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Copyright ОАО «ЦКБ «БИБКОМ» & ООО «Aгентство Kнига-Cервис»

Global “Perestroika”

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INSTITUTE OF WORLD ECONOMY AND INTERNATIONAL RELATIONS (IMEMO)

Global “Perestroika” TRANSFORMATIONS OF THE WORLD ORDER Edited by Alexander A. Dynkin, Natalya I. Ivanova

Moscow VES MIR Publishers 2015

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UDK 327 BBK 60.5 + 65.5 +66.4 G52 Contributors: S.A. Afontsev, A.G. Arbatov, N.K. Arbatova, V.G. Baranovsky, G.I. Chufrin, I.V. Danilin, V.Z. Dvorkin, A.A. Dynkin, T.U. Farnasova, V.G. Gelbras, Ye.Sh. Gontmakher, N.I. Ivanova, N.I. Kalinina, A.N. Kalyadin, E.V. Kirichenko, V.B. Kondratiev, N.I. Kozyrev, A.V. Kuznetsov, V.V. Lapkin, D.B. Malysheva, V.V. Mikheyev, Ya.M. Mirkin, S.K. Oznobishchev,V.I. Pantin, O.B. Reznikova, A.V. Ryabov, E.S. Sadovaya, V.A. Sautkina, I.S. Semenenko, I.A. Seyfulmulyukov, P.V. Topychkanov, I.P. Tsapenko, G.I. Vaynshteyn, F.G. Voitolovsky, A.G. Volodin, N,V. Zagladin, A.V. Zagorsky, S.V. Zhukov Editors of sections: V.G. Baranovsky (Section III Politics and Security), Ye.Sh. Gontmakher (Section II Socio-Political Processes), N.I. Ivanova (Section I Economy) Editors of the book: A.A. Dynkin, N.I. Ivanova Peer reviewers: Member-correspondent of the RAS O.N. Bykov, Dr. of economics S.K. Dubinin, Dr. of history V.Ya. Belokrenitsky, Dr. of philosophy Yu.A. Krasin The book was originally published in Russian under the title: Globalnaya perestroika / A.A. Dynkin and N.I. Ivanova. Moscow, VES MIR, 2014. ISBN 978-5-7777-0589-1 English language edition is the updated version of the Russian language publication. Translated from Russian by Margret Sutterwaite, Andrei Nikolaev and Interdialect+ Ltd. All rights reserved. No part of this publication may be reproduced, stored in retrieval system, or transmitted, in any form or by any means without prior written permission of the Institute of World Economy and International Relations (IMEMO), Russian Academy of Sciences and VES MIR Publishers

Cover design by Anna Arenstein

Editors gratefully acknowledge the financial support of the BP company for this English version publication Printed in the Russian Federation

ISBN 978-5-7777-0595-2

© IMEMO, 2015 © VES MIR Publishers, translation, 2015

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CONTENTS

Foreword (A.A. Dynkin) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Postbipolar Polycentric World in the Context of the Ukrainian Crisis (A.A. Dynkin, N.K. Arbatova) . . . . . . . . . .

10

Section I. ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

43

Introduction (N.I. Ivanova). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45

Chapter 1. Global Economy in the Search for a New Growth Model (S.A. Afontsev) . . . . . . . . . . . . . .

49

Chapter 2. Innovation (N.I. Ivanova, I.V. Danilin) . . . . . . . . . .

64

Chapter 3. The Corporate World Map (A.V. Kuznetsov) . . . .

83

Chapter 4. Regulation of the Global Financial Sector (Ya.M. Mirkin) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100

Chapter 5. USA: A Potential for a Qualitatively New Phase of Socio-Economic Development (E.V. Kirichenko) . . . . .

121

Chapter 6. State Companies and Development Banks in the Contemporary Economy (V.B. Kondratiev) . . . . . . . . .

145

Chapter 7. “Non-Conventional Hydrocarbon Revolution”: Impact on Oil and Natural Gas Markets (S.V. Zhukov, O.B. Reznikova) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

174

Section II. Socio-Political Processes . . . . . . . . . . . . . . . . . . . . . . . .

205

Introduction (Ye.Sh. Gontmakher) . . . . . . . . . . . . . . . . . . . . . . .

207

Chapter 8. A New Periphery. Challenges of Post-Communist Development (V. V. Lapkin, V. I. Pantin, A. V. Ryabov) . . .

210

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Contents

Chapter 9. Democracy and Challenges of a Changing World (G. I. Vaynshteyn, N.V. Zagladin, A.V. Ryabov) . . .

232

Chapter 10. Transcultural Migration and the Future of Multiculturalism (I.P. Tsapenko, I.S. Semenenko) . . . . . . .

248

Chapter 11. Social Imbalances (E.S. Sadovaya, V.A. Sautkina) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

272

st

Chapter 12. 21 Century Individual: In Search of a New Identity (I.S. Semenenko, V.V. Lapkin) . . . . . . . . . .

296

Section III. Politics and Security . . . . . . . . . . . . . . . . . . . . . . . . . . .

311

Introduction (V.G. Baranovsky). . . . . . . . . . . . . . . . . . . . . . . . . .

313

Chapter 13. System of International Relations: The Emergence of New Realities (V.G. Baranovsky) . . . .

319

Chapter 14. Crisis as Catalyst of European Integration (N.K. Arbatova) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

363

Chapter 15. New Trends and Controversies of Transatlantic Relations (F.G. Voitolovsky). . . . . . . . . . . . . . . . . . . . . . . . . .

387

Chapter 16. Dialectic of the US–China Relations (V.V. Mikheyev, F.G. Voitolovsky) . . . . . . . . . . . . . . . . . . . . .

424

Chapter 17. AFPAK Zone as a Source of Instability in the Region and of Threats to International Security (G.I. Chufrin, V.G. Gelbras, A.G. Volodin, N.I. Kozyrev, D.B. Malysheva) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

441

Chapter 18. Armed Conflicts in the Middle East in XXIst Century (D.B. Malysheva) . . . . . . . . . . . . . . . . . . . . . .

476

Chapter 19. International Security: Paradygm Shift (A.G. Arbatov, V.Z. Dvorkin, A.V. Zagorsky, N.I. Kalinina, A.N. Kalyadin, S.K. Oznobishchev, P.V. Topychkhanov, T.U. Farnasova). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

495

Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

537

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FOREWORD … any genuinely new trend is a knight’s move, a change of shadows, a shift that displaces the mirror. V. Nabokov. The Gift

This book is an attempt to make sense of a changing world around us. Stationary state and evolution are interrelated variables of historical process. At times, however, evolution speeds up, ceases to be gradual and turns into a  revolution (social, technological or scientific). The  global economic crisis of 2007–2009, also referred to as “The Great Recession”, has brought the need for change into foreground. The global world order is amid sweeping changes. A single generation saw a bipolar world of the Cold War fall apart and the illusions and excesses of a unipolar world shatter. Now, according to one view, we are witnessing the emergence of a hierarchical polycentricity or, in another view, a world without poles or a dominant model. Are these views relevant? A new multi-factor tandem of the USA and China is arising. Will their relations stabilize or destabilize global development? What new conceptual economic models will replace Keynesianism and a tight Chicago-style monetary policy that dominated the pre-globalization world of the 20th century? When will it be safe to say the crisis is a thing of the past, especially in the European Union? Evidently, welfare market economy in its traditional incarnation has ground to a  halt, due to, in particular, demographic trends. What comes next: an individual responsibility society? What shape will a new social compromise take? The twentieth century saw a vigorous leap to democracy through the yawning tragedies of authoritarian and totalitarian experiments with their expansionism and aggression. Can one assume that market economies will become, over a foreseeable span of the 21st century, a universal goal and vehicle of development all around the globe? The “Arab Spring” is a hasty label coined by journalists. What seasons are yet to come in the vast conflict-torn region of the Middle East

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and Northern Africa? Will new failed states – a source of instability and terrorism – spring up on the region’s map? Can the Sunni and the Shia be reconciled, how will the Syrian regional “Cold War”, at times breaking out into a hot phase, end? What will be the outcome of the struggle for leadership between Iran and Saudi Arabia? What hazards lurk in the atomization and dispersion of contemporary developed world societies? An identity crisis and a crisis of multiculturalism against the background of mass migration, terrorism, closed foreign-culture communities: can these challenges be addressed by legal adjustments of tolerance under a “safe tolerance” policy without spinning into xenophobia and intolerance? Economic turbulence and a stalemate of negotiations within the World Trade Organization (WTO) have accelerated the formation of new regional economic areas in the Northern hemisphere: the TransAtlantic trade and investment partnership, the Trans-Pacific partnership. These partnerships envisage not only the abolition of trade duties and investment barriers, but also unification of standards for goods and services, uniform government procurement bidding rules, etc. Stimulation of economic growth and competition is expected to be driven by de-bureaucratization and non-tariff constraints, as well as harmonization of legislation. Can these help achieve a Trans-Atlantic “renaissance” and curb the expansion of Chinese manufacturers? Finally, the currently subsiding economic crisis brought forth, as many times before, a new wave of innovations, primarily in the production of hydrocarbons and information technologies (IT) In energy industry this is exemplified by the production of shale gas by horizontal drilling and formation fracturing, as well as the production of shale oil and bituminous sand oil. Energy innovations already have a strong impact on the regionalization of energy markets, altering the directions of goods flows and shifting the positions of key global players, both producers and consumers of hydrocarbons. In IT, a surge of innovation is represented by a new generation of mobile devices, tablet computers, cloud programming and databases, social networks. IT innovations have an even more profound impact, including changes in lifestyle, localization or global integration of business. The dynamics of IT innovation has far-reaching implications for education, medicine, society, politics, international and military-strategy, including new equipment for intelligence and warfare operations. It is highly likely that whole professional areas will transform, many

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mass professions disappear, and a high and stable structural unemployment arise, melting the middle class down and, consequently, driving income polarization. How will these breakthrough innovations change the hierarchy of key global players? What challenges do they pose for national political systems and the nature of international relations? Evidently, issues on the agenda are numerous. Researchers and politicians of the leading countries are engaged in an active search for answers to these questions, which dominate global professional, public and political debates. Making sense of a new reality and a search for a post-crisis “new normal” state is the theme that inspired this book, created by a team of authors from the Institute of Global Economy and International Relations. What makes this book special is its interdisciplinary span, multi-factor angle, and an ensemble of economic, sociological and political science approaches. This, I hope, will help give more dimensions to a picture of the contemporary world outlined in the book. Academician Alexander A. DYNKIN

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POSTBIPOLAR POLYCENTRIC WORLD IN THE CONTEXT OF THE UKRAINIAN CRISIS Alexander A. Dynkin, Nadezhda K. Arbatova

Now that, for the first time since the end of confrontation between the two systems, the crisis in and surrounding Ukraine has taken the relations between Russia and the West to breaking point, many cannot but speak about whether or not this is a new Cold War. For the first time in the last 25  years, there is a threat of a new demarcation line being drawn in Europe, which, since the end of the bipolar system, has been considered as the world’s most stable region. The current crisis in the relations between Russia and the West stems from the tension arising in the polycentric world order as a result of its hierarchical pattern changing so quickly.1 The EU countries, which are going through a prolonged recession coupled with an integration crisis, as well as the United States, which is coming to the end of a painful decade of lost wars in Afghanistan and Iraq, have overlooked restoration of the new Russia’s identity and integration interests. If, fifteen years ago, during the Yugoslavian crisis, Russia, which at the time was experiencing a severe transformation crisis and even a sovereign default, did not have the resources for defending its interests, by 2014 the situation changed, this important development being disregarded by the West in providing unconditional support for the change of regime in Kiev. This is why the consequences it faced proved so unexpected. Tactical mistakes have, of course, been made by both Brussels and Moscow.

1 The “hierarchal polycentricity” concept was first formulated in the monograph “Russia in a Polycentric World” published in 2012 (A.A. Dynkin and N. I. Ivanova, editors). This publication did not go unnoticed and the international expert panel of the University of Pennsylvania (USA) included it under No. 15 among the 60 outstanding studies of international matters published in 2012–2013.

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New Trends in the Modern System of International Relations In the context of the Ukrainian crisis, the “new Cold War” concept can only be treated as a metaphor meaning extreme animosity in relations. In fact, the Cold War is a specific, if not unique, state of international relations implying existence of a number of factors, the first being a bipolar system of international relations, the second–ideological, military and political confrontation, the third – an unprecedented arms race and the fourth – indirect involvement of both East and West in regional conflicts and wars through their respective satellites. None of these factors is currently present in the international relations developing under the influence of two counter trends: driving towards multilateral cooperation and global governance, on the one hand, and new bipolarity and confrontation, on the other. This new bipolarity, which, at the moment, is barely visible, will differ radically from its previous version. The demarcation line will most likely go between liberal capitalism and authoritarian capitalism, between countries with long standing and emerging democracies, both sets of criteria being present in a “very diluted” concentration. This will constitute bipolarity within a single economic system in the context of the modern polycentric world, which, in contrast to the past, is far more global, diverse and dynamic in terms of scale, participants and changes in the position of states in the global and regional hierarchy, respectively. Alongside the global centers of power, additional strength is acquired by regional leaders who may, at different levels and on different matters, be competitors or partners at the same time. This can be illustrated by cooperation between the United States and Iran, two apparently irreconcilable adversaries, in connection with the sharp aggravation of the situation in Iraq. Without waiting for a resolution with respect to the Iranian nuclear program, which has always been a stumbling block in the bilateral relations, the US has launched negotiations with Iran over supply to the Iraqi government of drones and military unmanned aircraft to fight radical Sunni groups which the United States supported in Syria against Bashar Assad. Like a drop of water, this example mirrors the multilayered nature of modern international relations. Moreover, the concept of center of power has, itself, changed. Now, in contrast to the past, it implies that, rather than military power, it is

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the economic potential and attractiveness of its political and social model that constitutes the most important component of power. Strictly speaking, even the classic static bipolarity of the Cold War in its pure form did not survive the 1960s, as it was later impacted by the forming multipolarity, mainly as a result of China’s split off as an independent power center, the USSR–China conflict, the European Economic Community’s growth in economic strength and political activity and the emergence of the Nonaligned Movement, which, among other states, included Yugoslavia and India. Moreover, as opposed to the previous historical dispute between socialism and capitalism (the Clash of Two Worlds), where the leading role belonged to the arms race, the severe ideological and economic competition between the market economy and its antithesis – the centrally controlled economy – a new less severe confrontation will likely shape up around the two political and social models of market capitalism. Analysis of the differences between the liberal and authoritarian capitalisms is not covered by the scope of this chapter, since it is a major independent research task that does not allow assessments to be simplified for publicist purposes. It should only be noted that the differences arise from the farreaching historical and structural specifics of different societies in the modern polycentric world. They stem from how deeply law is rooted in a society, from the personal responsibility of its individuals, their selforganization traditions and forms of social bondage and solidarity. The current leaders of authoritarian capitalism or “capitalism without democracy” are China and Russia and this model finds support in developing countries, specifically, in Central Asia and Latin America. British historian and commentator Timothy Garton Ash wrote: “For the first time since 1989, democratic capitalism has a very serious competitor, and that is authoritarian capitalism in the Russian or the Chinese versions. That’s not attractive to people in the West, but it is attractive to a lot of people in developing countries. So for the first time I would say in 20 years, we have a serious competitor”.1 There is, however, another more optimistic perspective. Its supporters say that “democratization and globalization are still the megatrends that determine the new quality of political-economic space. These are “boosted” by new auxiliary processes that either promote or delay the 1 Gaisa Altynbayev Authoritarian Capitalism in Russia, Kazakhstan and Azerbaijan challenges the West. (http://rus.azattyq.org/content/cis_capitalism_middle_clas/1939793. html)

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main trends”.1 Today, the delay in these megatrends is quite obvious, since the historical dynamics of the next cycle of the global democratization process has mostly exhausted itself for the time being. The “World Liberal Project” is at the stage of exploring the territories it won and it might overcome the delay as successfully as in the past crises during its progressive development”.2 This approach to the modern system of international relations is based on the imperative of economic and political interdependence of fundamental national interests in the context of globalization. At the same time, certain Western political scientists give quite pessimistic assessments of current developments. Thus, in his article “Illiberal Capitalism” published as early as 2008, Gideon Rachman wrote: “The creation of mutual interests in a global economic system should help limit any new rivalry between the West and Russia and China.But hopes that the two countries would embrace the Western political model now seem outdated and naive.”3 These sentiments among Western scientists were largely heated by the Caucasus crisis of 2008 and the Ukrainian rift between Russia and the West has convinced many analysts and politicians that the split in post-bipolar international relations is a fait accompli. Clearly, the growing disagreements on a number of Russia’s domestic and foreign policy issues between Moscow, on the one hand, and the United States and the European Union, on the other, are pushing Russia towards China and other states that do not raise such questions and often come under similar criticism themselves. From this perspective, the Ukrainian crisis has strengthened China’s position in the Russian direction. The large-scale gas agreement signed between Russia and China in May 2014 has clearly signaled to the West, imposing sanctions on Russia, that Moscow has a real alternative now. In other words, the West has actually abandoned the Greater Europe project that was to extend from Lisbon to Vladivostok. But, in the polycentric world, Russia cannot deem itself to have emerged completely 1 Vladimir Kulaguin. Imperishability of Authoritarianism? // International Trends (Journal of International Relations Theory and World Politics). (http://www.intertrends. ru/sixteenth/006.htm) 2 Ibid. 3 Gideon Rachman. Illiberal Capitalism: Russia and China Chart Their Own Course // The Financial Times. February 9, 2008.(http://www.ft.com/cms/s/0/f7aa8626-be0011dc-8bc9-0000779fd2ac.html#axzz3QhoJob9t)

