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Russian-American Relations Symposium: Session Two: Russian Foreign Policy

Presider: Celeste A. Wallander, Associate Professor, School Of International Service, American University
Panelists: Fedor Lukyanov, Editor-In-Chief, Russia In Global Affairs, and Stephen Sestanovich, George F. Kennan Senior Fellow For Russian And Eurasian Studies, Council On Foreign Relations
January 22, 2009
Council on Foreign Relations

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CELESTE A. WALLANDER:  So we would like to begin our discussion of Russian foreign policy.  I think our colleagues on the first panel of the morning did a terrific job of not only covering the issues in politics and economics in Russia, but also leaving us with some questions or some potential implications that we'll want to explore in the impact of domestic politics and economics in Russia on Russian foreign policy.  

I'm Celeste Wallander.  I'm a professor at American University, and I'm feeling very privileged to be part of this gathering.  I would always feel privileged to be at the Council, but especially at the beginning of a new point in American foreign policy and relations with Russia.  

I want to caution you, or explain to you that we thought that we could be most helpful -- Steve, Fedor and I, on this panel by focusing really on Russia -- on Russia's interests, Russia's strategies and priorities, what Russian policies and relations are from a Russian perspective, with a Russian focus.  

Our colleagues on the third panel this morning will be looking at specifically the issue of U.S.-Russia relations, implications for the United States.  So, as we continue to, sort of, this nice package of discussion, this will be our focus -- on Russia.  That's also a little caution to you, if you're thinking of asking a question, what kinds of questions I would welcome, those that focus on Russia, in particular.  

I was thinking -- we are really very lucky on this panel, in addition to having two leading experts on Russian foreign policy, to have two experts who have managed in their careers the very difficult task of being scholars and intellectuals in the area of Russian foreign policy, but also speaking to policies, speaking to current events.  

Both of our speakers on this panel have worked both in the more academic and long-term scholarly thinking part of our field and our profession, but also are well known as analysts in media and in events such as our own.  But, we're focusing on policy.  

And since we highlighted Steve's Foreign Affairs article -- which I do recommend to everyone.  If you've not read it, if you -- if the holidays got you a little bit back -- behind in your reading, you definitely want to read Steve's article from the November-December Foreign Affairs.  And Fedor just gave me the latest edition of "Russia in Global Affairs."  So, they are active and successful scholars in their own right.  

Our speakers are Fedor Lukyanov, who is the editor-in-chief of "Russia in Global Affairs."  He holds an advanced degree, a Ph.D. from Moscow State University where he actually focused as a Germanist, so he does have a broad range of knowledge.  

He has served as a media analyst for -- I can't even go through the whole list of all the important media outlets, which span the traditional print media and also includes internet media as well.  So I think he, you know, exemplifies, again, this modern Russian -- sorry, "elite" (chuckles) that can speak to all kinds of audiences, and interpret Russia for the broader global audiences, as well as interpret the world for Russian citizens.  

And Steve Sestanovich, who is the Kennan Senior Fellow at the Council on Foreign Relations, but also a professor at Columbia University; served as the special assistant to the secretary of State during the 1990s for Russia; was one of my predecessors, as director of the Russia-Eurasia Program at the Center for Strategic and International Affairs; and is very -- a great resource for all of us, and a great colleague in Washington as well for the Russia-watching community.  

So, I thought that we could start "big picture," "big theory," but it might be useful to -- being a social scientist, I always like to go back and forth between the deductive approach and the inductive approach.  And I thought it might be useful to think about a specific case that has been in the news, and what it tells us about Russian interests and priorities and strategies.  And that would be the Ukraine-Russia gas -- I'll call it "dispute," we don't like to use the word "war" too much, it has nasty implications -- but the Russia-Ukraine gas dispute.  

So, I wanted to ask Fedor, what do you think were Russian priorities or objectives in this encounter?  And, were they achieved, do you think, by the Russian leadership?   

FEDOR LUKYANOV:  Thank you very much, Celeste, for this kind introduction, and thank you for the invitation to be here.  It's a big honor and a big privilege, big pleasure to me because -- especially because the journal, "Russia in Global Affairs," the Russian version of that is published with participation of Foreign Affairs magazine, and we are very happy and very proud to have such a partner.  

As for Russian-Ukrainian gas "something" -- gas "dispute," "war" or something else -- because this story, I think, is quite mysterious still.  In my mind, this conflict has a significantly different nature than previous conflicts between Russia and Ukraine on the gas fields.  As we all know, gas tensions between two countries became routine since 1990s, and, actually, in my mind, this year -- or 2008, nobody expected that this conflict will erupt into real war, with two weeks gas cut to Europe.  

The reason is that for the first time Ukraine decided -- or President Yushchenko decided to behave in the same manner as usually Gazprom used to behave vis-a-vis Ukraine and vis-a-vis other partners -- which means to show force, to demonstrate that Ukraine is as necessary for Gazprom and for Russia, as Gazprom is inevitable and indispensable as a gas source for neighboring countries in Europe.  

And how it evolved -- with the payoff of that last day, exactly last day before a long banking holiday in Russia, and then decision to cut any negotiations December 31st.  In my mind, that was just an attempt by Ukrainian side to show for Gazprom that Gazprom can't do anything without Ukraine.  Gazprom is a gas monopoly, but Ukraine is, in fact, transit monopoly.  Then the strategic mistake made by Gazprom after that -- and I think that this mistake was made because Gazprom was absolutely unprepared for such kind of move by Ukrainian side -- was to cut gas supply to Europe.  

We can discuss why they did it, what were reasons -- immediate reasons, and where Russian gas disappeared in days between January the 1st and January the 6th, but anyway, of course, this decision was strategically very damaging because I think that now, after this crisis has been, I hope, settled, but long-term damage to Gazprom's reputation in Europe is huge.  

