A U.S. Policy Response to the Economic Challenge Posed by Russia
Samuel Charap introduces principled integration—a new U.S. approach to dealing with Russia’s role in the international economy.
Originally published as a chapter in Timothy Colton, Timothy Frye, and Robert Legvold, eds., The Policy World Meets Academia: Designing U.S. Policy toward Russia (Cambridge, Mass.: American Academy of Arts and Sciences, 2010).
Economic ties are typically a low priority in formulating U.S. policy toward Russia. There are several good reasons for this tendency. First and foremost, trade and other economic considerations are of minimal importance in the U.S.-Russia relationship. Our trade turnover with Russia is miniscule relative to the size of both countries’ total trade; we import a very small amount of Russia’s hydrocarbons, its most important export; and foreign direct investment in both directions is not a major component of either economy’s overall foreign direct-investment stock.
Second, Russia was not a significant or even coherent actor in the international economy for the first decade of its post-Soviet existence. As a result, “normal” economic ties with Russia are a relatively new phenomenon. In the 1990s, U.S. economic policy toward Russia focused on economic assistance, facilitation of economic reform, and work with international financial institutions on their lending projects—not the sort of relationship we have with other emerging markets.
Because the economic aspect of the bilateral relationship was largely insignificant, there was little controversy about how to shape policy in this sphere for the first decade after the Cold War. Issues such as facilitating trade, working with Russia on its World Trade Organization (WTO) accession, or trying to improve the investment environment for U.S. companies operating there did not spark the same acrimony in Washington as did security matters or human rights.
Moreover, the notion that integrating Russia into the international economy would supplement Western efforts to bolster Russia’s economic reforms was also relatively uncontroversial. That such integration might have a liberalizing impact on Russia’s politics was a less widely accepted notion, but even those who doubted it shared similar policy prescriptions, if for different reasons. (Generally, their focus was on benefits for the U.S. economy.)
This situation has changed radically in the past five years. The policy response to Russia’s role in the international economic system has become central to the debate about U.S. strategy. There are two schools of thought on what the response should be.
On the one hand, there are those who continue to emphasize the importance of integration and utilizing policy tools to boost the commercial ties between the two countries, for both economic and political reasons. On the other, there is a growing group of analysts and observers that rejects this posture and instead advocates a far more confrontational approach—what might be called a neocontainment policy. They caution against integration, or in some cases call for isolation, and focus on ways to counter Russia’s economic activities abroad. With every new headline about Russia’s alleged use of its natural-resource wealth as a “political tool” this point of view has become more common.
These two conceptions of the U.S. policy response to the economic challenge Russia poses might seem irreconcilable. But a well thought-out strategy can address the concerns of neocontainment advocates while retaining core “integrationist” principles, which from a long-term perspective are fundamentally sound. This paper proposes such a strategy, termed “principled integration,” and suggests tactics, such as building relationships with institutions instead of individuals, demonstrating “strategic persistence” with the integration process, and seeking common ground with Moscow on economic ties, that policy-makers can employ to implement it.
The case for integration
A number of justifications can be made for putting integration at the center of the U.S. economic policy response to Russia. First, the more Russia is tied in to the international economic system—which is essentially an element of the West—the more of a stake it has in preserving and bolstering that system. If excluded, Russia could become a fully revanchist power, a state intent on thwarting Western interests and challenging the existing global economic order. Indeed, some of its recent behavior suggests it might be heading in that direction.
Integration is therefore an important means of “managing Russia’s rise,” to borrow a phrase associated with U.S. policy toward China. In other words, engagement and integration present an opportunity for the United States to shape Russia’s external posture. A Russia integrated into the international economic system will be a more responsible stakeholder in that system.
Today, Russia is far from a responsible stakeholder. Often both in word and (less frequently) in deed Moscow has challenged the existing international economic system. For several years, the Kremlin has been decrying the existing international financial architecture. At the St. Petersburg Economic Summit in 2007, then-President Vladimir Putin declared that the “existing organizations aren’t capable of regulating international relations. The structures that were created in the interest of a small number of active players now appear archaic, undemocratic, and inept.” However, similar words spoken in the fall of 2008 by current President Dmitri Medvedev in the midst of the global economic crisis were seen as constructive and almost mirrored Western leaders’ statements.
While there are many examples of Russia’s rejection of international economic norms, such as the European Energy Charter, Moscow has acted constructively on several occasions. Russia is now a net donor to the World Bank’s lending activities, and in recent years it has contributed to the Bank’s programs and sought its advice on policy issues, such as housing and communal-services reform and energy efficiency. Such behavior suggests that the path toward becoming a responsible stakeholder remains open.
