U.S. and Russia                  

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Thursday – June 11, 2009

South Ossetia & Abkhazia - Independence

              As a consequence of the Georgia - Russia conflict in August 2009, Russia recognized South Ossetia and Abkhazia as independent countries. In some sense, this recognition was also a consequence of Western recognition of Kosovo as an independent country.

             The spring meeting of the American Bar Association Section of International Law considered the legal basis for independence at its 2009 spring meeting on April 16 in Washington, D.C. I was invited to present the Russian position as part of a panel entitled "Kosovo, South Ossetia, Tibet and the Shifting Standards for Self-Determination." The panel was moderated by Professor Howard Fenton of Ohio Northern University College of Law and the panelists included Professor Julie Mertus of American University, Ms. Anna Dolidze, currently a scholar at Cornell and formerly President of the Georgia Young Lawyers and Mr. Nima Taylor, board member of the Tibet Justice Center.

             The general theme of my presentation was that an examination of the facts and application of the principles of the Helsinki Accords and the UN Charter supported Russia's recognition of both South Ossetia and Abkhazia. Further there is no significant difference between the justification for recognition of these two countries as independent and the rationale for independence of Kosovo. Although I was not speaking on behalf of the Russian government, I did consult the Russian Embassy and various Russian experts for background information. As might be expected there was a vigorous discussion both among the panelists and with the audience, but it was a discussion that took place within the spirit of respectful debate and disagreement. The PowerPoint outline of my presentation is available by clicking on the following link. ABA Panel Presentation

Tuesday – February 17, 2009

A Few Comments on the Crisis

                I have been asked by a Russia friend to share some comments on the economic crisis and any projections about what it means for economic relations between the U.S. and Russia. Keeping in mind that I am trained as a lawyer, not an economist, I wanted to share a few observations.

                  In the U.S., the news continues to be gloomy and our media accentuates every bit of negative news. As a result it is hard to find anyone who is not fundamentally anxious about the situation. None of the recognized experts will even guess as to what will happen next. No one really knows whether we will be coming out of this recession soon or whether we will sink into a full-fledged depression. Predictions range all over the place, from recovery at the end of 2009, to continuation over the next 10 years of flat economic activity, to a depression with no end in sight. Given that no one knows what will happen, the question for most of us is how to manage our businesses and our lives in the face of this uncertainty.

                   What is clear is that the current crisis is the product of long-term developments connected with the process of globalization. As industrial production migrated to lower-wage areas of the world, consumption remained concentrated in the developed markets of the U.S., Europe and Japan. Particularly in the U.S., high levels of consumption were maintained despite declining levels of national production of key consumer goods. Consumption was supported by a dramatic expansion of consumer credit, much of it from increasingly high levels of borrowing against the value of homes. This expansion of consumer credit was encouraged and fostered during the period of both Presidents Clinton and Bush. In the most extreme form, it is worth remembering that in the aftermath of the September 11, 2001 bombings, Bush advised Americans that the best thing they could do to fight terrorism was to go shopping. By this he meant to keep up the growth of the U.S. economy by spending money. The reality of the past period is that an increasing portion of U.S. consumer spending came from borrowed money or credit card financed purchases.

                  It is estimated that consumer spending accounts for 70% of the U.S. economy. Over a long period of time, globalization brought us a world in which the basic engine of the world economy became cheap Chinese consumer goods sold to U.S. consumers for dollars and Chinese-owned dollars, along with Russian and Middle Eastern oil dollars, circulated back into the U.S. through the purchase of U.S. debt and investment in U.S. securities.

                   The rapid development of the world economy that was fueled by this credit/production cycle also fueled a rapid rise in raw material prices, including oil. The dramatic rise in oil prices and the prices for other raw material commodities played a key part in the rapid Russian economic growth since 2001.

                    Now consumer spending in the U.S. is collapsing and this is the root cause of the crisis. As U.S. housing prices continued to raise on an annual basis, U.S. consumers continued to borrow against this theoretical value. Our national and international investment banks encouraged this borrowing because it looked like they could make very high returns through turning mortgages into investment vehicles. This is what led to the “sub-prime mortgage crisis,” as the appetite for what looked like easy money led mortgage brokers to lend to more and more people in the U.S., with less and less attention to either the ability to pay, or the possibility that property values might stop growing. The point of this lending was to provide the raw material for the mortgage-backed securities that were in demand from bankers and investors world-wide as a high return investment. When U.S. housing prices stagnated and then began to decline, the credit bubble burst. The failure of mortgage-backed securities has led to a collapse of the banking and credit markets around the world. This collapse of credit, in turn, is further accelerating the collapse of U.S. consumer spending.

                  The question of reviving the U.S. economy is not a simple one. The immediate problem is finding ways to boost consumer spending. The gap in consumer demand that is caused by the collapse of credit is what is being referred to by some economists as the “hole” in the economy left by the collapse of the financial system. This hole is growing larger as the economy contracts and more people are thrown out of work. Plugging this “hole” and providing funds for consumer spending is what is behind the stimulus program. Government spending is supposed to substitute for the missing credit from the banking system by putting money in consumers’ hands and stopping the accelerating pace of job losses.

                  The political debate in the U.S. over the stimulus bill did not focus on whether stimulus was necessary. The debate was over how to spend the money and whether the stimulus legislation was too large or too small. Everyone agreed that consumer spending needed to be stimulated.

                   In the long run, the stimulus legislation and the various other areas of U.S. government intervention in the economy will undoubtedly lead to inflation and depreciation of the value of the dollar through the rapid expansion of the U.S. money supply. The current strategy of massive government spending relies on the U.S. government continuing to borrow the similarly massive amounts of money in world capital markets to pay for the U.S. government deficit. This strategy increases the U.S. reliance on China, Middle East and Russia to continue to finance the U.S. budget deficit and correspondingly threatens the availability of credit and investment capital in other parts of the world. Given the tremendous imbalance between production and consumption in the world, this can only be a temporary situation. The world economy is unlikely to go back to the equilibrium of the period before the crisis, which rested on the imbalance between production and consumption being bridged by expanding credit to U.S. consumers.