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in a vacuum, which is why the prospect of the Greater Asia project has arisen to stretch from Shanghai to Smolensk and from Arkhangelsk to Teheran. This trend finds its specific expression in the SCO strengthening and in various “Silk Road” options. While Western politicians are concerned over Russia and China getting closer, many experts believe there are objective factors restricting a full scale union of the two partners. For instance, it is said that “there is just as often a noticeable lag between the rhetoric of summits and what is actually achieved. Of course, both countries have moved closer together in recent years, but Moscow and Beijing have also traditionally hedged their relations with each other. China, of course, does not want to damage its much more lucrative ties with the West by joining Russia on a bold anti-Western crusade, while Russia is fearful of being drawn into the Chinese orbit and eventually being reduced to the position of Beijing’s junior partner”,1 even though, in the mid-term, Beijing will rather follow in the footsteps of or act in parallel to Russia’s foreign policy on a number of traditional security issues (such as restrictions on nuclear weapons and nuclear non-proliferation, regional conflicts, other than in the Asia-Pacific region, etc.). This is because the Russian foreign policy institutions not restricted by communist doctrinal requirements are more dynamic and professional. Moreover, Russia’s parity with the US in the sphere of strategic and other types of armament, its achievements in the fundamental sciences, leadership in the nuclear industry, space exploration and other high-tech areas provide Moscow with more policy space. On the one hand, the modern polycentric world offers greater flexibility for case-specific tactical solutions by certain international actors but, on the other, it is fraught with quite a few risks and threats they might face. Clearly, the most advantageously positioned state or coalition is the one that will build better relations with other centers of power, rather than those they have set up between themselves.2 This, in the recent past, was also how Russia and the European Union stood in the world, one having missed many opportunities during the high demand period and the other having had its position affected by the global economy recession of 2008–2009 and the subsequent stagnation that caused 1 Nikolas Gvosdev. Get Ready World: Russia and China are Getting Closer. (http:// inosmi.ru/world/20140520/220450558.html) 2 Alexei Arbatov. Moscow–Munich: A New Framework for Russian Domestic and Foreign Policies. Carnegie Moscow Center. Working Paper No. 3 2007. Page 12

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a deep structural crisis inside the EU. China has now got a chance to occupy an even more advantageous position in its economic and political relations with Russia, the US and Japan and to strengthen its influence in Central and South Asia, the Gulf region and Africa. For instance, Russian sinologist Alexander Lukin notes that “with the strengthening of its position, China is clearly becoming more active as a foreign policy player. Certain voices are heard in the country  encouraging the government to act more aggressively with respect to “historic offenders”, above all Japan. They propose to follow the US example and use troops abroad in order to protect economic and political interests…”1 So far, Russia is not on the “offender” list and, in the opinion of a number of Chinese experts, is given the role of China’s strategic, power and raw resource supplier, but who knows what the Chinese ambitions might be in the future? Many analysts note that China will benefit the most from the West-Russia confrontation over Ukraine. The divides between Russia and the West that undermine their cooperation on fundamental security issues also work well for radical Islamism. It is a cross-border ideological movement targeting mainly European Civilization (including the US and Russia) and seeking to unite Islamic nations in a single caliphate. Its rapid rise has resulted from the USA’s severe political miscalculations in Iraq, Libya and Syria. The Greater Middle East concept put forward at the beginning of the current century2 and used extensively by the US Department of State under Condoleezza Rice has eventually led to the diametrically opposite result, i.e. the emergence of an Islamic terrorist quasi-state – the Islamic State in Iraq and the Levant (ISIL). “Ideological and military expansion of this new center of power may give rise to another stage of acute conflicts, terrorism and proliferation of weapons of mass destruction in the world. Withdrawal of UN peacemakers and NATO contingents from Afghanistan after 2014 could entail the Taliban taking its revenge and then attacking Central Asia from the North and Pakistan from the South.”3 1 Alexander LukinNation and Martial Spirit // Russia in Global Politics (http://www. globalaffairs.ru/number/Natciya-i-voinstvennyi-dukh-15960) 2 Adam Garfinkle.The Greater Middle East in 2025.Foreign Policy Research Institute E-Notes. December 17, 1999. (http://www.bu.edu/globalbeat/mideast/FPRI121799. html) Adam Garfinkle was a speechwriter for US Secretaries of State, Colin Powell and Condoleezza Rice. C. Power and C. Rice. 3 Nadezhda Arbatova. Joined in Conflict Military Industrial Journal (http://www. vpk-news.ru/articles/21222)

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This area has already been expanding in connection with what is happening in Iraq where ISIL is fighting to create a Sunni Islamic State stretching from the eastern coast of the Mediterranean to the Euphrates. There is also a possibility of a new conflict breaking out in the South Caucasus and potentially affecting the North Caucasus as well. And if the goal of establishing a worldwide caliphate is hard to attain given the diversity of the Islamic world, creation of separate Islamic confederations might pose a real threat to international security. Georgy Mirsky, a well-known Russian political scientist warns: “Clearly, these countries cannot be joined in any state structure. In this sense, Muslim unity is no more real than Arabic unity. Yet, if these countries establish a more or less similar ruling regime operated by militant, intolerant Islamists many radical Muslim fanatics will consider this as a caliphate. And this step will advance realization of the idea of establishing Islam as the world’s dominant power…”1 The view that the Ukrainian crisis has broken the existing postbipolar world order ought to be considered more carefully. The first question we need to ask ourselves is: what has this new world order been? In general, large scale wars in Europe ended in peace conferences–from the Peace of Westphalia to the Yalta Conference–establishing a new world order and new rules of conduct in international relations. In contrast to the previous world wars, the end of the Cold War did not result in new developments being reconsidered. Moreover, the collapse of the Eastern Bloc convinced the West that all its political moves have been correct and nothing should be changed. Russian researcher Dmitry Trenin wrote: “The processes of the last decade of the 20thcentury have proven deeper than those following both world wars, so establishment of a new system of international relations has been protracted.”2 Russia, which made the biggest contribution to the relatively smooth termination of the bipolar confrontation, could not influence the international system reform significantly owing to its profound economic difficulties and political weakness in the early 1990s. The political elite in the West has shown an erroneous tendency to view Russia as 1 Georgy Mirsky. Live to See Caliphate (http://echo.msk.ru/blog/georgy_mirsky/ 1351488-echo/) 2 Kosovo: International Aspects of the Crisis /edited by D. Trenin and E. Stepanova.Carnegie Moscow Center. 1999. P. 15 (http://carnegieendowment.org/files/ cosovomnaspekty.pdf)

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the Cold War loser, thus offering a logical explanation for Russia’s domestic hardships and reduced role on the global stage. In other words, Russia’s Western partners have ignored the fact that a former enemy’s excessive weakness is not necessarily a benefit. Not only can it suddenly cause a third party to acquire considerable strength but it can also arouse revanchist sentiments in the loser and, eventually, create a bigger threat than the one posed by the former opponent. This seems to be the dialectics, the “new normality” of the polycentric world. The attempts to transform the existing Euro-Atlantic ad hoc security system have not yielded any noticeable results. Russia’s desire to have the OSCE nominated as the decision-making center for all European countries-related matters has not been successful either. It was not accepted by the West in the first half of the 1990s, this leading to the OSCE structures gradually marginalizing themselves. Irrespective of the multiple steps to adapt NATO to the requirements of the new agenda in international relations, the organization has failed to cast off its Cold War coat or find its post-bipolar identity and has remained a source of serious problems in Russia–West relations. The Organization’s activities have resulted in Europe preserving the outdated spheres of influence logic. As a result, the developed relationship between Russia and the West has included quite a number of rudimentary elements dating back to the Cold War era. This system, found generally satisfactory by the West, has failed to satisfy Russia in its recovery from the crisis of the 1990s. From this perspective, Putin’s speech in Munich on 10 February 2007, the “red line” drawn by Russia in the Caucasus crisis in connection with the prospect of NATO’s expansion into the CIS area, President Medvedev’s proposed new European Security Treaty (2009) and the current crisis over Ukraine should, in fact, be treated as signals to the West, however different in form and essence, that there is a need for new post-bipolar world order bases to be developed. In other words, the hopes that the confrontation between the two military blocs will be replaced by a common structure uniting the former adversaries have not materialized since the end of the Cold War. All post-bipolar era crises – i.e. NATO’s operation against Yugoslavia in 1999, the 2008 conflict over South Ossetia, and the current Ukrainian crisis–have clearly demonstrated that none of the current security organizations designed to resolve such conflicts has been able to perform their duties effectively.

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In the absence of the aligned vision of a new world order, the system of international relations has been changing its shape and configuration with kaleidoscopic randomness – from a unipolar or Americanocentric world order to a polycentric world differing totally from the concert of nations of the 19thcentury and the polycentricism existing before the Second World War. Academician Yevgeny Primakov wrote: “The  tendency towards a unipolar world structure generated by the United States policies was based on the US remaining the most powerful state in the world after the USSR’s collapse… Consequently, the supporters of this view have gone even further, claiming that, in the post-Cold War context, this unipolar structure could have served as a basis for establishing a world order securing stability and safety of all states.”1 The West’s fundamental conceptual mistake in the Russian direction has been its misconception that a partnership, even if it does not have clear ultimate goals, can by default satisfy Russia and adapt it to the key Western institutions–NATO and the EU. Possibly, the most important lesson learned from the 25 years of the post-communist world order is that a partnership structure in which Russia does not participate equally in developing the rules of the game is not capable of integrating a country that has retained its sovereignty and independence over the last 400 years. Having arrogantly opted for unilateral and arbitrary military actions in Yugoslavia in 1999, the US has been bogged down in a hopeless invasive war in Iraq, undermined the coalition policy implemented in Afghanistan by the UN and NATO, tied its own hands with respect to Iran and the DPRK and caused an unprecedented increase in anti-American sentiment all over the world. Eventually, the US has been bound to encounter other countries’ unified resistance irrespective of the size of their economies or military power. Henry Kissinger, a  well-known American politician and historian, warned that nothing was more dangerous to the current world order and the stability of American society than the US hegemony in world politics. It can excite unpredicted manifestations of anti-Americanism justified in the eyes of an unexpectedly broad coalition of diverse countries and regions.2 In this context, the Ukrainian crisis should not be treated as collapse of the post-bipolar world order, but rather as proof of its absence. 1 Yevgeny Primakov. World without Russia? What does political short-sightedness lead to? P. 1 (www.litmir.net/br/?b=103218) 2 Henry Kissinger. Does America Need a Foreign Policy? Toward a Diplomacy for the 21st Century. NY: Simon & Schuster, 2001.

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It is now widely acknowledged that, irrespective of the outcome of the Ukrainian crisis, the relations between Russia and the US, on the one hand, and Russia and the EU, on the other, will not get back on to the old track set up after the War of August 2008. This is the beginning of a  new stage, a  new clause in international relations, the contents of which will largely depend on the parties’ intent and ability to build their strategic priorities correctly. Robert Legvold, a well-known American political scientist, warns that if Russia and the West do not end their confrontation over Ukraine shortly, the international community will not be able to combat global threats effectively. If Russia and the United States approach each other in starkly adversarial terms, the conflict will badly warp the foreign policies of both countries, damage virtually every important dimension of international politics, and divert attention and resources from the major security challenges of the new century.1 We believe that proper lessons learned from the Ukrainian crisis on the basis of a detailed and unbiased analysis of its causes will subsequently help minimize the damage caused to international relations by the current confrontation between Russia and the West and retain the key liaison channels between them.

Ukrainian Rift: Conflict Anatomy In contrast to the Caucasus crisis of 2008, which was a confrontation between Russia and NATO, the conflict in and over Ukraine started as a clash between the European Union and Russia, or rather rivalry of their regional strategies–the EU Eastern Partnership policy and Russia’s Eurasian Union project, Ukraine being the main focus in both. Different points can be cited as the onset of the growing contradictions between Russia and the EU, for instance, Ukraine’s refusal to sign the European Union Association Agreement adopted by Kiev in November 2013 shortly before the Vilnius Summit. But it is possible that the turning point occurred earlier, in 2012, when Moscow stressed the Eurasian vector and did not want Ukraine to pursue its path to Europe, this time without Russia. The deep roots of the current conflict developing as 1 Robert Legvold.Managing the New Cold War. // Foreign Affairs. July/August, 2014. P. 79.

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pre-determinedly as a Greek tragedy, go back to the past and originate from how the relations between Russia and the West evolved over the previous two decades. Many Western politicians are now nostalgic about the 1990s when, according to Javier Solano, who occupied high positions in both NATO and the EU, the relations between Russia and the West were “really fantastic.” One cannot help being surprised by such a superficial and selective vision of this period by the West. It is during those years that an attempt was made at a communist revenge (in August 1991), Soviet assets were privatized in a shocking non-transparent manner, the confrontation between Yeltsin’s Government and the Supreme Soviet was resolved by force. Of course, there are no “what ifs” in history but the question “was it possible to exit the 70 years of communism through evolution?” seems to remain unanswered. Then came the two Chechen wars, when tens of thousands were killed. It was during those years that the Russian carrot and stick policy was formulated with respect to CIS countries that Moscow seems to have never treated seriously as sovereign states.

Origins of the Russian strategy in the post-Soviet area Since the collapse of the USSR, the Kremlin has seen the post-Soviet area as a single whole, in which traditional ties can be restored around a coordinating center that rewards loyalists and punishes defectors. The euphoria following the collapse of the USSR in 1992 was replaced by a sense of loss and defeat in 1993, this defeat occurring in the immediate environment rather than on some distant outskirts. The understanding of the interests and the conditions needed for their implementation has caused the elite to pay more attention to Russia’s actual position in the CIS. The “gathering” of CIS states under its aegis and the process of resolving certain specific problems (boundaries, drug trafficking, organized crime, transit pipelines, etc.) has pushed the Russian leadership towards establishing “special relations” with CIS countries eventually boiling down to Russia acquiring the role of the Newly Independent States’ donor. Rather than differentiating relations within the CIS and identifying its priority partners, Russia has, in fact, accepted the dependency attitude of its immediate neighbors, who have shifted on to the Russian

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leadership all the blame for the lawless actions of the former Soviet authorities, under the pretext that the real governance mechanisms of the USSR and the RSFSR had been merged into one. Russia has become a target of a variety of complexes, suspicions and negative assessments and emotions (whether perceived or actual), on the one hand, and ambitions, expectations and claims (often selfish and knowingly exorbitant), on the other.1 Given the above, it is only natural to ask what this position has actually given Russia. We believe that, according to the Russian leadership’s calculations, this has been a necessary payment for preserving Russia’s political influence in the CIS region. At the same time, the CIS countries’ political loyalty has been superficial in nature. It has been offered as payment for Russian financial injections. It is only when the domestic political situation in certain CIS  countries has become unfavorable for the ruling elites that they have asked the Russian government for help demonstrating their proRussian sentiments. On the other hand, at other times, CIS states have often used tensions in their relations with Russia in order to secure help and support from the West, these tensions often being artificially heated up. For Russia, the dilemma has been more complex because, on the one hand, it could not ignore the problems on CIS territory and, on the other, the strength and resources it needed for resolving those issues have been significantly reduced. Being unable to transform the CIS from an institution designed to ensure that the divorce is more or less civilized into an organization with flexible geometry, Russia has attempted to use the weaknesses of the CIS countries with unresolved conflicts in order to preserve its position in the so called “near abroad”. This policy eventually resulted in the GUUAM coalition being created in 1997 (consisting of Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova) to counterbalance Russia’s dominance on the post-Soviet territory. Of the entire range of bilateral foreign policy relations between Russia and the other CIS states, those between Russia and Ukraine have been the most important ones since the collapse of the USSR. Their significance for both Russia and Ukraine can be explained by the key role they have played in the internal political development of these 1 Nikolai Kosolapov. Stanovleniye subyekta rossiyskoy vneshney politiki [Establishment of the Russian Foreign Policy Player], In: Pro et Contra. Volume 6. N 1-2. 2001. P. 22. (http://uisrussia.msu.ru/docs/nov/pec/2001/1-2/ProEtContra_2001_1-2_01.pdf)

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two largest countries emerging from the USSR. They have played a vital role in ensuring stability in the post-Soviet area and, consequently, throughout Europe. The Ukrainian and Belorussian peoples are closest to Russians in ethnic, cultural, socio-political, historical and religious terms. President Boris Yeltsin said once: “The fact that Ukrainians are one of us cannot be torn from our hearts. Such is our common destiny.”1 However, history has repeatedly shown, it is the closeness between Russia and Ukraine that created problems in their relations, arousing excessive emotions in politicians of both countries and causing them to rush into ill-considered actions. This is confirmed best by the multiple ups and downs in Russia–Ukraine relations and their highly complex nature over the last two decades. The relations between Russia and Ukraine in the first decade of their independence went through the same stages as the rest of Russia’s politics in the CIS: the stage of disintegration and aggravation of contradictions caused by the partition of Soviet assets (in 1991–1993); Russia’s focus on multilateral mechanisms and fixation of the donor model of economic relations with Ukraine (in 1994–1996); and gradual transition from stagnation to pragmatism (1996–1999). In general, the policy implemented by the Russian Government under Yeltsin was reactionary in nature. Moscow was not developing the Russia–Ukraine relationship agenda but rather was responding to the foreign policy requests and steps made by Kiev, or indeed its other CIS  partners. “Russian diplomats had to respond to Ukraine putting forward its conditions for removing nuclear weapons from its territory, denying joint use and funding of the Black Sea Fleet, accumulating its multibillion debt, taking gas from trunk gas pipelines without permission and implementing a policy that restricts use of and education in the Russian language…”.2 The conflict over the Crimea that broke out immediately after the collapse of the USSR has become the same bone of contention in the relations between Russia and Ukraine as the Transdniestria problem in Russia–Moldova relations. The Crimea-related disputes between Moscow and Kiev have mostly revolved around 1 Citation: Arkady Moshes. Slavyanskiy treugolnik. Ukraina I Belorussia vo vneshney politike 90-kh godov [Slavic Triangle. Ukraine and Belarus in Foreign Policy of the  1990s]. In: Pro et Contra. Volume 6 No. 1-2. 2001. P. 107 (http://uisrussia.msu.ru/ docs/nov/pec/2001/1-2/ ProEtContra_2001_1-2_06.pdf). 2 Ibid. P. 114.

