Can the EU help Russia modernise?

by Katinka Barysch

The EU and Russia are planning to launch a ‘partnership for modernisation’ at their next summit in Rostov on May 31st. The initiative – launched by Commission President Barroso at the last summit six months ago – is meant to breathe new life into a relationship that has become stale and tense. It is unlikely to succeed.

At first glance, an EU-Russia modernisation partnership looks like an excellent idea. It could entail joint science programmes, pilot projects in high-tech industries or student exchanges. Such projects should in theory be free of the ideological clashes that have held back EU-Russia relations in the past. They could help to restore mutual trust. They could allow the EU to acquaint Russia with European norms and values, not through lecturing but through day-to-day co-operation. In the medium term, successful modernisation could help to transform the apathetic Russian middle class into an entrepreneurial class that demands property rights and civil liberties. Last but not least, a successful modernisation partnership would generate new business opportunities for companies from the EU, which would, for example, be able to sell energy savings technologies to Russia.

Politically, the modernisation partnership looks promising. Modernisation is what Russia talks about today. President Medvedev has warned repeatedly that unless Russia radically reforms its economy, the country will face terminal decline. Russia must diversify away from exporting energy, and create jobs for the 95 per cent or so of the workforce that does not work in oil and gas. Surveys have shown that Russian policy-makers overwhelmingly believe that Russia needs outside help with modernisation. The recently leaked memo from the Russian foreign minister also called for Russia to forge ‘modernisation alliances’ with European countries. The EU has found that lecturing Russia on the need to reform does not work. So why not speak in Russia’s own interest by offering help with what has become a national priority?

Moreover, some EU policy-makers hope that since it is mainly President Medvedev who is pushing for modernisation, a re-focusing of EU-Russia relations on this topic may strengthen his hands vis-à-vis the more statist and authoritarian Putin clan.

Finally, political disagreements and tensions will remain inevitable in EU-Russia relations, whether over gas sales or the fate of Ukraine. The modernisation partnership could encourage co-operation that is independent of politics and focuses on technical, environmental or social issues. Such co-operation could help to stabilise bilateral relations and mitigate the dangerous intellectual isolation in which many Russian bureaucrats and scientists seem to operate today.

However, there are also several reasons why the partnership for modernisation may be a bad idea.

First, and most importantly, what most people in the EU mean by modernisation is very different from the notion held by the Russian leadership. Russia’s concept of modernisation is state-led and project-focused: a state-financed nanotechnology institute, state-owned banks lending to selected sectors, a brand-new ‘innovation city’ outside Moscow set up by government fiat – these are the building blocks of Medvedev’s innovation economy.

This approach cannot work. In today’s dynamic global economy, picking winners is not something that governments can do. An innovative economy needs open markets, venture capital, free-thinking entrepreneurs, fast bankruptcy courts and solid protection of intellectual property. Russia’s business environment is characterised by wide-spread monopolies, ubiquitous corruption, stifling state-interferences, weak and contradictory laws, and so on. The whole idea that Russia can shift from an economy that relies on oil, gas and heavy industry to a cutting-edge, high-tech one is spurious. Russia should first try to move existing industrial sectors up the value chain by using imported technology and know-how. Large-scale indigenous innovation may come later.

A state-led approach to economic change is particularly problematic in today’s Russia because its public institutions function so badly. Sergei Guriev, a Moscow-based economist, has compared the quality of Russia’s state administration and legal system of today with that of South Korea 12 years ago, before it embarked on its impressive growth spurt. He concluded that South Korea’s institutions were quite simply in a different league and that Russia’s chances of catching up with the world’s most developed countries were slim.

The Russian leadership hardly trusts its own bureaucracy to implement a road building programme. How is it supposed to build a replica of Silicon Valley? Even if such isolated programmes were successful, their impact on the wider economy would be limited so long as competition is restricted and successful companies must fear kleptocratic officials. The risk is that the money that the Russian government is about to pump into selected sectors and high-profile projects will not only be wasted. It will create a constant, future demand on public resources that may well be better spent elsewhere.

In short, Russian modernisation does not need vertical state intervention but a horizontal improvement of the business environment. It is doubtful whether the Russian leadership has the political will to clamp down on corruption, improve competition, reform the education and science sectors and strengthen the rule of law.

The question the EU needs to ask itself is whether it should accept and support Russia’s flawed concept of modernisation, or whether it should make support conditional on Russia implementing at least some of the reforms needed to strengthen the rule of law and improve the economy. In the past, EU attempts to cajole or persuade Russia to implement reforms have had limited or no impact. The modernisation partnership is unlikely to be very different.

Katinka Barysch is deputy director at the Centre for European Reform