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"We must stop picking fights with the West"

31 January 2008
The Daily Telegraph

THE Kremlin has offered a rare admission that Russia's hard-nose diplomacy and the manipulation of the energy sector for political goals is deterring investors, leaving the country friendless as the credit crunch spreads to Eastern Europe.

Alexei Kudrin, the finance minister, acknowledged yesterday that spats with Europe and America on a raft of issues have gone too far. "Our dependency on global economic ties, on our exports, is so strong that we need to shift our foreign policy goals as soon as possible to safeguard stable investment," he told the Russia Forum, a summit of economic and political leaders organised by investment bank Troika Dialog.

Former Kremlin staff chief Anatoly Chubais called on the government to tone down the nationalist rhetoric and stop picking needless fights with the democratic world. "We really have to think about how much our foreign policy costs our economy," he said.

"If we want, we can go on persecuting the British Council and closing down their St Petersburg offices. This is a disgusting event," he said, to wide applause.

The warnings come as Russia's economic boom begins to fray at the edges.

The huge appetite for foreign cars and luxury goods is soaking up the oil and gas bonanza, thinning the country's security cushion at a disturbing pace.

There is no likelihood of a financial crisis along the lines of the 1998 default, when crude slumped to $12 a barrel and foreign reserves fell below $20bn ( pounds 10bn).

The country now has reserves of $470bn - the world's third largest - and a petroleum stabilisation fund with foreign investments worth $127bn. Together they provide a $600bn war chest to fight off speculators.

Even so, risks lurk. Companies have had to borrow heavily abroad to raise capital because the internal bond market is still too primitive to keep pace with blistering growth, running at 7.8pc last year.

The deformed credit system has forced companies to look abroad for funds. They have amassed $430bn in external debt. Russian credit spreads have jumped by 80 basis points since the August crunch.

"Russia is not immune to financial contagion," said Varel Freeman, vice-head of the European Bank for Reconstruction and Development. "Medium-sized banks are going to face difficulty gaining access to credit. This is something we need to watch. A lot of things can go wrong," he said. There are signs that the country is falling victim to the "Dutch Disease" as wealth from energy and metals drives the exchange rate to levels that damage the rest of the manufacturing industry. Commodities make up 80pc of exports.

The current account surplus has fallen from near 10pc of GDP to below 4pc even though oil prices have been soaring. It is likely to reach balance within two years. "If oil falls to $50 a barrel, Russia could be in trouble," said Commerzbank.

Ian Bremmer, head of the risk firm Eurasia Group, said Russia enjoyed a lucrative niche in energy, nuclear power, and arms sales.

"If there is any country in the world you want to go 'long' over the next 10 years, this is it. Wall Street leaves Russia," he said.

But politics are another matter, and in the end politics always trumps economics. "We all know that the West humiliated Russia for 15 years. Now they don't see themselves as benefiting from Western leadership," he said. "We have conflicts with Russia over Kosovo, Georgia, missile defence, the North Pole, Litvinenko, the British Council, and Iran. It is hard to find any other country from the perspective of Washington or Brussels that has so many problems. If there is any one issue today that will allow the EU to create a consolidated foreign policy, it is opposition to Russia."

Joschka Fischer, the former German Vice-Chancellor, said the Kremlin needed to rethink its prickly approach, or risk being left behind as in the 21st Century era of subtle co-operation.

"Let me be frank, if we see Russian zones of influence and power politics, this raises a lot of concerns. Is Russia going to improve its soft-power skills or rely on hard power? Are we going to see an independent judicial system, based on rules?" he said.

Former premier Yegor Gaidar pleaded for time, insisting that Russia would grow out of its truculent phase. "We're like an overgrown teenager, with the body of an adult but the mind of a youth. But teenage years come to an end, and I hope we will be out of this soon," he said.