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the two main issues: the status of the Crimea and the future of the Black Sea Fleet. The first issue stems from the region’s demographic and geopolitical history in the Soviet period. And even though the peninsula’s population is mostly represented by ethnic Russians (68%) and Ukrainians (26% approximately), it also populated by more than a hundred other ethnic groups. The Crimean Autonomous Soviet Socialist Republic (the “Crimean ASSR”) was organized as a constituent federal entity within the Russian Soviet Federative Socialist Republic (the “RSFSR”) in the early 1920s. After the end of the war in 1945, the Crimean ASSR’s status was reduced to that of a region, this resulting in the limited autonomy it enjoyed earlier being cancelled and the territory being transformed into a typical administrative unit within the USSR. Another radical change to the region’s status was made on 19 February 1954, when, on Nikita Khrushchev’s initiative, the entire peninsula was transferred from the RSFSR to Ukraine to commemorate the 300th anniversary of Ukraine’s unification with Russia, on which Russians, Ukrainians and Crimeans remained silent.Yet even such a typically Bolshevist act of randomly modifying the country’s internal borders was marked by a number of violations of the Constitution in effect at that time. Another point is that, in the context of a unitary state, this border redrawing exercise was irrelevant as such. It is only since the collapse of the USSR that certain circles have become more active both in Russia and in the Crimea, insisting that the 1954 transfer of the Crimea to Ukraine was unlawful. The conflict escalation dynamics in 1992–1994 shows a connection between the Russian leadership’s intention to use the situation in the Crimea in their relations with Ukraine and the twists and turns of the struggle for power between diverse political forces beyond Yeltsin’s inner circle, above all, between nationalist groupings/patriots and radical democrats. The Russian leadership’s serious blunders on the way to Russia’s democratic transformation, such as the crisis of October 1993, which caused a wave of nationalistic sentiments and the first war in Chechnya, has contributed to neo-imperialists intruding en masse into the Russian policy-making process on the territory of the former USSR. With regards to the Black Sea Fleet, Moscow initially favored its retention within the military component of the CIS and then its joint use with Ukraine. The future of the Black Sea Fleet immediately became the most sensitive issue in Russia–Ukraine relations and nationalists in both countries repeatedly used it, pretending to be true defenders

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of the national interests of Russia and Ukraine, respectively. Following protracted discussions and heated rhetoric from both sides, the fleet was ultimately divided. Russia’s ratification of the Great Friendship and Cooperation Treaty in 1998 meant Moscow’s official recognition of Ukraine’s independence, sovereignty and territorial integrity, including the most contentious issues over the Crimea and Sevastopol. The bilateral treaties on division of the Black Sea Fleet and its onshore infrastructure officially secured the parties’ agreement on “Russia’s naval base abroad”. Yet the mere fact that the treaty was only signed in 1998 evidences the shortsightedness and ineffectiveness of the Russian policy. We believe the Russian leadership should have signed it much earlier–as soon as the USSR collapsed. Moscow becoming involved in endless debates over the Crimean problem and disputes between the Russian and Ukrainian military over the division of the Black Sea Fleet and Sevastopol, rather than elaborating a mutually acceptable compromise, should be recognized as an obvious mistake of Boris Yeltsin’s Administration. First, this was counter-productive in the context of Russia’s interests on CIS territory. The developments in the region in the second half of the 1990s demonstrate that the Russia–Ukraine disagreements forced Kiev to seek alternative partners in both the CIS and the West. Under Putin, the Russian policy in the CIS started to change. With the growth of its economic and financial potential and independence, Russia switched to a pragmatic approach to each specific neighboring state or sub-region. Abandoning its ephemeral imperial projects, Moscow focused on its power export transit to Europe, buy-out of promising businesses and infrastructures, natural resource exploration and extraction investments and preservation of really important military bases and facilities in the context of structuring relations with its neighbors.1 At the same time, the political elites in the CIS were not ready for a radical review of their privileged relations with Russia in the power industry and other sectors. Their dichotomy and, specifically, their desire to be independent from Russia but to retain the privileges arising from cooperation with the country has, on the one hand, secured the former relationship model with Moscow but, on the other, has supplemented it with a polemical, if not controversial element. 1 Alexei Arbatov. Moskva – Munkhen; noviye kontury rossiyskoy vnuitrenney I  vneshney politiki [Moscow–Munich: A New Framework for Russian Domestic and Foreign Policies]. In: Moscow Carnegie Center. Working Paper No. 3, 2007. P. 18.

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In this context, despite all the criticism of the foundations of Russian strategy in the CIS area, we cannot ignore the internal aspect of the Ukrainian crisis. Strictly speaking, all conflicts in the CIS are considered in three dimensions–by applying the internal, the Russian and the intentional criteria. Apart from any external influence, any conflict on the post-communist territory has its own domestic roots, otherwise no outsider would have been able to drive a wedge between the titular nation and national minorities. The current conflict inside Ukraine proves the failure of its political elite–not only those who came with Yanukovych but throughout the post-Soviet period. With the collapse of the USSR, the disintegration processes started up in the former Soviet republics that had their own national, religious and territorial problems even before Soviet rule was established. The conflict dynamics have largely been dependent on the political elites’ readiness and ability to resolve major socioeconomic and other issues effectively. Like almost all post-Soviet countries, Ukraine, after gaining independence, has faced such grave problems as nationalism, clans, corruption and general state inefficiency. Unlike Russia, it was not rich in oil and gas, this calling for a carefully considered development strategy to be adopted in the national economy. At the same time, among the former USSR republics, Ukraine had the best civilizational basis (science, information, technologies) and socio-cultural foundation for independent development, the best agricultural soil in Europe, which it failed to use and, in many aspects, found itself to be lagging behind Russia, Belarus and Kazakhstan, let alone its European neighbors (Poland, Slovakia, and Hungary).1 Many experts seem to think that Ukraine is the only CIS state that has failed to reach the quality of life of the Soviet period.2 And if, in 1990, Ukraine was slightly ahead of Poland in per capita GDP, its current indicator is three times lower than the Polish one. Kazakhstan’s economy is bigger than Ukraine’s, even though the Ukrainian population is triple that of Kazakhstan. 1 Alexander Strizoe. “Mezhdu TS I YeS” [Between the CU and the EU]. In: Nezavisimaya Gazeta 13 February 2013 (http://www.ng.ru/ideas/2013-02-13/5_ts_es.html) 2 See Maria Snegovaya. Pochemu u Ukrainy nye poluchilos? Strana mezhdu revolutsiyey I reformami [Why has Ukraine Failed? Country between Revolution and Reforms]. In: Vedomosti 25 December 2014. No. 241 (3745). (www.vedomosti.ru/opinion/ news/37829511/ukraina-bez-reform)

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The inadequacy of Ukraine’s political class is one of the main reasons for growing destabilization in the country. US scholar Shermann Garnett wrote about Ukraine in the late 1990s that one of the most serious problems preventing internal political stability was the continued presence of strong ethnic and religious barriers in the country and among its political elite.1 Failure to address the socioeconomic problems of the eastern areas and the Crimea has contributed to certain regions breaking away, this being accompanied by a surge of nationalistic sentiments therein. It should also be added that what has become the key qualitative characteristic of Ukraine’s elite is its dependence. Russia, which for 12  years following the collapse of the USSR has been supplying carbons to Ukraine at prices almost equal to Russian domestic prices has released the country’s political elite from the need to conduct quite severe structural and institutional reforms. On the contrary, the elite has been concentrating on its internal fight for access to and re-distribution of the transit and the Russian natural rent. Under these circumstances, certain groups of stakeholders, political-oligarchic clans have emerged, causing stagnation in and degradation of the national economy. They have managed and are still able to compensate for popular protests by whipping up nationalist hysteria and accusing Russian “donors” of all the economic failures. ”Being part of the old elites has helped generate profit in the new context. Corruption and kick-backs have become a natural continuation of this system. As a result, Ukraine has been stuck in between capitalism and communism,this leaving insiders with ample arbitration opportunities and depriving them of any incentives to conduct reforms,” writes political scientist Maria Snegovaya. According to Daniel Treisman, professor at the University of California, Los Angeles, Leonid Kravchuk (1991–1993) was one of the most unsuccessful reformers throughout the region.2 The situation has not improved much in subsequent years. Polish economist Marek Dąbrowski believes that “Ukraine had a chance to implement consistent economic reforms in 1994, 1998–1999 (Leonid Kuchma) and 2004 (Viktor Yushchenko) but the result has always been ambiguous.”3 In other words, no significant 1 Shermann W. Garnett. Russia and the West in the New Borderlands in The New Russian Foreign Policy. Ed. by Michael Mandelbaum. 1998. Council on Foreign Relations. USA. P. 73. 2 Citation: Maria Snegovaya. Pochemu u Ukrainy njye poluchilos?… 3 Ibid.

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liberalization or de-bureaucratization of the economy has ever taken place, nor has the elite changed much since Soviet times. This situation has continued since another Maidan in 2014. ”There are very few new faces in the Government. PetroPoroshenko has been in politics since 1998, having worked with Kuchma and Yanukovych. All those in the top ten of Poroshenko’s Bloc are of the same type. Arseniy Yatsenyuk has been in politics since 2001; Oleksandr Turchynov has (together with Yulia Timoshenko) been the closest ally of Pavlo Lazarenko, Interior Minister Arsen Avakov was part of the Establishment as early as when Kuchma was in office,”1 Maria Snegovaya emphasizes. The Kiev coup d’état on the night of 21 to 22 February 2014 used the power of popular protest against the corrupt bureaucracy that disappointed the European expectations. On the other hand, it also marked another redistribution of spheres of influence between politicooligarchic clans, as was the case in 2004, however democratic or proEuropean the new winners’ slogans. Yet the current situation is characterized by a much deeper and more sensitive socioeconomic crisis in Ukraine than 10 years ago. Annual inflation is just a step away from 25%; the budget deficit at the end of 2014 reached 8.2% of the country’s GDP. Foreign exchange reserves are being eaten away quickly and, at the beginning of 2015, totaled $7.5 billion, this being the value of the  5  weeks’ imports. (According to the IMF rules, a state’s minimum foreign exchange reserves should cover three months’ volume of imports.) According to the Financial Times, in 2015, the Ukrainian national debt neared 90% of its GDP. In order to put Kiev in the good graces of the IMF, the Verkhovna Rada adopted an unrealistic budget for 2015 after an 18-hour marathon session in parliament at the end of December. Yet, as a fresh scandal has revealed, someone secretly added a billion hryvnia to the budget at the last minute.2 It is doubtful that appointment of foreign specialists to key positions in Kiev will be able to put an end to the  deep-rooted practice of nationalizing losses and privatizing profits that has been in place for 25 years. This balancing on the verge of sovereign default cannot last long. 1

Ibid. SMI: MVF silno nedootsenil skorost rosta gosdolga Ukrainy [Media: IMF underestimates greatly Ukraine’s national debt growth rate]. In: Vzglyad. 07 January 2015 (http:// www.vz.ru/news/2015/1/7/723438.html); Balazs Jarabik. Ukraine Fatigue: To Be or Not To Be. (http://carnegie.ru/eurasiaoutlook/?fa=57755) 2

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Mistakes of the West In criticizing Russia on its way to internal transformation and in its relations with the outside world, the US, NATO and the EU have generally shown a tendency to ignore their own mistakes in the Russian direction. In the 1990s, the attention of the US/NATO and the European Union was focused primarily on post-communist Europe–the war in Yugoslavia and preparation of the Central European and Baltic countries for accession to NATO and the EU. For this reason, Russia was offered a pragmatic model: “do not interfere in our business and we will not interfere in yours.” At the time, Yeltsin’s market reforms and Moscow following in the footsteps of the West’s foreign policy were enough to put Russia in the good graces of Brussels and Washington. In the early 1990s, the Russian leadership, in turn, considered a formal break from the Soviet past to be quite sufficient for harmonizingthe relations between Russia and the West. The leading EU and NATO countries turned a blind eye to Russia’s domestic policy, which was far from “European,” specifically on the territory of the CIS. One of the lessons to be learned from this experience is that, figuratively speaking, you cannot be a “European” outside and a “non-European” inside your own country at the same time. In the 1990s, the leading European countries and the United States did not want to get involved in resolving the multiple ethnic conflicts and problems arising on the ruins of Soviet empire. And Russia could not afford to stand by and watch what was going on beyond its new transparent borders on CIS territory. Yet Russia stabilized the region as best as it could, though often very severely, by freezing a number of conflicts and deploying its military contingents in Abkhazia, South Ossetia, Transdniestria, Armenia and Tajikistan. But once the former USSR territory became more or less stable and the Central European problems were resolved, NATO and the EU got round to dealing with the CIS countries.

Without Russia–Against Russia Once the problem over the USSR’s nuclear legacy was resolved, the European Union and the US/NATO triggered centrifugal trends on CIS territory as a key element for these countries’ alleged democratization,

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but mostly as security against the USSR’s restoration in any form whatsoever. Holding, with one hand, Yeltsin’s weakening regime, which it continued to see as the best of what could have been established in Russia, the West proceeded to draw another border in Europe with the other–just in case, as a safeguard against any unforeseen scenario. Making the CIS as distant from Russia as possible has become the main principle of the strategy implemented by NATO and the EU in the region. This policy has proven counter-productive, confirming Moscow’s worst fears regarding the West’s objectives and whipping up nationalist and revanchist sentiments in Russia. Russia has been consistently circumvented by NATO and the EU in their regional strategies. For Russia’s political class, the decision to expand NATO to the East was the beginning of the end of the reform launched in the North Atlantic Alliance and its adjustment to the new security challenges since removal of the global conflict threat that put into question the very existence of the Atlantic Union in its current shape. Russia’s grievances and suspicions over the real objectives of this expansion have been aggravated by the NATO leadership’s ambiguous policy. For instance, the Partnership for Peace program was originally offered to Moscow as an alternative to the Alliance expanding to the east, this being the main reason that Russia accepted it. The rules of the game have changed subsequently, this resulting in the Madrid decisions made to adopt the Founding Act regulating the relations between Russia and the West but failing the test of the Yugoslavian crisis of 1999. The eventually created Russia-NATO council has also circumvented the issue of strategic goals in NATO’s relations with Russia. The chance to change this paradigm was missed after 11 September 2001, when Vladimir Putin took a step towards the US and NATO, with the intention of changing the relationship by greatly improving the level of cooperation. The Kremlin offered the USits unprecedented support as a true ally in setting up an anti-terrorist coalition, supplying arms to the North Atlantic Alliance and conducting a military operation in Afghanistan. In October 2001, explaining Moscow’s position with respect to the second stage of NATO’s enlargement, Vladimir Putin reiterated that Russia would reconsider its position with regard to such expansion if it were to feel involved in such processes. 1 No coherent response was given to Russia other than the USA’s withdrawal 1

Jones G. Putin Softens on NATO. // Moscow Times. Oct. 4, 2001.

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from the  ABM treaty, the war launched in Iraq on a spurious pretext (which incidentally affected Russia’s economic interests), a new round in NATO’s enlargement including the Baltic countries, etc. The two crises of the post-bipolar era–NATO’s operation against Yugoslavia and the South Ossetia conflict in 2008 have, in fact, embodied the fundamental security contradictions between Russia and the West, and specifically over “NATOization” of the European security system. Furthermore, the EU enlargement and NATO’s expansion to the east have been traditionally presented by Brussels as two complimentary processes. And even though the Copenhagen criteria do not specify NATO membership as a prerequisite for joining the EU, the recent waves of European Union expansion into the post-communist countries of Central and Eastern Europe confirm that, de-facto, this is the case. This factor has changed Russia’s originally positive attitude to the European Union’s expansion and its Neighborhood Policy. In March 2003, the EU published the first version of the European Neighborhood Policy (the “ENP”) – the “Wider Europe–Neighborhood” report. The publication was preceded by debates over whether or not Russia should be included in the ENP. The solution found consisted in inviting Russia in such a way that it would refuse the invitation itself. The Report considered the European Union’s neighboring countries as a common space, without identifying priority directions or the most important partners (similarly, in fact, to the Russian model in the CIS). For instance, Russia found itself to be ranked at the same level as the EU’s remotest Mediterranean neighbors. Given Moscow’s post-imperial complexes and specific concern over its status as an international player, its refusal of the invitation to the neighborhood policy program was a foregone conclusion. On the other hand, Brussels was provided with a good argument against including Russia in its regional strategy on the grounds that it was not what Russia itself wanted. It is quite possible that, had Russia originally been covered by the NATO enlargement policy as the principal partner, the Caucasus crisis would not have broken out. It is also likely that the conflict over Ukraine would not have occurred either if, from the very beginning in 2008, Russia had been invited into the Eastern Partnership that emerged as a regional dimension of the European Neighborhood Policy. The lesson learned from this story is that, in post-Cold War Europe, Moscow will always treat any Western strategies ignoring the largest European

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state as a threat to its national interests: “Without Russia means against Russia.” Moreover, now Russia has sufficient resources to oppose any projects it considers as a threat to its national interests.

