By Eurasia Group analyst Alexander Kliment
On July 9, Aman Tuleyev did a remarkable thing. The governor of Kemerovo province in central Russia sent a telegram to global steelmaker ArcelorMittal, which operates three coal mines in the region, demanding that the company continue to operate the mines even if they lose money -- or surrender them to the regional government with zero compensation. This story underlines an important emerging trend for foreign investors in Russia: fear among Russian public officials of rising unemployment has reached a level of urgency that is pushing some of them to extraordinary lengths to stop it.
Faced with dwindling demand for coal this year, ArcelorMittal wanted to cut production and headcount at the mines, which employ about 6,000 people. But in his telegram, Governor Tuleyev warned that his first responsibility was to local workers and that he would not allow closure of the mines under any circumstances. Tuleyev, well known in Russian political circles as a volatile and outspoken crusader for workers, has called in the past for the prosecution of factory owners and the nationalization of their assets. Two days before his warning to Arcelor Mittal, his government seized control of a shuttered electrochemical company after unpaid workers asked for his help.
But this is not a story about one populist governor determined to play the role of friend to the working man. Tuleyev can't do anything with ArcelorMittal mines without (at least) implicit support from Russia's top leadership, and Federal authorities haven't yet weighed in on this issue. In the end, outright expropriation of foreign-owned assets remains unlikely; it would do too much damage to Russia's investment reputation. But the risk for investors in some areas -- especially labor intensive sectors like metals, mining, manufacturing, and automotive -- is becoming increasingly obvious: to preserve social stability, they may be pushed to operate factories or enterprises at a loss under threat of takeover by local authorities. Similar risks could arise even for regional retail and consumer-oriented sectors.
But these governors are responding to increasing political pressure coming from Moscow. Prime Minister Vladimir Putin and President Dmitry Medvedev have pushed governors to deal with rising unemployment and unpaid wages within their provinces without asking federal authorities for help. They can't afford more episodes like the one that took place last month in Pikalyovo, a beleaguered monogorod (a town in which one company employs virtually the entire workforce), where Putin arrived in person to rebuke the owners of shuttered local factories. The prime minister made a show of standing up for the workers and demanding that the factories reopen... before the central government quietly cut the owners -- including well-known oligarch Oleg Deripaska -- a sizable bailout check.
Federal officials can't afford to stage the same show in hundreds of towns and cities and doesn't want responsibility for local economic performance. It's also important to remember that Russia's regional governors are not elected by their constituents. They're appointed by the Kremlin. If a local official like Tuleyev wants to keep his job, he must first please his political masters in Moscow.
Beyond the risks for foreign investors, the seizure of businesses and factories would be bad news for the efficient operations of the companies concerned -- since regional bureaucrats don't usually make effective business managers -- but also potentially for the federal budget. Regional budget revenues, particularly in the regions hardest hit by economic recession, are in freefall this year. Cash-strapped local officials can squeeze regional banks and oligarchs only for so long. Eventually, they will have to turn to Moscow for the money they'll need to keep workers in their jobs. With the fall in prices for oil, gas, and other commodities and the global credit crunch, Russia's economy contracted by about 10 percent over the first half of 2009, and federal budget revenues are falling sharply. More demands from the regions will exacerbate an annual budget deficit already projected at about 8 percent for 2009.
Broadly, Moscow's key political objective of maintaining social stability despite dwindling revenues could begin to place regional officials between a fiscal rock and a political hard place. As that pressure mounts, foreign investors may be among the first to feel the squeeze.
ALEXEY NIKOLSKY/AFP/Getty Images
By Ian Bremmer
Moisés Naím wisely warns us in his latest FP column that transnational problems are pressing just at a moment when multinational consensus on solutions has become nearly impossible to achieve. If 20 countries produce 85 percent of global GDP, 20 countries generate three-quarters of global greenhouse gasses, just 21 are directly concerned with nuclear non-proliferation, and 19 account for almost two-thirds of AIDS deaths, limiting negotiations over collective action to the smaller number of states needed for workable solutions makes good sense. But in today's geopolitical environment, 20 is still a very big number.