And, of course, the damage of Ukraine -- to Ukrainian reputation as a transit country is also enormous.  But, I'm afraid that, in this particular case, Ukrainian reputation is not as important, because the partner of all European companies, and European Union, as an organization, is not Ukraine, it is Gazprom.  

Anyway, if we take the whole story of relationship between Ukraine and Russia in gas field, what we witnessed and what we faced this year was the fact that the previous system of relationship -- which was always, from the beginning, from 1992, was based on special deals and not on normal, transparent market-based, price-building procedures -- this system has been exhausted completely.  

And I hope that the one positive result of this war, or dispute, will be that Russia and Ukraine, at last, will get same price-building formula as Gazprom has with all other European -- all countries in the European Union.  Still, I'm not sure that the conflict is settled, because President Yushchenko's position is still quite dubious and unclear.  

And then next problem, which I expect will be in two or three months -- when and if we will see that Ukrainian economy, which is in quite a bad shape now, they can't pay this price.  What to do next?  But, anyway, a positive move in this war was that now at least both parts agree that they need, more or less, transparent system, and not a very complicated system of personal relationship between certain politicians and companies.  

WALLANDER:  I just realized I failed to do one of my most important duties she presider, which is to remind you, please, to turn off your phones and BlackBerries if you haven't already.  You need to turn them completely off so they don't interfere with the communications system.  And also to remind everyone that the meetings today are on the record.  So, whether that inspires you to be more risk-averse -- a risk taker, or risk averse, you at least need to know the meeting's on the record.

Sort of a Russia that's focused on whether to be transparent, not transparent, taken by surprise?  

STEPHEN R. SESTANOVICH:  Celeste, I agree with what Fedor has said, but I'd like to put the "war" -- I'll use that term if you won't -- in two different contexts.  One is the Russians had this confrontation with the Ukrainians in the context of very different energy prices from what they probably expected just a few months earlier as they anticipated it.  

They were riding high with oil prices at 140 (dollars), with the gas price implied by that, very, very high.  But by the time they came to this confrontation, with oil prices down at 40 (dollars), the implied price for gas is probably less than what they've been trying to get out of the Ukrainians, and the Ukrainians know that.  They know that the Europeans are soon going to be asking for -- I mean, they're going to have an adjustment in their price of gas that they buy from Russia that's less than the Ukrainian price.  

So the Russians are dealing with changes in their status that are -- that they have to adjust to.  I mean, the way I'd put this, in the most general terms, is the Russians, for a couple of years, have been feeling that their position in the international pecking order has been going up, and they wanted to lock in new -- a new standing for themselves.  

Now (chuckles) their position in the international pecking order is going down and -- because their main asset, the value of their main asset is going down.  And the question is how does that affect their behavior?  

I'd add one other context for the confrontation with Ukraine that is very much part of Russian rhetoric, and that is the war with Georgia.  The Russian leaders have been saying, you know, the Ukrainians are guilty of all kinds of crimes against Russia because of their support for Georgia -- arms sales to Georgia, which now a new Russian law will provide for sanctions against a country that supplied the Georgians; there is the anger at Yushchenko's standing side-by-side with Saakashvili as the war was going on.  

And that increases the temptation for Russians to try to affect Georgian -- Ukrainian politics.  So, there is that broader context which makes this not just a commercial dispute -- although, it has, of course, always that core element.  

WALLANDER:  I wanted to ask Fedor also, that broader context of Russian-Ukrainian relations, do you think it will be an -- is this a contained, or containable dispute or war?  

Are there implications for, sort of, the next crisis on the horizon that a lot of us are always looking at, which is Crimea and the status of Crimea within Ukraine, including the issue of the Black Sea Fleet base?  

Or, do you think it really was a commercial dispute, or is it -- have much broader political connection, including maybe the Georgia war?  

LUKYANOV:  So frankly, I don't know any major energy business in the world which might be seen as completely free of political aspect.  So, of course, in such kind of relationship you can't separate commerce from political environment.  

Environment is very bad -- that's right.  And, after Georgian war, Ukrainian -- rather, President Yushchenko's position, because in Ukraine we saw significant difference between him and Tymoshenko -- him and the partner regions.  But anyway, Yushchenko, as a symbol, as embodiment of Ukrainian state, took very, very clear position on the Georgian side.  And, of course, that spoiled relationship with Ukraine anymore.  They were not excellent before, as well, but still.  

At the same time, I don't think that in this particular case, with gas conflict, Gazprom was interested to politicize that issue initially.  Quite the opposite, Ukraine was interested to politicize because Ukrainians expected that -- quite, maybe logical and rationally -- that in any case Russia will be blamed for that, because of general mood, because of Russian previous behavior, because of clear stereotypes vis-a-vis Ukraine from -- in Europe and the United States.  And that was rather a rational calculation.  

As Steve mentioned, of course gas situation and hydrocarbon situation is changing rapidly.  It's absolutely obvious that prices will go down significantly in gas, and Putin said it.  The only thing I would add is that that, yes, Ukrainians knew that, but Ukrainians -- until now, until this settlement, refused to go over to the normal European formula because they expected that fixed price would be better for them anyway.  

And this year we will see.  Maybe the average price for gas will go lower than those $250 which Putin offered initially.  But then prices certainly, some day, will go up.  So -- anyway, it's very good that we’re moving toward the new formula, which will at least illuminate this -- eliminate this opportunity to try to achieve deals based on politics and not economy.  

WALLANDER:  Okay.  

Well, I want to think a little more broadly now about -- and so that's Russia, Ukraine, and sort of think about whether these dynamics are more generally at play in Russia's relations, or priorities and policies towards -- in particular, it's neighbors, it's post-Soviet neighbors.  

And I thought it was interesting, Fedor, in your recent Moscow Times article you noted that the issue of Russia's relationships with its neighbors -- Russia's presence in its neighborhood, and its policies in its neighborhood have been a primary area of U.S.-Russian frictions.  And it was clear in your article that you thought it would be.  

