Commentary: Putin Got His Deals--But Russia Isn't Happy

By Paul Starobin

It was one of the most successful summits since the end of the Cold War. On May 24 in the Kremlin, Russian President Vladimir V. Putin and U.S. President George W. Bush signed off on a strategic nuclear arms reduction pact. Four days later in Rome, NATO leaders agreed to accept Russia as an alliance partner.

A treaty, a partnership, a deepened friendship: Putin clearly got what he wanted. And he knows what he wants next: a steady flow of foreign investment, especially from the U.S., as Russia's Westernization proceeds apace. But how much do Russians really want to Westernize, especially if it means selling assets to foreign owners?

The answer to that question will determine Putin's success. Disturbingly, the post-summit mood in Russia is sour, a mix of wounded pride, apprehension, and historic animosity. "Russia Capitulates to NATO" was the headline on, an online Moscow-based newspaper. What look like victories to Putin come across as surrenders to his enemies. Putin agreed to arms reduction--on terms largely dictated by Bush. And Putin got a deal with NATO--but it limits Russia's role to areas such as peace-keeping, even while the ex-Soviet Baltic republics are likely to win full membership.

Grumbling about America's bear-hug friendship isn't confined to ex-Soviet generals. It's widespread among ordinary Russians and even among members of the Western-oriented political elite, such as Anatoly B. Chubais, the chief of electricity monopoly Unified Energy System. The problem, says Michigan State University professor Vladimir Shlapentokh, is "black envy" over America's wealth and might. The Chubais group of reformers "want to be rich and powerful in their country and enjoy high prestige abroad," Shlapentokh says. Hard to do when America, not Russia, holds the cards.

Putin's answer: swallow your pride and team up with the West. But it will take a lot of teamwork to expand Russia's role in the world economy. Nearly 11 years after the collapse of the Soviet Union, what stands out is Russia's relative isolation. From 1994-2001, annual direct foreign investment in Russia, per capita, averaged $165, compared with $2,240 for the Czech Republic and $1,245 for Hungary, according to Moscow brokerage Renaissance Capital. And even with its lucrative energy sales, Russia ranks 17th among the world's exporters.

Part of the problem is that foreigners are still seen in many provincial corners as a threat. Renaissance Capital economist Alexei Moiseyev says he was "shocked" on a recent visit to the Tula region, south of Moscow, to encounter resentment by officials toward Procter & Gamble Co., which had acquired a detergents factory in 1993. "In their psychology, working for a foreign investor and being paid is worse than working for a Soviet director and not being paid," Moiseyev says.

Political discontent could also crystallize over Putin's goal of rapid entry into the World Trade Organization, which European Union leaders boosted on May 29 by agreeing to grant Russia "market economy" status. As their own condition for Russia's WTO membership, EU countries are insisting that that Moscow slash subsidies that keep energy prices some six times lower than in Europe. A sharp price increase could sap Putin's popularity. "Any drop in his approval ratings could open the way for a patriotic conservative figure to accuse Putin of selling out to the West," warns Irina Khakamada, a leading liberal in the Russian parliament.

True, Putin so dominates the stage that he can probably weather the emerging backlash and win reelection in 2004. But this should be no cause for relief on the part of Western leaders. After all, one of their goals is to make Putin's Russia a vibrant democracy. But in a more open society, there's more scope for opposition to Putin.

Such is the dilemma Bush must mull in Washington. Which is better: Czar Vladimir in firm control of a pro-U.S. policy, or a freer country in which anti-Americanism could be a political rallying cry? Dealing with Russia is never going to be easy.

Starobin covers Russian politics and economics from Moscow.

Before it's here, it's on the Bloomberg Terminal.