Game with no Rules Many consider the subsequent escalation of contradictions between Russia and the West to have been caused by the Kosovo case. But it is not so much about Kosovo as about the absence of common rules of conduct after the end of the Cold War. Even though the Helsinki Act of 1975 asserted the rights of nations to self-determination, it clearly favored the territorial integrity principle, this being explained by a major global conflict threat in the context of the West–East political and military confrontation on the European continent. Territorial integrity and inviolability of borders were, at the time, perceived from the perspective of the threat of external aggression. Interestingly, even though the Helsinki principles were not legally binding, noone could even think of violating them given the global war threat. Once the Cold War was over, these principles began to be used selectively, depending on countries’ political preferences and interests. Almost every one of the Helsinki commandments was breached once it was seen to contradict the interests of the great powers. Russian political scientist Alexei Arbatov wrote: “While the key values with respect to one’s own country or that of one’s allies are the principles of territorial integrity and non-interference in internal affairs, when it comes to one’s rivals, the priority is given to the rights of national minorities to self-determination and the possibility of humanitarian interventions for protection of human rights, ethnic groups or faith-based communities.”1 The truth of these words is clearly confirmed by the U.S. Stances on the Secession report for 1967–2014 (see Table 1). The ideological or idealistic approach dominating the US policy and aimed at transforming the outside world to make it comply with the US visions of what it should be, has seriously damaged international relations. This was most vividly proven by NATO’s bombings of Yugoslavia, Kosovo’s separation, the war in Iraq, humanitarian intervention 1 Alexei Arbatov. Ukraina I realnaya politika [Ukraine and Real Politics]. In: NezavisimayaGazeta. 26 June 2014 (http://www.ng.ru/ideas/2014-06-25/5_ukraina.html)

The result of the Six-day war has to resolved by Israel-Syria peaceful negotiations. Position is still the same

NO

YES The result of the conflict with Indonesian authorities after decolonization and the result of the UN transitional administration

YES The result of political crisis and civil conflict in Ethiopia

NO

The result of the war between Greeks and Turkish communities in Cyprus. The U.S. stand for union Cyprus with federal system to prevent conflict between NATO members

1993 Eritrea

* All sources are based on official position of the US (White House and State Department).

Motivation of the US position

U.S. STANCE

1983 North Cyprus

2002 East Timor (Timor-Leste) YES The result of civil conflict in Sudan

NO Violation of the territorial integrity and sovereignty of Georgia

The result of civil war in former Yugoslavia based on decisions the Contact Group “Guiding Principles” and Ahtisaari Plan

2011 South Sudan

YES

2008 Kosovo

2008 Abkhazia and South Ossetia

Violation of the territorial integrity and sovereignty of Ukraine and Budapest treaty

NO

2014 Crimea

32

1967 The Golan Heights

Table 1. U.S. Stances on the Secession*

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by the “coalition of the willing” in Libya and, finally, the West’s active involvement in the “color” revolutions in Georgia and Ukraine. Henry Kissinger believes that “the idealist school of thought is impatient with self-imposed restraints. It does not necessarily reject the geopolitical aspect of realism. But it translates it into a call for crusades on behalf of regime change…This is why crusaders have usually caused more upheavals and suffering than statesmen.”1 Moreover, in interpreting the Helsinki principles in its own way, the United States and its allies could not know that other states would follow their example. Russia’s humanitarian operations in the South Ossetian conflict, its recognition of the independence of Abkhazia and South Ossetia mirror the actions of the US and its allies. In the politics of intentional actors, the polycentric world game with no rules, which, in fact, has no limits, is dangerous since it has an inertial dynamics of its own that makes parties inclined to launch a “preventive strike” in conflicts, this manifesting itself most clearly during the Ukrainian crisis and the Crimea’s reunification with Russia. Today, one of the most important questions is whether or not the Helsinki principles are still relevant and if their order of priority has changed. If we are still living within a common legal framework and the principle of territorial integrity remains important, how do we treat the secession cases of Kosovo, South Ossetia, Abkhazia and the Crimea? Do they constitute exceptions from the rules laid down by the Helsinki Act? What are the circumstances under which national minorities have the right to self-determination? Acts of genocide against national minorities by titular nations, as well as mass violations of human rights, may, clearly, serve as a basis for oppressed nations to separate themselves. Yet, no less important is the question: who will arbitrate these disputes and establish objectively whether or not acts of genocide or human rights violations have actually taken place in order to exclude application of double standards? If there are currently no common rules and the only thing that matters is the great powers’ interests, however interpreted by their leaders, then whatever happened to Kosovo, South Ossetia, Abkhazia and the Crimea is well justified. Eight years after the Kosovo conflict (when Milosevicwas already dead and Belgrade had set itself on a path towards 1 Henry Kissinger. Realists vs. idealists. // The New York Times. May 12, 2005. (http:// www.nytimes.com/2005/05/11/opinion/11iht-edkissinger.html?pagewanted=all&_r=0)

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Europe), the United States explained the need for Kosovo’s independence by “Albanians simply not wanting to live with Serbs.” But if a national minority’s desire constitutes sufficient grounds for separation, then it seems to be equally applicable to Abkhazians and Crimeans, who “simply do not want to live with Georgians or Ukrainians,” respectively. There is no need to explain what this would mean for multinational states or Europe’s stability.

Eastern Partnership and the Eurasian Union: pro et contra The EU Eastern Partnership (EP) project launched ten years ago in Prague and Russia’s Eurasian Union concept suggested in 2011 by Vladimir Putin, then the Prime Minister, were mostly developed for political purposes, the first consisting in bringing the EU and its Eastern partners (Ukraine, Moldova, Georgia, Azerbaijan, Armenia and, subject to certain conditions, Belarus) closer together within the European norms and standards, the Treaties of Association being designed to secure this purpose. This project emerged as Brussels’ response to the European Neighborhood Policy errors and as a result of its disappointment in the leaders of “orange revolutions” and effectiveness of GUAM. On the other hand, despite all its good intentions, the Eastern Partnership project had a number of inherent flaws. The mistake was that Russia–the EU’s biggest partner had been excluded from the EP on the pretext that it would not have wanted to participate. Had Russia been invited but had refused to participate, this would have been its own choice and noone could have said that the EU “bypassed” Russia in the CIS region. Furthermore, in approaching its Eastern partners, Brussels proceeded from the experience it gained in the countries of Central and Eastern Europe and the Baltics, whose peoples saw their European identity and development path as very natural. The situation was different in the Eastern Partnership countries, above all Ukraine. One part of its population has traditionally looked to the EU and the other–to Russia. The EU has made the mistake of attempting to impose the “either this or that” choice on a divided and unprepared society. Moreover, Brussels dealt mostly with the political elites of its partner countries, whereas the ordinary people, although aware of the burdens they were to live through during the transformation period, knew very little of the advantages associated with the final result of this process.

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Being, in fact, a technical project, the Eastern Partnership has failed to give expert assessments of how creation of the Deep and Comprehensive Free Trade Area (DCFTA) will affect certain economic sectors of the partner-countries. Nor have any reasonable timeframes been determined for the purpose of making the Eastern partners’ transition to new rules less painful for their populations. Moreover, the Eastern Partnership is based on vertical (the EU–partner country), rather than horizontal integration of the EU Eastern partners, even though it is the latter version that can create a prerequisite for strengthening stability in the region. Another omission on the part of the Eastern Partnership has been its automatic coverage of both Azerbaijan and Armenia–the two countries engaged in the Nagorno-Karabakh conflict. It is concerns over the security Armenia could not get within the framework of the Eastern Partnership that predetermined Yerevan’s choice of the Customs Union. Latvian political scientist Andis Kudors noted that “the European Union–Customs Union debate over Armenia’s future has been won by the Collective Security Treaty Organization (CSTO)… This joke spread by the media is a good reflection of the main reason for Armenia’s choice–its concerns regarding security.”1 Ukraine was, clearly, the central link in the Eastern Partnership not only because it is the largest country in Eastern Europe but because everyone remembered Zbigniew Brzezinski’s words that without Ukraine, Russia ceases to be an empire, but with Ukraine, suborned and then subordinated, Russia automatically becomes an empire. And even though Brzezinski himself has long since abandoned this concept, the EU’s leading politicians have taken the “mantra” literally, this resulting in policy being accelerated towards setting up an Association with Ukraine. Yet, even in Moscow,Brezinski’s last century formula has many supporters. Moscow’s Eurasian project, according to its architects, means creation of a powerful supranational structure under Moscow auspices that is capable of becoming one of the poles of the modern world, on the one hand, while serving as an effective link between Europe and the dynamic Asia-Pacific region, on the other. In fact, the projects of regional integration based on common interests, good will and equality have been the result of globalization and its 1 Andis Kudors. Novoye dykhaniye dlya “Vostochnogo partnyorstva” Yevropeyskogo soyuza [New Breath for the European Union’s Eastern Partnership] (http://inosmi.ru/ sngbaltia/20131004/213561265.html#ixzz36DT7mNA3)

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deadlocks. For instance, the years of fruitless debate within the scope of the WTO Doha round have resulted in construction being launched of the Trans-Pacific and Trans-Atlantic Trade and Investment Partnerships. Creation of the Eurasian Union is a transition from economic to political integration, from the Customs Union to a political association. But the Eurasian Union concept contains a number of ambiguities. Does the new Eurasian project mean Russia’s return to its unchangeable special path? What is the conceptual difference between Soviet Eurasianism, which ended in the USSR’s collapse, and the current Russian one? Is there any new strong Eurasianism ideology that can, in fact, be shared by very different countries and nations? The Eurasian Union’s ability to serve as an effective link between Europe and the Asia-Pacific Region also gives rise to questions, since neither Europe nor Asia has needed any “bridges” for ages. They have developed close, strong and direct economic relations: the trade volume between China and the EU and the US is 6–7 times higher than with Russia, without any “bridges.” Furthermore, Russia’s Eurasian Union partners are playing their own games around this project. For instance, Belorussian President Lukashenko clearly said in an interview that integration within the Eurasian Union would never reach the same level as within the Union State of Russia and Belarus. The main focus of Kazakhstan’s President Nursultan Nazarbayev has always been economic rather than political integration. Kazakhstan fears that, if it joins the Union, it might not be treated as an equal partner. Russia and Kazakhstan have different visions of Eurasianism. Russia sees it as creation of an isolated center of power and for Kazakhstan it is a drive towards independent integration into the global community by creating systematic connections and by filling the concept of independence with real substance. Armenia and Kyrgyzstan joining the Customs Union has taken these issues even further from being resolved. The question arises: with whom should Russia have built the Eurasian Union? Ukraine has naturally been considered as its key partner in this project.

Ukraine’s Meaning for Russia’s Future Negotiations over Ukraine’s inclusion in the Customs Union have been going on since 2010. Even though Ukraine has signed a memorandum or cooperation with the Customs Union on 31 May 2013, it

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has generally stuck to its position of getting closer to the European Union. The Russian leadership has mostly explained its concerns over Ukraine joining the EU by economic reasons and potential damage to the Russia–Ukraine economic cooperation. At the same time, certain statistics prove that these concerns have obviously been exaggerated. At the end of 2013, Ukraine ranked fifth in Russia’s foreign trade, its share totaling 4.7% of the Russian foreign trade turnover. Since 2011, the foreign trade turnover with Ukraine has dropped, this applying to both RF export to and imports from Ukraine. Exports from Russia dropped from $29.1 billion in 2011 to $23.2 billion in 2013 (minus 20.3%). Imports from Ukraine to the RF dropped from $19.8 billion in 2011 to $15.1 billion in 2013 (minus 27.3%). Table 2. Russia’s key foreign trade partners ($ billion, 2013)

Turnover

Export

Import

Share in turnover, %

World

844.2

526.4

317.8

100.0

1

China

88.8

35.6

53.2

10.5

2

Netherlands

76.0

70.1

5.8

9.0

3

Germany

74.9

37.0

37.9

8.9

4

Italy

53.9

39.3

14.6

6.4

5

Ukraine

39.6

23.8

15.8

4.7

6

Belarus

33.6

20.0

13.6

4.0

7

Japan

33.2

19.6

13.6

3.9

8

Turkey

32.8

25.5

7.3

3.9

9

Poland

27.9

19.6

8.3

3.3

10

USA

27.7

11.2

16.5

3.3

11

Kazakhstan

26.5

17.5

9.0

3.1

12

South Korea

25.2

14.9

10.3

3.0

13

UK

24.6

16.4

8.1

2.9

14

France

22.2

9.2

13.0

2.6

15

Finland

18.7

13.3

5.4

2.2

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Some Russian economists believe that the threats of large scale reexportation from the EU to Russia via Ukraine are also greatly exaggerated. Russia’s current weighted average import tariff rate is 7.7% and Ukraine’s  – 4.5%, yet no one has raised any re-export issues. If the economic part of the EU Association Agreement is implemented, the average duty rate for EU goods to be imported into Ukraine from the EU will drop to 0.2%. On the other hand, Ukraine will be opening up its market gradually, over 10 years, whereas the EU market will open once the agreement is signed. Furthermore, both parties are to retain zero rate tariff quotas for the purpose of regulating imports of certain agricultural goods the market for which, once it is opened, will be felt by local producers most acutely. The existence of the customs border between Russia and Ukraine and the requirement to provide certificates of origin among other mandatory documents guarantee that the origin of goods is duly controlled. Of course, violations are possible but this would already be attributed to falsification of documents and would imply collusion between the parties. Given that, on 27 June 2014, Kiev signed the economic part of the Association Agreement, the Russian leadership has already warned that the privileges within the CIS free trade area are likely to be cancelled and that Russia will return to the most favored nation regime if the agreement “has any negative effect on the functioning of the CIS free trade area.” At the same time, certain Russian experts believe that, if safeguards are adopted, the break in economic relations will affect the Russian military and industrial sector, which is not likely to be able to replace Ukrainian component parts soon.1 The main reasons for Russia’s concern over Ukraine’s departure seem to lie in the political sphere. This is partly explained by the problems it causes to Russia’s status and regional strategy, specifically its concerns over the loss of the privileged partner role with respect to the CIS countries. Yet the Russian leadership’s overreaction to Ukraine’s association with the EU is based on the discomfort felt by a certain part of Russia’s political elite that has abandoned its modernization alliances with the West. The modernization strategy has, naturally, been rejected by the entrenched bureaucracy fused with the highly monopolized, raw material and export dependent economy as a threat to its welfare. 1 Tatiana Yedovina. Ukraina vpisyvayetsya v svobodnuyu torgovlyu [Ukraine Fits into Free Trade]. In: Kommersant// Kommersant. 27 June 2014. No. 109. P. 3 (http:// www.kommersant.ru/doc/2499772)

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It would be fair to note the existence of the reverse dialectic connection: under the influence of low demand on the carbon markets in the specific Russian context, induced economic diversification creates preconditions for exiting the export and raw material dependent economy. Ukraine’s defeat on the way to modernization will have an adverse effect on Russia’s future. Above all, this will “pupate” the current political and economic system for many years, strengthen supporters of the Russian “specificity” theory and revive the longing to restore many features of the Russian and, subsequently, the “Soviet” Empire, including messianism as justification for bringing the Russian World together.

What next? Today, the question incessantly mooted by the Baltic countries and Poland is whether or not the Crimea constitutes a precedent for Russia’s subsequent expansion to the south-eastern parts of Ukraine, Transdniestria and northern Kazakhstan, where Russians constitute a large portion of the population. We believe that such an interpretation of the question serves to increase tensions in order to stimulate growing financial injections from Brussels and Washington into “bordering” countries and to provide a tool for pressurizing their Russian-speaking minorities. Yet, if the answer to this question is “yes” and such a plan has been in place from the very beginning, then why should Putin have pulled Yanukovych over to his side and supported him during the Maidan events? The turning point has been the Maidan leaders’ gross violation of the Kremlin-supported compromise of 21 February 2014. It is since this violation that what was only possible has become unavoidable. This has been followed by a chain of political blunders by Kiev: its attempt to cancel the law on regional languages;1 formation of “a government of winners” (A. Yatsenyuk) rather than “of national unity”; large-scale use of force, including heavy artillery and the air force (rather than launch of a dialogue) against dissenters; imposing a financial and economic blockade of the south-east of Ukraine. 1 This law (the so-called Kolesnichenko Law of 3 July 2012) provided for a possibility of official bilingualism in regions where national minorities account for over 10% of the population. The abolition of the law would affect not only the Russian language, but also Hungarian, Rumanian, Polish, and other languages, although Russians constitute the largest ethnic minority in Ukraine.

