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Wall Street Journal Europe
November 7, 2001
Making the Most Of the Russian Embrace

WASHINGTON -- The St. Petersburg historian Evgeny Anisimov once said that a miniature Alexander Herzen, the 19th-century Russian philosopher, sits on the shoulder of every Russian. His soft, wise voice encourages tolerance, moderation, rule of law and Western values.

The problem, says Blair Ruble of Washington's Kennan Institute, is that a much larger Ivan the Terrible shouts in every Russian's ear from the other shoulder -- in a voice for repression and brutality. And more influential yet is Peter the Great, residing in the Russian heart with his hankering for some new empire.

How Russians solve this internal turmoil will determine whether Russian President Vladimir Putin's dramatic policy shifts toward the United States following September 11 end in tears, or in the sort of seismic, pro-Western geopolitical shift that some European and Bush administration officials predict. "Whether or not Russia can ever join Europe in any meaningful way . . . will require Anisimov's Herzen to be able to speak more loudly to the Russian soul," Mr. Ruble told a Carnegie Endowment group here that is studying how Europe can better integrate Russia.

Western diplomats can barely contain their excitement about the implications of Mr. Putin's eagerness to join their antiterror coalition. A senior U.S. official speaks of "useful and significant" intelligence assistance. He says Mr. Putin set the radically different tone in his first conversation with Mr. Bush on Sept. 11, when he not only offered friendship but also canceled Russian military exercises planned for the Pacific. This was more than a gesture: He knew it would free U.S. spy satellites to fight the terror war.

European Observer

"The ball is now in the West's court," says the American official. "I think there is a historic opportunity but it can be missed." Yet when Mr. Putin meets George W. Bush next week, Americans shouldn't forget that they could also miss the opportunity if they embrace Russia too easily. What the West needs to avoid is a Faustian bargain that would trade Western principles in the name of addressing security interests. Whether Russian can join Europe will have more to do with what it is internally than with what it does externally in the name of fighting terrorism. The danger is that an overeager Washington will look the other way at continued business corruption, human-rights violations, press censorship or the sale of advanced, dangerous weapons to countries likely to use them in the wrong way. The last time America and Russia joined hands against a common enemy, Germany's Third Reich, four decades of Cold War followed.

That said, some facts suggest that Russia's Westward lean may be more lasting than those that have failed before. President Putin's only ideology is the pragmatic pursuit of Russian interests. His embrace of America's war on terrorism serves them in several respects: He justifies his own war on Chechen rebels, demonstrates Russia's usefulness against a common enemy, redefines his relationship with Washington from rivalry to partnership, and gains Western support for his potential membership in global institutions, most importantly the World Trade Organization. Best of all, he focuses foreign investors on his country at a time when it can bear their scrutiny.

Mr. Putin early this year decided to pay off Russia's sovereign debt rather than demand lengthy, painful rescheduling or forgiveness negotiations. Last month, Russia prepaid a $350 million installment on a loan from the International Monetary Fund that wasn't due until 2003. One senior international banker says what drives Mr. Putin, whom he knows personally, is a mixture of Russian pride and high oil prices, which helped GDP to grow by 8.4 % last year and 5.5% this year, making it one of the world's fastest growing economies.

Mr. Putin has introduced a flat tax and other tax reforms that make honesty less costly and he's pushing through judicial reforms that may someday make corruption more risky. His pressure on the country's oligarchs, Western investors report, has turned many of them from stripping assets to making new investments. Russians are now investing more at home annually than the country is losing in capital flight.

"There are two reasons why people behave themselves -- greed and fear," says William Browder, managing director of Hermitage Capital Management. He says many Russians who gained their wealth through questionable means now are discovering that they can best retain riches or increase their company's stock value by cleaning up their act. Others are going straight out of fear that Mr. Putin's scrutiny could undermine their schemes.

All that said, Western investors in 1998 learned the lesson of premature enthusiasm about a Russian economic miracle. A recent Russian Investment Symposium in Boston at which Mr. Browder spoke was surprisingly well attended given current fears of travel. Yet Russians seeking Western favor and investment far outnumbered Americans willing to throw down large amounts of new capital. Those looking for clues in the coming weeks about Russia's determination to stay the course should keep their eyes on the following:

Military Reform. Now that Mr. Putin has recognized that America isn't the enemy, will he change military doctrine and force structures to match that belief, thus "demilitarizing" the relationship with the U.S.?

NATO Enlargement. Now that Russia and the West are fighting terrorists together, the Baltics should come into the alliance at the Prague Summit next year without Russian objection. That said, Mr. Putin might well want to suggest a new form of alliance with Russia that reaches far beyond Europe.

Gazprom and Asset Stripping. Russia's most important company has long been regarded by Western investors as one of its more corrupt. Mr. Putin ousted company CEO Rem Vyakhirev five months ago, but Mr. Vyakhirev and his clan are still pulling strings in ongoing boardroom battles. This has become Russia's leading test of whether a company can regain its stripped assets.

WTO Membership. If Mr. Putin pushes forward here, it means that he wants international rules to help him enforce economic change, against opposition from Russian businessmen who prefer a more closed shop. When Mr. Bush meets Mr. Putin, they'll have the chance to write some history. Seldom have the two countries' interests so closely coincided. Yet the final test for Russian won't lie in Afghanistan but at home. "What we have on the table," notes Dmitri Trenin of the Carnegie Endowment in Moscow, "is a historic opportunity -- not to join a great antiterror coalition, but to do away with the final vestiges of the Cold War."

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