Without getting into the issue of the U.S.-Russia part of that, I thought it would be a good launching point for us -- which I think you're right, I mean, it has surprisingly become, maybe not surprisingly, but I'm not sure we all would have expected that 10 years ago, this issue of Russia's role in its region has been a particular point of friction -- and ask you especially to comment, if you could, about what your understanding of the meaning of President Medvedev's term "the zone of privileged interests" might mean, its staying power; its practical implication in policy; how it's seen from a Russian point of view?  

LUKYANOV:  (Laughs.)  

WALLANDER:  You notice I said "a" Russian point of view.  I'm not going to make you answer for "the" Russian point of view, although feel free.  

LUKYANOV:  Of course, it's no secret which "sphere of privilege" interest is.  It's post-Soviet era.  But, interestingly, President Medvedev never specified it.  And when he repeatedly was asked what does it mean, this sphere of privilege, he refused to say that it is a post-Soviet era.  And he used to describe it as the countries which are traditionally -- which traditionally have ties with Russia.

I think that the --

SESTANOVICH:  At the Council, in November, he even suggested that it might include the United States --

LUKYANOV:  Yeah, exactly -- hopefully, hopefully.  (Chuckles.)  

I think that this formula, it was one of five principles of Russian foreign policy formulated after -- immediately after Georgian war.  I think it was emotional and quite unfortunate, because everybody knows that any big power has spheres of influences, but it's no need to proclaim it and then to -- 'what next?'  

So my question to Mr. Medvedev would be, what do you expect from this, after this kind of statement.  That any country -- some country will say, yes, we will support Russia in protecting its sphere of privileged interest.  I think that this notion will gradually evolve into more economic and pragmatic content.  

Because, for example, again coming back to this Ukrainian issue, it became crystal clear how interdependent the whole Europe is and the role European Union tried to play with sending monitors and being actually a mediator between Russia and Ukraine.  It was, in my mind, strategically a very positive way because we understand that this gas system was not created to be cut in pieces actually.  It was a Soviet system with the production and transport within the same framework.  

Now a lot of problems evolved when the system was separated in different parts.  I think that we now understand that we need to reunify the system, of course, on a completely different basis, understanding that European energy security is impossible without some big deal including both Russia and Ukraine.  And I hope that this crisis will start to move us to that direction.  And that will contribute to redefine also the sphere of privileged interests.  

WALLANDER:  Okay good.  I'm going to ask you to address this but also to bring -- what I want to particularly ask you about something you've written in your Foreign Affairs article where you argue, and I think quite successfully demonstrate, that early in the Putin presidency in 2002, in particular, NATO was not a particular obstacle, was not a particular bone of contention, wasn't something that Russian foreign policy leaders worried a lot about, that they had reconciled themselves to enlargement and were interested in working with NATO.  So if you could talk about this sphere of privileged interest concept in contemporary Russian policy.  But also is, you know, is that -- is the real problem NATO or is there a broader set of concerns about Russia's presence in its -- in this area?

SESTANOVICH:  Yeah, it's -- you're absolutely right, Celeste, that the issue of Russia's relations with its neighbors has become a -- come to the center of Russia's relations not just with the United States but even more strikingly with Europe.  If you think about what the interaction between Europe and Russia has been in the past six months, it's first of all been negotiating an end to the Georgia War.  Sarkozy’s found himself a shuttle diplomat, for better or worse, and that was -- that became the kind of defining foreign policy issue of his -- of his presidency of the EU.  Now for the Czechs and the EU the issue is Russia's relations with Ukraine.

So the spaces in between the EU and Russia have become the source of contention and while the EU and Russian diplomats sit down and define and negotiate this big document that they agreed to -- you know, a new partnership and cooperation agreement, in reality the content of their relations is being redefined every day by these troublesome issues that are probably not going to play any part in the partnership and cooperation document.  Those are the tough problems for them.  

Now about NATO, the -- the question for NATO has always been whether it could develop a good relationship with Russia based on lots of issues of potential cooperation in a way that would make the issue of enlargement just seem less important.  And what has happened -- what happened in the '90s and the early part of this decade was that there's a real effort to give some content to that relationship so as to put the issue of enlargement aside.  That effort has largely failed.  There are working groups of majors and colonels that talk about this or that issue but the real cooperative content of the relationship is very little.  And that means that the issue of enlargement stands out as the core question.

And so with NATO, as with the EU, the effort to define a big and productive cooperative relationship has generally given way to friction over, you know, the lands between.  

WALLANDER:  Good.  Well that actually brings us conveniently to another sort of potential structure for Russia's relations in its region with Europe and also, I would expect, with China and other countries of Eurasia, which is another of President Medvedev's interesting ideas which is this idea of a Eurasian security architecture and the need -- and the argument that the OSCE has failed, it didn't prevent the Georgia War.  NATO is not the right mechanism; it's viewed with distrust in Russia by Russian leaders.  And so the proposal to come up with a European security architecture and to launch discussions which -- the topic of which usually elicits the comments, at least in Washington, of yes but we don't know what they mean by that -- what the idea is, what the content is.  

So here's an opportunity to see if we can figure out what the content of a Eurasian security architecture might be again from a Russian perspective -- a Russian perspective.  Fedor do you have thoughts?

LUKYANOV:  So, Steve is absolutely right. It’s really a core of problems in Europe relationship between Russia and the European Union and broader.  There is inability to separate economy from security.  I think it's really the main question for years to come, how to create a security system in Europe which all participants in Western Europe and Eastern Europe and in between and Russia will trust.  Because when we tried with the European Union first of all to build up a framework of economic relationship, very deep even with integration paradigm, think -- but security is something of -- security is for NATO in '90s -- (inaudible).  We will focus on the economy.  

This attempt has failed for obvious reasons because, especially in the energy business, you can't -- interdependence is the basis for cooperation in case you trust each other, in case you distrust each other, interdependence is source for instability, insecurity and big problems.