                 

                   For the U.S., the long-term, critical task is to not only revive consumer spending, but to transform the U.S. economy into one that produces more goods. This is at the core of one aspect of the Obama spending plans, with its emphasis on building a new “green,” energy-efficient economy, investment in physical infrastructure for the 21st century and investment in modernizing the education system to produce higher value work force. This is the only way to move away from the over-reliance on credit to finance consumer demand.

                  So what does this mean for Russia and for U.S.-Russian economic relations? Again, I can only speculate about around some general observations. The main aspects of the crisis include the decline in oil prices and the rapidly changing dollar – ruble exchange rate. The combination of changes in these two areas will exert a dramatic influence on various sectors of the economy.

                  Clearly imports of goods prices in dollars will be much more expensive for Russian consumers. This should boost sales of domestically produced goods that can compete with foreign goods in terms of overall quality. It should also increase the competitiveness of Russian manufactured goods that are made with ruble cost structure, but sold abroad for dollars. This generalization does not apply in the same way to the natural resource commodities, which face a period of difficulty because of declining world commodity demand and prices, along with significant debts to foreign lenders that are priced in dollars.

                  The dynamics of the current economic situation will benefit certain sectors, like outsourcing, which pay wages in rubles and sell services in dollars, and damage other sectors.

                  Despite the obstacles posed by the rising value of the dollar, I expect that there will be increasing interest in some industry sectors in the U.S. in finding new foreign markets. For instance, in Massachusetts, the largest industry sector is medical instruments and this sector typically receives about 20% of its income from foreign sales. Given the unique and high-quality of products in this industry, I expect that many of the companies in this sector will seek to increase their foreign sales through looking at new markets, like Russia.

                  A lot will depend upon whether the U.S. and Russian governments maintain a commitment to open markets and global economic integration. In the depression of the 1930’s governments tried to protect their home markets by erecting barriers to protect their own national market. This led to shrinkage of the overall world economy and intensified the Depression. Much will depend upon what policy choices are made in this crisis.

                  What does it mean for us? There are many who fervently believe that a time of crisis is also a time of opportunity. It is undoubtedly true that opportunities will develop in certain specific economic sectors for importers, exporters and investors. Finding such opportunities will require a high level of professional skill, discipline and courage to take risks. At a minimum, the ties built and maintained during a time of crisis will position the resulting partnerships to take advantage of opportunities in the upturn and recovery period. Beyond that it is hard to say more than we will live through it and see.                 

 

Friday – October 17, 2008

Conflict in Southern Ossetia

        During my recent trip to Russia (September 3 – 22) I spent a great of time talking to Russian friends, listening to Russian media and reading Russian analytic journals trying to understand the conflict in the Caucasus and its impact on relations between the U.S. and Russia. What was quite striking to me is that Russians and Americans live in absolutely separate and parallel information universes in regard to the conflict in Southern Ossetia. Much of our information about this little known part of the world is coming from some of the same sources who maintained that the invasion of Iraq was justified by the presence of weapons of mass destruction and by the link between Saddam Hussein and Al Qaeda, conveyed by our submissive and uncritical mass media.

       It interesting that while most Americans no longer trust President Bush, Vice President Cheney and Secretary Rice in regard to Iraq, even progressive Americans tend to believe them in regard to Russia. The reflex negative assumption about Russia is a strong remnant of the Cold War that Americans cannot throw off and is related to the long period in which the Russians have been the bad guys in all levels in our culture and in our media. It is important to keep these background assumptions about Russia in mind when evaluating the information and analysis of the August conflict and not immediately jump to conclusions regarding Russia.

       While the conflict in Georgia has been largely pushed out of the news spotlight by the global financial and economic crisis, there are lessons of importance from the Georgia-Russia conflict that will continue to have relevance for years to come and that are linked with questions about the U.S.’s role in the world that should concern us all. In this regard, Americans should at least be aware of and consider reality as Russians see it.

Georgians, Ossetians, Abkhazians & Russians – A Brief Historical Background.

       The Caucasus region is a complicated patchwork of different cultures, languages, ethnic groups and religions. The majority of Georgians are Orthodox Christians and speak a language that is unrelated to any other in the world, except perhaps Basque. Historically, the Russians, as fellow Orthodox Christians have been the patrons and protectors of the Georgians in their battles with other peoples and ethnic groups in the Caucasus. In the Soviet period, Georgian artists and intellectuals played an important part in overall Soviet cultural life and are even today widely respected in Russia. Georgian wines and produce were popular and distributed widely in Russia. Georgian food was also very popular and even today almost every restaurant that serves Russian cuisine includes Georgian soups and often other Georgian specialties.

       There are about 4 million Georgians living in Georgia and some 1 – 2 million living abroad, most of them in Russia. Many of these people are economic refugees from the depressed economic conditions of the 1990’s and from the frequent internal conflicts in Georgia. The money that they send back to Georgia is a key contributor to the economy of Georgia.

       The Ossetians are ethnically distinct from the Georgians and speak a language closer to Farsi (Persian). Georgians and Ossetians have been at odds with each other for a long time and it would be impossible to sort out who did what to whom in this long history of fighting with each other. The most accurate summary of their relations would be to say that each has committed atrocities on the other, right to the present day. The Russians point out that even in the brief period of Georgian independence in the1920’s under a Menshevik Georgian government, Georgia was denied entrance into the League of Nations because of their conflict with the Ossetians.

       There is no historically definite and identifiable geographic boundary of “Georgia.” The current boundaries were determined by the Soviet government in the aftermath of the civil war and overthrow of the Menshevik Georgian government as part of the construction of the Soviet Union. It is worth noting that these borders were drawn or approved by Stalin, himself a Georgian, born in Gori. The current regions of Abhazia and Southern Ossetia were included within the boundaries of the Georgian Soviet Socialist Republic. The Ossetian ethnic group was actually split in two, with the majority in the region of Northern Ossetia (now a part of the Russian Federation) and the minority in Southern Ossetia.

