Salzburg Diary

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As many of you know, I have been blogging this week from the Salzburg Global Seminar’s session on Russia: The 2020 Perspective.

Most of what I've written so far has been focused on U.S. policy toward Russia. But the United States can only influence Russian domestic developments on the margins. So, what does Russia itself need to do over the next 12 years?

If I were president of Russia, my absolute top priority would be to strengthen property rights, which will make it possible for Russia to diversify its economy away from oil and gas, build a real middle class, and bring in much-needed foreign investment and advanced technology. There is much work to do. Exhibit A: the case of Hermitage Capital Management Limited, which until recently was the top portfolio investment fund working in Russia.

Hermitage CEO Bill Browder, you may recall, made news in 2005 when he was suddenly barred from reentering Russia. Browder had been making too much noise about "shareholder rights," and in doing so he apparently stepped on some powerful toes. The fund has since pulled its $4 billion worth of investments in Russia, but new details are emerging that paint a disturbing picture of the business environment in the country. Last week, Hermitage updated its investors on a campaign of "administrative harrassment" in Moscow that could have ended with corrupt local officials absconding with hundreds of millions of dollars worth of the fund's assets.

According to Hermitage, the story goes like this. In summer 2007, its offices were raided by the Moscow Interior Ministry, supposedly as part of an investigation into Kameya, a company owned by one of Hermitage's clients. The allegation was that Kameya owed $48 million in taxes. When Kameya's people went to clear things up with the Tax Ministry, officials there confirmed in writing that in fact, the company was eligible for a refund and owed no back taxes. Meanwhile, when one of Hermitage's lawyers complained about the raid's questionable relevance to Kameya, he was beaten by Interior Ministry goons, arrested, and fined 15,000 rubles for his insolence.

So, what was going on? Hermitage alleges that "a more sinister agenda" was at work. The real purpose of the Kameya raid was for Moscow Interior Ministry officials to get their hands on documents that could be used to seize the fund's assets.

Here's how the attempted scam worked. The Moscow Interior Ministry official in charge of the "investigation" launched what Hermitage calls a "fishing expedition" to locate the fund's assets -- demanding all records from four foreign banks that might lead him to the prize. At the same time, somebody used the captured documents to fraudulently change the ownership of three investment vehicles owned by British bank HSBC, a Hermitage trustee. From there, it gets complicated, but the bottom line is that a mysterious team of lawyers representing "their" companies then assented to a fake court ruling that would have put the three HSBC entities on the hook for $380 million. Luckily for Hermitage, the vehicles were "dormant" and held no assets, so the would-be millionaires came up empty.

"The more we learned, the more unbelieveable it became," Hermitage says. The fund's management passed along their findings to Russia's finance minister in Davos, which were then put in front of President-elect Dmitry Medvedev and a pair of investigations has begun. The year before, though, Medvedev had personally assued Browder in Davos that his visa troubles would be cleared up, and he couldn't deliver. Now, Hermitage says the officials involved in the attempted theft are making "spurious claims" and feeding misinformation about the fund to the press -- so the fund is going public with the story.

This case will be a key test for Medvedev,  a lawyer by training who has vowed to tackle Russia's property rights and corruption problems when he takes office in May. But as European Commissioner for External Relations Bentia Ferrero-Waldner put it to us in Salzburg this week, "Ultimately the world will assess Mr. Medvedev on his deeds, not just on his words." It's showtime, Dmitry.

Blake Hounshell is Web Editor of ForeignPolicy.com. He has been blogging this week from the Salzburg Global Seminar session on Russia: The 2020 Perspective.

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It's been one of the recurring themes of the Bush administration: a rejection of the traditional concept of diplomacy as a game of give-and-take in which trading away concessions allows you to get what you want on your top priorities.

Nowhere is this more evident than in U.S. policy toward Russia. Allow me to explain what I mean. The United States and Russia differ starkly on a few discrete issues: NATO enlargement in former Soviet republics such as Ukraine and Georgia, the ABM Treaty and the proposed U.S. missile shield in Poland and the Czech Republic, the Conventional Forces Europe (CFE) Treaty, Kosovo, the Nabucco trans-Caspian pipeline, and democracy and human rights. Meanwhile, the United States has sought cooperation from Russia on Iraq, Iran's nuclear program, the six-party talks with North Korea, and a host of other issues large and small.