And, of course, when Russia has negotiations with Ukraine about gas, which is non-political -- which should be non-political issue.  But you can't eliminate and abandon the whole set-up of emotions connected to Ukrainian policy at large and NATO enlargement and so on.  

Same in Europe, for example.  Let us be frank, people in Poland, people in Baltic state, they don't trust NATO, they don't trust the European Union.  They will have clear security guarantees from the United States.  And when projects like Nord Stream are in the discussion they immediately connect it to more to Molotov-Ribbentrop and so on, which is, in my mind, absolutely not the case.  But it's inevitable.  So we need to merge economy and security, not to separate but to merge them.  And how to do it -- it's actually not very easy to specify what President Medvedev meant.  His first speech in Berlin about this Eurasian or European security architecture was very vague.  His next big speech in (Avian ?) was more complete but after that you could ask but what is new in this -- in those proposals because all principles here mentioned were, more or less, basic Helsinki Accord principles.  

The problem is first that those principles agreed 40 or 65 years -- 35 years ago.  They need to be, so to say, re-legitimized because so much changed in Europe since Helsinki Accord.  And, for example, one of main reasons why Soviet Union needed it was to legitimize all the borders in Europe.  There is, again, the key question in the European space.  How many borders have changed?  

And second, which is connected to this security/economy issue, OSCE has unfortunately lost its initial substance.  Because out of three baskets we had initially now there is only one which is in force and not in full scale.  Actually OSCE is about election monitoring, which is great, but it's too little.  

Military and -- political and military balance which should be discussed now again.  And Russia tried -- I think it was 2007 -- tried to call extraordinary session of OSCE to discuss CSC treaty, when Putin first signed warrant that Russia might (regrow ?).  Nobody was interested in fact to discuss this.  And second economy basket in OEC which disappeared automatically when European Union emerged.  But now we need to discuss all those issues again, unfortunately or fortunately, I don't know.  

So, I see Medvedev's idea not as a revisionist agenda but an attempt to come back to status which was agreed several, three, four decades ago, of course in a new form.  

So, there is a very -- I think that the Russian reputation now as a revisionist country which stopped status quo which is mainly based on Georgian events.  It's not quite fair because, in my mind, unilateral recognition of Abkhazia and South Ossetia was not a strategy, it was, more or less, forced reaction.  And just -- this demonstrated how bad it is to destroy status quo and how many problems you get after that.  

WALLANDER:  I'm going to ask Steve to offer his thoughts on that. And just to kind of give everyone a heads up, after that we're going to turn for your questions and discussion as well.  So --

SESTANOVICH:  Look, I think there's some real potential in Medvedev's ideas.  And if it -- if the Russians were to approach a negotiation about European security in one spirit which is to try to find a way of, you know, getting themselves to the table for real -- you know, to create mechanisms that would be consensual and related to real problem-solving, you know, you can imagine something good coming out of that.  

The real -- the tough issue is going to be what is -- what seems to be the Russian agenda to the two most important existing European security institutions, and those are NATO and the OSCE.  And a lot of the kind of fine print of some of the proposals that the Russians have made, slightly spelling out the ideas for a new European security conference, have suggested that it's really supposed to be to put NATO in its box and diminish it as an institution, which I just think is a real non-starter and would have to get put aside in early discussions or else you'd get -- you'd get absolutely nowhere.  

About the OSCE, Fedor has said, I liked this phrase, election monitoring, which is great.  That's not exactly the approach -- or the views that the Russian government has had.  (Chuckles.)  And so that will be the tough question is, in a -- in some architecture of European security what's the place for commitments to political reform, democracy, transparency, free elections and all -- all those things that were embodied in the Cold War settlement?  And if the idea is, well putting those aside, please, then I think that's going to be a non-starter too.  

So there's a kind of an intriguing potential here and some obvious problems that could just short circuit it.  

WALLANDER:  But I think your tone -- and I've heard you say this elsewhere -- is we won't know until we find out.  So we need to discuss those to be able to figure out if it will be a problem.  So managing that process will be a tough one.  

SESTANOVICH:  A lot of my friends think I'm just a gullible chump for proposing to even get in to such a discussion because, you know, they can see all the pitfalls (chuckles) and all of the ways in which this is just going to, you know, be a bad thing.  

WALLANDER:  Well, I'm with you on the need to discuss it and find out where we can go.  

So when I recognize you would you please stand up, wait for the microphone, identify yourself and give your affiliation and pose a question.  

QUESTIONER:  Yes, my name is George Hoguet from State Street Global Advisors in Boston.  

My question for our panelists has to do with Russian policy towards Iran and whether Russia can live, do you think, with a nuclear-armed Iran.

LUKYANOV:  Yeah, I think that Russia believes that we can live with a nuclear-armed Iran.  Drawing the significant difference in assessment of nature of Iranian regime, of course, in Russia we don't have a full consensus.  There are different views even in the ruling group.

But I think that the prevailing view is that Iran is a country which is seeking status of regional, so to say, superpower, and they need nuclear capacities as a symbol of that.  And when they will have nuclear potential or a clear possibility to create it, they will feel better and they will be ready to engage in deals and negotiations, which is very much different from American and Israeli view, which is more or less that Ahmadinejad is a crazy fanatic, Islamic lunatic, who will immediately start nuclear war against Israel when he achieves that.

I think that at the end, the main force for changes in the whole situation around Iran is not in Moscow but is here in the United States.  Iran -- there is a significant illusion that Russia has very much leverage to influence Iran.  I'm not a specialist on Iran, but my impression used to be that Iran is very skillfully playing all participants in negotiations -- with Europeans, with Russians, with Americans.  And their ultimate goal is to achieve more or less equal dialogue with the United States -- not with Russia, not with the European Union.

And if new administration will offer basically new approach vis-a-vis Iran -- and if I'm not mistaken, this year we have a presidential election in Iran, which might remove Ahmadinejad personally, which will not change the nature of Iranian state, but he is a symbol of something very bad.  So I think that there is -- the key to the whole situation is here, not in Moscow.  Moscow will not be eager to press Iran, but if relationship between U.S. and Iran will start to develop, I think that the Russian position will adapt to that.