        When the Soviet Union collapsed, Georgia became an independent country based on the borders drawn in the Soviet period. Its first President, Ziad Gamsukhurdia, was a dissident poet, who became an extreme nationalist president. He insisted that all business be transacted in Georgian and broke with the Russian Federation. The regions of Abhazia and Southern Ossetia immediately indicated that they had no intention of living under Georgian domination and through armed struggle began to separate themselves from Georgia.

         Open warfare was brought to a halt under a Russian-monitored peace, but there was never a complete resolution of the conflict on a political level. The status quo was maintained for 17 years, with periods of skirmishing on the borders and threats on each side. During this period Abhazia and Southern Ossetia were not administered by the central Georgian government, but by their own local government structures. People in these regions did not have Georgian passports. This made it very difficult for them to travel outside of their small territories for business, trade or simply personal reasons. Abhazians began to obtain Russian passports in the 1990’s, but there was no legal basis for people in either area to obtain Russian passports until 2004 when there was reform of Russian immigration legislation. People in both regions rushed to obtain Russian passports that would allow them freedom to travel and conduct business.

         The Russians never recognized the independence of these two regions, at least partly because they held to a recognized international position of not condoning re-drawing national borders, however these borders were determined. This political position was the official basis of their opposition to the forcible redrawing of the borders of Serbia to allow Kosovo to become independent. Once this principle was breached in the case of Kosovo, it opened the door for potential Russian recognition of Abhazia and Southern Ossetia. Up until the August 2008 conflict, the status of Abhazia and Southern Ossetia within Georgia was referred to as a “frozen conflict” because there was no attempt to solve it, but there was no open warfare. In the wake of the August conflict, Russia recognized each of these territories as independent countries in recognition of the unwillingness of the people of these territories to join as minorities in a Georgian state.

Georgian Democracy.

         The U.S. government and our mass media stretch the truth by calling Georgia a stable democracy. Georgia’s first president, Zviad Gamsukhurdia was forced out of office by a popular uprising that turned into an armed struggle. I was in Tblisi, the capital city; about three weeks after Gamsukhurdia was forced from office and all of the buildings in the downtown area were full of bullet holes from the intense, close-in fighting that took place there. This period of violent political struggle initiated serious displacement of Georgians, not only from Abhazia and Southern Ossetia into Georgia proper, but within the country as well due to political conflicts.

         Gamsukhurdia was succeeded by Eduard Shevardnadze, who had been the last Foreign Minister of the Soviet Union. He naturally tried to restore the ties to Russia, but there still remained violent conflicts with Georgian nationalists in the areas outside of Tblisi. I was told that part of the force that helped him seize power were criminals freed from Russian jails and who were then given the privilege of looting Southern Ossetia with official approval as reward for their support. Georgia went through a period of economic depression as it tried to establish the basis for an independent national economy. Ultimately Shevardnadze failed and was himself faced with a popular uprising, the so-called “Rose Revolution” that brought current President Saakashvili to power.

         Saakashvili was educated abroad (including in the U.S.) and his ascension to power was associated with the “color revolutions” that brought anti-Russian nationalist governments to power in Ukraine and Georgia. Saakashvilli came to power in November 2003 after a series of violent street demonstrations. The Russians have long asserted that these color revolutions were financed by foreigners, included George Soros. Wherever the truth lies, Saakashvili is a very strong Georgian nationalist, who has vigorously criticized Russia and aligned himself with the Bush Administration. At a conference in Poland, I personally heard Saakashvili describe Russia as the modern day equivalent of the Mongol Hordes, seeking to destroy Western civilization and needing to be confronted militarily before they could overrun all of Europe.

          Saakashvili has a reputation of being head strong and impulsive. The Wikipedia entry on him states the following: “Relations with the United States are good, but are complicated by Saakashvili's ‘volatile’ behavior. Former and current U.S. officials characterize the Georgian president as ‘difficult to manage’. They criticize his ‘risky moves’, moves that have often ‘caught the U.S. unprepared’ while leaving it ‘exposed diplomatically’.” Russians characterize him as unbalanced and crazy.

         Saakashvili made recovery of Abhazia and Southern Ossetia primary objectives of his administration and received significant military aide and training from the U.S. and Israel to equip his army to achieve these objectives. He is widely seen by the Russians as a “project” of the U.S. and a surrogate for U.S. foreign policy associated with Vice President Cheney. He has largely cut off Georgia from its traditional markets in Russia.

        Saakashvili faced his own popular uprising against his government, complete with mass demonstrations and the occupation of the central square in Tblisi. In response, he shut down opposition TV stations and his security forces used tear gas and rubber bullets against the opposition demonstrators. In January 2008, he won re-election, amidst opposition claims of fraud.

Who Started the August Conflict.

         Even the Bush Administration admits that the current stage of the conflict in Southern Ossetia was started by the Georgians. During July there were secret negotiations between representatives of Southern Ossetia and Georgia about ending their conflict. Some feel that the Ossetians entered into these negotiations because of Russian pressure. At the end of July, the Georgian side announced that Edward Kokoity, the president of Southern Ossetia had dropped his demand for independence. Then Kokoity replied that there was no such agreement. In response to this rejection, the Georgians launched a “warning” rocket attack on the capital city of Southern Ossetia, Tsvingali. On August 2, the parliament of Southern Ossetia ordered the evacuation of all children from Tsvingali and this evacuation continued through August 4. The Georgian side interpreted this evacuation as preparation for war and skirmishes and cross fire began on August 5. This is the day considered by the Ossetians to be the beginning of the active conflict, while Russian sources refer to the evening of August 7 as the starting point. On August 6, the Georgians began to bombard Tsvingali with artillery and rockets. On August 7, President Saakashvili went on television to say that there would not be any war. This assurance caused many civilians in Tsvingali to come out of their bomb shelters and return home.

        On the evening of August 7, while most of the world was watching the opening ceremony for the Beijing Olympics, the Georgian bombardment of Tsvingali resumed and then on August 8 the Georgian military forces and tanks launched an assault on Southern Ossetia.

