Russia: financial crisis frays ‘social contract’

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"The Putin era is over but Medvedev’s has not begun. This is the real Russian crisis."

In “a stunning one-week drop“ of $31 billion, Russia’s foreign exchange reserves yesterday dipped below $500 billion for the first time in eight months. The financial hemorrhage saw reserves fall to $484.7 billion, heightening fears of emerging recession.

The crisis could undermine the unwritten social contract in which the state ensures rising living standards and the people stay out of politics. “It’s a crisis of the middle class,” said Dmitry Oreshkin, an independent analyst. “This is an entirely new phenomenon for Russia and it’s hard to say what will happen.”

Financial constraints could impair the state’s ability to distribute patronage and subsidies. “The Russian government has been spoiled by this bonanza, by basically unlimited resources and the ability to pour money onto social problems,” argues Masha Lipman of the Moscow Carnegie Center. “I think the country is moving toward a situation in which there may not be resources for everyone, and that’s a huge change.”

But systemic change appears unlikely. “The regime seems quite stable; with little real movement towards democracy,” argues Lincoln A. Mitchell. “Russia is a largely consolidated illiberal semi-authoritarian regime.”

The state has been “taking a lead in forming the intellectual and spiritual life of Russians”. Ominously, the regime has even been successful in fostering anti-Western chauvinism among formerly liberal and democratic activists and ideologically motivated youth gangs formed in the aftermath of Ukraine’s Orange Revolution “have spawned a network of ideologically correct organizations.”

Less than a year after President Vladimir Putin announced that the Kremlin would establish its own NGOs, such groups are now finding their voice. “There is a red line, where Russia cannot accept further pressure on its borders in its traditional geopolitical arena,” says Natalya Narochnitskaya of the Moscow-based Institute for Democracy and Cooperation, a Kremlin-friendly ‘think tank’ (the Institute recently opened offices in Brussels and New York in a bid to expand Russia’s “soft power” abroad). “Ukraine becoming part of a hostile military bloc, and seeing [NATO] bases sprout in Russia’s historic heartland, is simply not something we can ever accept.”

The democratic West remains divided over how to deal with Moscow’s authoritarian new nationalism. “The current approach – seeking to punish aggressive, defiant Russia but working with Moscow in vital areas of common interest – is not sustainable,” says Carnegie’s Lipman.  ”US anger is only making things worse. The risk of Russia slipping towards an isolationist course and a militarized economy is growing … The foundations of US policy towards Russia must be revised.”

European approaches have proved to be equally problematic. The EU put respect for human rights and democracy at the core of EU-Russian relations, and “Russia seemed to be on her way to Europe and to joining the Euro-Atlantic institutions,” notes Dieter Dettke, a visiting fellow at the National Endowment for Democracy. The EU believed it provided the best model for Russia’s future. But things didn’t quite work out that way:

Russia was never truly happy with the norms and standards the EU prescribed, and there was always a sense of resentment stemming from the lack of input Russia was able to provide to a partnership with the EU. The geopolitical and democratic revolution that many in the West had hoped for, by including Russia in the family of Western democracies and Euro-Atlantic institutions, never took place.

One might hope for better U.S.-European cooperation and it has recently been argued that “only such a coordinated application of carrots and sticks has a chance of guiding Russia back toward the international community.” But in the absence of a single European approach, that seems unlikely. As the European Council on Foreign Relations noted in a recent report on EU-Russia relations, there are at least five different European positions on Russia:

• The Trojan Horses (Cyprus, Greece) who generally defend the Kremlin;
• Strategic Partners (France, Germany, Italy, Spain) whose business-driven “special relationship” with Russia prevent common EU policy;
• Friendly Pragmatists (Austria, Belgium, Bulgaria, Finland, Hungary, Luxembourg, Malta, Portugal, Slovakia, Slovenia) who prioritize business interests over political issues;
• Frosty Pragmatists (Czech Republic, Denmark, Estonia, Ireland, Latvia, Holland, Romania, Sweden, the United Kingdom) who prioritize business goals but are still prepared to confront Moscow on human rights and;
• New Cold Warriors (Lithuania, Poland) with a hostile relationship with Moscow and opposed to an EU-Russia partnership.

The burgeoning economic crisis may lend credence to Michael Emerson of the Center for European Policy Studies:

 A realistic Russia will recognize that it does not hold all the cards, with serious weaknesses in its economy, demography and international political reputation. The EU has to find the political will and unity to craft a strategic understanding with Russia, which would see a convergence on civilized norms for the wider Europe.

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