SESTANOVICH:  Could I just add one thing?  I think the Russians probably would prefer that Iran not have nuclear weapons, but it's a preference.  And the question is what would they be prepared to do to achieve that preference?  I don't think they want to solve the problem, or more likely fail to solve the problem, by identifying themselves as an enemy of Iran.  They want to do it while preserving a basically positive relationship.

You could argue that there's a certain amount of diplomatic sophistication in that, but you're not going to be able to solve it except by preserving some good relations.  But right now -- I think Fedor is absolutely right -- they wouldn't expect to be targeted by an Iran with nuclear weapons.  But if in the process of trying to stop Iran from getting nuclear weapons they make themselves Iran's enemy, maybe that will change.  They don't want to do that.

WALLANDER:  (Inaudible.)

QUESTIONER:  I started with a question on Iran, but you have just covered it.  Now I’d like to switch to China.

WALLANDER:  Could you --

QUESTIONER:  Irene Meister.  What do you see in this forthcoming relationship with this total area, but China in particular?

WALLANDER:  Steve, you can go first.

SESTANOVICH:  Well, the relationship with China is based on the interests, above all, of some big elites in the -- we're using that word again -- apologies to Igor Malashenko --

WALLANDER:  It's all right.  He's on my list.

SESTANOVICH:  -- some sort of big institutional interests in Russia; energy, the energy sector, the nuclear power sector, the arms exporters, and a little bit, if we could call it this way, the ideology department of the central committee, but mainly those institutions that I mentioned that see China as an important market.

I'd only add -- and those interests have tended to promote a very good relationship, but with some changes on the horizon.  Chinese arms purchases are going way down.  That's not -- it's not as promising a market.  And one question you'd want to ask is, as they go down, will the incentives for Russia to sell more and more sophisticated stuff go up?  Will the pressures go up?

China is a very, very large part of Russian arms exports, and that is an interesting subject of negotiation between the Russians and the Chinese right now.

LUKYANOV:  I think it's a very clear understanding in Moscow and in Kremlin that there are limits of military cooperation and arms sales to China.  We sold everything we could without making damage to Russian security.  But Chinese now need something else and more.  But I don't think that Russia will be interested to improve Chinese military capacity, because it's quite obvious that now political relationship is absolutely excellent, best ever.

But in, I don't know, 10 years' time, I think that the Russian leadership will face a very serious dilemma -- how to keep political parity with China; political parity, not economic one, which will last since -- a long time, but political one, because now, because of tradition, because of special cautiousness of China, Russia is -- internationally, Russia is much more active and more reasonable.  But it will change, certainly, because Chinese will need higher profile, inevitably.  And how to deal with that, that will be a real challenge.

I think that might cause change of the whole prism through which Russian political establishment is looking to the outside world, because when you understand that China potentially is a significant threat, maybe not in military terms but in terms of overwhelming economic influence on a big part of Russian territory, then you need to balance it somehow.  And the only balancing power might be only the United States.

Three weeks ago, it was a big conference in Moscow, fourth conference in -- (inaudible) -- four months -- experts from four countries -- Russia, China, India and Brazil, came together to discuss this new creation.  And I was invited to make an introductory statement.  And it was very funny, because first thing -- every main speaker from every delegation said was, "Yes, there is very good that such kind of structure now is emerging (breaks ?) is great."  Second thing:  "But we are so much different, so much different, oh that’s really -- we have different agendas."

So it's very good for Russia and maybe for other participants in this conciliation to have an opportunity to say that we have very good and very reliable partners outside the Western world.  But next is not to show that this structure might be seen as anti-American, anti-western.

WALLANDER:  You've been waiting for a while, so I will call on you.

QUESTIONER:  Thank you.  Igor Malashenko, New Media Investments.

As Fedor Lukyanov demonstrated, the quality of decision-making process in Russia is not great.  So in August we had Georgia.  In January it has been Ukraine.  What's next?  What is the next problem we should be bracing for?  And, of course, it's a question for both of you gentlemen.  Thank you.

WALLANDER:  I'm going to let you think about that one.  (Laughter.)

While they're thinking, I will point out -- I mean one of -- again, another point that often gets made is that the calendar is going to drive a lot of Russia's interaction with the outside world.  There is a G-20 meeting coming up.  There is a G-8 meeting.  There is -- you know, so the calendar drives some of these potential opportunities for demonstrating good decision-making.  But anything on the horizon -- and there's questions also about a reigniting, potentially, of some kind of armed conflict in Georgia, which I think now we're getting a sense that may not happen, but there has been concern.

SESTANOVICH:  Well, thank you for tap-dancing, Celeste.  (Laughter.)

WALLANDER:  I expect reciprocity someday.  (Laughs.)

SESTANOVICH:  I appreciate that.

I guess I would say that I don't consider either the Georgia or Ukraine confrontations to be over.  And those are troubled relations that can kind of reignite at any time.  There's always a kind of post-confrontation lull, and you'd expect that, but those can come back.

I guess the thing that I would look for, that I'd be interested to watch over the next couple of months, is the way in which Russia handles its sort of repivoting in relations with the United States.  But -- and I know you don't want to talk about that, and I'm not going to, but I'd say with a focus on two things -- arms control, particularly related to ballistic missile systems in Central Europe, and NATO, because, you know, some sort of deft footwork would be necessary, really, to reposition the Russians if they want to move toward a defusing of the confrontation over Poland, the Polish and Czech systems.

The Russians have kind of identified a formula that they would be able to get that would allow a defusing of that.  But some of their other statements recently have indicated they're just expecting the United States and NATO to back down totally.  And I think if that's the case, we may see some continued ill will and sort of worse relations on that front.

