will be more attuned to the growing anti-American sentiment within the Russian political elite, and will not simply want a voice at the table of world affairs, but will want Russia?s views heard and incorporated into whatever policy the United States pursues.

Thus, managing Russia?s decline will be one of the chief tasks of the next administration. It is time that we began to rethink the rhetoric about Russia, what we say about Russia publicly, and be prepared for a more limited relationship over the next several years.

Michael McFaul -- Stepashin for President?

The most important event for the U.S.-Russian relationship in the near future is the Russian presidential election in June 2000. Other issues are either not as important, or will be seriously influenced by that election. No one understands this more than prime minister Sergei Stepashin, who is touted as a potential presidential candidate.

Could Sergei Stepashin become the next president of Russia? We do not know him particularly well; he has never visited the United States as a prime minister, and few people in the West have followed his career. Stepashin is a viable presidential candidate for many reasons, a few of which I present now, not as an advocate for his candidacy, but rather from the perspective of a political campaign organizer.

First, his approval ratings are going in the right direction.

Second, the present economic stability is good for his candidacy. The economic turmoil of last August has subsided, allowing Stepashin to work as prime minister in a time of relative economic stability.

Third, Stepashin is a politician, an aspect that we underestimate in the West. He is a person who has run for and been elected to public office. Stepashin is not merely a bureaucrat from Yeltsin?s administration, but has been an influential political actor in Russia for over a decade. Those who know him well say that he is extremely ambitious, that he wants to be president.

Fourth, Stepashin is the right age; he is not too young, like Boris Nemtstov, nor is he of pension-age, as are his likely competitors Yevgenii Primakov, Yuri Luzhkov, and Gennadii Zyuganov. His campaign organizers could urge the Russian electorate to elect a young and energetic person to lead the country in the new millenium. Age will be an excellent cleavage issue, and could in fact become Stepashin?s greatest asset.

Fifth, as a general who has headed the MVD and FSB, Stepashin can run for president as a "strong man." Despite these credentials, he does not have a strong record on battling crime and corruption. In a campaign, however, especially if his competitor is Luzhkov, one can foresee another cleavage issue developing ? the anti-corruption leader Stepashin versus the mayor of Moscow, who many view as corrupt.

Sixth, Stepashin is a national-level politician who has held national office for a decade. In pure electoral terms, this could be another way to distinguish Stepashin from men like Zyuganov and Yavlinsky, who are associated with a parliament that has been largely impotent. Stepashin could also distinguish himself from Luzhkov by portraying the Moscow mayor as a local leader who is ill-suited for leadership of an entire country.

Seventh, Stepashin can run as a reformer and a democrat, framing the vote as a choice between the past or the future, an issue that resonated with the Russian electorate enough to re-elect Yeltsin in 1996. Polling in Russia shows that stability is the single most important thing that voters care about. Stepashin has devoted his life to law and order, so he can position himself as a candidate of stability, in contrast to Zyuganov, who would likely change the rules of the game should he come to power.

Finally, Stepashin can run as a candidate who is least likely to throw President Yeltsin in jail. Of all of the presidential candidates, Stepashin is the least likely to go after Yeltsin, whom he has known and been loyal to for many years. In turn, "the family" and other supporters of the status quo could provide the Stepashin presidential campaign vast resources in terms of money and television.

What are the impediments to Stepashin?s candidacy? First and most obviously are other presidential candidates, whom we do not have time to discuss today. What is more worrisome to me in the short run, however, is whether or not Stepashin will continue to be prime minister and whether there will be elections at all in Russia. The elite is not unified behind Stepashin. In particular, that group of people around Berezovsky called "the family," who backed Nikolai Aksyonenko (First Deputy Prime Minister and former Railways Minister) over Stepashin for prime minister, has done much to destabilize the Stepashin government. This Berezovsky grouping believes, erroneously in my view, that they can use their wealth and media monopolies to elect anyone they want. Based on their success in re-electing Yeltsin in 1996, Berezovsky and other oligarchs think that they can influence Yeltsin to appoint figures like Aksyonenko or Aleksandr Lebed as prime minister, and then they can get elected this person as president. I think they are absolutely wrong in that calculation.

This group may also be tempted to hold onto power through extra-constitutional means. Rumors in Moscow about such scenarios have surfaced with increasing frequency as we get closer to the election. The probability for an extra-constitutional coup in Russia is low. However, the consequences of a coup for Russian stability and U.S.-Russian relations are so high that we need to focus on further reducing that low probability number. I?m also confident that a coup attempt would fail. No political actor in Russia has the resources available to actually undertake a successful coup.

Al Gore will be attacked on his record on US-Russian relations no matter what happens in the Russian presidential elections next summer. But the greatest potential problem for Gore, and the legacy of the Clinton Administration on Russia more generally. would be the collapse of democracy in Russia. Therefore, the Clinton administration should work toward insuring that the elections in Russia are held freely and fairly. If Russia does not have a presidential election next year, then all accomplishements of the bilateral relationship over the last decade will be quickly forgotten.

