Medvedev's Russia: The Business of Power and the Power of Business

Posted: 29 February 2008  

by Peter B. Doran

On March 2, Russia will choose its third president in the post-Soviet era. First Deputy Prime Minister Dmitry Medvedev will assuredly win the non-competitive election. Medvedev’s ascension comes at a pivotal moment in East-West affairs. Indeed, Russia's relations with Europe and the United States have grown increasingly acrimonious over issues like Kosovo, missile defense, the CFE treaty and Iran's nuclear program. Simultaneously, the Kremlin has strengthened its commercial ties with Europe, as it attempts to become a key EU energy supplier. Under President Medvedev both trends will continue. However, Moscow's assertive international posture will increasingly conflict with its desire to advance Russian business interests – particularly in the energy sphere. The long-term impact of this divergence will hinge on the outcome of a policy debate currently taking place inside the Kremlin.

In December 2007, outgoing President Vladimir Putin eliminated most of the potential drama surrounding this Sunday’s elections when he designated Medvedev as his preferred successor. Immediately after the announcement, Medvedev invited Putin to serve as his Prime Minister. Putin graciously accepted.

Western observers have noted that Medvedev’s rise signals an internal defeat for the hawkish siloviki – former spies who populate the highest offices of state. On the campaign trail, the Kremlin's media machine has presented Medvedev as a seamless continuation of Putin's foreign and domestic policies. During his high-profile visit to Serbia this week, for example, Medvedev dutifully eliminated references to Western cooperation and characterized U.S. policy on Kosovo as "cynical."

However, in other public statements, Medvedev has articulated a more liberal approach than his predecessor. This includes a fresh commitment to personal freedoms, property rights, and moderating state influence in the business sector. "We're talking about freedom in all its forms," Medvedev said earlier this month, "personal freedom, economic freedom, and in the end, the freedom of self expression." Regarding Russia's foreign relations, Medvedev noted the "common set of values" which Russia shares with the West and highlighted the necessity for U.S.-Russian cooperation. "It is inevitable," he said.

These remarks differ in tone from Putin's rollback of democratic governance and economic liberalization, and sharply contrast his increasingly antagonistic approach to the West. Most recently, Putin promised to revive the moribund arms race. He has likewise threatened Poland and the Czech Republic over the planned missile defense system. "If it is deployed, we will have to react appropriately," he said. "In that case, we will probably be forced to target some of our missiles at the objects threatening us." Putin made a similar threat against Bulgaria in June 2007. Seven months later, he and Bulgarian President Georgi Parvanov signed a formal agreement to build the $14.6 billion South Stream gas pipeline through Bulgaria – presumably still a potential target for Russian missiles.

Ultimately, energy politics rather than military bravado will determine Russia's external policies towards Central and Eastern Europe. Russia is increasingly dependent on the energy windfall to finance the state budget. In fact, without energy exports, Russia's budget deficit would total an alarming 6.6 percent of GDP. Meanwhile, the inflow of petrodollars has sparked an unsettling rise in inflation, increased reliance on foreign imports and dramatically undermined the country's economic competitiveness.

Russia’s economic challenges have begun to expose internal divisions over the Kremlin's hawkish drift. Indeed, if Russia is to stay on track towards becoming the world’s fifth-largest economy, then it will need to expand Russian business abroad and attract foreign investment at home. Against this background, the economic costs of Russia's foreign policy are difficult to measure.

In late January, Finance Minister Alexei Kudrin and United Energy Systems Chief Anatoly Chubais, both Medvedev allies, expressed rare public criticism of the government's aggressive stance towards its neighbors. Kudrin was the most assertive in stressing the detrimental impact that banging one’s shoe has on the country's economic outlook. "In the nearest future we need to change our foreign policy goals to guarantee stable investment," said Kudrin, adding, "we really need to think about how much our foreign policy costs our economy."

Nonetheless, as Europe's need for energy rises so will Russia's commercial position in the European energy market. The steady flow of export revenue will allow the government to offer the public popular spending programs in place of structural economic reforms.

In the Duma, Putin has indicated his intention to focus on domestic, rather than international affairs. Nevertheless, Putin will be more powerful than any Russian prime minister in the contemporary period. If a conflict with Medvedev does emerge over foreign or domestic policy, Putin's overwhelming majority in the Duma would allow him the constitutional prerogative to divest the presidency of the very same powers which he spent so many years consolidating.

Thus far, Medvedev has cautiously avoided any potential for conflict but stressed the need to maintain a strong presidency. "There are not three, four or five centers of power," Medvedev said. "The president governs Russia, and according to the Constitution there can be only one." This is certainly true. However, as Vladimir Putin has demonstrated, the limits of presidential authority are open to interpretation.

Peter B. Doran is an analyst of Russian affairs in Washington, DC, and an Associate Scholar at the Center for European Policy Analysis (CEPA).

The views expressed in this article are those of the author and do not necessarily reflect the opinions of the Center for European Policy Analysis.