Second, closer economic ties could improve the overall climate of U.S.-Russia relations, therefore making discussion of other, more divisive issues possible. A less antagonistic atmosphere will by no means necessarily lead to agreement, but a climate of goodwill created by closer economic ties should increase the chances for productive dialogue.
Further, robust economic relations could add, as the Brookings Institution’s Steven Pifer puts it, “ballast that could cushion the overall relationship against differences on other issues.” Presently there are remarkably few stakeholders in the U.S.-Russia relationship in either country. In the case of U.S.-China ties, the vast number of American firms with economic interests at stake helps prevent radical swings in the bilateral dialogue. By contrast, Washington’s relations with Moscow all too often have rested on flimsy foundations such as the personal bonds between presidents. Increased commercial ties would create a group of private actors in both countries that could provide an anchor to the bilateral relationship. The example of China shows that such a group can play an important role in stabilizing relations and keeping open lines of communication.
Third, the United States could reap substantial economic benefits from new investment opportunities, increased trade, and greater inward investment achieved through engagement and integration. The low starting point for commercial ties (between 2000 and 2008, U.S. trade with Russia was thirteen times lower than the total trading volume with China) suggests that major gains could be made in relatively short order.
The converse—that stronger economic relations with the United States could increase prosperity in Russia—is another reason to pursue integration. Greater prosperity in Russia will add to the ranks of the country’s middle class. While studies have shown that Russia’s middle class is by no means a great believer in democracy and is especially skeptical about the appropriateness of a democratic system for the country, they are overwhelmingly in favor of free market norms and are more positive about the impact of economic reforms than their less well-off counterparts. Therefore, the growth of this cohort could put pressure on the political leadership to liberalize the economy, or at least to attach costs to the reversal of market reforms.
The causal linkage among prosperity, a free market, and a more democratic political system is disputed. But the chances for democratic consolidation have been shown to increase in countries with the rise in the middle-class share of overall gross domestic product. Moreover, new evidence suggests that nations with “contract-intensive” economies are less likely to engage each other in fatal conflicts than democracies that lack such economies. (There were no such conflicts among the former in the period 1965 to 2001, while there were several among the latter.) In other words, “democratic peace” might in fact be “capitalist peace,” and therefore it is certainly in the U.S. interest that the only other nuclear superpower be a market economy.
Finally, economic integration is a means by which the U.S. government can promote values in Russia. Russia’s increased cooperation with international economic institutions could embed norms in its economic policy sphere that are associated with open societies, such as the rule of law and property rights, and also could reinforce and deepen the free market. Even engagement that stops short of membership with organizations such as the WTO or the Organisation for Economic Co-operation and Development (OECD) carries with it obligations to adhere to internationally accepted norms of behavior. Much of the change in Russian laws and regulations in commercial and corporate law over the past decade can be attributed to the need to act in accordance with international practice. One example is the 2001 Customs Code, which was written to comply with the Kyoto Convention, the international standard for customs procedures.
The integration of Russia’s private sector firms into the international economic system has also had a palpable impact. When Russian enterprises have significant ties to Western and especially U.S. firms (given our stricter laws), they face increased demands to comply with relevant legal statutes. For example, if a U.S. firm has an investment in or trade dealings with a Russian company, the U.S. Foreign Corrupt Practices Act necessitates investigations of potential sales representatives, sales agents, and even employees. If a U.S. firm acquires a controlling stake in a Russian enterprise or opens a subsidiary, all ethics codes required by U.S. law must be implemented. More generally, greater access to global markets achieved through integration incentivizes better corporate governance, since those firms that meet international standards are far more likely to succeed. According to a report by the International Business Leaders Forum, these incentives have already changed enterprises’ behavior.
The neocontainment critique
A vocal group of analysts and scholars in Washington and beyond is deeply skeptical that integration could precipitate these outcomes. Further, they consider the integrationist agenda naive and imply that pursuing it could undermine the U.S. national interest. Their critique rests on several assertions about Russia’s motives, namely that Moscow seeks to use its newfound economic might almost exclusively as a means to thwart the United States and our allies; to employ energy as a tool of its foreign policy, subjugating its neighbors and bringing Europe to heel; to undermine the existing global economic system; to embed and extend its corrupt elite patron-client relationships in other countries in order to extract ever greater rents and increase political control; and to manipulate the price of hydrocarbons by colluding with other exporters. As two observers put it:
- The geo-economic and geopolitical implications of Russia’s economic power
- projection abroad cannot be overstated. As the Russian state’s main source of
- revenues and as a foreign policy arm, it enables the Kremlin to extend Russia’s influence on a global scale. . . . The Kremlin has made it clear it intends to diminish America’s standing as a world leader by promoting a “multipolar” world, and by using its military, economic, and “soft” power to re-establish Russia as America’s closest competitor.
