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Russia's Confidence Ignores Potential Long-Term Woes

In Moscow, the man on the street exudes a new confidence. He seems convinced that the good times have finally arrived, that the March presidential election poses no dangers (or holds much interest), and that things will only get better. Local business leaders seem convinced that a U.S. economic slowdown holds few risks for Russian growth.

The country's economic expansion is indeed gathering speed, and prospects for foreign investors in many sectors appear better than ever. But too much confidence is a dangerous thing. It can encourage you to ignore serious long-term problems and to respond to perceived security threats in an unnecessarily hostile and aggressive way. That might ultimately prove bad for business - to say nothing of Russia's relations with the West.

It's not hard to believe in Russia's near-term prospects. Much of the country's growth is fueled by three sectors perfectly positioned for the current state of international politics and the global economy - oil and gas, arms, and nuclear power technology. A fast-growing consumer class is creating new opportunities for foreign firms to profit from rising demand for a broad range of goods and services.

Investors I spoke with during a recent visit to Moscow were bullish on everything from new opportunities created by the longer-term effects of climate change on Russia's Arctic shipping lanes to an underdeveloped agricultural sector that could eventually become an important player in alternative energy markets.

Russia still has serious social problems. Its health-care system remains abysmal. Declining birth rates and life expectancy have raised fears that the country's population might fall by 30 percent by the middle of this century. Life expectancy for a Russian man is 59 years. Only in the past year has the government sharply increased spending to slow these trends.

But these issues will not stunt Russia's near-term growth. Short of an unexpectedly dramatic global economic meltdown, Russia may well move beyond its current 7 percent growth toward the double-digit expansion we've seen in China.

The problem is that all this confidence allows Russians to ignore other longer-term problems that will matter for foreign investors. First, Transparency International, a non-profit watchdog, ranked Russia 143 out of 179 countries for perceived corruption in 2007. Russian courts and judges remain among the world's most suspect.

Kremlin insiders use the tax police as a weapon for score-settling with political and business rivals. Commercially motivated murders of local businessmen are more common in Russia than in almost any other emerging-market country. Russia also trails its emerging-market competitors in domestic investment dollars per capita, and the lion's share of Russian capital continues to head for the exits.

But the greater risk posed by the new confidence is that it feeds the foreign-policy belligerence that continues to pit Moscow against the United States, European Union and several of its neighbors.

The list of issues that have soured Russia's relations with the United States is a long one. Russia's withdrawal from the Conventional Forces in Europe Treaty, its vow to veto any U.N. resolution that recognizes Kosovo's independence, and the Kremlin's furious reaction to U.S. plans to place missile defense sites in Poland and the Czech Republic are simply the latest conflicts to divide the two governments.

On Feb. 8, Putin blamed NATO for "a new phase in the arms race (that) is unfolding in the world," and warned that Russia will be "forced to retaliate."

Tit-for-tat charges of harassment, brutality and dishonesty between the Russian and British governments recall the depths of the Cold War. The Organisation for Security and Cooperation in Europe now says that Russian officials have made effective monitoring of the country's presidential election impossible.

The Russian government continues to stoke tensions with Georgia and Ukraine. Last summer, Estonia accused Russia of launching a cyber-attack on government, banking, and media Web sites in the country after its government decided to remove a Soviet-era war memorial from the center of the capital city.

Much of the country's political elite continues to fear that the West means to encircle Russia, to reverse its gains and to undermine its international influence. In fact, Moscow responds to some of its neighbors the way Beijing responded to Taiwan a generation ago - with a hyper-sensitivity best explained by a psychologist, not a political scientist.

As with the previous generation of China's leaders, Moscow will moderate responses to perceived provocations from the West only when it is self-confident in both its ability to generate growth and its position in an evolving world order.

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Related Topics: foreign policy | russia |

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