Take the R Out of BRIC

What on Earth is Russia doing on the list of top emerging economies?

As Russia proudly boasts its prominence at G-20 summits, gatherings of the BRIC countries (Brazil, Russia, India, and China), and other global economic round tables, an embarrassing question arises. Does Russia really deserve to be a BRIC? The country's economic performance has plummeted to such a dismal level that one must ask whether it is entitled to have any say at all on the global economy, compared with the other, more functional members of its cohort.

I have just returned from Moscow, which is always dreary around this season. But this year, the mood among the capital's eloquent liberal economists has hit a new low. For the last seven years, Russia has undertaken no significant economic reforms. Instead, the state has been living off oil and gas, like a lucky but undeserving rentier. With oil prices hovering just above $75 per barrel, the elite can stay afloat without much effort and even less development. Russians talk about a new Brezhnev stagnation, a reference to the 1970s slowdown that a post-Soviet Russia had hoped to avoid. Meanwhile, the Kremlin identifies itself with the BRICs -- the world's leading emerging economies.

But Russia is clearly falling behind. This year, China is likely to grow by 8.6 percent, India by 6.0 percent, and Brazil by 0.3 percent, according to J.P. Morgan. Russia's GDP, on the other hand, may plunge as much as 8.5 percent. Even worse, this year Russia is the worst performer among the G-20 group of the world's largest economies. In 2008, Russia had the second-largest GDP of the four BRIC countries at current exchange rates. This year, its GDP will drop far behind Brazil and possibly also India.

Of course, the country stands out in other undesirable ways from the G-20 as well. Although it is not the most authoritarian (China and Saudi Arabia take top place in that category), anti-corruption watchdog Transparency International ranks Russia by far the most corrupt. The consequences of this have been visible: Moscow has failed to build roads since 2000. In his Nov. 12 presidential address, President Dmitry Medvedev acknowledged that investments in infrastructure are a waste because projected costs are several times higher than justified. Corruption is costly.

Nor is Russia a member of the World Trade Organization, unlike all other G-20 countries. It came close to entering that organization last June, but Prime Minister Vladimir Putin suspended the attempt, leaving Russia outside international trade debates.

If Russia is indeed falling out of BRIC, it is because that country's crisis is not financial but systemic. Russia is suffocating from the dominance of corrupt state corporations and red tape -- and oil isn't going to save it this time. The government bailed out the worst-hit state corporations and banks from financial crisis with its reserves last year, the third-largest such stock in the world. The current growth crisis followed; this massive misallocation of capital to state crony companies has depressed economic dynamism.

Meanwhile, the paralyzing gridlock between Putin and his chosen successor, Medvedev, only makes things worse. A cruel joke is making the rounds in Moscow: There is definitely a Putin camp and a Medvedev camp. The question is, to which camp does Medvedev belong? What's clear is that the two sides fight persistently. When the financial crisis struck, the reformist Medvedev camp rose in influence, but when the oil price surged again, the state-focused Putin camp returned with a vengeance.

Today, it's hands down the Putin show. Falling out of influence, Medvedev has launched a devastating criticism of his partner's state capitalism. "Should we drag into the future our primitive raw material economy and endemic corruption?" he asked in his Web posting "Forward Russia" last September. In particular, Medvedev criticizes "legal nihilism" and inefficient state corporations.

Perhaps what Medvedev hopes is that Russia's economic performance will prove so meager that it will force the country's rulers to embrace economic reforms. The state corporations perform so poorly that not even an authoritarian polity can defend them much longer. Most criticized are the armaments company Russian Technologies, the energy companies Gazprom and Rosneft, and the bank VTB. The biggest corporate catastrophe among these is the state-dominated gas monopoly Gazprom. At a time of global oversupply of gas, the company refuses to modernize, choosing instead to intimidate its customers in Europe. Sagging demand and high prices have driven down its output 20 percent this year, but its management remains in denial. Rumors abound that major CEOs will be ousted, and the government has spoken vaguely about privatizing 2,500 state companies.

There has been one concrete sign of what may be to come. Putin's old media minister, Mikhail Lesin, was sacked on Nov. 18 by Medvedev because of "unethical behavior" and "conflicts of interest." Lesin had imposed government control over Russian television while allegedly running a related business empire of his own. It was quite a surprise to see the Kremlin holding its cabinet to such standards.

Sooner rather than later, something will have to give. Tension is growing between Medvedev's talk about modernization and the reality that the Kremlin is at a stalemate. Russia is too rich, too well-educated, and too open to be so corrupt and authoritarian. The country should just hope change can come fast enough that BRIC doesn't turn into BIC.



The Eurocrats Europe Needs

Catherine Ashton and Herman Van Rompuy should suit the European Union -- and that's all that matters.

Today, two obscure figures will take to the highest posts in the new European Council: Belgian Prime Minister Herman Van Rompuy as president and EU Trade Commissioner Catherine Ashton as high representative for foreign policy. The positions, created by the Lisbon Treaty after eight long years of wrangling within the European Union, were highly heralded and meant to give Europe a powerful unified voice on the world stage. But the selection of Van Rompuy and Ashton by European leaders was met with derision -- or, worse, yawns -- on both sides of the Atlantic.