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At the same time, it has been clear from the very beginning that Russia will not stand by and watch conflict and bloodshed escalate in the south-eastern parts, this potentially resulting in the biggest and the most dangerous international military conflict in the center of Europe since 1945, extending far beyond Ukraine’s borders. This scenario is highly unlikely given that all those participating in the conflict, directly or indirectly, know the price to be paid for this confrontation. Nor is it possible to implement an alternative scenario, i.e. going back to the status quo ante bellum, to the pre-war state, with Crimea returned to Ukraine, as the West and the Ukrainian leadership insist. Nor is an interim option excluded, consisting in the Transdniestrian model being adopted for the south-eastern regions. This would result in another conflict frozen on CIS territory but would not stop Ukraine from moving towards the European Union, just as it did not stop Cyprus from pursuing its path to European integration in its time. What to do? First, apply every effort and use every tool to de-escalate the conflict. The efforts made during negotiations by the Russian, German, French and Ukrainian foreign ministers give rise to cautious optimism, but more decisive steps are needed for real ceasefire to be established and the warring parties to be drawn apart. The “Boisto agenda” developed by a group of high level experts from Russia and the US contains a roadmap listing 24 steps to be taken in order to stop the war in south-east Ukraine. These proposals relate to both short and medium term aspects of the problem: ceasefire; deployment of an OSCE monitoring mission in the area separating the warring parties; deployment of a UN-authorized peacekeeping mission as security against ceasefire violations; maximum autonomy for and special status of the Donetsk and Lugansk Regions of Ukraine; resolution of issues relating to restoration of the infrastructure and housing destroyed in war-hit areas; re-establishment of economic relations between Russia and Ukraine; the latter’s neutral military and political status supported by international guarantees of its territorial integrity.1 We believe these steps may be considered in the process for peaceful settlement of the conflict. Moscow’s relationship with Washington and Brussels will obviously not be the same even under the best case scenario. Yet this does not necessarily mean it will be worse. Robert Legvold noted: “The crisis 1 Way to diplomatic settlement of the Ukrainian crisis // Kommersant. 26 August 2014 (http:/www.kommersant.ru/doc/2553169)

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in Ukraine has pushed Moscow, Washington and Brussels over a cliff and into a new relationship, one not softened by the ambiguity existing since the collapse of the USSR, when each party viewed the other as neither friend nor foe.”1 If a compromise is reached over Ukraine’s future such that it satisfies Russia, the West and Ukraine, the current confrontation will be overcome in time and the fundamental commonality of interests and interdependence of a multipolar world will prevail.2 As regards the relations between Russia and the European Union, Russia’s integration into the four common spaces with the EU will obviously be “frozen” for years, even if the situation develops positively. The relations between Russia and the European Union are increasingly reminiscent of the USSR–Europe interaction at the time of selective economic and political cooperation. Even so, the current crisis allows a fresh look to be taken at the essence of the strategic partnership between Russia and the EU, which has proclaimed four common spaces in economics, external and internal security, science and culture, but has completely overlooked the main question of how the CIS fits into these frameworks. As a result, the Russia–EU strategic partnership has been crushed by tough reality. This is the lesson both Russia and the European Union must learn from the Ukrainian crises. After a while, it might, therefore, be possible to think of reformatting the Eastern Partnership towards a subject-specific, functional approach to cooperation with Russia in the CIS in the most important economic and security spheres. This can be exemplified by the proposal made by then President Medvedev in 2009 to the European Union that it allocate a syndicated facility to Ukraine in order to upgrade its gas transportation network. The conclusion is quite obvious. If both the EU and Russia are interested in stability and prosperity of greater Europe, a new common partnership concept is needed that would exclude the zero-sum game option.

1 Robert Legvold. Managing the New Cold War. // Foreign Affairs. July/August, 2014. P. 79. 2 Given the current context of extreme tension between Moscow and Washington, it is hard to imagine that, at one time, they were allies over the same old Crimean sore. During the Crimean War (1853–1856), when Russia ended up face to face with all of Europe, it was only the young overseas republic that, despite its neutrality, consistently implemented its St. Petersburg-friendly foreign policy. Five years after the Crimean War, when the American Civil War broke out, Russia paid back a hundredfold for the USA’s friendly attitude during the Crimean War. The Russian government’s benevolent neutrality and a visit by a Russian squadron to the northerners prevented Great Britain and France from interfering in the internecine war on the southerners’ side. (Diplomatichesky vestnik, November, 2003).

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The functional approach by Russia and the EU to cooperation in the former USSR area within the scope of “expanded Eastern partnership” or “Eastern partnership +” on terms of equal participation by Russia would allow the new dividing lines in the region to be overcome. In the more distant future, the strategic partnership issue might regain its relevance in the relations between Moscow and Brussels. The unavoidability of the “European way” was substantiated by none other than Russian President Vladimir Putin as early as 2002, when he said: “The essence of any country and its people is determined by its culture. In this respect, Russia is a European country without doubt, because it is a country of European culture.”1 Of course, this will require that European countries reassess their priorities, albeit painfully, and realize their continuity with those of Russia. In the post-war years, the French and the German leaderships coped with this task. The criticism to which Russian and foreign politicians expose Russia for rolling back democratic institutions and laws is considered fair from the perspective of the frustrated but naive expectations of European intellectuals. It is very important in any historical analysis that the points of departure be determined clearly. Obviously, in comparison with most Western countries, the democratic institutions and laws in Russia are not sufficiently developed and political practice often departs from formal constitutional mechanisms, procedures and laws. Yet it should not be forgotten that the revolution of 1991 was European in its historical content. After the revolution, Russia set itself on the way towards deep system-wide transformation, starting virtually from scratch only slightly more than two decades ago. Major European countries have been following the democratic path for dozens and even hundreds of years and not without dramatic historical twists and turns either. And finally:in 2015 the world celebrates the 70th anniversary of the anti-Hitler coalition states’ victory over Nazism, and Europe – the 40th anniversary of the Helsinki Final Act. This provides good grounds for Russia and Western countries to achieve what they failed to do after the end of the Cold War, i.e.: to initiate a peace conference in the “Helsinki +” format, profoundly revising the generally accepted principles in order to establish common rules of conduct excluding conflict in Europe. The authors hope the analysis provided in this chapter may be helpful in elaborating a future inclusive architecture for European security. 1 Citation: Alexander Yanov. Russkaya ideya i Putin [Russian Cause and Putin] (http://diletant.ru/articles/19114048/)

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Section I ECONOMY

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INTRODUCTION Natalya I. Ivanova

The global economic crisis of 2007–2009 revealed grave imbalances and fundamental contradictions intrinsic to the global economic growth model shaped up in the 1990s and the 2000s and posed the problem of a transition to a new development model. The contours of this model are beginning to transpire in almost all fundamental features and characteristics of the global economy. Although the details of the new model are still largely uncertain, a few important long-term vectors of development can be discerned: the meltdown of the developed counties’ economic superiority over the larger developing ones (this applies, in the first place, to a shift of the relative weights of the USA and China), completely new traits in the competition of innovation systems, a transformation of the world’s corporate map, a transition to new multilateral regulatory principles for international finance, a new phase in the development of state capitalism. The chapters of this section will discuss these processes in detail. Long-term prospects of the shaping-up of a global economic growth model are defined by a changing role of resource, technological and institutional factors, as well as patterns and mechanisms of economic policy. The role of cheap labor as a relative competitive advantage of developing countries in the global economy will dramatically decrease over the next decades. A shift toward capital-intensive technologies requiring skilled work force, combined with a sharply increasing efficiency of use of natural resources, may strengthen the developed countries’ global economic footprint again. In this context, it is still unclear how the balance of power will eventually tilt between the USA and China, the two leaders of the contemporary global economy. While the USA is still an undisputed leader in a number of quality-related positions, which, taken together, contribute

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Section I. Economy

to a much higher productivity of labor, China leads, and will continue to lead, in economic growth, accumulated financial reserves, the scale and the rate of structural reforms. Less certain are China’s outlooks in innovation-driven development and its ability to tackle resource and environmental challenges. At the outset of the 21st century, global technological development was marked by growing competition in most industry segments within leading countries and among individual states on large global markets. China and other developing countries made a great progress both in the levels and the rate of change of numerous innovation-driven development indicators. Thus, e.g., the level of enterprise activity, an enormously important indicator of innovation potential reflecting the willingness and the actual ability of individuals to open up a business, crucially distinguishes China, Hong Kong, Singapore not only from India, Brazil and Russia, but also from the USA and the European countries. China’s indicator is above the average values for the EU, the APEC, and the OECD country groups. A number of other facts and trends suggest that well-known imbalances and contradictions between the USA and China in trade, financial and exchange regulation have been supplemented by new idiosyncrasies of technological competition, a struggle for leadership that would have seemed impossible in the early 2000s. This said, the USA still retains strong competitive edge in a battle for innovation-driven leadership, mainly due to a balance of diverse institutions of the national innovation system and an advanced national and corporate culture of research and development. Opportunities for a success of entrepreneurial function in research and commercialization of innovations are still much higher in the USA than elsewhere, as confirmed, e.g., by the results of the shale revolution. Between 2005 and 2010, the US oil and gas industry underwent a “non-conventional hydrocarbon revolution”, the two pillars of which were a growth of shale gas mining and a subsequent rise of light shale oil and gas condensate production. A fast growth of non-conventional gas production enabled the USA to secure global leadership in the production of natural gas from 2009 on. Recent forecasts predict that growing oil and gas condensate extraction from low-permeability strata will make the USA the world’s largest producer of liquid fuel, fundamentally reshuffling of the world’s energy map. The success of the shale revolution is due to a synergy of technology factors and enormous entrepreneurial energy

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of enthusiasts and large corporations alike, driven, on the one hand, by tax incentives and, on the other hand, by high oil and gas prices. Another major vector of the economic perestroika is the emergence of new regulatory mechanisms for global finance. The scale and the complexity of global finance came into a conflict with its de facto unilateral regulation and excessive accumulation of power in a limited number of global financial centers. A misfit between the regulatory system of global finance and the target of regulation was one of the main triggers of the 2007–2009 shocks and the 2010–2012 Eurozone debt crises. The challenges of 2007–2009 were reacted to by boosting the trend of shifting toward a multi-tier global financial regulation system. As a transition to new principles of global financial regulation progresses, global financial regulatory powers will become increasingly decentralized. It is well known that the rapid economic globalization of the 1990– 2000s was accompanied by a dramatic growth of multinational enterprises (MNEs), both in number and size. The MNEs are now rapidly adapting to a new environment and re-building themselves by reshaping global added-value chains, putting pressure on governments and international organizations in the field of investment regulation, and influencing political initiatives for regional integration. Moreover, the strengthening of MNEs in the developing countries shows that the impact of global business is all-embracing and cannot be reduced merely to economic operations of those companies. In particular, significant geographical shifts in leading branches of the global economy drive the socio-economic development of countries and individual regions alike. The impact of MNEs accelerates the transformation of regional economic structures. The causes and implications of a fast growth of state-owned companies, banks and corporations are among the most debated issues of the contemporary perestroika of the global economy. This growth is due both to a dramatic rise of the BRIC economies and a takeover of new functions by developed countries’ state-owned companies, which include securing the sustainability of financial development, the implementation of large infrastructural projects and other global activities. Clearly, contemporary state capitalism differs from its predecessors greatly. Firstly, its rapid development in a group of countries with a globally significant population creates the benefit of a scale effect. Secondly, it has much more complex and efficient tools of industrial

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and financial policy at its disposal. Finally, today’s state capitalism is much more successful in using capitalist tools for attaining development-related goals: fighting poverty, creating infrastructure, and resolving the issues of large cities. The state’s return into economy will take a different shape due to a change in economic environment and the lessons many state-owned enterprises have learned from the past. The next 10–15 years will likely be defined by a struggle among different models and versions of capitalism, rather than between capitalism and socialism. Therefore, the question of an optimum role of state in economy is no longer relevant, and priority shifts to the issue of the extent to which institutional reforms and economic policy improvements at both the national and the international level can secure a flexible adaptation of the economy of each country to a profound global perestroika.

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Chapter 1

GLOBAL ECONOMY IN A QUEST FOR A NEW GROWTH MODEL Sergey A. Afontsev

“New Normal” or New Uncertainty? The global economic crisis has revealed grave imbalances in the global growth model that had matured during the 1990s and 2000s. Consequently, global economy faced a challenge of a transition to a new, more flexible and balanced growth model which can support high and sustainable growth rates. Understanding parameters of this model is of major interest for both specialists in economic theory and experts engaged in formulating practical recommendations for political decision-making. Three closely related groups of issues dominate debates on transition of the global economy to a new growth model, i.e., the state and the dynamics of global markets, fundamental determinants of economic development, and economic policies to overcome crisis and ensure sustainable economic growth. Thus far, the most influential concept describing the impact of the crisis on the state and the dynamics of the global economy used to be that of the “New Normal” first elaborated by M. El-Erian, a manager of PIMCO investment company, in May, 2009.1 According to this concept, the crisis created a “new normal” state in the global economy characterized by a considerable (as compared with the previous decade) slowdown of economic growth, aggravated debt problems, increased market uncertainty, and a further 1 El-Erian M. A New Normal // PIMCO Secular Outlook. May 2009 (media.pimco. com/ Documents/Secular%20Outlook%20May_09%20Email-Web%20FINAL3.pdf). The coinage of the term “New Normal” (well known for the US public in another context, particularly, due to a comic TV series of the same name) as referring to the situation in the global economy is attributed to El-Erian’s colleague, who first used it in March, 2009., See Pimco’s New Normal // Forbes Magazine. February 8, 2010 (www.forbes. com/ forbes/2010/0208/investing-mutual-funds-stocks-pimco-new-normal.html).

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shift of global economic activity towards emerging markets (including China). Despite the original prediction that the global economy’s “New Normal” would last three to five years after crisis started, some experts predicted that challenges resulting from the “New Normal” would persist over the next few years.1 Whereas the “New Normal” framework predicts a slowdown of the global economy coupled with a deterioration of global financial climate, alternative conceptual frameworks that focus on trends in the real sector paint a generally mixed picture. The only emphatically pessimist forecast is produced by proponents of the “innovation pause” hypothesis, which has gained some currency in the Russian literature. This hypothesis claims that the current stage of the global economic development has exhausted growth potential produced by the previous generation of “general purpose technologies”, and the opportunities for further productivity improvements have shrunk.2 A more optimistic view is expressed by the experts focusing on reindustrialization trends, who predict de-intensification of industrial outsourcing to developing economies, return of investments to developed countries and revitalizing manufacturing industries in these countries (primarily the USA and the EU member states).3 A certain renaissance of manufacturing in developed countries is largely due to a rise of labor costs in the leading developing economies, which may slow down the growth of the latter and adversely affect global stock markets.4 At the same time, revival of industrial growth in the developed countries will help improve the outlook for global economy. The most optimistic concept is that of “green economy”, which emphasizes investments in the development and introduction of new 1 This view is shared, among others, by the experts of PricewaterhouseCoopers: Sentence A. The «New Normal» for the Global Economy // Paper presented at the Nuffield Health Summit. March 7, 2013 (http://www.nuffieldtrust.org.uk/sites/files/nuffield/ andrew_sentance_global_economic_outlook.pdf). 2 Polterovich V.M. Gipoteza ob innovatsionnoi pause i strategiya modernizatsii [Innovation Pause Hypothesis and Modernization Strategies] // In: Voprosy ekonomiki. 2009. Issue 6. Pp. 4–22). 3 Tregenna F. Manufacturing Productivity, Deindustrialization, and Reindustrialization // United Nations University Working Paper No. 2011/57 (http://www.wider.unu.edu/ publications/working-papers/2011/en_GB/wp2011-057/_files/86328907787665417/ default/wp2011-057.pdf); The Reindustrialization of the United States // Euler Hermes Economic Outlook. Special Report. January 2013. No. 1187 (http://www.eulerhermes.us/ reindustrialization.pdf). 4 Minack G. The American Manufacturing Renaissance Is Bad News For Stocks // Business Insider. April 4, 2013 (http://www.businessinsider.com/minack-americanmanufacturing -renaissance-is-bearish-2013-4).

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technologies aimed at cost-effective use of resources, reduced emissions of pollutants and green-house gases and a general reduction of anthropogenic impact on the environment as key factors of future economic growth.1 UNEP experts estimate that the “green” scenario for the global economy (which implies annual investments in the relevant technologies at approx. $1.3 billion) may result, by 2050, in additional 16 percentage points of GDP growth, 14 percentage points of GDP per capita growth and a reduction of global energy requirements by 48% as compared with the baseline scenario.2 A careful review of the concepts listed above shed light on the nature of the key arguments they present to explain. Strictly speaking, the “New Normal” concept is in principle devoid of any theoretical basis and can at the very best be viewed as an empirical hypothesis rather than an explanatory tool to be used to analyze the ongoing processes in the global economy. In addition, the notion of the “New Normal” obviously describes the state of the global economy that is only “normal” during the crisis period, rather than a “normal” path of post-crisis development. In fact, this observation explains why hopes that the “New Normal” would cease to exist emerge each time stock markets experience a rally.3 The “innovation pause” hypothesis is backed up theoretically by a development (N.D. Kondratieff’s “long waves”) as suggested by G.  Mensch at the end of the 1970.4 It should be noted that even 1 Cato M.S. Green Economics: An Introduction to Theory, Policy and Practice. London: Earthscan, 2009; Hahnel R. Green Economics: Confronting the Ecological Crisis. N.Y.: M.E. Sharpe, 2010. 2 Towards a Green Economy: A Path to Sustainable Development and Eradication of Poverty. Summary Report for Representatives of Government Authorities. Saint-MartinBellevue: UN Environment Program. 2011, p. 32. (http://www.un.org/ru/development/ sustainable/ger_synthesis.pdf ). 3 No New Normal as Stocks to Bonds Rallied Like the 1990s // Bloomberg.com. January 7, 2013 (http://www.bloomberg.com/news/2013-01-07/no-new-normal-as-stocksto-bonds-rallied-like-the-1990s.html). Notably, the authors of the terms themselves subscribe to this view: Pimco’s El-Erian: ‘New Normal’ May Soon Be Ending // MoneyNews. com. January 25, 2013 (http://www.mon-eynews.com/Economy/El-Erian-new-normalending/2013/01/17/id/471938). 4 Mensch G. Stalemate in Technology: Innovations Overcome the Depression. Cambridge: Ballinger, 1979. In particular, the idea of innovation clusters and uneven introduction of “general purpose technologies” (i.e. technologies with a wide range of applications in various branches of economy), which is key to the innovation pause hypothesis, represents one of the numerous paths for the elaboration of G. Mensch’s idea of an uneven pace of “basic” innovations (i.e. innovations that revolutionize technological foundations of economic development and result in the emergence of new branches and sectors of economy).