The ongoing economic meltdown has accelerated the inevitable transition from a G7 to a G20 world. Gone are the days when the United States, UK, France, Germany, Italy, Japan, and Canada could credibly claim global political and economic leadership. Today, no institution that excludes China, India, Russia, Brazil, and a few other emerging heavyweights can fully address the biggest international challenges.
But it's not simply that it's tougher to forge compromises with 20 negotiators at the table than with seven. It's that some of the new players have fundamental disagreements with the established powers on some very big questions -- like what role government should play in an economy. Agreements on managing transnational health crises, nuclear proliferation, regional security, or greenhouse gasses and global warming will involve complex policy solutions with direct impact on domestic economies.
Second, the new governments at the table are preoccupied with problems much closer to home-issues that can be addressed on a (relatively) more modest and manageable scale. China's political leadership, an increasingly indispensable player on several transnational problems, is far more concerned with domestic than with international challenges. Much of its foreign policy is intended to fuel the continuation of explosive domestic economic growth-and the millions of jobs it creates. Its rhetoric may be global, but its focus is more often regional. The governments of India, Russia, and Brazil are likewise intent on managing the impact of the global recession on their domestic economies and advancing their political interests within their immediate neighborhoods. That's why much of the forward movement on transnational issues will come from regional groupings like the European Union, the Gulf Cooperation Council (GCC), and the Association of Southeast Asian Nations (ASEAN).
Some respected observers of international politics have called for a G2, a meeting of US and Chinese minds for the ultimate in minilateralist institutions. There are many reasons why this won't happen anytime soon-if ever. The Chinese leadership may enjoy such talk, but its most seasoned policymakers know well that China cannot yet afford to shoulder such burdens. Nor are Washington and Beijing likely to agree on how to solve many of these problems. And to reduce international consensus to two countries is to ignore the growing importance of many others.
In other words, Moisés is correct that 20 is a much more manageable magic number than 200. But these 20 are unlikely to accomplish big things for the foreseeable future.
by Ian Bremmer
Globalization has created unprecedented opportunities for new investment in education within dozens of emerging and frontier-market countries -- by providing new generations of students with the information and resources they need to compete in the global economy.
As with everything else related to globalization, there's a downside. Upwardly mobile elites in volatile developing states often choose to apply what they've learned in the more lucrative job markets of the West. In many countries, this chronic problem discourages state spending on education: Why commit substantial capital for a long-term investment in people who may simply take their gifts elsewhere -- especially when near-term results can be achieved by spending on something more tangible? Yet, failure to invest in education lowers the arc of a country's development.
For a glimpse of the future of a state's economic growth and its political stability, a look at its education system can provide useful insights.
global standards, particularly in higher education, is becoming one of the
biggest advantages for Persian Gulf states. Governments
throughout the region have devoted much more time and resources to it in recent
years-Saudi Arabia, Dubai, and Abu Dhabi especially-both in terms of building
infrastructure, attracting top talent, and leveraging partnerships with other
institutions of higher learning. But the most important change comes in the
form of new opportunities for young women, empowering a massive untapped
resource. At the same time, we're likely to see a growing development gap
within the United Arab Emirates as the less developed emirates-Ajman, Ras
al-Khaimah, Sharjah, etc-are burdened with well-entrenched elites who fiercely
resist the social liberalization that comes with radical improvements in
The Gulf stands in marked contrast with most of North Africa, where government policy reflects the preferences of an older generation that still sets the curriculum and rejects western-style training in favor of a focus on nationalist and, in some cases, socialist principles. Budgets are also a problem. That's a particular issue in Egypt, where younger urban lower and middle classes are increasingly frustrated with the quality of local schools. Growing emigration rates for the most talented young people create risks of increasingly brittle economic growth.