         I have heard several different versions of what the Georgian assault was trying to accomplish. Southern Ossetia has a mountainous border with Russia and is connected to Russia by a single tunnel through the mountains. The mainstream Russian version of Georgian strategy was that it intended to be a rapid assault that would reach the tunnel before Russia could send its military to counter attack and thus gain control of the territory of Southern Ossetia. Another version is that the Georgians had no intention of blocking the tunnel, but instead wanted it to remain open to allow them to push the Ossetians out of the territory through this tunnel into Russia.

        Opposing the Georgian assault were Ossetian irregulars and lightly armed Russian peacekeepers (around 200 of them). The Ossetians carried out classic guerrilla tactics in opposing the Georgians. Then the Georgians were struck by Russian air power and on August 10, the regular Russian army came through the tunnel and pushed the Georgians out of Southern Ossetia.

         The Georgian assault leveled most of Tsvingalli and caused significant civilian casualties. The number given by the Russians and Ossetians (and disputed by Georgians and their supporters) was close to 2,000 deaths. Considering that the total population of Southern Ossetia is around 100,000 people, this is a significant part of their population. Russian sources estimate that 40,000 of the total population became refugees.

         At this point, the Russian army pushed past the borders of Southern Ossetia and Abhazia. Then directly or through aerial bombing, the Russian military destroyed the Georgian military infrastructure that supported the assault. In the process, they created another wave of Georgian refugees. The Georgians and the Western media state that there are 150,000 refugees from the Russian counter-attack. The Russian position is that they only targeted military installations and that it would defy logic for them to leave in place the military infrastructure that supported the Georgian assault and give the Georgians the possibility of repeating it.

Ethnic Cleansing.

         Russia has stated that the objective of the Georgian assault was to take control of the land of Southern Ossetian and then to cleanse it of Ossetians through a combination of murder and creating refugees. Their position is that they saved the Ossetian population from genocide. They are offended and stunned that the world is criticizing them for defending the civilian population of Southern Ossetia.

        The attack by the Georgians on the capital city of Tsvingali did not distinguish between civilians and non-civilians. It was an all-out assault with artillery and tank fire that appears to have concentrated on civilian targets. During my visit Russian TV repeatedly showed footage of Georgian tanks firing indiscriminately at buildings in Tsvingalli. This footage comes from a telephone camera held up by a young Georgian in one of the tanks and is accompanied with his whoops of joy, as if playing a video game. There were also stories of Georgian assaults on Ossetian civilians, women and children, hiding in bomb shelters. The Russians report that the Georgian name for the assault was “Clear Fields,” indicating their intention to clear out all of the Ossetians.

         I cannot independently verify these Russian assertions. However, I did obtain some independent verification through non-official sources. The family of one of my business contacts was sheltering refugees from Southern Ossetia. He is not a politically active person or someone who has ever expressed strong political opinions to me, but he reported that the woman staying with them said that the Georgian troops who came to her village rounded up the women, children and old people and began shooting them. She said that she personally lost small children in the assault. This is credible and stunning confirmation of Russian claims.

         In the aftermath, Ossetians carried out assaults on Georgians who had been living in the territory of Southern Ossetia and in the border regions. A significant Georgian village north of Tsvingali, which had served as a base for Georgia forces, was leveled by a combination of Ossetian irregulars and Russian tanks. It would be a falsification to say that ethnic assaults were one-sided. However it is a cycle of violence that was escalated by the Georgian assault. The book is still open as to whether the Georgians would have carried out widespread ethnic cleansing (genocide) if they had been victorious, but this is a claim that should be investigated.

Geopolitics.

 

         The Bush Administration has had a two pronged strategy towards Russia. The first has emphasized cooperation and partnership through the personal friendship between Bush and Putin, cooperation on intelligence and action against the Taliban post 9/11, cooperation in pressuring Iran on nuclear proliferation and in talks with North Korea on the same subject, continuation of negotiations for Russia’s WTO entry, etc.

         The second, led by Vice President Cheney, has focused on developing support for anti-Russian nationalist leaders in the bordering countries, NATO entry for Poland, the Czech Republic and Baltic countries, new missile defense systems in Poland and the Czech Republic, a very aggressive push for diversity of energy supply for Europe and new oil & gas pipelines the by-pass the Russian pipeline system. This is based on a needless demonization of Russia and a policy of pushing a narrow definition of U.S. interests while Russia was in a period of weakness.

        The Georgian calculation that they had U.S. backing for their assault on Southern Ossetia is the product of the second policy focus. Whether or not Georgia had explicit backing from the U.S. or not, they thought they did. The Russians for their part now consider the Cheney policy of encirclement and confrontation as determining U.S. policy towards Russia. They consider that the Georgians acted as the surrogate for the U.S. in attacking a Russian-protected ally in Southern Ossetia.

         Most Russians have concluded after the August conflict that all of the U.S. rhetoric about democracy, freedom and human rights is simply an ideological smoke screen covering the pursuit of naked national interests by the United States. Therefore, appeals based on those values have no impact on them.

         There is an additional geopolitical footnote that relates to U.S. policy towards Iran. I was told that the Russians have sold new air defense systems to Iran that are now being installed and that were scheduled to be completely installed at the end of September or the beginning of October. These new installations would substantially increase Iran’s air defense capability. This meant that there was a window of time in September when it would have been possible to bomb Iran before the installation was complete. If the U.S. were considering bombing Iran, there are a limited number of air corridors available for this purpose. Given that Turkey did not allow the U.S. military to use its territory for invading Iraq, it is unlikely that they would allow passage through their air space to bomb Iran. Georgia and Azerbaijan, located just north of Turkey could offer such a corridor. The Russian military announced that among the military infrastructure that they destroyed in Georgia were radar installations that could have been used to guide U.S. planes through the Georgian air space for such a bomb attack. The destruction of this equipment made it much more difficult to bomb Iran using this corridor.

         All in all, Cheney’s relationship to whatever was afoot in the Caucasus was clearly evident in his rush to the region to visit Ukraine, Georgia and Azerbaijan to shore up the alliance of states that he and the U.S. have created there and to offer $1 billion in additional aid to Georgia.

