Russia in 2000: The Implications of Political Change in the New Millennium
March 2000
The implications of political change in Russia
in the coming decade are profound, and the stakes are high. With Vladimir Putin
now president, the future is uncertain. If your company has exposures in Russia,
it may be too late to mitigate political risks through Political Risk Insurance
(PRI). You must consider other options for mitigating political risks in Russia.
by Daniel
Wagner
AIG
In the final hours of the last millennium, the world received a political
risk shock when Boris Yeltsin resigned as president of Russia. As if we needed
a reminder that we live in a world filled with unforeseen political risks, Yeltsin
was determined to underscore the point as the new millennium began. Not only
was it the end of an era in Russian political history, it was the first time
that a Russian leader had resigned from office.
There is some question about whether Yeltsin resigned willingly or under
pressure from a host of political forces that had collectively decided it was
time for him to go. Regardless, many political analysts view his departure with
relief. At least now, they say, Russia has hope of stopping its political, social,
and economic hemorrhaging and of getting on the path of recovery.
This view has merit. Many analysts, and certainly many Russians, have blamed
Yeltsin and his cronies for what ails Russia. The deterioration of the Russian
economy, the weakening of its armed forces, its loss of influence and prestige
on the world stage, and the continuing decline of the Russian standard of living
are in large part the result of Yeltsin's weak leadership, endemic corruption,
and the mafia's corresponding grip on Russian business.
Is Putin the Answer?
At first glance Vladimir Putin appears to be the answer to the prayers of
ordinary Russians. Here is a man who is young and seemingly strong enough to
be an effective president. He is riding a wave of popularity by continuing to
crush the Chechen rebels. Moscovites have not had to worry about bombs going
off in their neighborhoods for months (although there is some question about
who planted those apartment building bombs in the first place-the Chechen rebels
or the Russian government). Putin was reportedly competent in the jobs he held
in the Soviet State Security Committee (KGB) and the city government of St.
Petersberg before becoming prime minister, and was allegedly promoted for his
performance running a spy operation in West Germany in the 1980s.
But herein lies a problem: Putin has never held elective office. He spent
his entire career being groomed by a system that despised the West. He spent
15 years as a Russian spy-which by its nature requires lying and deception-and
spent only 5 months as prime minister before becoming acting president. In fairness,
former U.S. President George Bush had been the head of the Central Intelligence
Agency (CIA). He was appointed to that position, held it for only a year, and
was not a career spy.
For a population that is hungry and has become increasingly nationalistic
over the past decade, the elevation of a man like Vladimir Putin to the office
of the presidency of Russia could, and probably will, prove to be a dangerous
move.
Putin appears to be in tune with the pulse of the Russian people. The question
is, how far will he take his people's desire to restore Russia's former glory?
He has already proven to have a propensity for waging war (in Chechnya) in pursuit
of a political objective (the presidency). Is he capable of renewing the Cold
War for political gain? In a speech in December 1999 praising the Russian security
services, he said Russians should not "fall prey to the illusion that they have
no enemies." He is clearly capable of reverting to Soviet-style political rhetoric.
Implications of Political Change
I would like to believe that Putin has what it takes to turn things around,
and that he is not the demigod he is making himself out to be, but I have serious
doubts that Russia's relations with the West will be as smooth in the decade
to come as they were in the past decade. What happens in Russia may well be
the single most important factor influencing global politics in the coming years.
Can you imagine what would happen if, in this world of globalization, democratic
rule, free markets, and the information revolution, Russia reverted to its pre-1991
anti-capitalist ways in an effort to recapture its place in the world? Bilateral
relations between the United States and Russia, and multilateral relations between
Russia and the European Union, United Nations, and the International Monetary
Fund would quickly deteriorate. The scientific and military cooperation carefully
crafted over the past decade would cease. Military spending would again become
the centerpiece of the Russian budget, prompting the West to respond in kind.
Our focus on the pursuit of prosperity would be replaced by a new preoccupation
with a well-defined enemy.
Yeltsin's abrupt resignation has implications for Russians certainly, but
also for the world, because Russia's relationships with the world's other countries
will change. Putin may well be elected president of Russia on March 26, 2000,
in which case his objective of returning Russia back into "a great power" could
take many forms. It could mean that Russia recreates the Soviet Union by force,
or that Putin will use strategic alliances to expand Russia's sphere of influence
globally as it and the United States did during the Cold War, or that Russia
will use nuclear blackmail to get what it wants.
Putin probably believes he has nothing to lose by attempting to return Russia
to its former glory any way he can. Russia has fallen so far, so fast since
1991 that it almost seems that it cannot deteriorate much further. Indeed, the
hopes and aspirations of the Russian people appear to be riding on what he will
do to achieve this. What concerns me is that Vladimir Putin is a man who was
produced by a system accustomed to imposing its will. He has yet to prove his
democratic credentials or a willingness to bring about meaningful change without
force.
Protecting Against Political Risks
If your company is not already trading with or investing in Russia, now may
not be the best the time to consider doing so. There are too many unknowns.
The foreign trade and investment climate could improve markedly in the coming
months. Putin could make enhancement of Russia's relationship with foreign businesses
a priority. More likely, however, is little or no meaningful improvement in
the foreseeable future because of the need to first address Russia's other problems.
The powerful oil Goliath BP Amoco lost more than $500 million last year by
investing in a Russian oil company (Sidanko) that became insolvent and was taken
over by a Russian competitor. It is not difficult to imagine the types of problems
ordinary businesses could encounter by trading and investing in Russia at this
time.
If your company currently has exposures in Russia, it may be too late to
mitigate political risks through Political Risk Insurance (PRI). The PRI market
has been concerned about Russia for some time. Since "the house is already on
fire," most PRI providers would not even consider assuming additional liabilities
in Russia for the foreseeable future. However, depending on the nature of the
business and the investor/trader in question, some PRI coverage may be possible
to obtain.
Options for mitigating political risks in Russia are currently limited to
the following.
- Choose your joint venture partners extremely carefully.
- Ensure that your company has a firm grasp of the legal landscape.
- Establish the broadest possible political foundation of support for
your business venture.
Too many companies have gotten caught in the crossfire of political turf
wars in Russia. Between competing government interests, the mafia, and the influence
of the country's tycoons, it is easy to become a casualty. There is probably
no real protection against the swirling current of political intrigue in today's
Russia. Having an iron stomach, common sense, and good luck are as useful an
arsenal of weapons to have at your disposal as the right political connections,
a successful history of doing business in Russia, and competent legal advice.
Russia's current predicament is perhaps the best example of what is at stake
when considering the implications for political change in the new millennium.
To make Russia a great nation again, rather than just a great power, will require
a significant change in thinking as well as practice on the part of Putin and
the Russian people. The implications of political change in Russia in the coming
decade are profound, and the stakes are high. Let us hope that Vladimir Putin
proves to be smart enough to work with the rest of the world to help make Russia
great again, and that he does not prove to be a man who rules with an iron fist
as have so many dictators in Russia's past.
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