Normally, you might think that the United States would prioritize these issues and make tradeoffs to achieve its most important objectives. But, as President Bush made clear in Ukraine last week, when he said, "There's no tradeoffs, period," U.S. officials don't believe they have to make any concessions. Each issue should be viewed separately and on its merits, they argue, rather than linked. Ukraine and Georgia should be admitted to NATO because it's the right thing to do. Russia should not feel threatened by U.S.-backed "color revolutions" in former Soviet republics or by American defense installations in Poland, the Czech Republic, Romania, and Bulgaria. Russia should accept Kosovo's independence. Russia should cooperate in preventing Iran from going nuclear because a nuclear Iran is not in Russia's interests. And so on.

The only problem is, the Russians have a vastly different view of their own interests. They see U.S. moves, such as trying to convince Turkmenistan to sell its gas to Europe or pushing to bring Georgia into NATO, as extremely hostile acts reminiscent of the cold war. It makes them less willing to cooperate on other issues; it heightens their paranoia and feeling of besiegement, and it strengthens the elements within the Russian strategic class who see geopolitics as a zero-sum game with the United States as their chief adversary. (By the way, these are the same guys who aren't so into the whole democracy thing.) For many years, a failure to take Russian interests into account wasn't an obvious problem because the Russians were weak and took their lumps. But as we're seeing nowadays, they are willing to make provocative moves such as pulling out of the CFE treaty or threatening to split Ukraine when they don't get their way.

Now, maybe Russia is still a paper tiger and its bluster shouldn't dissuade the United States from strongly backing pro-Western governments in Ukraine and Georgia or trying to cut Gazprom off at the knees in Central Asia. Maybe some degree of democratic backsliding was inevitable after the chaos of the 1990s. I tend to think, though, that the United States underestimates how these issues interrelate at its peril. In the real world, there are tradeoffs, and we can't wish them away.

Blake Hounshell is Web Editor of ForeignPolicy.com. He has been blogging this week from the Salzburg Global Seminar session on Russia: The 2020 Perspective.

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What do Russians think about the U.S. electoral campaign? I spoke with two distinguished Russian scholars last night here at the Salzburg seminar I'm attending this week.

The first scholar told me that the hardliners and the security establishment are eager to see John McCain in power. He's more or less a known quantity, and his recent statements about ejecting Russia from the G8 will make it easier for them to make the case that the United States seeks to humiliate and corner Russia. A McCain election would be seen as evidence that Americans want to continue George W. Bush's policies, which are generally unpopular in Russia.

On the other hand, the scholar said, Republican presidents from Nixon to Ford to Reagan have a much better track record in making overtures to Russia, perhaps because they don't fear being painted as weak.

Both scholars, who come from the liberal end of the political spectrum in Russia, seemed intrigued by Barack Obama as someone who could offer a "fresh start" in U.S.-Russia relations. They weren't so comfortable, however, when I told them that Michael McFaul is Obama's main Russia advisor. McFaul, a past FP contributor, is well known in Russian foreign-policy circles for his harsh criticism of Putin's democratic credentials.

Clinton would be more predictable, given that her main Russia advisor is Stephen Sestanovich. His 2006 report for the Council on Foreign Relations was read closely in Russian political circles. But Richard Holbrooke, another Clinton advisor and a potential secretary of state, is seen as hostile to Russian interests for his role in the Balkans during the 1990s. When I told them that it's not inconceviable that Holbrooke would get a top job even under Obama, they weren't too psyched.

Blake Hounshell is Web Editor of ForeignPolicy.com. He has been blogging this week from the Salzburg Global Seminar session on Russia: The 2020 Perspective.

If you want to wrap your head around Russia's current attitude in the world, you have to understand the Russian view of three key periods: the breakup of the Soviet Union, the chaos of the 1990s, and the so-called color revolutions in Ukraine and Georgia. Dmitri K. Simes ably deals with the key issues here, but I just want to highlight this insightful quote about U.S.-Russian relations in the 1990s:

We haven't played everything brilliantly with these people; we haven't figured out how to say yes to them in a way that balances off how much and how often we want them to say yes to us. We keep telling Ol' Boris [Yeltsin], "'OK, now here's what you've got to do next – here's some more shit for your face.'"

–Bill Clinton to Strobe Talbott, 1996

Blake Hounshell is Web Editor of ForeignPolicy.com. He has been blogging this week from the Salzburg Global Seminar session on Russia: The 2020 Perspective.