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in the 1980s, i.e. during the the heyday of the “long waves” theory, this approach was sharply criticized, mostly for the lack of empirical evidence supporting its prediction of “innovation clusters” and “pauses” between them. Since the “long wave” theory was finally pushed to a periphery of economic research by overwhelming empirical evidence in the late 1980s and the early 1990s,1 retaining but a limited number of heterodox supporters, attempts to use G. Mensch’s approach to explain contemporary trends in the global economy look like a theoretic anachronism. Moreover, even this circumstance put aside, the “innovation pause” hypothesis can provide no creditable account for present or future trends of global economic development, as no evidence of any “innovation pause” in recent decades is available.2 The same “theoretical anachronism” is characteristic of the reindustrialization concept It was first suggested by the sociologist A. Etzioni3 during the economic crisis in the US more than thirty years ago and followed by numerous publications much talked of then, but completely forgotten4 Attempts to revive this framework were made during the current crisis. This resurrection attempts, in contrast to a revival of G. Mensch’s ideas discussed above, show some conceptual progress as reindustrialization becomes to be associated with changes in comparative prices of productive factors (in particular, growing labor costs in developing economies and falling natural gas prices in the USA). A step forward is also characteristic of the “green economy” concept, which, unlike its parent concept of sustainable development, emphasizes the role of creating incentives for the development of 1 Solomou S.N. Phases of Economic Growth 1850–1973: Kondratieff Waves and Kuznets Swings. Cambridge: Cambridge University Press, 1987; Poletaev A.V., Savelieva I. Tsikly Konrdatieva i razvitie kapitalizma [M. Kondratieff Cycles and the Development of Capitalism]. Moscow, Nauka, 1993. The still ongoing attempts to revive the “long wave” hypotheses empirically (cf., e.g.: Metz R. Do Kondratieff Waves Exist? How Time Series Techniques Can Help to Solve the Problem // Cliometrica. 2011. Vol. 5. No. 3. Р. 205–238) are based on the application of statistical frequency filters, which, as was demonstrated by the early 1990s, can generate cyclic fluctuations of arbitrary duration as a statistic artefact. 2 Innovatsionnaya politika. Rossiya i mir, 2002–2010 [Innovation Policy. Russia and the World, 2002-2010] / Ed. N.I.Ivanova, V.V. Ivanova. Moscow, Nauka, 2011. 3 Etzioni A. Reindustrialization of America // Science 22. 1980. Vol. 209. No. 4459. P.  861; Etzioni A. Reindustrialization of America // Review of Policy Research. 1983. Vol. 2. No. 4. P. 677–694. 4 See e.g.: Rothwell R.G., Zegveld W. Reindustrialization and Technology. N.Y.: M.E. Sharpe, 1985.

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specific technologies to raise resource efficiency, reduce the  dependency on energy imports, and create new jobs.1 In both cases, structural and dynamic characteristics of the global economy are associated with changes in fundamental determinants of economic development. A review of these changes is crucial for a systemic understanding of the emerging global growth model in the global economy.

Determinants of Economic Growth: A Revanche of Resources and Technologies Traditionally, analysis of growth models relies of five groups of explanatory factors, that are resources and technologies, economic geography, socio-cultural factors, institutions, and economic policy. A number of fundamentally important findings regarding comparative roles of and interrelations between the relevant growth determinants were made over the last two decades. First, it was shown that economic geography factors are now changing their nature from external determinants of economic development to derivatives from resource- and technology-related factors and those of economic policy. Landscaping investments (incl. swamp drainage and creation of artificial islands), development of medical and agricultural technologies (elimination of contagious diseases and parasites; drop irrigation systems, hydro- and aeroponics), development of housing and transport infrastructure and comfort technologies (heating and conditioning systems, ‘smart home’ and ‘green home’ technologies) may radically change human habitat and the environment of economic activity, thus opening up new opportunities for a fast economic growth in countries with originally unfavorable climate conditions. Spectacular economic success of such countries as Israel and the United Arab Emirates is a clear example of the fact that geographic location or climate can no longer be viewed insurmountable barriers to economic growth.2 1 Porfiriev B. “Zelenaya ekonomika”: realii, perspektivy i predely rosta [Green Economy: Realities, Outlooks and Growth Constraints] // Working Materials of Carnegie Center. Mart 2013) (http://carnegieendowment.org/fi les/WP_Porfiriev_web.pdf). 2 Senor D., Singer S. Start-Up Nation: The Story of Israel’s Economic Miracle. N.Y.: Twelve, 2009; Pradhan S. The UAE’s Economic Policy and the Current Global Meltdown: An Appraisal // Dubai School of Government Working Paper Series. August 2009. No. 09-04.

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An important implication for  Russia that the notorious “cold climate factor” cannot be regarded as a binding constraint on economic growth. It is true that Russia experiences a peak of electricity consumption in winter months due to the use of heating appliances, but Israel suffers a similar peak in summer due to the use of conditioning system, whereas the use of energy-efficient technologies minimizes the adverse impact of this factor on economic growth.1 Second, attempts to explain differences in rates and levels of economic development based on a hypothesized autonomy of sociocultural factors (“differences in mentalities”, “levels of socio-cultural development”, etc) have failed, as illustrated by analysis of the of role Confucian values in the economic growth of the East and the South-East Asia. These were alternately viewed as a barrier to economic growth in the 1960–1970s and as one of its key drivers in the 1980–1990s, in both cases without sufficient foundation.2 It is now acknowledged that social and cultural factors can be most effectively accounted for by a resource- and technology-based approach (quality of human capital) and an institutional approach (the role of social institutions). Studies of values, which gained certain currency in Russia due to publications by R. Inglehart,3 have by now lost most of their influence on development research. Third, it has been shown that formation of an economic policy and recommendations to improve its efficiency are inseparably associated with operation of political markets and institutions.4 As a consequence, a study of economic policy is being increasingly given a stronger institutional dimension. It is thus even possible to speak of a new synthetic “institutional political economy” approach to development issues. This approach considers institutional environment as a principal factor structuring both challenges to economic policy and responses to these challenges. latter, in turn, influence the evolution

1 Hemmings P. Addressing Challenges in the Energy Sector in Israel // OECD Economics Department Working Papers. December 2011. No. 914. 2 Sang-In J. No (Logical) Place for Asian Values in East Asia’s Economic Development // Development and Society. 1999. Vol. 28. No. 2. P. 191–204. 3 E.g., Inglehart R., Welzel K. Modernization, Cultural Change and Democracy: The Human Development Sequence. New York, Cambridge University Press, 2005. 4 For a detailed review of this issue see: Afontsev S.A. Poliyticheskie rynki i ekonomicheskaya politika [Political Markets and Economic Policy]. Moscow, Lenand, 2015. Pp. 188–232.

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of economic, legal, and political institutions, as well as the economic system as a whole.1 Therefore, one can claim that a “big triad” of theoretical frameworks has emerged to be used to explan economic development. These are based on the study of resource- and technology-related, institutional and political economy factors, the latter two groups being increasingly viewed as coupled. Although the most important scientific results over the past decades resulted from research focused on two latter two groups,2 the key role in shaping a new model of global economic development is played will be played in foreseeable future by resources and technologies. This is due to the nature of key challenges to the global economy and the mechanisms that structure responses to these challenges. Key challenges to the global economy are, in turn, chiefly related with two groups of factors, i.e.: • global demographic changes related to population ageing in developed countries and more limited supply of cheap labor in developing countries, and • rising competition for resources in the global economy, which stimulates investment in the development of new types and sources of materials, resource-efficient and recycling technologies. These factors will be decisive for the development of the global economy in the coming years. In particular, a dramatic change of the role of cheap labor as a source of comparative advantages in the global economy is forthcoming. Cheap labor was a key to rapid economic progress in countries of East and South-East Asia to leadership in economic growth in the second half of the 20th and the first decade of the 21st centuries. With gradual growth of wages and the completion 1 This pattern is most clearly traceable in studies addressing relationship between income distribution and policy making in countries with diverse structures of political institutions (see: Alesina A., Rodrik D. Distributive Politics and Economic Growth // Quarterly Journal of Economics. 1994. Vol. 109. No. 2. Р. 465–490; Gradstein M., Milanovic B. Does Liberte = Egalite? A Survey of the Empirical Links between Democracy and Inequality with Some Evidence on the Transition Economies // Journal of Economic Surveys. 2004. Vol. 18. No. 4. Р. 515–537). 2 These achievements culminated in the book: Acemoglu D., Robinson J. Why Nations Fail: The Origins of Power, Prosperity, and Poverty. N.Y.: Crown Publishers, 2012.

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of demographic transition contributing to a meltdown of advantages of those countries, their success will be hard to reproduce by other developing countries due to a general shift towards capital-intensive technologies (replacement of labor with capital) as well as adverse institutional conditions in countries with the largest working-age populations (Africa, poorest countries of Asia). A shift towards capital-intensive technologies and an improved quality of human capital in developed countries will be supported by a shift of age structure towards older cohorts. Attempts to compensate labor deficit by inviting immigrants is a palliative with bleak economic outlook (as a ‘skilled labor gap’ cannot be filled up by an inflow of immigrants from third-world countries) and significant risks of conflicts caused by growing social, religious and racial heterogeneity. As a result, a transition to “economic growth without population growth” will become relevant for developed said countries. Signs of such a transition are observable in Japan, which has secured high living standards for its citizens over past decades despite population ageing and almost non-existent labor inflows from abroad.1 Notably, this has been achieved notwithstanding a long-term economic stagnation. New growth policies initiated in 2013, if successful, may make Japan a testing ground for a new growth model for economically developed countries. As for the use of resources, a growing resource-efficiency and substitution of relatively expensive resources (and their sources) with less expensive ones is likely to result in growth of the global economy without reaching limits of resource. On the other hand, one should not expect such resources to be dramatically overpriced (due to a deficit) or under-priced in the long run, as the growth (or fall) of prices for specific types of resources will spur their substitution (or extended use), while a possible fall in prices for specific resources in some countries (e.g. for environmental reasons) will be followed by an extended use of such resources elsewhere. Generally, a shift towards capital-intensive technologies requiring the use of skilled human capital, combined with dramatic improvements in resource efficiency, can shift the balance of competitive advan1 Barrett B. Japan as the New Normal: Living in a Constrained Economy // Our World 2.0 (United Nations University). January 4, 2013 (http://ourworld.unu.edu/en/ japan-as-the-new-normal-living-in- a-constrained-economy/).

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tages in the global economy in favor of the developed countries again. While emerging market economies grew 4 times faster than economically developed countries in 2012–2013,1 this ratio is highly likely to stay at 1.5–2 within a decade after the end of the global crisis. This scenario is highly realistic, since the relevant shifts in the use of resources are already being observed. Importantly, these shifts are backed by the mechanism of comparative market prices rather than a governmental policy, which can only supplement the former. Despite numerous lamentations about the “inefficiency” of market mechanisms in the global economy, comparative prices work with invariable efficiency. Three trends that will gain momentum in the near future should be mentioned in this respect. First of all, a growing global demand for resources supports development of new extraction technologies, new (previously nonprofitable) resource deposits and new types of resources. The most spectacular examples of all three factors combined are the “shale gas revolution” which already happened and the “shale oil revolution” expected in the coming years. Both revolutions shattered predictions (frequently aired in the mid-2000s) of a coming era of “expensive energy resources”. However, no “cheap energy resource era” should be expected earlier, the availability of cheaper resources fuels the demand for them and thus impeds a drastic – and protracted – fall in prices. The logic of this trend can be illustrated by the case of reshoring US manufacturing mentioned above. Cheap shale gas was one of the key factors in the US economy (alongside with rising labor costs in the countries of the East and South-East Asia, primarily in China) that made the strategy of reshoring a highly attractive successor to the strategy of off-shoring indus-trial operations.2 Characteristically, industrial re-shoring is much slower in the EU countries, where the shale gas revolution did not occur and excessive labor costs are due to the active 1 IMF World Economic Outlook Update: Growing Pains. July 9, 2013 (http:// www.imf.org/exter-nal/pubs/ft/weo/2013/update/02/). 2 McMeekin B., McMackin E. Reshoring U.S. Manufacturing: A Wave of the Present // BusinessClimate.com. September 2012 (http://businessclimate.com/blog/wp-content/ uploads/2012/09/Reshoring.pdf), Re-shoring Manufacturing: Coming Home // The Economist. January 19, 2013 (http://www.economist.com/ news/special-report/21569570growing-number-american-companies-are-moving-their-manufacturing-back-united); Bogdanova O. Globaliztsiya vyshla iz mody [Globalization is Out of Fashion]. In: RBK. 2013. Issue 4. Pp. 30–37).

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welfare policy. As can be seen, the mechanism of comparative prices is extremely efficient.1 A shift of priorities towards resource-efficient and “green” technologies, politically charged as it is, also rests on a clear economic logic of comparative prices. Remarkably, country priorities of a green technology support i.e., creation of new jobs in developed countries, improvements in resource efficiency in the leading developing countries, and rising incomes of the poorest part of population in “less successful” developing countries) reflect specificities of the national production factor markets.2 Therefore, comparative prices have a crucial impact not only on the behavior of market agents but also on political decision-making.

Institutions and Economic Policy The example of green technology development discussed above is a spectacular illustration of changes in the role of institutions and economic policy in shaping up a new growth model. Development studies usually single out four main types of institutions relevant for economic growth, i.e., economic, social, legal and political institutions. Improving economic and legal institutions is a key to promoting growth and strengthening national technological potentials, while a reform of political institutions is often a necessary condition for the improving the quality of economic policy. Although social institutions have a considerably greater inertia, their change, triggered by shifts in the social structure (including those due explained by the growing role of the middle class) can be a powerful driver of changes in institutions of three other types. While the research of the 1990s and the 2000s emphasized the extent to which institutional reforms and improvements in economic policy expand available resources and raise efficiency of their use, 1 This casts doubts on the prospects of reindustrialization of the European economy pushed forward by the EU Directorate-General for Enterprise and Industry as part of the Mission Growth initiative (http://ec.europa.eu/enterprise/initiatives/mis-siongrowth/). Cf., in particular, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Commit-tee of the Regions. Brussels. October 10, 2012 (http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=COM:2012:0582:FIN:EN:PDF). 2 Cf.: Porfiriev B. Op.cit., p. 8.

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today focus shifts to the issue of the degree to which the relevant factors can raise flexibility of economic adaptation to changes in comparative resource prices, primarily through support of technological changes aimed at the replacement of labor with capital, low-skilled labor with highly skilled labor, relatively expensive natural resources with relatively cheap ones (together with the general spread of resource-efficient technologies). In economic policy, the traditional ‘state-market’ dilemma of economic regulation is now becoming obsolete. First, by definition, no efficient regulation of global market can be implemented at the level of individual nation states. It requires international (global and regional) mechanisms based on co-operation of state and non-state actors. Second, the focus is shifting to national economic policies that seek to supplement the market to maximize country’s competitive edge, rather than replace it. Third, crucially important for national economic development is quality of regulatory institutions and their functions, rather than just the size of the government (i.e., the ratio of government spending to the GDP) or the public sector (i.e., the proportion of economic assets managed by the state). All this means that the most fundamental economic policy challenge is that of an optimal balance between national and supra-national regulation of economic processes. Whereas regulatory reforms at the national level initiated by actors of national political markets had played a key role in the support of economic development from the late 1940s to the end of the 1990s, the 2000s saw a considerable rise in international institutional innovations. This applies, first of all, to the rise of “New regionalism” as a model for regional economic cooperation.1 The dominant format of regional economic agreements (REAs) is now that of “Free trade area plus” (FTA+), which implies the abolition of customs barriers to trade in goods, liberalization of foreign direct investment and trade in services, improved safety networks to protect investors and intellectual property rights, as well as a harmonization of business regulation in member countries (so called behind-the-border issues). Regional economic cooperation is also developing through agreement networks under the FTA+ principle, rather than formal organizational structures. This process, the most active in the Asia-Pacific 1 For more details see Afontsev S.A. Ot Tamozhennogo soyuza k edinomu ekonomicheskomu prostranstvu [From the Customs Union to the Common Economic Space: Opportunities and Risks] // EKO. 2012. Vol. 6. P. 94–112.

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region, will definitely spread to other regions (e.g., in the context of a future FTA between the EU and the USA).1 Besides, the late 2000s and the early 2010s was marked by a sharp change in the role of global institutions in coordinating anti-crisis policy and developing universal rules of economic regulation (the most remarkable example being a dramatic rise of the role of the Group of Twenty, G-20). Although the global crisis was triggered by developments in national economies (chiefly, the USA), the crisis spread globally due to structural and institutional deficiencies in the global economy. The most painful structural flaw used to be the amassment of global imbalances among the “new” and the “old” leaders of global economy, while the most severe institutional one is preservation of an archaic nationally oriented regulation system despite large-scale innovations on global financial and commodity markets. Whereas changes in the structure of competitive advantages of developed and developing economies will help reduce structural disproportions in the global economy that arose during the last two decades, the elimination of institutional imbalances as such is a necessary condition for a new growth model. Elimination of institutional imbalances is most urgent in the field of financial market regulation. A global resource and technology shift hinges on a rising supply of capital. In the pre-crisis period this was achieved through constant incessant flow of financial innovations. With foreign assets of international banks exceeding the value of the global GDP over 50 times and the value of financial derivatives in circulation exceeding the global GDP over 1,000 times,2 the lack of adequate mechanisms of global financial regulation inevitably creates risks of recurrent crises in the international financial system. It is also evident that, given scale and scope of financial operations, any attempt to “restore balance” between the size of the real and the financial sectors through a “sequester” of the latter (e.g. by taxing financial operations) will inevitably cause the supply of capital to fall. 1 Findlay Ch., Urata Sh. (eds.). Free Trade Agreements in the Asia Pacific. L.: World Scientific Pub- lishing, 2009; Kawai M., Wignaraja G. Free Trade Agreements in East Asia: A Way toward Trade Lib- eralization? // Asian Development Bank Briefs. June 2010. Nо.1; Fact Sheet: United States to Negotiate Transatlantic Trade and Investment Partnership with the European Union. Office of the United States Trade Representative. February 13, 2013 (http://www.ustr.gov/about-us/press-office/fact-sheets/2013/february/US-EU-TTIP). 2 Bank of International Settlements, Quarterly Review, various issues (2010–2013).