You're going to have the NATO summit in two months.  And how Russia positions itself toward NATO at a time when there's a lot of kind of self-referential good feeling about the alliance, but also an internal look at trying to define its mission in the future.

The Russians have to find a way, if they want to, to reposition themselves toward -- for the possibility of a better relationship with NATO.  And I think you raise an interesting question.  Is their decision-making preparing them for a good outcome on either of those two questions.

WALLANDER:  Fedor.

LUKYANOV:  Yeah.  Well next -- in both cases, Georgia and Ukraine, we have presidents who, in different forms, but tried to project their power on fields where Russia felt it was unacceptable.  So they thought they might win.  They lost.  At least Georgia, and Ukraine we will see, but I think that Yushchenko personally will not be very much successful in the future.

As for -- so if we will find somebody else in the post-Soviet which we’ll try same manner, maybe it will be repetition.  I don't see, frankly speaking, other leaders with the same capacities.  Other presidents are much more flexible and cautious.

As for general view, I think that overall mood in Russian politics has changed significantly since August-September because of financial crisis.  Russia will need, as actually any country, but Russia especially will need to set clear priorities and to abandon those parts of previous foreign policy agenda which are not as important; for example, it's absolutely great to send ships and high-ranking politicians to Venezuela, Nicaragua or Bolivia.  It's great idea to intervene in the American backyard.  But it's very good when you have abundance of money and resources, and especially when your partner, your dear friend Chavez, has a lot of money to pay for Russian weapons.

Now situation has changed both for Russia and Chavez, so I don't think that this part of Russian geopolitical agenda of 2008 will continue -- of course not.  But Europe and Eurasia will continue to be priority, regardless which level of crisis will approach.

WALLANDER:  Let's start there.

QUESTIONER:  Thank you.  John Connor, Third Millennium Russia Fund.

My question is about the OSCE election monitoring role and the negative media.  As we know, they were kept out in '08.  If you read the report from '04, the first half was fulsome in praise for the Russian election mechanics; second half cited abuse of incumbency power; blended grade.  I gave it a fair reading.  I thought it was maybe 72 on a blended scale.

The media treatment was universally "OSCE flunks Russia election."  And Russia didn't let them back in in '08.  I'm wondering if you agree with that reading of the '04 report.  And if so, is there some way that the media dimension of this can be better managed?  Because now we're treated to the absurd spectacle of Russia importing people from Uzbekistan to monitor Belarus elections, and they all pass.  Is there some way out?

WALLANDER:  I'm very glad to be presiding this panel after the last two questions.  (Laughs.)  A view on -- was the OSCE -- is the media to blame here?  (Laughs.)  Was the OSCE report a little more even-handed and we had a bad turn in Russian-OSCE relations, or were the 2004 elections not up to snuff, too?

SESTANOVICH:  Well, the 2004 elections -- remind me, John -- were not the most intensely competitive elections when Putin was getting re-elected, so that the mechanics were kind of easy to do right.  You know, there may be a lot of people in the room who've read that report, but I'm not one of them.  (Laughter.)  And I commend you for reading it.  (Laughs.)

I would say only I'll bet you're right, but I would also say that OSCE reports tend to have a lot of positive and negative things in them.  And the real issue isn't sort of looking at the scale of 100; it's sort of what the performance is on three or four big items.  And, you know, I think Putin in 2004 could have won a totally free and transparent election, but I bet the OSCE was right that there were a lot of things there that didn't completely pass muster.

If I could use that as just a platform to say something about the next round of elections, because -- and I hope I'm not, you know, going too far back to the last panel -- if Masha and Tim are right that there's some potential for an elite division over the future of Russian politics, one place you'd expect to see it is in the parliamentary election of 2011 and in the presidential election of 2012.

And before -- between now and then, is there more opportunity to form opposition groups?  Is there some greater access to the media for groups that want to criticize the government and government policies?  And those are the things that people ought to be watching and thinking about the kind of report that an OSCE team would provide in those years.

I think this is an interesting period in Russian politics.  A lot of Russians have said that after -- this is before they knew how the 2008 succession was going to develop -- that this period after 2008 was going to be when pluralism returned.  And that will provide lots of interesting opportunities to see whether the Russians want to reintroduce some of the more open procedures that they had in the past.

Medvedev is clearly aware of this, and that's why he's proposed token modifications of the political arrangement, for example, saying that there should be opposition seats in the Duma on a different basis.  You know, they've encouraged the emergence of some alternative very small power centers, media openness, the idea that opposition parties have a right to be in the media, an idea that Medvedev surfaced and then got absolutely nowhere.

But, you know, if he comes -- if he sticks with that, you'll see some things -- people beginning to exploit those openings.

WALLANDER:  Yeah, and it strikes me that there would be a big payoff in Europe for that kind of -- especially in Europe that that would be welcomed and a potential OSCE role of reestablishing of the legitimacy --

SESTANOVICH:   Absolutely, and it will --

WALLANDER:  -- for Russia --

(Cross talk.)

SESTANOVICH:  -- it will affect the way in which people read Russian commitments and statements in a European security conference, in the revival of the OSCE.  So what Medvedev and Putin do here in -- in adjusting the political system will have something to do with that larger diplomatic agenda that we talked about here.

WALLANDER:  Mm hmm.  Fedor?

LUKYANOV:  After a Duma election in December 2007, which was rather exceptional even for Russian circumstances, President Sarkozy called President Putin -- at that time President Putin -- and congratulated him cordially for success of United Russia Party, which was absolutely surprising because from the point of view of diplomacy and protocol he didn't need to do it because it was not presidential election and parliamentary election.  But Sarkozy was so much excited about how great -- how skillful it was organized -- and, of course, he was jealous because he can't do the same in France.   So he called his friend Vladimir and congratulated him.  