Conclusions.

         Our understanding of the world is shaped by the information available to us. Up until when I was a junior in college, I thought that the decisive battle of WW II was the Normandy invasion. Then I learned that the German army had around 15 divisions in Western Europe and some 350 on the Eastern Front. I learned that Germany army in the east had been shattered by huge and decisive battles in Russia and was already in retreat before the advancing Soviet army by the time of D-Day. This information turned my understanding of WW II on its head. This taught me that without objective and full information, it is impossible to have an accurate perspective on key issues.

         America’s understanding of Russia is based on images in the mass media created and fostered by the very same political forces who have promoted an aggressive U.S. foreign policy throughout the world, based on the notion of a “Pax America.” Our media has presented us an image of Russia as an aggressive, authoritarian state seeking to expand against its neighbors in classic big power imperial style. Given the conditioning of Cold War images, this is an easy sell. At times CNN has acted almost like the press agency for President Saakashvili’s government. The quality of information presented and its political bias has led to Russians and Americans living in parallel information universes, with completely different perspectives on the world.

          The Russians have concluded that since the U.S. was not able to back up its proxy state in Georgia, except by sending money, the failed assault was both a failure for Georgia and a defeat for U.S. policy in the region. Russia sees this failed assault as part of the process of the decline of the U.S. as the sole world super-power. Since his speech in Munich in February 2007, Prime Minister Putin has put forward the view that the world must be seen as multi-polar, rather than being defined simply by the interests and conceptions of the U.S. as the sole world super-power. Multi-polar in this sense means taking account of the varied national interests and perspectives of different countries with different values, most notably China, India, Brazil, South Africa and Russia. The Russians view the unraveling of our financial system as further evidence that the U.S.’s ability to control world events on its own has reached its apex and is in decline. We should consider seriously whether they are correct and if so, what this means for our future relations with the rest of the world.

         Sorting out what happened in the conflict between Russia and Georgia over Southern Ossetia is part of a bigger process of sorting out where our country should be headed in the 21st Century. I question whether the majority of the American people ever thought that they were voting for our country to be the world super power or whether this is really important to them in any sense. Today there are critical questions facing our country regarding where we should spent American lives and American money, in what foreign conflicts, and for what reasons? Decisions on these issues are shaped by our national political elites and the framing of issues in the mass media for public consumption. We face critical issues of adjustment to a multi-polar world by our political elite that goes beyond the question of who is elected our next president. The time in which the world financed our self-indulgence and our deficits while we dictated policy where we wanted and when we wanted, based on the power of our military and the power of the dollar is coming to an end. Unfortunately, we lack clear formulations of alternative policies that reflect the changed world in which we live.

         Backing away from an unexamined and ideological defense of Georgia is an important step towards developing a more mature and balanced view of the world and towards evaluating the real, legitimate interests and priorities of the United States. It is also critical for arriving at a realistic and pragmatic policy towards Russia as an important member of the multi-polar world in which we live.

 

Monday – March 10, 2008

Dramatic Growth in Massachusetts Exports to Russia

              An examination of the export statistics from Massachusetts to Russia in the period between 2005 and 2007 shows a dramatic increase in volume. In 2005, the total annual value of export sales was approximately sixty-five million dollars. In 2006, this increased by seventy-eight percent to a total of one hundred and seventeen million dollars. Then in 2007, there was another forty-four percent increase to a total of one hundred and sixty-eight million dollars. Overall Russia was in twenty-fourth place on the list of foreign export destinations for Massachusetts. Looking at the list of U.S. states exporting to Russia, Massachusetts stood in fourteenth place.

              While the increase in export trade is dramatic from the point of view of the rate of growth, there is clearly room for much more vigorous trade in those industries that compose the core of the Massachusetts high tech, innovation economy. The types of goods currently making up a large amount of Massachusetts exports to Russia are not from these core sectors. While first place in the overall list was industrial machinery including computers, second place was motor vehicles and tractor trailer cabs, sixth place was frozen chicken and eleventh place was aircraft, spacecraft and parts. Most likely the exports in categories two through four represent resale of goods produced elsewhere, but with the deal carried out by a Massachusetts company.

Eighty percent of Massachusetts exports to Russia come from the top four categories of commodities – industrial machinery, including computers; vehicles and parts; electric machinery, sound equipment, TV equipment; and optic, photo, medical or surgical instruments.

              Given the relatively low total of exports to Russia, the volume can be dramatically impacted by several large individual sales of goods that may or may not continue into the years to come.  For instance there was a sale of over seven million in frozen chicken in 2007, but no sales of chicken in 2005 and only sixty thousand dollars of sales of chicken in 2006. Similarly, there were large sales of semiconductor material for solid-state non-volatile storage, road tractors for semi-trailers, aircraft parts and electronic circuit boards that appear for the first time in 2007.

             

              In the core areas of the Massachusetts high tech economy, the strongest representation, after industrial machinery was medical equipment in fourth place and pharmaceutical products in fifteenth place.

              A review of the trend of accelerating volumes of exports and the weak representation of the core sectors of the economy in this export trade can lead to a number of conclusions. It could be that the increase in export volumes is ephemeral and built on a series of one-time sales that will not repeat. It could also be that there remains a large up-side for the export trade to increase if companies in the core sectors begin to focus on competing in the Russian market.

 

Sunday – January 27, 2008

U.S. Policy re Russia Post-Presidential Election?

              As the Presidential primaries have moved forward the war in Iraq and foreign policy in general have received diminishing attention from the candidates. Relations with Russia, as a subset of U.S. foreign policy, have received almost no official attention from candidates in either party, except for the occasional gratuitous deprecating comments about Vladimir Putin. Nonetheless the next President will have to take account of Russia and decide to keep the current policies or adjust U.S. policy.

             So far all we seen little to indicate what their policy will be after taking office. From Mitt Romney we have seen complaints regarding Vladimir Putin as Time magazine’s “Man of the Year.” Then there were the comments of Hillary Clinton and John McCain, who stated respectively that they had looked into Vladimir Putin’s eyes and saw “nothing” for Clinton and “K.G.B.” for McCain. Aside for some references to needing to work with Russia on nuclear disarmament on the Obama and Clinton websites, there has been little of substance regarding Russia.