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Attempts to fill up the capital gap through monetary incentives are likely to create new financial bubbles similar to those in the USA in the pre-crisis period. Therefore, the only reasonable approach to the issue of capital availability is to create a full-fledged regulatory system for global financial markets. The development of, and the debates on, the exact regulatory rules should involve market actors ensuring the functioning of a financial market infrastructure (including representatives of stock exchanges and international rating agencies). Their participation will not only expand the information and expertise available for decision-making, but also provide an incentive for market actors to comply with the rules they themselves helped create.1 Finally, the very nature of decision-making at the national level experiences a dramatic change. In recent decades, a clear criterion to assess national economic policies, i.e., their contribution to improving their competitive positions in the global economy, whether these policies seem “right” to experts or politicians or not. An emergent mechanism of “evolutionary selection” will in the long run marginalize inefficient approaches to economic policy and promote sustainable economic growth. In these circumstances, the issue of an “optimal role of government in the economy”, which used to be the central one to debates on economic policy for decades, becomes irrelevant, while the task of finding an optimal combination of market and political incentives to improve competitive positions becomes the top priority. Actions taken at regional or global levels may supplement national policies or substitute for them (when the respective authorities are partly delegated to supranational agencies).2 Therefore, national governments face an extremely complex challenge. On one hand, national economic policies should be consistently adapted to new international rules. On the other hand, a balanced approach in reforming economic policy is needed to prevent both “jumps ahead” in supporting technological innovations lacking commercial prospects and preservation of conservative institutions and 1 Afontsev S.A. Globalnyi krizis i regulirovanie mirovykh finansov [Global Crisis and Global Finance Regulation]. In: Mezhdunarodnye protsessy. 2009. Vol. 7 issue 1 (19). Pp. 17–31). 2 Occasionally, however, international-level regulatory decisions may have an adverse impact of the national economy (a widely debated example refers to possible negative consequences of tightening international financial regulation for the financial sector of the UK).

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tools reducing the flexibility of production factor markets. Both these problems are most typical of economically developed countries, especially the EU, where extensive incentives for green technologies went hand in hand with preservation of excessive social commitments that have pushed labor costs up and discouraged productive employment. Although there are positive trends in the EU welfare policy, despite spending cuts in countries most affected by the crisis, has remained unaltered. This model, which accounted for 58% of total global social spending1 between 2004 and 2009, casts doubts on the ability of the  EU  countries to shift to the new growth model, making outlooks of a post-crisis recovery in Europe unclear. Economic and institutional reform policies should thus create an environment most favorable for technological changes invited by transformations in the structure of comparative productive factor prices without adding new disproportions in the economic system. Finding appropriate responses to this challenge will be decisive for future economic developments and relative weights of individual countries and regional groups in the global economy.

1 Gill I., Raiser M. Golden Growth: Restoring the Lustre of the European Economic Model. Washington: International Bank for Reconstruction and Development, 2012. Р. 18.

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INNOVATION Natalya I. Ivanova, Ivan V. Danilin

High-Technology Business: Creative Destruction on the Move Innovation proved to be a key factor of an accelerated growth of the global economy in the early years of the 21st century. This was due to a synergy of three factors: an inflow of new technologies, high business activity and a growing number of countries successfully implementing modernization strategies. Technology innovations spread across world trade channels and global research, production and sales structures of multinational corporations at an unprecedentedly high speed. This growth was suspended for a while by the global economic crisis of 2008–2009, that severely hit high-technology markets, capitalization of big tech companies, and significantly impeded fundraising for venture funds and companies. The acute phase of the crisis was not followed by strong recovery in most developed economies, so growth rates of most large industries and markets remained below the pre-crisis level. Crisis and recession were reinforces by some long-term trends of hi-tech markets. First of all, we can identify stable trend for differentiation of demand for high technology goods and knowledge-intensive services and a rapid reduction of their life cycles in the context of relatively lower market entry barriers in many hi-tech industries (biotech, ICT, some types of semiconductor products, etc). Secondly, globalization implies establishment of new international centers of technology, competence, and hi-tech production facilities (including ones created in response to the challenge of entering new markets) as well as reinforcement of international labor division and rise of complex integrated global supply chains. Finally, the area of high technologies and innovation itself is expanding. On one hand, new hi-tech areas emerge and fundamentally new

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industries appear (nano-production, artificial intelligence, etc.) while simultaneously innovation waves spreads to traditional industries (e.g. advanced IT in energy resulting in Smart Grids). On the other hand, innovation actors are in process of constant development and diversification: we can see steady rise of specialized R&D services markets, crowdsourcing and virtual innovation communities based on open innovation and networking principles (including specialized Web-resources like Innocentive or Web-enhanced IT-development alliances like Eclipse), etc. All these processes spurred a sharper competition and restructuring of many major markets – a needed precondition of new innovation breakthrough, and have multiple profound implications for innovation strategies and business models of multinational corporations, as well as the phenomenon of leadership and the purport of innovation. Two successful basic models of innovative multinational corporations emerged. The first is a product leader. This model is based on the advanced competences to ideate and design new products, develop narrow range of key technologies with extended use of subsystems and components from all over the world, global reach for customers and control the market. In other words, this model`s centerpiece is profound understanding of a customer, including its` unexpressed needs and requirements, and ability to control and realize product development and marketing. Most other functions and processes are outsourced to specialized suppliers of goods and services, oriented on B2B demand. The other model hinges upon a dynamic corporate open-innovation system. In practice this means establishing a company with an ideology of a “venture fund” – creating new value by constant acquisition of start-ups and other innovative companies, technologies or concepts, and spinning off autonomous or semi-autonomous corporate units (teams, subsidiaries, joint ventures with other actors). The most typical examples here are Google and Cisco Systems, which largely owe their growth in innovations to regular acquisitions. Rise of both models (which in real life intersects and converge) has far-reaching implications for the global economy and the innovation markets. On one hand, it opens up additional technology and innovation growth opportunities for new players, including ones from developing countries, who seek to occupy new niches and grasp new opportunities. The aforementioned trends of the hi-tech expansion or diversification

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create a constant need for new dedicated solution suppliers. The venture corporation model has a significant development potential for large companies from developing countries, as it implies the formation and implementation of more complex investment strategies. However, the introduction of new models and the deprecation of standard practices of relationships with suppliers create not only advantages but also challenges, especially at early stages of the development and marketing of new products. It us exemplified by technical problems with finalizing Boeing-787 Dreamliner project, as well as chronic issues of leading motor vehicle manufacturers, who regularly incur significant costs of recalling millions of cars. Building and synchronizing a global supply chains remains a challenge even for global companies with a considerable expertise in system integration and strong competences in key technological areas. Evolutionary adaptation of hi-tech companies results in strengthening of some most successful and flexible and crash of most others. This Schumpeterian “creative destruction” mostly takes form of disruptive technological innovations on the side of “challengers” – future market leaders. These innovations are not only welcomed by consumers and market, but also drastically change the structure and the outlooks of any given market. The most visible examples of industry restructuring at the outset of the 21st century are discussed below. The most important disruptive innovations and changes still happens in the information and communication technologies (ICT) sphere, which is also the largest innovative industry in the global and most national economies. According to the data of Booz & Company (reviewing and publishing data covering 1,000 world’s public companies with highest R&D spending), ICT companies account for some 28% of global research and development (R&D) spending – the largest share among all industries. ICT companies are followed by healthcare, mainly pharmaceutical (22%), and automotive (15%) companies. It is worth emphasizing that development in the ICT industry is performed not solely by specialized firms, but also by companies producing other goods and services, including traditional ones. This is true both for general ICTs (focused on a given industry needs and goals), and for products of industry-specific ICTs – from sensors and automation and up to specialized simulation and modeling software. This situation boost strongly actual share and significance of R&D in information and communication technologies (table 2.1).

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Table 2.1. R&D spending by largest US ICT Companies in 2010–2013 ($ billion) Company

2010

2011

2012

Microsoft

8.951

9.362

7.571

Intel

6.576

8.350

7.519

International Business Machines

5.720

5.990

4.531

Cisco Systems

5.711

5.628

4.161

Google

3.762

5.162

5.035

Oracle

4.108

4.449

3.572

Hewlett-Packard Co.

3.076

3242

2.556

Qualcomm

2.504

3.221

1.928

Apple

1.959

2.612

2.623

EMC

1.888

2.150

1.897

Source: Battelle// R&D Magazine. 2012. December.

The lead segment of the global ICT market is still represented by American companies, since the USA leadership in most ICT areas is backed up by advanced technologies and wide scope of research and development activities in the private sector. Although total US corporate R&D expenditures (in all areas) are comparable to their European counterparts, American companies spend almost twice as much on ICT, as their EU competitors. In addition, concentration of two-thirds of national R&D expenditures on the corporate side in the USA undoubtedly produces scale and qualitative effects. Similarly, the domination of the USA in global ICT venture investments guarantees faster and more efficient selection and commercialization of the most innovative solutions, and attracts brightest talents from all over the world. In 2012 alone US venture market (accounts for 70% global venture capital) investments in ICT totaled $14.5 billion (Table 2.2). Much stronger is also the research base of American ICTs, accumulated in leading American universities. The vulnerability of even the most successful European companies was confirmed by the crash of a world-renowned Finnish mobile phone manufacturer Nokia, the flagship of the European ICT of the 2000s, which succeeded in entering global markets and achieving a global leadership (with the exception of the US).

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Table 2.2. US venture business investments in ICT and associated segments in 2007–2012 ($ million)

2007

2008

2009

2010

2011

2012 (QI–QIII)

Computers and periphery services

0.55

0.47

0.34

0.41

0.49

0.45

ICT services

1.90

2.10

1.23

1.64

2.27

2.00

Media and entertainments

2.16

1.80

1.37

1.54

2.24

1.95

Network solutions and equipment

1.44

0.76

0.75

0.68

0.36

0.32

Semiconductors

2.04

1.59

0.77

1.05

1.35

0.92

Software

6.13

6.07

4.21

5.15

7.51

8.27

Telecommunications

2.20

1.52

0.64

0.80

0.63

0.58

Total

16.42

14.32

9.31

11.26

14.85

14.49

% of total venture business investments in the USA

51.49

4786

45.70

48.30

50.40

54.64

Source: PricewaterhouseCoopers // National Venture Capital Association Money Tree™ Report. Data: Thomson Reuters Investments by Industry Q1 1995 – Q4 2012.

In the midst of global crisis in 2009 several factors including falling demand, dropping capitalization and drying financial resources plunged the company into deep turmoil. Company’s largest shareholders and investors were US pension and venture funds, whose earnings had drastically dropped due to financial turbulence and who were the first to withdraw their funds from overseas assets. Simultaneously Nokia failed to address strategic challenges of aggravated competition. It missed the emergence of fundamentally new markets for smart phones and tablets, created primarily by the American corporations. Eventually, it lost the battle for those markets, now dominated by the US and Asian giants Apple and Samsung. This defeat turned out even more significant for competition than the market entry by Chinese manufacturers featuring mass inexpensive mobile phones. Nokia`s attempt to form new alliances were met coldly by the market. In February 2011, Nokia shares dropped by over 70% on the an-

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nouncement that it planned to base all of its smart phones on Microsoft Windows operating system. In 2012, Nokia announced its intention to sell the Vertu de luxe phone brand to the EQT venture company, cut 10,000 jobs by 2013, and close its only plant in Finland. These measures were expected to raise $1.3 billion to save the company, but didn`t result in Nokia comeback as market leader. 2011 and 2012 saw the ascent of Apple as an undisputed leader in ICT and on the financial market. Apple had previously shared the first or the second place in terms of capitalization with Exxon Mobil, a constant leader of the US and the global economies1. Despite Steve Jobs’ death in August 2011, which is likely to have a grave impact on the company’s long-term outlooks (thus, e.g. the company’s indicators dropped for the first time in 2012), the phenomenon of Apple itself has demonstrated the supremacy of the US market, innovation model and management philosophy. Obviously Apple is not likely to stay on top of the technological and financial Olympus for centuries, as its competitors actively attacks its positions, with most dangerous in face of South Korea’s Samsung. Apart from struggle for customers, the companies waged a patent war, which also implies a narrowing technology gap. Samsung and Apple mutually accuse each other of plagiarism, only in 2011 filling over 30  patent infringement lawsuits in ten countries. In October 2011, a temporary ban of Samsung tablets2 sales was executed as Apple successfully proved that technologies used by Samsung to produce Galaxy series tablets had been patented by company from Cupertino. Previously Apple` suit resulted in ban on Samsung tablets sales in Germany and Netherlands. However, as early as in December of the same year a court rejected Apple’s lawsuit in the USA. In November an Australian court also ruled in favor of Samsung by lifting a ban on the sales of Galaxy 10.1 Tab in the country. In June 2012, the Hague court decided 1 On August 9, 2011 Apple’s capitalization for the first time exceeded that of Exxon, which had long been the world’s largest company, but already by the end of the same year the oil corporation surpassed Apple by $1 billion ($347 billion against 348 billion). At the same time many analysts predicted the company’s shares to grow to $460–470  billion by year end, which would make it an undisputed leader (e.g.: The  Economist. August 13, 2001. P. 32). This forecast proved correct. The shares quickly grew during the first six months of 2012, reaching $600 billion in April, which was 60% above the level at the beginning of the year. Apple retained leadership until January 24, 2013, when Exxon Mobil took the lead again. 2 http://polit.ru/news/2011/10/13/samsung_ban/

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a  patent case in favor of Samsung Electronics Co. Apple will have to pay indemnities for the infringement of a patent on telecommunications equipment used to manufacture a number of its products, including iPhone 3G, 3GS, 4 and iPad 1 and 2. It was Samsung’s first judicial victory in the companies’ patent battle. The Chinese manufacturers, who already achieved some leading positions in smart phone markets and by 2013 shipped almost one-third of the global communicator supplies, are reinforcing their fences, too. Analysts note that global smart phone sales will rise and since developing countries remain key consumers of these products the market will raise by 70-80% overall by 2013. On the PRC domestic market national brands can successfully compete with international players – especially in towns. Chinese manufactures including Lenovo Group, Huawei Technologies Co. Ltd., and ZTE Corp. have already launched a  budget smart phone product line with an average price of approx. RMB 1,000 (or $160.00), which is much lower than the prices offered by Apple and Samsung. An example of an industry affected by slower technological, organizational, financial, and economic shifts is the aircraft manufacturing, which is a technologically highly complex industry with a long-term Boeing-Airbus duopoly on the largest market of civil wide-body aircraft. These companies are transitioning to new technologies and business models that will help them adapt to a new global reality. A new era of aircraft industry dawned with the creation of B787 Dreamliner, which most fully (at the current technological level) embodied the industry’s numerous priorities: • replacement of metals with composites and other advanced materials in all elements of the fuselage; • 3D-printing of some components; use of state-of-the-art automation for design and production; • large-scale deployment of ICT systems, including GPS navigation, leading integrated traffic management and tracking systems, technologies for the optimization of all processes. Boeing, like other global aircraft manufacturers, optimizes the tasks of increasing useful load, reduction of operating costs, including fuel consumption, through a reduced aircraft weight, the use of various fuel mixes including renewable resources, etc. The two lines of parallel development are the creation of super-light materials for the aircraft

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body (polymers, composites) and the creation of state-of-the art avionic equipment. Still, many of the advanced industry projects will require a considerable changes not only in technology landscapes, but also in corporate management, manufacturing and value chain organization, and to a large extent in the business models of air-carriers, as well as ancillary infrastructure owners (rebuilding of airports, new fueling infrastructure etc.). Over the next decade, therefore, the global aircraft industry will largely remain focused on optimization, expecting the relevant technologies to ripen. However, a subsequent shift to other comprehensive research and technology platforms and business models is inevitable. The nature of those changes, the resource requirements and the scale of activity suggest that the new entrants, who are not burdened with “legacy of assets” and take advantage of national governments` development mobilization tools, may have at least the same chances as today’s leaders. The pharmaceutical industry is another science-driven market where major restructuring is incipient. Despite a fast, almost three-fold hike of R&D spending over the previous decade, the industry has yet to achieve its goal of development of new generation of relatively affordable mass medications (called “blockbusters” by industry experts) and treatment methods. Several reasons are quoted to account for this situation. Firstly, a dramatic surge of costs of research and testing for new medications owing to tightened requirements to the effects of chemically complex agent use. Secondly, big hopes for biomedical technology boom, expected decade ago, proved to be unjustified. Thirdly, a focus on preserving the existing model of healthcare with its constant growth of government procurement of prescribed medications and other characteristic features. Finally, inefficient innovative development models of the pharmaceutical companies, which stick to extending existing practices: despite market changes and breakthrough discoveries, industry leaders continue to push vigorously pharmacological formulae en mass to pre-clinic and clinical tests in hope for discovery of a new blockbuster or substitutes for existing blockbusters – instead of qualitative changes, including investments in research and biological processes modeling, development of narrowly focused, but highly demanded therapies and medications, etc. The challenges faced by large market leaders are exacerbated by the expiration of patent protection of the most profit-generating blockbusters. Drop of profits inevitably will result in R&D-budget stagnation

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or cuts, harsher requirements to the optimization of innovation strategies, e.g. by stimulating outsourcing, primarily, by way of the search for, and the formation of, new technological alliances with small businesses. As a result, since the mid-2000s, in order to keep their market positions, even such giants as Novartis and Phyzer had to venture on solutions replacing their core business model by entering “inexpensive” markets of generics and expanding biotech investments. The crisis aggravated the industry’s ailments: innovative development dropped, and the industry is yet to return to a pre-crisis extent and rate of R&D support. On the other hand, as shown by the latest biotechnological market monitoring in healthcare, smaller biotechnological companies have managed to offer more commercially attractive medications than specialized subdivisions of large pharmaceutical companies. The new products include antibiotics, vaccines and other new generation drugs. Importantly, smaller businesses have also showed research superiority by completing a number of Nobel-winning studies and providing employees with an exceptional workplace environment, including creativity, access to state-of-the-art equipment and newest preparations – generally in contrast with industry giants. Another factor of pharmaceutical market restructuring is growth of requirements of regulatory authorities and insurance companies, including ones to create not only mass medications, but also drugs for small cohorts of patients with specific health problems, which may lead to a  drop in earnings. Similarly, attention is increasingly drawn to personalized medicine, i.e. tailoring drugs to the requirements and peculiarities of an individual. Besides, an expanding array of medical information, combined with new methods of its storage, structuring and processing, as well as successful genome research pave the way to a new level of preventive medicine. This dramatic shift may determine the industry’s key economic and structural changes for the next decade.