The choices baffled most Europeans and bemused most everybody. The Economist's Charlemagne exclaimed "a decade of institutional wrangling for that?" Others described them as "Europe's gray mice," the "bland leading the bland," or "the EU's perfect couple of nobodies." Writing for the Irish Times, former EU Commissioner Chris Patten argued that the selections "surely [underline] the extent to which member states are in the driver's seat in the EU," signaling that it "is no superstate striding bravely into a bright new dawn." I joined in the fun too, on the Atlantic Council's blog, concluding that the Van Rompuy decision would "virtually assure that the EU president remains largely a figurehead, subservient to the heads of the member countries."

The reaction, alternately disappointed and chuckling, is understandable. After all, Europe had the opportunity to select a vigorous leader, like Tony Blair, who could stand shoulder to shoulder with leaders like U.S. President Barack Obama and finally provide that phone number in Europe Henry Kissinger sought three decades ago. Instead, we get what EurActiv's Rick Zednik has jokingly termed the dawn of "the Obama-Van Rompuy era."

But though the disappointment over what might have been is perfectly understandable, we should not lose sight of what is.

Many had hoped for a kind of European George Washington -- a commanding figure who would shape the presidency in his own image and lead a strongly unified country. But Europe is not the United States. The more apt comparison might be (as one of my blog commenters pointed out) to Samuel Huntington, the first president under the Articles of Confederation.  

Europe has its own parliament, its own flag, its own currency, and a new president. But it's not even a confederation, much less a country. The three traditional major powers -- Britain, France, and Germany -- carry outsize influence over the 20-plus lesser actors. The countries in the EU retain, and want, a definite degree of autonomy. Thus, the EU is, in essence, a glorified free-trade zone.

Given that, did anyone seriously expect the Brits to back a powerful European president when they won't even give up the pound and join the Eurozone? For that matter, how could the French and Germans have backed Blair when his country remains strongly Euroskeptic?

Recall, too, that the Lisbon Treaty was a backdoor solution created by EU bureaucrats frustrated with years of failure to advance the cause of Europe through the front door of national referendums. It was the EU Constitution by another name. With Lisbon, most member states could simply rubber-stamp the agreement in their legislatures. The sole exception was Ireland, which promptly defeated the measure in a referendum. It took a global financial crisis, major arm-twisting, and some light bribery to get the Irish to change their mind.

After the Van Rompuy-Ashton selection, many critics pointed out that the powers of the new president were incredibly vague. But that was by design, not incompetence. There's simply no consensus on what "Europe" should do beyond the realm of trade and financial policy. And while Ashton is not well-known outside the EU's inner circles, the Powers That Be have every reason to be confident that she'll execute that consensus from her new perch.

Thus, though we're a long way from the day when the world's two dominant economies will be able to conduct foreign policy as unitary equals, the degree to which "Europe" is a reality now would have been a wild fantasy 20 years ago, let alone 40 or 60.

The Germans, French, and Brits have spent an unprecedented 64 years without going to war against one another. That they have also worked as part of a military alliance for six decades is truly remarkable. Just 20 years ago most of Europe -- and not a few Americans -- viewed a reunited Germany with dread. Instead of a threat, however, it has become an even better partner.

Who could have imagined, when the European Exchange Rate Mechanism nearly collapsed when several constituent members adopted predatory policies out of domestic interest, that it would not only survive but be replaced by a common currency in less than a decade? Let alone that the Germans would agree to move away from the vaunted deutsche mark to anchor said currency?

For that matter, it seems like just yesterday that France was resisting all manner of regulation from Brussels in an effort to try and preserve its culture and its family farms. Now, France is arguably the main cheerleader for a united Europe.

The Brits, of course, remain the main Euroskeptics among the major powers. Although no less a figure than Winston Churchill called for a "United States of Europe," Britain has had to be dragged, kicking and screaming, into Europe. The EU predecessor, the European Coal and Steel Community, was formed in 1951; Britain reluctantly joined only in 1973, by which point the ECSC had morphed into the European Communities. Yet, though the Brits continue to worry over their sovereignty more than most -- a tradition likely to continue with their election of radically Euroskeptic parties in the recent elections -- they're nonetheless slowly seeing the value of the project. And Blair was a candidate for president while Ashton won the high commissioner post.

The recent choice to go with low-profile leaders likely means slower progress than some of us might have wished for, but the very fact that these new offices exist is progress. The Atlantic Council's Borut Grgic has argued persuasively that Ashton can help fix EU foreign policy, helping forge consensus on a whole range of thorny issues from the Balkans to Russia.

It has been 48 long years since the Europe project kicked off. We're a long way from a United States of Europe, but then again the founders of the United States declared independence in 1776 and didn't win a true union until after the Civil War ended in 1865. If it takes Europe twice that long, it might still be worth the wait.

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