              While the candidates are ignoring Russia, leading analyst are exchanging competing views of future policy. The last two issues of Foreign Affairs have presented two contrasting views of how U.S. policy towards Russia should develop. At issue is whether U.S. policy should focus on internal Russian politics or on a more restrained focus on managing areas of common geopolitical interest and areas of disagreement between the two countries. After the dissolution of the Soviet Union and during the Yeltsin presidency, U.S. policy was primarily aimed at shaping Russian internal economic and political developments. Some would argue that this paternalistic approach has continued to be the touchstone of U.S. policy towards Russia to date. This contrasting axis around which the Foreign Affairs articles spin.

              In the November/December 2007 issue, Dimitri Simes, president of the Nixon Center, argues for a change in U.S. policy in an article entitled “Losing Russia – The Costs of Renewed Confrontation.” Simes begins by stating that the fundamental flaw in the U.S. approach to Russia is the treatment of Russia as a defeated enemy. In characterizing post-Soviet Russia, Simes states that “since the fall of the Iron Curtain, Russia has not acted like a client state, a reliable ally, or a true friend—but nor has it behaved like an enemy, much less an enemy with global ambitions and a hostile and messianic ideology.”  His main point is that despite substantive disagreements with the U.S. on a number of geopolitical issues, Russia is not an enemy of the U.S. However if the relationship continues to be mismanaged there is a danger of a downward spiral in that direction.

             Simes argues that “what Washington must do is work with Russia to advance essential U.S. interests in the same way that the United States works with other important nondemocratic states, such as China, Kazakhstan and Saudi Arabia. This means avoiding both misplaced affection and the unrealistic sense that the United States can take other countries for granted without consequences.” Leaving aside the question of whether Russia is “nondemocratic,” Simes' approach argues for a more even-handed approach to diplomatic relations between Russia and the U.S. than what has taken place over the past period, particularly the Yeltsin years.

              In contrast, the January/February 2008 issue of Foreign Affairs contains an article by Michael McFaul and Kathryn Stoner-Weiss, both of Stanford University, entitled “The Myth of the Authoritarian Model – Howe Putin’s Crackdown Holds Russia Back.” This article begins with the statement that “whatever the apparent gains of Russia under Putin, the gains would have been greater if democracy survived.” The article argues that the basis for economic growth was developed during the Yeltsin period and then blossomed with the rise in world oil prices. McFaul and Stoner-Weiss take as a starting point that Russia has become an autocratic state that is looking towards the Chinese model of economic development. Their conclusion is that “sustained autocratic rule will not contribute to this growth and, because of continued poor governance, is likely to serve as a drag on economic development in the long term. Russians are indeed getting richer, but they could be getting even richer much faster.”

             This article makes an argument that is probably impossible to either prove or disprove on a factual basis. However it does represent the collected conventional wisdom of the majority of current academic Russia experts. While not ostensibly dealing with political and economic relations between the U.S. and Russia, this article implies a much different approach to Russia than that promoted by Simes.

              The fundamental difference between the two articles lies in the focus of policy. Should the focus of policy be on balancing cooperation and competition in the national interests of two sovereign countries or should the focus of policy be U.S. promotion of an agenda of reform of internal Russian society in accord with our own standards as the determining factor for overall relations between the two countries?

              The Simes article argues that the U.S. should stop trying to dictate Russian domestic policy because it is producing a counter-productive result. This point of view has been validated by my own experience in discussions with Russians at all levels of society. First of all, Russians are enjoying the fruits of the current economic boom and link that boom with President Putin. Second, they resent U.S. intrusions into their internal debates that are often uninformed and ideological. Russians now view most U.S. criticism of their society has a hypocritical exercise in promoting U.S. self-interest. Modern Russia wants to be left to its own to determine its own path forward, including defining the meaning of democracy and the proper role of civil society for itself and by its own criteria. They express a mixture of national pride and self-confidence that does not claim that Russia is a “wonderland,” but argues for Russian solutions to Russian problems.

              The McFaul and Stoner-Weiss article is an argument for the type of self-satisfied interventionary policy towards Russia that is leading towards the downward spiral that Simes fears. It is an extension of the judgemental "conventional wisdom" that dominates public perception of Russia and a "conventional wisdom" that is increasingly out-of-date and harmful to relations between the two countries.

              It is my hope that as the question of Russia gets sorted out in the new presidential administration that the Simes position becomes the dominant one and the often unwise "conventional wisdom" of the past is shelved as we move into the future.

 

Friday – December 28, 2007

Thoughts on the End of the Year - Gap between Political and Business Realities

As the 2007 draws to a close the gap between Russia-U.S. and Russia-E.U. relations and the growing opportunities for foreign business in the Russian market continues to widen. The gap between the perception of Russia by business people who have actual experience in Russia and those who only know about Russia through the media also continues to widen.

              As an example of this gap, yesterday (December 27), the Financial Times published an article about attitudes of German investors to business in Russia. The article quoted the fourth annual poll of German investors in Russia conducted by the BDI (federation of German industry), which revealed that 79% of respondents expected business conditions in Russia to improve next year and more than 25% of those expected strong improvement. Another 64% of respondents reported that business conditions in Russia had improved over the past year. German companies are forecast to invest more than a billion euros in Russia in 2008.

              This business optimism takes place against the background of heavy criticism of the recent Russian elections by German political leaders, led by German Chancellor, Angela Merkel. If you take into account the ongoing political problems between Britain and Russia and the tussle between the U.S. and Russia over the proposed U.S. missile installations in Poland and the Czech Republic, it is clear that political relations with a resurgent Russia are testy and becoming testier.