Their prescription for policy-makers is clear: contain the threat posed by Russia’s international economic behavior and find ways to mitigate it. Further, they argue, Russia should be kept out of the Western institutions of which it is not already a member, and serious consideration should be given to removing Russia from those in which it does participate.
The neocontainment strategy has the appeal of seeming tough on Russia. However, it is likely to worsen the very trends that its proponents find objectionable. Isolating Russia could make the Kremlin less likely to cooperate with the international economic system, could undermine those in Russia who wish to deepen connections with the West, and could empower the reactionary hawks in the Russian political establishment who prefer a “fortress Russia” model, complete with tight political controls, a closed economy, domination in the former Soviet region, and greater confrontation and competition with the United States and its allies. Isolation would also eliminate external leverage or incentives for reform.
Neocontainment advocates bring to the fore the direct challenges—they would say threats—that Russia’s external economic policy poses to U.S. interests. Their prescriptions might be counterproductive, but their arguments highlight Russian actions that render the integrationist agenda an inadequate policy strategy. Some have argued for adopting a middle ground, calling for limited engagement, or what one observer has called “hedged cooperation and integration.” Pursuing the integration agenda willy-nilly with an “illiberal, patrimonial, authoritarian” Russia, these critics argue, “would give the Kremlin the resources of globalization without the rules, constraints, and competition-inducing aspects of political and economic liberalization. It would feed Moscow’s power and leverage.”
If integration provides Russia all the benefits of the international economic system but exempts it from all the rules (and thus liberalizing pressures), then it is certainly not an optimal approach. Integration, however, need not be abandoned if it is part of a broader policy response that is guided by core Western principles and values and that ensures strategic preparedness. Rather than consciously hedging on the integration agenda, the United States should make it the foundation of a more comprehensive strategy.
A component of this strategy must be to use the norms that govern our political and economic institutions to shape our approach to Russia as an economic actor. We must move beyond declarations and take these principles and values seriously when formulating policy. In cooperating with Russia in international institutions, this stance would entail making no exceptions to the rules to allow for Russia’s entrance or to ensure its participation for political reasons. We cannot make special-case exceptions for Russia on economic matters in order to facilitate cooperation in other spheres.
As we plan new multilateral economic institutions that involve Russia, we should ensure that whatever structures result maintain an emphasis on transparency and accountability. In terms of bilateral trade, this aspect of our policy response implies vigorous enforcement of our laws, in particular the Foreign Corrupt Practices Act, anti-money laundering regulations, and related legislation. It also demands that we cajole our European allies into adopting similar codes of conduct for their businesses.
We also should not let our dialogue with Moscow on economic issues devolve into mere business promotion. Policy discussions should be a consistent component of this interaction, in particular on issues like property rights and the rule of law. Finally, a principled approach to Russia also calls for the development of clear rules on the activities of state-controlled or state-owned firms. While these entities do not represent an inherent threat to U.S. national security, they do deserve special scrutiny given their unique structure.
A strategy that reflects values also requires their consistent application. In our energy diplomacy, this requirement means adhering to our own principle that pipelines should be commercially viable. In terms of inward foreign direct investment, it means maintaining a nondiscriminatory environment for Russian investment in the U.S. economy. The United States has sufficient legal tools to protect its national interest in this sphere, especially following the passage of the Foreign Investment and National Security Act, which altered the procedures governing the activities of the Committee on Foreign Investment in the United States.
Technically there are no greater structural impediments to Russian investment than there are to investment from other countries, but Russian investors on several occasions have shied away from new projects because of fear of discrimination. If Russian enterprises are prepared to abide by American laws and regulatory requirements, they should not be subjected to additional impediments to investing here. If we ask Russia to treat U.S. companies fairly, we must be prepared to do the same in return.
The policy strategy of maintaining an emphasis on integration while being guided by values can be referred to as principled integration. This strategy should be complemented by strategic preparedness—that is, the United States should ensure that it has adequate capacity to respond to any challenges to its interests posed by Russia’s external economic posture. This goal requires a multifaceted effort, much of which falls under the rubric of “getting our house in order,” especially when it comes to our European allies’ energy policy. Preparedness measures in this area include creating a single market for gas, diversifying supply and transit options, and increasing the role of renewables and alternatives.