As for OSCE monitoring, in my mind OSCE monitoring system is under conceptual decline because it was invented early 90s in a completely different situation.  First, it was not planned for situation of geopolitical competition on a post-Soviet era.  At that time, all parties which committed to that they accepted common rules.  Now it's not the case and, of course, why -- a Russian view is that -- that OSCE monitors are, so to say, more loyal to some countries which are important for -- geopolitically important for the West, and less loyal for other countries which are, so to say, competitors.  So examples are Kazakhstan for -- Kazakhstan or Georgia.  

Another reason is that the whole system of election monitoring was considered as overseeing over transition of countries -- post-Soviet, post-Socialist countries -- transition to market economy and democracy.  Now, Russia is not considering itself as being in transition, and if not then the question is why you have rights to assess our internal -- internal political development.  So I think that every election in years to come will produce political conflicts but not influence very much Russia's situation.

WALLANDER:  All right.  Thank you -- (off mike).  

QUESTIONER:  Thank you.  (Inaudible.)  I want to ask a general question about the position of Russia in the international system.  As Russia's international economic position increase obviously because of what was happening internally it was accorded more -- more weight.  People were more interested in what was happening and you kind of saw Medvedev in particular come up with some ideas for reform of the international economic system, which could use some reforming and some ideas.  

But the other side of it was the West started to pay attention to what Russia had to say.  And my question really is will this continue now that Russia is more in the G-20 where its influence is much less and will be much less and the G-8 isn't going to deal with those issues?  And also should we be paying attention to what Russian ideas are?; obviously, that would presuppose there were ideas.  And my last point is if Russia's economic status does continue to decline do you see a revision to the past pattern where we pay more attention to Russia when it's a problem than to when it is a part -- when it's part of the problem than it is when it's part of the solution?

WALLANDER:  (Off mike.)

SESTANOVICH:  I think there's -- there's no doubt that Russian economic decline in economic standing is going to produce a decline in political status.  How can it not be that?  You know, we probably -- if we'd been meeting here six months ago we wouldn't necessarily have had the same attitudes toward -- toward the -- you know, the Russian GDP with -- and it's not just the decline of oil prices but the devaluation of the currency which -- and both of those may well continue.  

But they can also turn back up.  You know, the Russians have gotten themselves somewhere comfortably in the range of, you know, the -- maybe the sixth to the 16th biggest economy and it can, you know, they can kind of bounce a little up and bounce a little down.  The idea of the ruble as a reserve currency, I think, is probably on the shelf for a while.  But, you know, how Russia plays in, you know, the future international energy issues, that I think probably is -- that will continue to be a large role.  

I guess the question I'd ask, Toby, about your -- about your question is are the Russians part of a broad pattern in which countries respond essentially in sort of self-regarding and protectionist terms to an international crisis.  I mean, I think most countries seem to be acting as though in a crisis we have to fend for ourselves and -- and we don't expect cooperative solutions to be the answer to the crisis.  

We can all say in a time of crisis it's really important to have international cooperation but I think the Russian view is actually we aren't going to be able to rely on that much and that's why you see protectionism of one sort or another.  You don't -- you don't see the Russians stepping forward and saying yes, absolutely, we are with an international consensus about cooperation.  And if that's the case they may not, you know, if -- they may not stand out in the crowd.  

You may have trade wars.  You may have competitive devaluations and revaluations and -- and a much more sharp-elbowed set of economic policies among all those countries in the range of -- not just the sixth to the sixteenth but, you know, from the first on down.  And so we may not regard the Russians as trouble makers in that respect in an international environment in which you just have a lot more generally competitive policies.

LUKYANOV:  About Russian ideas, whether they should be regarded or disregarded, 2007 Russia unexpectedly put a question about reform of International Monetary Fund and said that Mr. Strauss-Kahn was absolutely unfit for -- for that job.  It was seen generally in the West as another attempt by Russia to spoil everything, to demonstrate that Russia is different and so on.  Now --

SESTANOVICH:  But was it supporting a Czech, right?

LUKYANOV:  A Czech, yeah.  A Czech from -- yeah, exactly.  And this is the first case.

SESTANOVICH:  No more.  (Laughter.)

LUKYANOV:  And -- and now we see that maybe those criticisms was not -- (inaudible).  About G-20, I agree with Steve.  I don't believe in this format.  I think it will be just a manifestation of political show but in the end every country, especially in Europe and in Russia, will try to protect their economies.  And to pay attention to Russia or not to pay attention if Russia will decline economically, I think one of biggest lessons we can learn from experience of George Bush administration if you don't pay attention to Russia at all, as they did a significant part of their terms, it will end badly.

WALLANDER:  Okay.  I have a question way in back.

QUESTIONER:  Rich Harold with BP.  I'd like to continue on the economic theme for a moment please.  Assuming that the financial crisis which came out, of course, in the first panel as -- as extremely serious for Russia, perhaps even more so than for most of the world -- assuming that continues for up to the next couple of years forcing Russia to deplete significantly its -- its currency reserves, what carryover do you see of the financial crisis into Russia's foreign policy, not only trade policy, which Steve has covered now and in his excellent piece online for CFR.  But more broadly, does Russia become -- you know, behave in a way that becomes more integrated with the West because of the need -- increased need for Western investment?  Does it become more isolated because of the need to scapegoat the West for the crisis?  Or does it -- does it pursue some erratic behavior because of lack of financial and political resources to pursue a -- a dependable foreign policy?

LUKYANOV:  Yeah, I would not overestimate yet the speed with which reserves disappear.  Yes, it was a period of, I think, a panic in November when Russian Central Bank tried to -- to support a national currency and they spent a lot of money doing that.  Now it's different.  It's a different situation and I think that devaluation will continue and generally Russia will be more -- Russian government will be more cautious in spending those reserves.  

As for impact on Russian foreign policy, you know, it's quite difficult to predict because this crisis is very much different from crisis '98 or other crises we had before because it's not only Russia which is affected but everybody.  I think the most defining factor will be proportion to which different actors in the international arena will be affected.  One small -- one example -- Russia is not in the best economic shape now.  Maybe it will deteriorate further.