              Unfortunately, for those of us in the business of promoting economic ties between Russia and the U.S., many U.S. business people who are not currently active in Russia form their opinions based on the hypersensitive political commentary in the mass media. Only last week, I was speaking with an experienced business person now engaged in developing graduate level management programs for students from developing market economies. His level of understanding of Russia was based on what he had read about Yukos and Khordokovsky in the mass media. His perception of Russia was so far from the dynamic and rapidly developing economy actually taking place there that it was almost impossible to know where to start in explaining the irrelevance of Yukos to today’s Russia. At the same time, it is difficult to begin to try to dispel these out-dated perceptions without appearing to be an apologist who refuses to see difficulties or problems in Russia. The truth about Russia lies somewhere in between the resurgent evil empire conjured up by the media and some problem-less land of boundless opportunity.

              The lack of an accurate understanding of this dynamic and rapidly changing country does not hurt an increasingly independent Russian economy, which is charging ahead on the back of historically high commodity prices, a growing middle class and expected huge investments in modernizing infrastructure. It also does not hurt those foreign businesses already established in Russia who are actively expanding, with profit levels often much higher than their operations in more established markets.

              It is my hope for the New Year that we can make a small contribution to breaking down the stereotypes and misunderstanding of Russia so that more U.S. companies can look objectively at the opportunities in Russia and so that the door is opened more graciously and actively to partnership with Russian companies in our market.

               

Monday – October 1, 2007

Boston Commemorates 200th Anniversary of US-Russia Diplomatic relations.

      Almost a year ago, I began pulling together a series of events to commemorate this anniversary in Boston. In the process I found a number of organizations and people who were interested in this anniversary, not for historical reasons, but in connection with their current projects. Even more interesting was the fact that many of the people active in Russia did not know each other. So the celebration of this historical event has led to current connections. My role was as the principal initiator and coordinator of this daylong series of events, including arranging for the US Ambassador to Russia and the Senior Counselor from the Russian Embassy in DC to come to Boston as the guests of honor. Most of this work was done under the umbrella of the U.S.-Russia Chamber of Commerce of New England, of which I am the president. Below is the summary of the anniversary events in Boston that I prepared for the Chamber.

“United States & Russia Diplomatic Relations Day” in Boston, MA

September 26, 2007

               On Wednesday, September 26, Boston observed the 200th anniversary of diplomatic relations between the U.S. and Russia through a series of events that were coordinated or organized by the U.S.-Russia Chamber of Commerce of New England. The guests of honor for all of these events were the U.S. Ambassador to Russia, William Burns and the Senior Russian Counselor, Oleg Stepanoff.

               The day began with an informal meeting with the Governor of Massachusetts, Deval Patrick; the Massachusetts Senate President, Therese Murray; Speaker of the House, Salvatore DiMasi; USRCCNE President Daniel Satinsky and USRCCNE Board Member and President of the UN Association of Greater Boston Richard Golob. After a lively discussion of possible economic, educational and cultural benefits of improving relations between Massachusetts business and institutions and Russian counterparts, the group moved to the Senate Chamber for a formal ceremony marking the anniversary that was hosted by President Murray. As part of this observance, Governor Patrick issued an official proclamation designating September 26, 2007 “United States & Russia Diplomatic Relations Day” in the Commonwealth of Massachusetts. Afterwards President Murray welcomed Ambassador Burns and Counselor Stepanoff for further informal discussion in her Senate offices.

               The next event on the schedule was a luncheon at the downtown Harvard Club, co-organized by the USRCCNE and the UN Association of Greater Boston. This luncheon was enriched by a special companion exhibit of historic Russian icons presented by the Museum of Russian Icons (www.museumofrussianicons.org). The over 100 participants in the luncheon had an opportunity to view the exhibit and network before hearing presentations from both Ambassador Burns and Counselor Stepanoff, followed by a short question and answer period.

               The luncheon was notable for bringing together a number of companies and individuals who are active in Russia, but who previously did not know each other. The principal sponsor for the luncheon was the Museum of Russian Icons.  The co-sponsor was GGA Software Services, LLC. Table sponsors were Grand Circle Travel, McDermott, Will & Emery, New Horizons, Pioneer Investments and State Senator Stan Rosenberg.

               The luncheon was also notable as the first collaborative event between the USRCCNE and the UN Association of Greater Boston (UNAGB). This collaboration was the brainchild of Richard Golob, who is both a Board member of the USRCCNE and President of the UNAGB. Incidentally, he is also CEO of GGA Software Services. The luncheon was co-moderated by Daniel Satinsky representing the USRCCNE and Richard Golob representing UNAGB. Thanks go out to UNAGB staff Lena Granberg and Erica Sanger and to USRCCNE Board member Kathleen O’Donnell, President of Market Access International for their organizational work that made the luncheon a great success.

               The day’s events continued with a gala opening ceremony for a special exhibit at the Massachusetts Historical Society (MHS) entitled “Moments of Destiny: Two Centuries of Russian-American Diplomatic Relations.” The exhibit begins with papers from John Quincy Adams’ two terms of service in St. Petersburg, continuing with artifacts and photos from the visit of the Russian fleet to Boston in 1864 in support of the Union cause and moving into the 20th century with photos and artifacts from Henry Cabot Lodge, Jr.’s role in Nikita Khrushchev’s visit to the U.S. in 1959 and the signing of the Limited Nucleur Test Ban Treaty in 1963 as witnessed by Senator Leverett Saltonstall.

               The MHS had an overwhelming response to their invitation to attend this opening ceremony, with over 220 people registered to attend.

               The program was opened by MHS Board President Amalie Kass. After remarks by MHS President Dennis Fiori, both Ambassador Burns and Counselor Stepanoff made presentations. The program included further historical background and insight provided by the MHS staff and concluded with a special presentation to Amanda George, a high school student at Buckingham Brown & Nichols who was the winner of an essay contest initiated by the US Embassy in Moscow and co-sponsored by the MHS.

               The guests at the ceremony enjoyed catered Russian food from the Beriozka food store and a decorative scheme created by Margaret Coleman of the Russian American Cultural Center.

               The exhibit is open to the public at the Massachusetts Historical Society until October 31, 2007.