Being adequately prepared also means developing the analytical capacity and maintaining the composure necessary to assess Russia’s intentions accurately and avoid false assumptions about its behavior. For instance, assertions about the Kremlin’s motives put forth by neocontainment advocates in Washington and reflect common tropes in Western media coverage. But many of these assertions are overblown, and some are simply false.
The allegation that Moscow uses energy as a tool of foreign policy is an apt example. While it is true that there are several strategically consequential cases in which Gazprom, the state-controlled gas giant that has a monopoly over gas export, or Transneft, the fully state-owned oil pipeline operator, engaged in behavior that served a declared foreign policy goal, often these goals were consistent with commercial objectives. Further, the demands of the balance sheet sometimes operate at cross-purposes with the interests of the state, and in some cases commercial concerns prevail, as the deterioration in the relationship between Russia and Turkmenistan in 2009 demonstrated. Though a mysterious pipeline explosion provided Gazprom some justification, its interest in buying less Turkmen gas (essentially because it had no one to sell it to) led to an unprecedented row between the two countries and an acceleration of Ashgabat’s efforts to boost its energy links with China.
In short, it would be erroneous to assume that the actions of Russia’s energy firms are exclusively intended to further the foreign policy objectives of the state. Effective strategic preparedness must entail maintaining the ability to assess Russia’s actions as objectively as possible.
Implementing principled integration will take a level of creativity and interagency coordination that the U.S. government is rarely able to muster. A complete implementation blueprint is beyond the scope of this paper, but below are three tactics that can be adopted to realize this strategy. These tactics are not meant to be systematic, nor are they intended to accomplish the strategy in themselves. They should, however, be part and parcel of the policy approach.
Institutions, not individuals
First, we should focus on finding institutional, not individual, counterparts in Russia. All too often the character of U.S.-Russia economic interaction has been determined by relationships between individual decision-makers. The relationships between Presidents Bill Clinton and Boris Yeltsin and George W. Bush and Vladimir Putin are the most prominent examples, but there are others as well. In the 1990s, there were close relationships between various U.S. policy-makers and the so-called young reformers in Russia, especially Anatoly Chubais. Reliance on these personal ties was bound to lead to wild vacillations in the bilateral relationship, especially when Yeltsin was in office and high-ranking officials changed or lost their jobs at a rapid pace.
It also meant that U.S. and other Western officials were not always talking to the people in Moscow who were actually making decisions. Instead, they chose familiar faces. For example, on August 15, 1998, just days before the financial crisis, high-ranking International Monetary Fund and U.S. officials headed to Moscow for high-level talks on avoiding the impending catastrophe. Rather than meeting with the prime minister or a delegation of negotiators, they met with Chubais (who was only a special envoy at that point) and Yegor Gaidar, another favorite counterpart. Gaidar had no post in the government; indeed, he had been out of office for several years. Not surprisingly, the two did not deliver on any of the vague commitments that were made at the meeting.
Cultivating personal relationships with those in power is crucial when interacting with a personalistic political system such as Russia’s. But it is nonetheless crucial to build strong ties between institutions. Here the U.S.-Russia Bilateral Presidential Commission, established by Presidents Obama and Medvedev to broaden the discussions between the two governments, represents a step in the right direction. The United States, however, should also support partnerships among nongovernmental organizations and business associations and their Russian counterparts to broaden ties beyond the state-to-state level.
A second important tactic is what can be called strategic persistence when it comes to Russia’s international integration. Attempts at integration in the post–Cold War era inevitably began with high hopes that were subsequently dashed, producing a period of hand-wringing and disappointment. Therefore policy-makers and observers would be well served to temper their expectations about the possibility of success for the integrationist approach. Even when Russia’s integration into the international economic system moves forward, officials should not expect an instantaneous change in its behavior. The integration project itself is a long-term enterprise, and the impact of integration on Russian actions will only be palpable years later. Further, this impact may not necessarily produce behavior that is always to our liking.
In other words, the integrationist approach requires a high—perhaps impossibly high given the political stakes attached to the U.S.-Russia relationship—level of patience. Frustration at both real and imagined failures to integrate Russia is a common theme in U.S.-Russia relations in the post–Cold War era. Continued disappointments often lead to “integration fatigue”: “We tried, it didn’t work, so why bother?” Russia’s apparent rejection of WTO membership in favor of the Customs Union with Kazakhstan and Belarus might well produce this reaction.
