Russia’s Failure to Modernize Undermines Relations with United States

 The final presidential debate saw Republican candidate Mitt Romney again describe Russia in hostile terms. Romney qualified but did not repudiate his earlier remark that Russia was the United States’ “number one geopolitical foe,” and he hammered President Obama for allegedly wearing “rose colored glasses” in dealing with Moscow. Though Romney’s fixation on Russia can seem baffling, it is a calculated strategy and a reflection of Russia’s limited significance for the United States. As long as Russia continues to resist reforms that would reduce its dependence on energy and enable greater foreign investment, U.S.-Russia relations will remain dominated by contentious political issues, while U.S. politicians will have a free pass to use Russia as a scapegoat for problems ranging from human rights abuses to the conflict in Syria.

The presidential debate coincided with the opening in St. Petersburg of the annual conference of the Valdai Discussion Club, a Kremlin-backed initiative to reach out to the foreign expert community. The theme of this year’s meeting was economic modernization, a perpetual challenge for a country that received more than half its budget revenue from oil and gas last year.

Energy dependence is at the root of Russia’s failure to modernize, which in turn has made it fairly peripheral for the United States. While Russia has rebounded strongly from the financial crisis of 2008–2009, its economy continues to underperform; GDP growth this year is projected to be around 3.5 percent, or less than half the level for China or India. With oil prices projected to stagnate, and lacking a competitive manufacturing base to take up the slack, the World Bank projects that Russia faces a period of protracted low growth. Not only is Russia reliant on energy revenues, but those revenues are generated primarily by inefficient state-run energy companies, Gazprom and Rosneft. Easy access to oil and gas revenues has precluded serious attempts to modernize the economy by promoting innovation, which would make it easier to set up small and medium-sized businesses, or by developing commercial credit. Meanwhile, capital flight continues to accelerate (net outflows will exceed $40 billion this year), and the migration of talented young people has reached crisis proportions. As one Valdai participant noted wryly, Russia’s principal exports today are energy, capital, and people.

This economic stagnation is a major reason for Moscow’s perpetually strained relations with Washington. Russia’s natural resource–dependent economy, coupled with severe corruption, import restrictions, and inconsistent enforcement of property rights, has limited the development of economic ties with the United States. Without a strong business lobby of the sort that forces politicians to be more circumspect in their dealings with, for instance, China, Russia continues to provide a convenient bogeyman for candidates who want to, as Romney said, “show more backbone.”

Though the Obama administration has sought to build a more constructive relationship with Russia, the results have been limited. Without strong economic ties to cushion the blows, disagreements over issues like missile defense or Syria have taken on outsized significance. Both Washington and Moscow recognize the need to boost bilateral trade and investment, but as long as Russia produces mostly oil and gas (which the United States can acquire more cheaply from domestic sources or from the Western Hemisphere), while remaining an unwelcoming destination for foreign investment, prospects for smoother political relations will remain slender.

The focus on modernization at this year’s Valdai Club shows that the Kremlin understands it must do something. Yet it is doubtful that either a clear vision of the way forward or the political will to make painful reforms exists. Presentations during the Valdai conference called for solutions running the gamut from extensive liberalization to a move back toward state planning. Shortly before the conference, the Kremlin announced that state-owned Rosneft was swallowing up the TNK-BP joint venture, placing a majority of Russia’s oil production under state control for the first time since the Soviet era. In his own Valdai remarks, Vladimir Putin appeared remarkably sanguine about Russia’s ability to reduce its energy dependence and modernize the economy, despite evidence that the outflow of capital and talent is accelerating.

How Russia chooses to organize its economy is a choice for Russians themselves. In making that choice, however, Moscow must understand that a failure to open the economy up to foreign investment while moving toward a less energy-dependent growth model will limit prospects for building a more constructive relationship with the West, above all the United States. The Kremlin is, of course, right to accuse politicians like Romney of applying a double standard. But rather than castigate the United States for its (very real) hypocrisy, it would do better to look in the mirror and realize that its own resistance to reform merely enables those in the United States who are still inclined to believe the worst about Russia.

Jeffrey Mankoff is a fellow and deputy director of the Russia and Eurasia Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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