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The focus of the seminar I'm attending here in Salzburg is figuring out what Russia will be like in 2020. It's no small task, since Russia's political and economic development in the past few decades has been notoriously unpredictable.

One thing we do know is that the future of Russia will largely be determined by oil and gas, at least in the near term. Oil and gas account for about 20 percent of Russian GDP and more than 60 percent of its exports. The rest of the economy depends heavily on energy. As one panelist put it today, oil is like the blood of the economy, so you can't think about it solely in percentage terms. You can't live without blood, no matter what its percentage of your body weight might be.

The recent high oil prices have a great deal to do with Russia's democratic backsliding, as Thomas Friedman argued in "The First Law of Petropolitics." Oil revenues allow the Russian state to satisfy its citizens without granting them greater political rights. So, if you want to understand where Russian politics are headed, you need to know where oil prices are going to go.

But here's the problem: Nobody has a clue what oil prices will look like in 2020. As one of the presenters pointed out, even people you would think would be the top experts on this issue are usually wrong. Take the case of former BP CEO Lord Browne, who told a crowd at the Peterson Institute back in 2005 that he expected "a price that stabilizes at around $30 a barrel." Whoops. Today, oil prices are just under $107 per barrel.

If oil-company CEOs can't predict the future accurately, what about the oil futures market? In theory, oil traders ought to know better than anyone where prices are headed, since their livelihoods depend on making sound decisions. In reality, though, oil futures prices are almost always just an extrapolation of today's prices into the future. If oil is $10 a barrel today, the futures market will guess that it will be $10 tomorrow.

The obvious implication here is that anyone trying to forecast Russia's future is in big trouble. Another implication is that Dmitry Medvedev is only going to be able to shape Russia's development on the margins. More on that soon.

Blake Hounshell is Web Editor of ForeignPolicy.com. He has been blogging this week from the Salzburg Global Seminar session on Russia: The 2020 Perspective.

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Greetings from Salzburg, Austria, where I will be blogging this week from the Salzburg Global Seminar's session on Russia: The 2020 Perspective. I'm here thanks to the generosity of the Knight Foundation, which paid my way. I'm by no means an expert on Russia, but with Vladimir Putin's succesor now chosen and the NATO summit freshly ended, the timing couldn't be better for me to get up to speed.

One of the assigned readings for the session was "Putin's Plan," a fascinating  Washington Quarterly article by Brookings scholar Clifford Gaddy and CSIS Russia expert Andrew Kuchins. Gaddy and Kuchins got their hands on a dissertation Putin wrote for his 1997 graduate degree for the School of Mines in St. Petersburg. They argue that the thesis, "Strategic Planning of the Reproduction of the Mineral Resource Base of a Region," does much to explain Putin's behavior as CEO of Russia, Inc. Other scholars, notably the Carnegie Endowment's Martha Brill Olcott, have examined excerpts from the dissertation before, looking for clues to Putin's thinking about the relationship of energy companies to the state. But Gaddy and Kuchins extend the analysis to the Medvedev succession, arguing that Putin was looking above all for someone who could replace him as Russia's top "strategic planner."

In the course of his research, Gaddy discovered that Putin -- or whoever really wrote the disseration -- had actually lifted 16 of the document's 218 pages nearly verbatim from a Russian translation of Strategic Planning and Policy, a 1978 mangement tome written by University of Pittsburgh professors William R. King and David Cleland (though the author did include a reference to the book).

It's actually quite common for Russian politicians to beef up their resumes with questionable degrees and/or have ghostwriters pen their theses. It's also standard practice, I'm told, for intelligence officers to borrow analyses with attribution. Perhaps Putin was merely upholding the academic standards of the KGB, his former employer. Whatever the case, the outgoing Russian president obviously never suffered the fate of U.S. Sen. Joseph Biden, whose presidential aspirations were doomed in 1987 by accusations of plagiarism. Instead, the Russian media leapt to Putin's defense and said that King and Cleland had gotten their ideas from Soviet economists. Still, Russia's CEO seems touchy about the topic. When Gaddy asked Putin about his dissertation a few years back, he tensed up and dodged the question.

As for Dmitry Medvedev, many analysts here seem to be searching for clues that the Russian president-elect won't simply "plagiarize" Putin's policies. Will he be his own man? How long will it be before he can stake out a different path? More on this important issue in the next installment.

Blake Hounshell is Web Editor of ForeignPolicy.com. He has been blogging this week from the Salzburg Global Seminar session on Russia: The 2020 Perspective.