But a problem which all of us will face very soon will be not above spheres of interest -- of privileged interest in the neighboring countries but really spheres of responsibility because at least part of post-Soviet countries might face economic disaster.  Kyrgyzstan, Tajikistan, partly Moldova, even Ukraine -- we will see that the trends there are not -- not encouraging.  Question is whether Russia will need to help them, will -- will try to use the situation there to improve positions by the way in Ukraine.  

In Kiev, for example, now they are discussing whether the new situation with the new gas prices at least for this three months whether Ukrainian enterprises will -- will bankrupt and -- and Russia will buy all of them cheaply.  So -- so it's very difficult to understand to which extent different actors will be able to act -- to be active on -- but -- for example, on the post-Soviet era.  So really this is a crisis which we didn't see before.

SESTANOVICH:  After the Georgia war, Putin promised a 50 percent increase in military spending.  At some point, when the generals remind him of this in the next fiscal cycle he's going to say to them, I lied.  (Scattered laughter.)  It's my prediction.  The desire to keep the new expenditures down will mean that it's going to be harder to move the Black Sea Fleet.  That's a big, big expensive ticket item.  They're not going to want to do that -- some deal with the grain.  I mean, the Ukrainians have a stronger bargaining hand on that one, I would say.  

I would hypothesize that you may have some people on the Russian budget side saying, you know, some arms control agreements could be kind of good for us.  Maybe cutting down, to go in deeper in nuclear forces and other forces and -- could be good.  We're -- we're not going to play out the full implications of Putin's suspension of the CFE treaty.  You know, no new -- no tank buildup.  

But I got to -- I go with -- add one other thing to your question, Rich, which is a -- which is a very good one.  I'm struck by the continuity in the policy team given crisis.  David Remnick earlier talked about the quick turnover that you had in 1998 of, you know, prime ministers being replaced in rapid succession.  You've had -- you haven't had any sacrificial firings and I would say broadly speaking the liberal technocrat team is stronger than it was when the crisis began and that may -- I mean, but that will be an interesting question.  There will be a struggle.  

One of the issues that I've been trying to get people's attention on is what the implications are for investment policy because bailouts are expensive and if you say that you have a national security reason to bail out every Russian corporation that is going to have trouble in the next 10 -- next 10 months, rest of this year, you're going to be spending a lot of those reserves, and a liberal technocrat policy would be we don't have to bail everybody out just to avoid having foreigners get a larger share of major Russian companies.  But that's a disputed issue.  So far, the claim you have to bail us out because the foreigners may buy us up has been successful in getting bailouts, and that's going to be an issue that is debated, I would say, as the Russian crisis deepens.

WALLANDER:  I have time for one very brief question and then -- which would hopefully feed into wrap-up comments by our panelists.  This gentleman here has been patient.  

QUESTIONER:  Yes -- (off mike).

WALLANDER:  Could you -- could you -- go.

QUESTIONER:  Oh.  I was glad -- (audio break) -- has moved in this area and all of you but the representative of British Petroleum actually can answer some of these questions.  

Lately, you seem to be making a deal with the Russians.  We were told that you will not be there but as I read the reports, and I don't have any other secret information, but you appear to be staying in Russia.  There was a compromise by Putin and it goes to the point Steve was just making -- there are going to be more concessions, if I have to predict, on investment.  

I also disagree with Fedor that both leaders of Georgia and Ukraine are political courses.  It's going to be now extremely difficult to repeat interventions, undermine -- (inaudible) -- or you might do a very beautiful balancing act with Ms. Tymoshenko and the position in Georgia but it's got to be much more refined.  It will be for seasonal diplomats and perhaps some (poison ?) but I think above all you will have to be -- you know, concentrating more on the kind of diplomatic means rather than military means.

WALLANDER:  I'm going to jump to your question which I think is, am I right, so --

QUESTIONER:  I'm asking you if --

(Cross talk.)

QUESTIONER:  -- if I'm right.

WALLANDER:  And that will be a good way to conclude our panel.  Steve?

SESTANOVICH:  Well, I'd just kind of end where I -- where I started.  This is a period in which the Russians are going to have to adjust to a -- to straightened circumstances as lots of countries are, a diminished -- a reduced place in the international order.  And that is going to be challenged by or complicated by, you know, often a dysfunctional policy and decision making.  And yet as a Russian friend of mine said when I saw him in Moscow a couple of months ago, you know, difficult circumstances, low energy prices, economic hardship help us to think clearly.  And I think you may find a certain kind of clarity and focus in Russian policy over the next couple of years that you haven't had in the past couple of years because I think they've really been kind of on a toot of sort of geopolitical success as they felt it was.  And now they see a little better and that may produce better policy and more opportunities for us to work with them, let's hope.

WALLANDER:  Fedor, a sober versus dizzy with success atmosphere or --

LUKYANOV:  Absolutely.  I think that a new situation will force Russia to rely more on diplomacy, that's for sure.  As for two leaders you mentioned, in Georgia there is a tradition that so far neither of -- presidents of this country managed to complete his term, so I don't think that Mr. Saakashvili will be an exception.  So he -- he -- his positions might be changed even without Russian intervention and, of course, if we will see more moderate leadership in Georgia I think relationship with Russia will start to improve.  With Saakashvili, unfortunately not.  

As for Ukraine, Ukraine this year, the whole year, will be a year of election campaign in Ukraine.  We will see enormous battle between Mr. Yuschenko and Mrs. Tymoshenko.  In Moscow tactically now it's easier, of course, to deal with Tymoshenko who is more pragmatic but, believe me, nobody in -- in Russia has illusions about Mrs. Tymoshenko and how -- how she sticks to commitments.  (Laughter.)

WALLANDER:  So lots on Russia's plate -- potential change -- we think we’ll get a sense of some continuity.  Would you join me in thanking our panelists?  (Applause.)

SESTANOVICH:  Thank you.  Thanks a lot.


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