Anders Åslund -- Positive Trends in the Russian Economy

There are some rather surprising developments in Russia?s real economy. Last September, industrial production fell by 15 percent in comparison with September 1997, and Russia seemed to have entered economic free fall. Both GDP and industrial production fell by 5 percent last year, and the IMF forecasted a 9 percent decline in GDP for 1999. The Institute for International Finance offered even gloomier predictions, estimating that GDP in 1999 would fall by 15 percent. The Russian government, which is always overly optimistic, predicted a 4 percent decline in GDP this year.

Current economic trends do not correspond with these dire predictions. Since March, industrial production has not fallen, but grown. By May, it had grown by 6 percent in comparison with May 1998; in June, that figure was 9 percent. Given that industrial production fell as much as 15 percent in September 1998, the current trend points toward a 20 percent growth rate in September.

Industrial production in Russia this year will grow by approximately 7 percent. What are we to make of this? Is this serious or not? The most widespread explanation is that this is an effect of devaluation and oil price increases, which have indeed been substantial. Although one would then expect raw materials to do well, the production of oil and gas is falling. Instead, certain manufacturers, particularly in the microbiology, pharmaceuticals, machinery, textiles and shoes industries, are doing very well.

Today, Moscow shops are stocking domestically produced goods that Russians have not seen in open trade since the 1960s. Russian producers are now trying to penetrate the market, rather than merely striving to skim the market.

You have all heard about the "virtual economy" and that Russia is hopelessly barterized. However, since August 1998 the share of barter transactions between enterprises has fallen by 1-2 percent each month. We have long been concerned about arrears of all kinds. Now, they are all falling month by month -- enterprise arrears, wage arrears, and indeed, tax arrears.

Something is changing in the Russian economy. One can say that these statistics do not indicate a clear tendency if they represent only a few months. However, when industrial growth and diminishing arrears are evident for almost an entire year, it suggests that something more fundamental is happening.

Concerning government finances, this year the Russian government is embarrassingly over-performing. Federal-state revenues that have usually been around 10-11 percent of GDP were 15 percent of GDP this June, while the target for this year is only 12 percent. Therefore, public finances are doing very well, a remarkable trend considering that not long ago it seemed impossible to cut public expenditures in Russia. This year they are being cut by 5 percent of GDP.

How can we understand this? I believe that this is thanks to the financial crash last fall. You might think that this statement sounds terrible; indeed, living standards fell by approximately 30 percent in real terms. This was the worst shock that the Russian economy has faced. The August financial collapse caused the greatest decline in living standards since Russia began its post-Soviet economic transition.

What happened? You can say that this was the "real shock therapy," what the reformers failed to deliver in 1992 because they were not sufficiently credible. Hard budget constraints became credible, as there was no money left. The IMF and the World Bank did not provide anything, nor did portfolio investors whose funds had comprised 10 percent of GDP in 1997. The banking system stood still and it was impossible to raise more taxes. Paradoxically, it seemed fortunate to have the communists in government, because they failed to issue much money and actually enhanced the credibility of a policy of fiscal restraint.

So what did the poor entrepreneurs do? They realized that they would not get any money from the government and started working. They did the restructuring that they had not done before. We are now seeing that the number of bankruptcies has multiplied, while the number of profitable enterprises has increased sharply. There is a growing distinction between bad and good enterprises, when previously the good enterprises subsidized the bad through the government.

What this suggests is that the Russian economy might actually be turning around. Is this sustainable without investment? During the first two years of a turnaround you don?t really need investment because there are such large resources that are underutilized. The issue is to use the resources that are out there, not to get new resources.

So what should the IMF and the World Bank do in this situation? For the first time, with the exception of 1995, Russia is actually performing on its IMF agreement. This year Russia will have a budget deficit of around 3 percent of GDP, which is perfectly decent and makes Russia deserving of the IMF funds. I think that the IMF is acting correctly. Last year, it pulled the plug when it became clear that Russia was not going to undertake what it had promised it would do in July. Now, the IMF is about to give money when Russia is performing. So you can say that the IMF is acting as an economic organization, while in 1996 it acted as a political organization when the G7 used the IMF to give Yeltsin money toward re-election.

The World Bank is in a much more difficult situation. Russia does not really pursue any economic policy. On the positive side, you can say that this makes Russia far more predictable, because previously the economic policy changed all of the time. Now we can say, almost for certain, that for one year virtually nothing will happen in economic policy. We know what the government will do on the big issues ? nothing ? which is better than disasters. Of course, the best policy would undertake serious reforms, and they are unlikely. As the World Bank is intent on financing reforms, it is very difficult for the World Bank to justify any loans to Russia.

Summary by Elizabeth Reisch, Research Assistant with the Russian and Eurasian Program