This is the second of thee parts of a Russia Journal interview with Ajay Goyal. Please click here for the first part http://www.russiajournal.com/news/cnews-article.shtml?nd=48653

Most of Russia’s recent successes have been attributed to unprecedented high oil prices rather than President Putin’s administration’s economic prowess. With the economy largely addicted to oil and diversification plans slow in realization, what is the probability of full-blown Dutch disease developing in the country?

AG: Well, the disease is already here and the question is whether Russians can beat it. Its been a constant theme in The Russia Journal about how Russia risks becoming a Saudi Arabia where service and oil sectors boom at the expense of higher education, competitiveness and innovation. Russia is already addicted to oil. I think Russia is already a new Saudi Arabia although there are some historical strengths that no other developing country possesses. They could make all the difference, but they have not been capitalized. The economic growth is in all the wrong sectors. Almost 13-14 percent growth in the service sector, then 5-6 percent in the construction and almost nothing in the industrial sector. All growth is from investment in oil, gas and natural resource processing and transportation. The consolidation of so much industry in so few hands has hurt. Small entrepreneurs have had it very tough and those with control of major industries have not been interested in better governance or reinvestment of good fortunes.

Government has also failed to take the benefits of the oil-price boom to people to encourage greater entrepreneurial activity. New industrial venture creation is very low and government has not invested in building infrastructure for new small and medium size businesses.

People are spending as if there is no tomorrow. Economy is being driven by consumer spending when the same consumers produce nothing. They are not spending it on acquiring professional skills or educating themselves in any economic activity. Intellectual capital of the country is already drained. When the high tide of oil prices recedes, we will be left with a terrible stench of consumerism. The failure of economic strategy is three-pronged. The government is beefing up the reserves and not investing to stimulate economic activity. Instead, they are using the money only to pay pensions and increase consumer spending. The oligarchs, who control most incoming revenues because they own the natural resources, are still laundering money overseas. They have accumulated wealth outside and keep sending dividends to their offshore companies. Most of the oil wealth is still making its way to people like Roman Abramovich, who earn money in Russia but hoard it in the West. Foreign investors are so put off by the monopolization of many sectors by these oligarchs and by the corruption of the system that they are still very cautious in making direct investments to build major new factories. Putin’s finance and economic ministers have failed him. He is too tolerant of incompetence.

You have been doing business in Russia for almost 15 years, has it become easier or more difficult to do business in Russia today, and if easier, what other economic sectors can foreigners invest in Russia outside oil, gas and other natural resources?

AG: I first came to Russia in 1988. Because it was so difficult to do business here then, there were just so few of us. It was probably one of the worst places on the planet to live and work and do business. Things got worse. The period from 1992 onward was very chaotic. Bandit gangs used to run around without check; extortion, corruption, bribery, and theft were daily occurrences. There was no rule of law. Police and tax inspection were a part of the racket and we had to spend more time dealing with them than running the business itself. The first half of the 1990s saw a complete breakdown of governance in Russia.

For criminally minded people who had no internal moral limitations, it was very good period to do business because law was vague and was being whipped around and regulations were being tailored to order. The transaction risks and personal safety risks were very high.

Today, it is no longer so. I would say the last five years have offered no such excitement. President Putin has cleaned things up considerably. No gangs walking into offices, no tax police raids with flak jackets, and no arbitrary rules on taxation. All areas of economic activity have been regularized and Russia has, I could say, become almost a normal place for business. The risk and crisis I see coming are not of economic nature. Russia is a great place for those who want to invest in industry, agriculture, consumer goods, high-tech and real estate. For oil services, energy, it is not bad either, if you do not mind working as junior partners to Russian state-owned corporations. Corruption is still very high and bureaucracy is still a racket, but when compared to where we have been, the pace of positive change has been amazing.

This is a bit of contradiction in what you say, is it not? If everything is so rosy, why do you feel concerned?

Because we are all made of different stuff and we react differently to conditions. I sense an oncoming crisis that will not show on a radar screen or in any pre-investment analysis. It may not impact businesses because they do not make choices through emotional or moral considerations. U.S. companies did not say, oh Jeez, we will not invest in China because they execute 3,000 people every year! Celebrated U.S. corporate heroes actually shut down factories in the Unites States, made Americans jobless so they could source cheap from factories run by the Communist Party or the Chinese Army! Economic practice, flow of capital, sale of goods, trade of commodities is not about emotional attachment to a country or a people. Russia is a good place for large corporations and institutions to invest in. And, when you are attached only rationally, you don’t really see a problem. Let’s put it this way: the girls standing on Leningradskoye Shosse on the way to the airport, for some, that is an opportunity, while for others, it is unbearable shame. Would that show in any power point presentations of investment analysis? No. But does that show some very strong weaknesses in Russia? You tell me.