In sub-Saharan Africa, top students traditionally studied in public boarding schools. Strong economic growth has generated rising demand for better educational standards, but state governments haven't been able to keep up. To fill the vacuum, the private sector is stepping in to build private day-schools, which are located in neighborhoods that can afford them-unlike the boarding schools, which mix students from different class and tribal backgrounds. As a result, the private sector is giving a generation of Africans a much stronger sense of tribalism-with fewer opportunities to meet students from different cultural and socioeconomic backgrounds. These changes will help to heighten long-term risks of increased tribal and ethnic polarization.
India and Brazil have similar structural challenges and proposed solutions. To overcome lagging local education spending, they're bringing in the private sector and foreign direct investors to bridge the gap. Brazil is likely to have more success with this strategy, in part because the political system is more centralized and the country is less culturally diverse than India, where more than two dozen languages are each spoken by at least one million people. The most useful parts of a program that works in one area-like special schools sponsored by Embraer, an enormous Brazilian aircraft manufacturer, with advanced science and engineering-can be implemented in other regions of the country. In India, charter schools tend to function like special economic zones. They're effective, but their programs aren't easily transferable to another region of the country where different languages are spoken and cultural values respected.
In Russia, government has reinserted itself into school systems in a big way, both in terms of textbook content (in history and social sciences), as well as a broad effort to improve the quality of military training. Spending on culture and the hard sciences has lagged considerably. Combined with the extraordinary demographic crisis looming in Russia (with 0.5% negative population growth annually, Russian demographics are unmatched globally in any country not ravaged by war or famine), the longer-term trends look especially worrisome.
As with so many social developments, China's educational problems create competing internal pressures. The Chinese government has long been committed to vastly improved education standards for an enormous (and largely illiterate) rural population. It has succeeded. To maintain social order, Beijing must now create jobs for many more graduates than it did a few years ago. More than 20 percent of Chinese university graduates today are unemployed, while Chinese stimulus spending continues to focus mostly on energy-intensive (and not high-value, labor-intensive) industry. That's a problem that's likely to increase over time, in part because of the skepticism of Chinese leaders over more intangible non-industrial production, and in part because of the top-down, more rote nature of education in the Chinese system.
Then there's the leadership's strategy of nurturing nationalism in Chinese universities. The state has invested in the promotion of party loyalty within many institutions, including by creating so-called 50-cent gangs, students who receive small payments for each positive posting they write on behalf of the Communist Party on university web bulletin boards. A point of related tension: Increasing numbers of foreign students (including a growing number of Americans) are attending universities in China's fast-growing, increasingly prosperous eastern cities. Thus far, they've been relatively isolated from the general student population, but that's likely to spark conflict in coming years.
On the subject of education and nationalism, Western European schools have dramatically scaled back the teaching and promotion of national identity in recent years. But with growing immigration from Eastern Europe, the Muslim world, and elsewhere -- and a sharp economic downturn -- these governments are now struggling to cope with the rise of new ethnic, religious, and regional enclaves within their states. As a result, we're likely to see a serious backlash toward conservative state-sponsored promotion of national identities-some of which will be exclusionary, fueling intensified domestic social tensions.
By Eurasia Group analyst Alexander Kliment
In recent years, explanations of Moscow's increasingly assertive foreign policy have tended, in one way or another, to take the following form: Russia has more clout because Russia has more cash.
As soaring oil prices boosted the leverage of Russia's state-controlled energy companies and filled the Kremlin's coffers, Moscow consolidated power at home and was emboldened to stake its claims abroad in a hard-nosed, and sometimes bare-knuckled, way. There is a good deal of truth to this line of reasoning -- paying off its sovereign debts to the world and amassing lots of dollars to throw around certainly gave Russia the independence, the confidence, and the means to cut a dramatically more imposing figure on the world stage.