When steps toward integration are taken but Russia continues to behave in ways we find troubling, the first instinct of many in Washington is to reject the integrationist approach altogether. The prime example is the call to remove Russia from the G8; after all, membership in the club was conferred on Moscow as a sign of the West’s endorsement of Yeltsin-era reforms and as an attempt to ensure they would not be reversed. This attitude also is evident in the growing reluctance in the West to allow Russian firms, especially state-controlled ones, to list on Western exchanges. Rosneft, the state-controlled oil major, is listed on the London Stock Exchange, but little change can be observed in its corporate governance or behavior internationally. So why give other state-controlled or even state-influenced enterprises the opportunity to enrich their beneficiaries and the bankers who orchestrate the initial public offerings?
Integration fatigue has caused some observers to call into question the utility of integration per se. Since Russia’s current level of integration and its overwhelming need for the expertise and technology that greater integration would bring have not already liberalized its economy, they see no reason why we should continue engaging Moscow on these issues. But U.S. policy-makers should not be deterred by the lack of visible progress. The impact of integration is unlikely to be palpable for years, and the effects of increased prosperity are tectonic shifts, not short-term developments.
To stay the course of integration, a posture of strategic persistence should be adopted. Such a posture begins by accepting that integration is a long-term enterprise. It calls for policy-makers to persevere even if Russia takes steps back from the integrationist path. Abetting Russia’s drift away from Western institutions and norms is not in the national interest of the United States. Still, there are limits to what Washington should do if the Kremlin simply is not prepared to reciprocate.
Find common ground
Searching for areas of common ground represents a third tactic that can help realize the strategy outlined above. Often economic relations between the United States and Russia boil down to mutual recriminations and an exclusive focus on divisive issues. “Trade wars” are part and parcel of our relationships with even our closest allies, but U.S.-Russia interaction in this sphere often seems to be dominated exclusively by disputes. Examples include imports of U.S. meat products, Russia’s failure to implement its obligations under the bilateral WTO accession protocol, Russian customs procedures and corruption, U.S. export controls, U.S. sanctions against Russian enterprises, and the Jackson-Vanik amendment, among others.
Rarely, if ever, do the two sides focus on mutually beneficial issues. The only exception in recent memory is the 1-2-3 agreement on civil nuclear cooperation. But this initiative stalled following Russia’s invasion of Georgia in August 2008, and it no longer appears to be on the agenda.
Other possibilities for engagement have been largely overlooked. Elsewhere I have suggested two such avenues: facilitation of Russia’s OECD bid and cooperation on energy efficiency. The former does not involve the same contentious bilateral trade issues as WTO accession does, and it offers similar benefits in terms of improvements in the rule of law and property rights. The latter is potentially even more attractive: it is a priority of both presidents, entails public-private partnerships, could benefit industry in both countries, has environmental benefits, and could bolster cooperation between scientific communities.
Principled integration will no doubt face many challenges. Most prominent among them is the Kremlin’s rejection of Russia’s full-fledged integration into the world economy. Instead, it has chosen an approach that can be characterized as managed integration, the international economic policy analogy to managed democracy. The fear that both globalization and democracy, if unchecked, can undermine the regime, and thus Russia’s national security, drives the Kremlin to manage them both.
The Russian leadership is unwilling to accept the reality that true integration erodes national sovereignty and freedom in decision-making. Indeed, as the Carnegie Endowment’s Dmitri Trenin notes, for the Kremlin integration “implies promoting contacts with the international community in general, not joining any one of its parts.” Moscow also sees integration as a means of achieving growth, not an end in itself. As a result, the Russian leadership has chosen to increase Russia’s international ties, but to tightly control the process. Just as managed democracy has preserved the formal aspects of democracy without the substance of democratic norms and practices, managed integration allows for the partial internationalization of the Russian economy without true openness and interdependence. Both concepts demonstrate contradictory instincts: a desire simultaneously to encourage and constrain socioeconomic processes along with an understanding of the necessity and desirability of these processes but a deep anxiety about their possible consequences.
The approach of Russia’s current leadership, however, should not force a reconsideration of the principled integration strategy. Russia’s integration into the international economic system offers the possibility to shape its external behavior, encourage reform of its domestic political and economic systems, increase prosperity, improve the overall climate of bilateral ties, and promote fundamental values. Of course, there is no guaranteed causal linkage between integration and these outcomes, which, if they do materialize, could occur years from now. Nonetheless, principled integration represents the most effective policy strategy for furthering U.S. national interests.
Samuel Charap is Associate Director for Russia and Eurasia and a member of the National Security and International Policy team at American Progress.
Originally published as a chapter in Timothy Colton, Timothy Frye, and Robert Legvold, eds., The Policy World Meets Academia: Designing U.S. Policy toward Russia (Cambridge, Mass.: American Academy of Arts and Sciences, 2010).
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