Institutional risk perceptions and considerations are ignorant of social strains, though in the long run, they are not immune to them. There is nothing in Russia that should inhibit someone from investing here. What businesses have to consider is greater social responsibility, far beyond payment of taxes to repair the society and build new structures that can hold it together.

Back to internal politics, unlike most of his predecessors, President Putin is very popular in the country, and his popularity seems to remain stable. How can you explain this phenomenon?

AG: There is a simple answer. Russians mostly feel he has delivered. He had advantages, of course, he never had to make any promises, any agenda or manifesto. So whatever he does, is good enough.

But Russians felt orphaned when the Soviet Union broke up. A despotic, big brother state that was omnipresent in people’s lives just evaporated. Then there was a vacuum that was filled by gangsters, thieves, bandits, hooligans and same old bureaucrats. The thing Russians came to want the most was law and order. Yeltsin was a master of chaos and constant revolutions. Putin is a master of order and quiet compromise. Putin dealt very strongly with organized crime and bandits. Russians have been angered by transfer of national wealth to a dozen persons. Putin’s actions against Mikhail Khodorkovsky have made him very popular. His personality earns him lot of marks. He is not like any other politician Russians are used to seeing in the politburos or Kremlin. Among his peers in the West, he is perhaps the more articulate and sober.

He does not embarrass Russians. I also think it is because he has been good to aging pensioners and WWII veterans and Russians respect that.

I think most of the population perceives him as a democrat who would uphold national interest. It’s a good place in politics to be. For Russians, a liberal and democrat tag meant a politician who was a lap dog of the Americans. Russians do not want a despot, but they want a strong leader. They want a new democratic tradition, but do not want to be robbed by a few clans in the name of freedom. A vast majority of Russians have a different view of Putin from Western analysts because their expectations of Putin are different.

Talking of Western analysts, President Putin’s popularity, has not spread to the liberals. Most intelligentsia and almost all local and international human rights advocates detest him. How would you explain this discordance?

AG: Because the expectations of Western analysts were different from what Russians expected of him. Russia and its resources were being carved out and ready to be served on silver platters to Western countries and influential corporations. That was the objective of this democracy that forced down Russia.

I disagree with you that intelligentsia or liberals do not like Putin. The liberal and democratic vote in Russia goes to Putin. Russian intelligentsia was naturally suspicious of a man from the KGB. We did not like him a bit either for the first year and just see how critical The Russia Journal columnists were of Putin.

A segment of intelligentsia, or at least that section of it that wasn’t being bankrolled by the oligarchs, was mourning the social and moral degradation of country. They wanted freedom and capitalism, but not the Haramkhori [Urdu for debauchery] that settled like chimney soot on Russia.

A good number of liberals had already ruled Russia for a decade and made themselves a pretty good fortune. They had complete control of the media, economy, power, everything. Russia was a dictatorship of these “liberals.” So a good part of opposition to Putin is just heartburn over the loss of power.

Russian liberals, and it has been so for centuries, borrow their liberal ideas from the West. They ape the political theories of the West and have no popular base at home. Who would know of their existence if they were not criticizing Putin? Now they don’t just borrow ideas, they also get paid for them. So that is a second segment, which benefits financially from being in ‘contracted opposition’ to Putin.

Then, there is a third segment, which genuinely believes that Putin’s intentions are wicked and autocratic, that he will not give up power, that he is accumulating all powers in the hands of "siloviki" and they just don’t trust him. We have to respect this opposition and I hope they can keep the popular and moral pressure on Putin for him to follow the democratic path. But voters have abandoned the liberal leadership of the country in droves in his favor. Because they consider Putin to be more conscionable and trustworthy than those who worked under Yeltsin’s wings for a decade. The crisis is not for Putin, it is for the liberal intelligentsia. The threat to them is not from Putin, but from lack of credibility and loss of confidence from people.

There are charges that the so-called “vertical power authority” — the Kremlin’s rigorous policy of controlling the whole political spectrum — has sidelined the bicameral parliament, regional leaders and opposition parties in the country from practical involvement in public governance. Is there any credence to such charges?

AG: The reasons for Kremlin’s desire to assert control over regions and regional politics are valid and understandable. There have been separatist tendencies in the south and some local leaders had fuelled some of those urges. The regional leaders have had absolute powers which have led to absolute corruption. For years, State Duma laws had no standing outside of its walls and the Kremlin had no control over most of the country. Regional leaders had absolute control of the local media and administrative machinery. Elections were rigged with impunity, making real democratic choices impossible. Last decade of Russia was more like the medieval ages in Europe.