Yet as the country sinks deeper into an economic crisis initially brought on by the world's financial woes, but exacerbated by glaring structural flaws in Russia's economy, this line of reasoning suggests an important question: If Russia's current foreign policy was formed largely on the basis of rapid economic growth, will the collapse of that growth deform, chasten, or reverse Russia's recent foreign policy?
Russia's leaders certainly have a bit less cause for "petro-arrogant" swagger these days. But the Kremlin's core foreign-policy objectives -- finding diplomatic pressure points that make Russia a more indispensable global player, and consolidating political and economic influence over its neighbors -- don't, in fact, require all that much cash.
On the first point, casting a veto at the United Nations or trying to play a crafty mediating role with Iran doesn't require a fat wallet. Those things merely require a veto at the UN Security Council and a relationship with Iran, neither of which is in peril because of the economic crisis. Dealing with Syria, Iran, Venezuela or Cuba in ways that tweak Washington's nose and give Russia some bargaining leverage with the United States on other strategic issues -- such as missile defense or NATO expansion -- also does not hinge on the dynamics of the financial crisis. These policies will continue.
Concerning the former Soviet sphere, there is consensus among Russia's elite that further NATO expansion into the region is a red-line issue on which the Kremlin simply will not budge, no matter what Russia's finances look like. And in some ways, the financial crisis is actually expanding opportunities for Russia among the debt-ridden states in Russia's "near abroad." While Russia has been financially weakened by the crisis, it is still a powerhouse compared to neighboring countries. With international donors otherwise preoccupied, Russia has loosened the purse-strings to bail out governments and purchase distressed assets in what President Medvedev has called Russia's "traditional sphere of interest."
The Kremlin has already announced $2 billion loans to Kyrgyzstan and Belarus, a $3 billion contribution to Kazakhstan's sovereign wealth fund, and plans to establish a $10 billion regional bailout fund for post-Soviet states. And as Ukraine's internal political volatility continues to hamstring international lending there, Russia is poised to extend a similar amount to Kiev. While this is serious money at a time when Russia is facing financial constraints at home, the relative cost to Russia of gaining political and economic concessions from its neighbors -- whether by gaining preferential access for Russian companies and troops, or weakening regional ties with NATO and the United States -- is still a bargain for the Kremlin.
The global expansion of Russian state-owned and state-friendly companies, an important part of Russia's foreign policy, will suffer because of lack of financing. But on the more important goal of maximizing control over regional energy transport routes to Europe, the crisis will have little net effect. The global credit drought will probably delay plans for new Russian-controlled pipelines to Northern and Southern Europe, but by the same token, competing non-Russian pipeline projects are financially frozen as well. The status quo, in which Russia dominates the lucrative European market and can use gas supplies for political leverage in transit countries, suits Moscow well enough for the time being.
There are, of course, two caveats to all this.
First, the continuation of Russia's current foreign policy -- much like its domestic policy -- depends on maintaining the prevailing balance between hardliners and relative liberals within Russia's elite. There is a danger that a prolonged economic crisis in Russia could lead to an ouster of more liberal figures in Moscow, and the more marked ascent of the so-called "siloviki" hardliners. If that happens, Russia's foreign policy -- which, despite rhetorical cantankerousness, has been largely pragmatic, if frustrating, to U.S. and Western interests -- might lurch in a markedly more aggressive and unpredictable direction.
Second, if the economic crisis pushes Russia to the point of complete reserves depletion or catastrophic economic collapse (still very unlikely but possible if the crisis extends deep into 2010 and beyond), Russia's freedom of maneuver on foreign policy would be more significantly constrained. It would be difficult to seek international political clout while also seeking international financial support.
But barring that scenario, Moscow will continue to prioritize its core political and economic goals over relationships with foreign investors and governments. Time and again -- whether with Yukos, Shell, and Mechel, or Ukraine, Georgia, and Kyrgyzstan -- Russia's leaders have shown this inclination. The financial crisis won't change it.
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The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.