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Washington Profile
October 6, 2004
Three Russia experts give their views on some of the main threats facing Russia today.

::  Don Jensen is a former U.S. diplomat to the Soviet Union and currently director of communications for Radio Free Europe/Radio Liberty (RFE/RL)

Question: What do you think the biggest threats are to Russia's long-term stability, especially in light of the tragic events in Beslan and Putin's plans for government reform?

Jensen: In my view, the biggest threat to stability is the consequences of the so-called terrorist threat to the Russian Federation, primarily Chechnya; but I don't think that is the same as the worldwide terrorist threat. I think the threat becomes one to internal stability because Putin's attempt to centralize and deal with a very hard-line approach with this horrible tragedy is precisely the opposite of what Russia needed. It doesn't need to centralize power; it doesn't need to strengthen the "power vertical". I would argue that much of the problem with the way the Beslan hostage crisis was handled and some of the others come from a pre-existing over-centralization of power, the lack of rule of law and the fact that so many of these critical institutions for preserving Russia's understandable need for security have been undermined by corruption, and bureaucratic overlapping incompetence. I don't think centralizing power is really going to help that.

Question: What do you think would have been a more adequate response to the events in Beslan?

Jensen: The response in terms of what was "on paper" was not something I would disagree with: you don't negotiate with hostages. The problem has been that the security forces, and the command and control that affect them, are, as we've seen in the previous crises, undermined by incompetence, corruption and different institutions working across purposes. That's a systemic problem. That's not dealing with the tragedy, per se. The Russians seem clearly tempted to leverage that particular issue, which is to say, stability along their southern periphery with the U.S. and international terrorism in Iraq. There is overlap, of course, but the problems of Chechnya and some of the other unstable areas of the North Caucasus have to do much more with Russia's own internal development. So, in that sense, it's useful to say that Russia's internal development does affect the worldwide struggle against terrorism and as I said, there certainly are al Qaeda elements there. But primarily it comes from internal issues of mismanagement of the Chechen issue, Chechen nationalism and how Russia as a federation will evolve, and that's a different thing.

::  Brad Setser is a research associate at the Global Economic Governance Program at University College, Oxford, and co-author of Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies.

Question: What are the biggest economic threats currently facing Russia?

Setser: The biggest economic threat to Russia is the possibility of a decline in oil prices. Given the structure of Russia's economy and finances, everything is strained when oil prices drop. It's easy for Russia to do many things when oil is $50 a barrel and reserves are rising, when there's a massive current accounts surplus. When oil falls and Russia has to access international markets, however, then the Russian economy comes under pressure. Right now [the price of] oil is high because of strong demand and investment. At the same time, some suppliers are not producing quite as much as they used to, for example, the Middle East and Venezuela. But if the global economy slows, oil prices will start falling sharply.

There is also the issue of investments, but first we need to distinguish between the different kinds of investment. It's clear that people purchasing Russia's external debt have a fair amount of confidence that Russia has the capacity to repay it. Ever since bond restructuring in 2000, the price of Russia's bonds have continued to rise. In this sense, there exists some confidence in Russia's economy and its public sector finances. There are good reasons for this. The public sector has very substantial reserves now; it's not running large budget deficits....

The challenge for Russia will be to attract investors to Russia's private sector. There are two issues that relate to people's confidence in the legal and institutional structures of the Russian economy. First is the confidence that there exist strong institutions that protect minority shareholders. Second, and most importantly, there needs to be confidence that the Russian government accepts the existing distribution of private property. And in light of the latest developments in Russia, especially the Yukos affair, there is considerable doubt that the Russian government accepts the existing distribution of property ownership and control over major natural resources. Until these two uncertainties are substantially reduced, people are going to be much more willing to lend to the Russian government than to invest in Russian companies. This might be a hazard in the long run, because Russia cannot depend indefinitely on oil revenues and will need to develop other sectors of its economy.

::  Yulia Woodruff, analyst for Energy Security Analysis (ESAI), specializes in the petroleum industry of the countries of the former USSR. She has a strong research background in the fields of international finance and the Russian political economy.

Question: What are the biggest threats to Russia's stable long-term oil output?

Woodruff: In the next five years, I believe Russian oil output will continue to grow; the growth rate, however, will decline. The problems are obvious: first, falling investment in exploration and production, which is a factor of a more difficult investment environment and growing political risks.

Question: Do you think national security will play a role in energy output in Russia in the next five years, especially given the recent terrorist attacks in Beslan and Putin's planned consolidation of powers?

Woodruff: I personally don't think that this is the main factor which keeps companies from investing in production. However, I wouldn't be surprised, especially given the response to Beslan, to see the next terrorist attack aimed against Russia's oil export infrastructure, because frankly I don't think Putin's response of power consolidation was adequate to address the country's security issues. I don't think that whatever he is doing right now will increase the security of the country.

Question: So, you are saying that this move may in fact discourage investment in the long run?

Woodruff: I don't think that security issues are the main factor that is discouraging investment in the oil industry. I think that the political uncertainty and unpredictability of Putin's policies are a much bigger factor in terms of investment in oil exploration and production. Security issues are secondary, and I don't see oil companies concerned with security. However, I believe that the response to Beslan was inadequate and I wouldn't be surprised to see a terrorist attack on an oil export pipeline in Russia. And, in this sense, it could affect Russian oil production.

Question: What, in your view, would be a better way to develop Russia's oil industry?

Woodruff: I would like to see the government take steps in providing a clearer indication that it values private property and upholds the rights of individuals and institutions to hold their assets that they have in the country and to offer decreases in taxation in order to allow private enterprises to develop long-term plans.