But the choice for the regional electorate should not be between feudal autocracy and Tsars’ tax collectors. In the end, it is the same rotten public governance. If Putin intends to strengthen the federation to create institutions that could facilitate a real democratic process in the future, one could support this idea. But if Putin wants to run the country by keeping the reins of every regional leader in Kremlin, then there will be very rude surprises. I think Kremlin should have a five-ten year plan of termination for this model. Direct elections and local grassroots democracy will have to return in this period.

More freedom is the answer, not less. And if regional leaders fail to perform, then there are legal ways in the Constitution on how to deal with corrupt or criminal or incapable regional leaders. We are heading toward a dictatorship of bureaucrats and unelected officials, who owe their positions to nothing but loyalty to the head of state. It is very convenient, but it is also very dangerous if made into an irreversible practice.

Do you think President Putin will hand over political powers in 2008 to a candidate elected in a free and fair election, or will he orchestrate some constitutional changes that will enable him to stay further in the Kremlin?

AG: My personal instinct tells me he will relinquish. On this one point almost all well informed sources we have, people who have always been correct in their observations of Kremlin’s moves are unanimous. They think President Putin will relinquish power in 2008. We will know in mid- to late-2007 as the succession project unfolds. There is no doubt that many people would want President Putin to stay beyond the constitutional term and we know how events can be staged to manipulate outcomes. One should hope for his own sake, and for the sake of his own credibility that he has with the Russian people, that he would relinquish. Because no matter what strategy is employed to keep him in the Kremlin beyond 2008, it will be self-defeating. He could win the Presidency and lose all credibility with the people that he has earned in these last years.

Some opposition parties, including the newly formed Committee-2008 members, are not ruling out a scenario whereby Kremlin officials could seek ‘pseudo-legal ways’ to secure a third term for President Putin. Based on this and rising social tension, how high is the probability of “a colored revolution?”

AG: I do not think those who talk of revolutions have their fingers on the national popular pulse. These opposition forums, like club or committee 2008, are like a bingo club. So let us not talk about them.

The real opposition to Putin comes from the communists and nationalists. The kind of revolutions they do are only the red kind – the one’s in which blood flows through the streets.

As for ‘fruit and flower’ revolutions, I wrote about it months ago that they are unlikely. I think the circumstances in Russia are very different from those in Ukraine or other republics around Russia. Russia was ripe for a revolution in 1996. But the corrupt despots won in the name of democracy because the Western powers were supported them. Then things went so far that Russia could have had a red revolution – such was disaffection and anger with the Yeltsin regime – but then Putin came to power and stabilized the country. He carried out his own quiet revolution. No purges, no public hangings or whippings, but Russia has undergone a revolutionary change in the last five years. People can take to the streets, they can block trains and buses. They have done so since 1991. Coal miners had been on strike numerous times in the past. Strikes and street demonstrations are not revolutions.

If something like the Kiev scenario is attempted by oligarchs and their friends in western governments, then what is to stop a counterrevolution, crowds looking for oligarchs and their families and lynching them for stealing the national wealth? That anger is more palpable against them than against Putin. The public anger is against the primitive capitalism and its beneficiaries, robber capitalists and, less against Putin and his ministers. Unlike Yeltsin, Kuchma, Shevardnadze and Akayev, Putin has strengthened national companies and has not transferred oil and gas companies to himself. Anyone who thinks [Mikhail] Kasyanov or [Irina] Khakamada can lead a revolution in Russia should have his head examined.

If any other form of regime change is attempted in Russia, it would be a coup-de-etat and not a revolution.

One of the key platforms of President Putin’s rise to power and endearing himself to most people in the country was the promise to normalize the situation in war-torn Chechnya and return the separatist republic back to the Russian constitutional space. How would you comment on the Kremlin’s official policy on Chechnya today and how successful has it been?

AG: Chechnya was an open wound in terms of armed conflict, terrorism, and insurgency when the Russian forces went in. It is a far better place today than Iraq or Afghanistan. There are bands of terrorists that still strike, but that they also do so around the world. Chechnya is falling back to normalcy, as normal as a place can be after such atrocities, such fighting and destruction and violation of human dignity. The regime of rogues was removed and most major bandit formations have been eliminated. Chechnya will never normalize completely. The history of the region, the history of the conflict, the psyches, the foreign influences will not allow a complete normalization of the situation in that region. But the spread of Wahhabism and other forms of extreme fundamentalism have been contained. Chechnya is a success, if we consider what it could have become and almost did. It was on its way to becoming the world’s most sophisticated base for terrorists.

Please click here for the third part

http://russiajournal.com/news/cnews-article.shtml?nd=48685