              The events of the day concluded with Ambassador Burns delivering the opening lecture in the Charles Francis Adams lecture series at the Fletcher School of Law & Diplomacy. After an introduction by the Fletcher Academic Dean, Peter Uvin, Ambassador Burns delivered an expanded view on the themes of U.S. – Russia relations that had been introduced in his presentations during the earlier events. Then he took questions from an audience of approximately 100 students and professors until his voice virtually gave out.

               Attending all of the day’s events was a special group of Russian academics who are the first group chosen as the John Quincy Adams scholars under the Fulbright scholarship program. The group included Liubov Bugaeva, St. Petersburg State University; Natalia Suchugova, Russian State University for the Humanities (Dr. Suchugova recently published the first book in Russian on John Quincy Adams and will be affiliated with the MHS); Mikhail Rykhtik, Nizhny Novgorod State University;  Alexander Petrov, Russian Academy of Sciences; and  Vassilina Babina, Amur State University. Escorting the group was Deborah Guido-O'Grady, Public Diplomacy Officer,Russia, Ukraine, Moldova and Belarus Desks of the U.S. Department of State. While stationed in Moscow, Ms. Guido-O’Grady was instrumental in arranging for Ambassador Burns to come to Boston to celebrate this anniversary and participate in the events arranged for September 26.

               The Boston Herald wrote an article on the anniversary that appeared on September 25 that quoted Daniel Satinsky as President of the USRCCNE. The Boston Globe wrote an article that appeared on September 27 that focused on the ceremony at the State legislature and on the exhibit at the Massachusetts Historical Society. Photographs from all of the events of the day will be posted on the website of the USRCCNE (www.usrccne.org) as soon as they become available. 

             

 

Sunday – September 9, 2007

Daniel Satinsky affiliates with The York Group

              Daniel Satinsky and his Russian in-country partner, Mikhail Elashkin, have affiliated with The York Group (www.theyorkgroup.com) as Country Managers for the Russian Federation.

              The York Group helps information and communications technology (ICT) companies establish and grow sales in international markets. With local representative offices in 24 countries, York has the local on-the-ground resources to take technology solutions from anywhere to anywhere by developing and managing local country distribution networks. York has a proven methodology that can generate more revenue and greater profits at a faster rate and with lower risk than ICT companies can generate on their own.

               Russia is a rapidly growing market for all types of ICT products, but may appear to be a bit of a reach for companies not ready to incur the expense and risk of opening their own offices there. The York Group approach offers an alternative path to the Russian market with far less risk and expense than opening a direct marketing presence in Russia.

              York’s menu of market research and channel distribution development services can be tailored to the needs of companies at various stages of development of international sales, including companies new to international sales or unfamiliar with a particular country market; companies ready to utilize channel distribution but needing help to expand into new regions; and companies already engaged with channel partners, but not satisfied with the results from their current channel program and partners.

              After careful consideration, Satinsky and Elashkin have decided to expand the services they provide clients through their respective consulting businesses through associating with The York Group. The combination of The York Group’s experienced international network and structured methodology for development of distribution networks combined with Satinsky and Elashkin’s knowledge and experience in the Russian ICT market makes for a cost-effective service offering for entry into the Russian market.

              Any Massachusetts or New England company interested in further investigating the growing ICT market in Russia or entry into any other foreign market served by The York Group is invited to contact Daniel Satinsky. The York Group can also provide market entry services for any Russian ICT company interested in world markets, including the U.S. market. For further information, please contact Daniel Satinsky at dsatinsky@theyorkgroup.com.

 

Sunday – August 26, 2007

Software Sales in Russia – A Market Too Far?

              Is Russia a market that domestic U.S. software companies should consider? Russia for most mid-size software companies is uncharted waters with uncertainties about real demand, language and business culture. Recent news articles and surveys clearly show that Russia has become an important growth market for multi-national software companies. Given the large size of the country and the rapid development of business there, it is a market worth investigating for mid-size companies willing to adopt the proper strategy.

              While not nearly as large as the U.S. market, the growth of sales in the emerging markets and particularly in the BRIC countries (Brazil, Russia, India, China), is far outstripping domestic market growth. According to a Business Week article on August 6 emerging market sales boosted the quarterly earning for industry giants like Microsoft, IBM, SAP and Research in Motion. The article states that an IDC report projects overall tech sales growth in the U.S. of 6% in 2007; while predicting growth in India of 25%, Russia 17% and China 16%. IBM’s sales in Russia grew by 52% over the past year.

              The Russian IT web news service CNews (www.cnews.ru) published a report on July 23 that focused specifically on the sales revenue of top twenty foreign IT companies in Russia. The top eight foreign companies in the Russian market on this list were all equipment and hardware manufacturers. The ninth, tenth and eleventh spots were held by Microsoft, Oracle and SAP in that order. Between 2005 and 2006, the overall sales revenues of Microsoft grew by 63%; Oracle by 28%; and SAP by 43%. Other software vendors in the top twenty included Symantec, Check Point, TrendMicro and Eset.

              What is clear is that the major international software companies have made a substantial commitment to the emerging markets in general and in Russia, based on establishing working representation offices that carry out sales and marketing to build their presence. They do not seem to doubt the existence of real demand and they have moved to overcome barriers of language and business culture through their physical presence in the national market.

              The question for mid-size software companies is whether they can access this rapidly developing market without committing the same level of expense and management time as the larger companies have invested. There is no question that some level of investment of time and management resources will be required to enter a market like Russia, But it is not necessarily the case that a mid-size company has to duplicate the strategy of the giants.

              The alternative is to develop distribution channels based on partnership with existing distributors in Russia. Obviously any software company entering the Russian market must be ready to engage in localization of its product to take account of Russian language and business culture. But it is not necessarily true that a new sales and marketing operation must also be developed. In fact, this may be the exact wrong approach. The alternative is to engage in adequate market research and due diligence to locate an experienced and reliable Russian company already engaged in sales and marketing and having a depth of knowledge of the local market and clients that no outsider could possibly duplicate.

              By using distribution channels the distance to the rapidly growing market in Russia can be significantly reduced and mid-size software companies can share in growth that is now enjoyed by the industry giants.