SPEAKING FREELY Playing nice with Russia has failed
By Peter Morici
Speaking Freely is an Asia Times Online feature that allows guest writers to have
their say.
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Russia's invasion of Georgia should compel the United States and Europe to
alter their policies of economic engagement to promote democracy.
After the Cold War, the United States and Europe sought to integrate Russia,
China and their satellites into the Western market economy. Policymakers
believed this would encourage
democracy, human rights and a peaceful demeanor toward their neighbors.
Policymakers believed robust foreign commerce and free markets - privatization,
private property and Western business law - would expose these societies to
Western culture and instigate expectations for personal freedoms and free
elections. Market economies function best when individual initiative and
property rights are protected by elected governments. Democratic capitalism had
decidedly outperformed autocratic communist and fascist regimes. Prosperous
nations, invested in global commerce, are less inclined toward aggression.
Russia instigated wide-ranging privatization and other market reforms, opened
to foreign investment, and had a rocky experiment with democracy. From 1990 to
1995, gross domestic product dropped 50%, thanks to falling prices for oil and
metal exports, inadequate commercial law, cronyism and corruption. Output
stabilized for a few years and then output sank further after the 1997 Asian
financial crisis. Boris Yeltsin, largely discredited, turned over the
presidency to Vladimir Putin in 1999.
Mr Putin may be a capitalist but he is no democrat. He maintained essential
elements of a market economy but compromised elections, asserted control over
regional governments and the judiciary, squelched personal freedoms, and sought
to reassert Russian influence, when possible, in former Soviet republics.
Putin reasserted state control in the petroleum industry and pushed out foreign
investors. His government seized Yukos, once Russia's largest oil producer, on
trumped-up tax charges and threw its chief executive in jail. This pre-empted
investments by ExxonMobil and Chevron. Similarly, Shell was forced to sell half
its gas rights in Sakhalin to state-controlled Gazprom, and now Russian
investigators are forcing BP out of its Russian joint venture.
Yet, Russia benefits from global capitalism. It supplies 25% of Europe's
natural gas. LUKoil purchased Getty, owns 2,000 US gas stations, and is looking
to expand into refining.
Now, Putin is imposing new tough limits on foreign investment in mining and
screening foreign purchases in other "strategic" industries. Since most of
Russia’s steelmaking and other metals industries are vertically integrated,
limitations on investment in mining will circumscribe foreign participation in
metal production.
Yet, Severstal, Evraz and others have acquired about 10% of US steelmaking.
Novolipetsk (NLMK) is acquiring tube and pipe manufacturer John Maneely.
Severstal is buying US metallurgical coal producer PBS. Moscow is forming a
state trading company to cartelize Russia's grain exports.
Putin enjoys good fortune Yeltsin never had. Since 2002, oil prices are up
500%, and GDP is growing about 7% annually.
At home, Putin is widely popular for delivering stability and prosperity.
Russians have significant access to Western media and culture but do not appear
widely distressed about their loss of civil liberties or genuine democracy.
Despite the compromise of democratic freedoms and property rights, Russia's
peculiar market economy is growing faster than any industrialized democracy and
most former communist states.
Putin's success has inspired nationalism. With Russian tanks in Georgia, Russia
looks like a shadowy resurrection of the Soviet Union bent on bringing
neighbors into its orbit as circumstances permit.
All this confounds US assumptions that economic engagement will foster a
democratic and nonthreatening Russia, but these circumstances are best
explained by two sets of factors.
Rapidly rising prices for oil and other resource exports have powered growth.
If price increases slow or reverse, growth will slow or Russians could relive
the Yeltsin nightmare, less the luxury to express dissent.
The United States and European Union have given Russia nearly a free ride on
the Western economic system. Russian exports enjoy fairly open access to
Western markets, while Moscow maintains higher tariffs and non-tariff barriers
on imports. Generally, Russian enterprises invest freely in the West, while
Western investors are increasingly excluded and their property is far from
safe.
Emboldened, the bear has shown its teeth in Georgia, and other adventures
cannot be ruled out. European dependence on Russian gas and the absence of
consensus within North Atlantic Treaty Organization make this a broad menace to
regional security.
It is high time the United States and EU re-evaluate open commerce and
dependence on Russian resources. Russian exports and investment should be
welcome only to the extent US and European investments are welcome in Russia.
Europeans need to find alternatives to Russian natural gas.
A new realism should guide US and European policy.
Peter Morici is a professor at the University of Maryland School of
Business and former Chief Economist at the US International Trade Commission.
Speaking Freely is an Asia Times Online feature that allows guest writers to have
their say.
Please click hereif you are interested in contributing.
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