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Political Risk

Russia in 2000: the Implications of Political Change in the New Millennium

Daniel Wagner | March 1, 2000

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Russia parade in Moscow

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.

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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