USA – China: A Sharpening Competition Key statistical indicators and numerous innovation development ratings show the USA leadership. Despite financial difficulties and loss of competitive edge in some areas and industries accumulated R&D

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potential and a flexible economic policy enable a great number of innovators and entrepreneurs to adapt to a new context of national and global development. A comparison of leading countries in terms of efficiency of innovation policy, based on a wide range of indicators, including scientific achievements, domestic competition, intellectual property protection, participation in global trade, as well as immigration policy, ICT development, governmental procurement rules, etc., reveals the USA’s leadership as well. All BRICS countries, under this approach, have low grades and therefore a great improvement potential.1 But China is gradually taking lead in a number of local indicators assessing key prerequisites for innovation. Thus e.g. entrepreneurial activity (Table 2.3), an enormously important indicator of innovation potential assessing the individuals’ intention and actual ability to open up their own businesses, significantly distinguishes China, Hong Kong and Singapore not only from India, Brazil and Russia, but also from the USA and the European nations (except the UK). China’s indicators are also higher than country group averages (EU, APEC, OECD). Table 2.3. Entrepreneurial activity in developing and developed countries

G8 countries USA

New firms per 1,000 workers employed

Developing countries

New firms per 1,000 workers employed

4.3

China

6.3

Germany

1.19

India

0.12

France

3.08

Brazil

2.38

UK

8.05

Singapore

7.40

Italy

1.78

Hong Kong

19.19

Japan

1.28

EU members

4.73

Canada

7.56

ATEC members

4.73

Russia

2.61

OECD

4.38

All countries

4.52

Source: Data of Global Innovation Policy Index. ITIF and the Kauffman Foundation. March, 2012. Р. 67 (www.kauffman.org/globalinnovationpolicy). 1 Data from: Global Innovation Policy Index. ITIF and the Kauffman Foundation. March, 2012. P. 6 (www.kauffman.org/globalinnovationnpolicy).

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This indisputable advantage is reinforced by the PRC’s impressive achievements in a number of areas of education, science and technology. During 2000s and after China`s R&D expenditures grow by 21% annually, which is a very high rate historically and internationally and is 1.8 times ahead of the GDP growth rate. Globally China holds second position after the USA of R&D expenditures. The share of business R&D expenditures in China GDP currently exceeds that of the EU. Engineer graduates (with a bachelor or higher degree) from Chinese universities outnumber those from Japan, Korea, the USA, Taiwan and Germany taken together. The number of researchers and engineers employed in China has doubled in the 2000s. China has surpassed the USA by the number of papers published in scientific and technical magazines. In 2007 China’s share in global construction of semiconductor plants was 40% as compared to the USA’s 8%. Chinese manufacturers took the first place world-wide in the production of solar batteries in 2009, wind generators in 2010. China is also expected to become the world’s leading manufacturer of lithium-ion batteries. The country’s long-term strategic development course sets a whole range of goals with a view to boosting domestic investments. This means that the country’s leaders realize the limitations of the successfully implemented catch-up development based on borrowing leading technologies. Mere copying of foreign achievements is not enough to attain the new goal of becoming a global leader set by Communist Party of China. The pursuit of this goal will require more than just extended governmental funding of growing number of prospective R&D and innovation areas – practices that China still strongly support. Besides, ambitious plans of industrial and structural policy have been announced with a view to increase share of the technology-intensive industries in the Chinese economy but also to enter global markets with expanding range of products. Among key institutional components of the global strategy large-scale foreign trade and industrial policy measures to support domestic manufacturers is on the first place, which includes re-fashioned protectionism. Secondly, it is officially unacknowledged but consistently followed practice of infringement of Western partners’ intellectual property rights. Thirdly, it is other forms of governmental support of Chinese manufacturers, in particular, those focusing on international markets. This course is a matter of deep concern to trade partners, especially the USA, and many international organizations that regulate global flows of products, services, and capital.

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Key concerns regarding the PRC’s contemporary industrial, economic and innovation policy are listed below. These concerns are widely debated by international experts (list quoted here was composed by the US ITIF experts).1 • Rigid regulation of foreign trade by manipulating exchange and customs rates and quotes, value-added taxes. • Support of Chinese manufacturers both on the domestic and the external markets: large-scale governmental procurement, strict foreign supplies controls, encouragement of preferred manufacturers’ monopolism, subsidized exports and preferential funding of export operations. • China’s peculiar approach to intellectual property: forced transfer of Western counterparts` technology and establishment of joint ventures with foreign technological leaders, piracy at all levels, legal discrimination of foreign patent applicants, a special system of national technological standards, cyber-espionage. Several examples may be quoted to support this view. China’s largest industrial policy initiative singled out seven strategic sciencedriven industries2, which total share (just 2% in GDP in 2008) must be increased to 8% of GDP by 2015 and to 15% by 2020. The cost of this measure is approximately $1.5 billion for the first five years (subsidies, tax deductions, preferential loans, etc.), an amount that neither the USA nor any other developed country can afford to spend on such a wide range of industries and technologies3. Since the experience gained in these industries will be used to elaborate the mechanisms of new innovation policy, relevant national industry. The enterprises of these industries should demonstrate an efficient transition from reengineering (i.e. copying foreign technologies with some local improvements) to reinnovation (creation of endogenous models of innovation development based on well-known inter-national practices).

1 Atkinson R. Enough is Enough: confronting Chinese innovation mercantilism // The Information Technology and Innovation Foundation – ITIF. Wash. DC. February 2012. P. 20–25. 2 List of sub-branches: 1) energy preservation and environment protection technologies; 2) new IT generation; 3) biotechnologies; 4) state-of-the art machine-building; 5) new energy; 6) new materials; 7) electric cars. 3 Atkinson R. Testimony before the US // China Economic and Security Review Commission. May 10, 2012.

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The USA is especially concerned with a similar policy China pursues in another large industry – aircraft manufacturing. The US aircraft industry is highly developed, innovation-driven, and competitive; it secures a significant share in earnings from exports to all countries of the world, including China. However, China is willing to change the status quo. It created a state aircraft company, COMAC, to “use all opportunities of national and international cooperation with suppliers of components, assemblies, and units of aircraft, share with them in risks and advantages of cooperation in order to create a national production and service system, create and control a new global civil aircraft added value chain.”1 Concerns also arise due to a dramatic expansion of protectionist practices in governmental procurement of science-driven products. Since the early 2010s a joint decree of the Science and Technology Ministry, the Ministry of Finance, and the State Committee for Development and Reform created a national procurement catalog. This catalog includes domestic products that should be preferred to imported products for the purposes of government procurement. This practice has been followed by provincial authorities nation-wide. Crucially, most of the products of foreign companies locating their production in China do not fit the definition of “domestic” under the governmental procurement law adopted at the same time. Foreigners were forced to transfer patent rights to joint ventures with a controlling share held by a Chinese counterparts. However, in 2012 PRC officials changed rhetoric, stating that technology transfer or technological cooperation should be driven by business interests only, and the Chinese authorities could not make them a precondition for access to the Chinese market. However, China’s arsenal of protectionist policy is rich in other ingenious tools. Thus, e.g. access to telecommunications market is barred by national standards. The design of anti-trust legislation provides exemptions for domestic state enterprises, whereas foreign large companies are constantly persecuted. Foreigners’ access to the market is also constrained by patent regulation. These and other facts and trends suggest that specific issues of technological rivalry and struggle for supremacy (that seemed to be impossible even in early 2010s) aggravate existing the imbalances 1 Harrison G.J. Challenge to the Boeing-Airbus Duopoly in Civil Aircraft: Issues for competitive-ness // Technical report. CRS, July 25 2011 (http:// www.fas.org/sgp/crs/ misc/R41925.pdf ).

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and contradictions between the USA and China in trade, financial and foreign exchange regulations. Modern China is a vigorous actor, and in most cases also key trade partner not only for the USA but also for other most developed economies and China`s neighbor nations. So issues in the USA-China relations will inevitably spread to other countries and affect the entire global economy with implications that may be unpredictable, unless numerous established practices and rules of contemporary global order are duly adjusted to reflect China’s new role and interests. Although China is an active participant in the majority of new formal and informal associations and groups of the global economy and policy, the path to a change of its role in shaping up a global economic order is yet to be worked through. If China remains successful in key areas of contemporary technological and innovation development in near future, its new position as a  global economy leader will become ever more prominent. However, the USA and, at a lesser extent, EU still retain a considerable advantage in the big game for innovation leadership, which is due to several factors. These include, firstly, perfect institutions of a National Innovation System and an innovation ecosystem, advanced national and corporate R&D culture. Opportunities for self-realization, both scientific and commercial, are still much higher in the USA and the EU member states, which is unambiguously evidenced by an inflow of skilled labor force to these countries, intangible asset trade data, as well as business and innovation ratings. Secondly, one should not disregard a considerably better resource supply. The USA R&D expenditures alone exceeds $400 billion which is still much higher than that of the PRC and other Asian countries taken together, including per employee. An advanced research and innovation infrastructure and numerous professionals make the actual return on investment in this area higher than in the developing countries. This applies to the ability to create both disruptive and incremental innovations that shape up market trends. And ability to create disruptive innovations preserves the function of the USA and partly EU as Global Innovation System integrators.

Governmental Priorities A study of research and development, innovation and technological priorities, as well as of diverse science and innovation policy tools used

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for their implementation, shows1 a number of fundamental characteristics of the present situation. In the second half of the 20th century countries with a high share of government support of science and technology set their priorities primarily with a view to securing national security and defense. Later, the range of state scientific and technological goals grew to encompass such priorities as environment protection (with “green growth” ideas based on alternative energy) and healthcare, i.e. priorities of life sustenance in a broad interpretation of a term. Fast growth of leading economies in the 1990s and breakthroughs in the ICT, that brought hi-tech closer to people and society, deepened the perception of science as a force that may help solve key problems of both developed and developing nations – considering rapid pace and boundless opportunities of science and technology development. However, the realities of the early 21st century showed that the traditional concentration of resources on key areas was no longer an efficient response to the new challenges of scientific and technical development. Moreover, a number of expensive initiatives, priorities and strategies failed, despite being quite reasonably targeted by politicians and governmental authorities, for reasons that are broader than mere resource constraints of a given economy2. Revision of innovation policy principles and philosophy and a more rational prioritization in the era of budget constraints resulted in situation when large and costly governmental programs lost rele1 Nauka I Innovatsii: vybor prioritetov. [Science and Innovations: Setting Priorities] Ivanova N.I., Dezhina I.G., Danilin I.V. (eds.). Moscow, IMEMO, 2012. 2 A good example is the special priority of energy in general and nuclear energy in particular in Japan’s system of governmental scientific and technical programs. In the mid-2000s Japan government’s investments in energy innovative development amounted to $3.9 billion, exceeding similar budgets of any leading European countries manifold and 1.5 times higher than the analogous US budget. Moreover, in Japan energy industry has been prevailingly viewed as an important part of a “new technological mode” able to secure global energy leadership. This priority was dramatically and negatively re-evaluated after the Fukushima nuclear power plant (NPP) incident. Virtually all plans for nuclear energy development have been frozen. In contrast, renewable energy sources (RESs) are quickly gaining support and attention, becoming a new priority – also as a resource to replace at least some part of NPPs in future. However, transition to RESs is a complex matter too as shown by the experience of EU member states, where the implementation of ambitious goals of an energy strategy by 2020 with focus of RESs turned out to be the quintessence of innovation development issues. Despite a vigorous governmental and pan-European support that secured a high rate of growth of the industry, external (growing supplies of competing energy sources) and internal issues (including budgetary constraints) complicated and slowed down the progress in implementation of announced targets.

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vance or were abandoned in most developed nations – in favor of support of self-development institutions and mechanisms, creativity of all innovation process actors (researchers, inventors, entrepreneurs, and managers). A system of financial and economic incentives is gaining ground to secure mutual interests of innovations producers and consumers within national innovation systems framework. Such course is based on a package of financial, economic, industrial and scientific policies (a  policy  mix) and selective targeting of technology landscape infrastructure elements. Rather than simple prioritysetting, new national-level tools for technological development were comprised of government contracts for R&D-intensive industries in areas of public need, direct or indirect subsidizing of socially relevant sectoral R&D and education, support of interdisciplinary basic research projects, forecast and foresight activities, “soft” economic and political support of national hi-tech producers. Unless these conditions are met, national policies of priority setting and implementation of associated policy mix instruments appears to be more a lottery rather than a rational choice. Excessive reliance on situational political considerations and “cutting-edge” ideological concepts versus economic logics is one of the most frequent reasons of governmental innovation and R&D strategies failure. Moreover, rising global competition in all areas – from economics and politics to values and ideology, demography and natural resource conservation/development – goes hand in hand with a growing influence of a new system of factors that shape up the environment for national innovation systems. Even two decades ago most advanced economies, as leaders of innovation development, could strengthen their competitive advantages either within the national borders or by familiar interactions with the “golden billion” countries that had similar social or institutional foundations of research and technology development. Nowadays, globalization in industry, science, technologies, information, and even management creates conflicts and discrepancies of a fundamentally new nature, which can rarely be eliminated by traditional industrial and research policies. Thus, the US National Innovation System evolved in a decentralized way, based on efficient mechanisms of self-development in various segments of science and education, smaller and large enterprise that solved diverse tasks, etc. The implementation of large politically relevant technology projects did not fundamentally affect the National

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Innovation System general ascending trends. Federal authorities traditionally prioritized the growth of support of basic research, engagement of talented scientists and engineers from other countries, improvement of the institutions that secured the nexus of science and business, as well as freedom of enterprise. However, the pressure of external competition, especially from China, loss of competitiveness and jobs in the science-driven segments of industry and services required adjustments to this approach. The Obama administration, while still pursuing a general course of stimulating science and institutions, resorted to a more proactive policy in several most promising segments including clean energy and advanced manufacturing technologies. Focus on support for commercial technologies and innovations (in some cases close to industrial policy) was expected to ignite an innovation breakthrough comparable to the ICT revolution of 1980-1990s, securing future technological and industrial leadership for the USA. A massive federal financial, institutional and regulatory support was granted for broad range of energy and manufacturing innovations, within a framework of a technology life cycle approach (support for: technology development, first wave of infrastructure and industrial facilities construction, early adopters demand, etc.). Despite original expectations that first results of new energy policy will take effect within three to five years, in reality most of federal efforts did not yield immediate results for a number of reasons. First of all, technology and market challenges appeared to be higher than expected. It was especially true as growing activity of Chinese and other Asian manufacturers, technologically less advanced but more price competitive, undermined the positions of the US manufacturers. Symbolic in this case were bankruptcies of “new energy” start-ups supported by the government, such as Solyndra and Abound Solar. Secondly, a “shale revolution” that started in the USA at the same time, put down energy prices, enabling nation to come closer to its goal of oil and gas independence, but also hitting costly solar and wind markets. So, the effect of federal new energy policy was in fact shifted over longer term. This was also true for advanced manufacturing, a new focus for the Administration. The Chinese government is pursuing large-scale priorities of supporting national producers and capturing global markets – taking advantage of Japan and South Korea experience as nations that in previous decades also exploited catch-up development model with heavy

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accent on protectionism in support of national modernization actors as driving force for innovating their economies. However, the role of the state in the Chinese model is somewhat different than that in the aforementioned countries or generally in many other economies where public sector is a proactive actor of National Innovation System. China created a model with enormously rigid protection from external competitions, both market-driven and administrative. This approach bore some fruit, enabling Chinese hi-tech industries to engage in active competition with foreign players. This, at first sight, seems to help achieve the ambitious goals of global innovation leadership set by the Chinese government. Such policy, however, may result in some form of partly isolation of China from global innovation partnerships on which China still depends. Excessively rigid safeguards do not allow national actors to adapt to international competition adequately. In other words, the existing National Innovation System model may eventually defeat the very purposes for which it was formed. The key results of the innovation development of Germany show a balanced research, engineering and economic regulation. Large industrial companies fund most of sectoral industrial development. Smaller or medium businesses act as “innovation beacons” in the most advanced areas of R&D and technologies. A positive post-crisis trend is represented by a moderately growing state participation in business projects for innovation development support, which supported risky and costly research phases. Support of science-driven projects at an initial research phase is, as a rule, selective by industry and company size. Improvements of German Innovation System indicators appeared also as a result of a national High Technology Strategy implementation (launched in 2006). Among positive effects experts point out on improved coordination of innovation policy between various government agencies, clearly defined range of national technological priorities, set of “projects of future” and other key technologies initiatives to implement them, a closer cooperation between science and business. The remaining areas for improvement of the innovation system include lags in some new science-driven areas, an underdeveloped venture capital market, lack of skilled engineering and technical professionals, who were, historically, regarded as the country’s competitive advantage. Summarizing results of research and innovation policy review in advanced economies, one can claim that what they share is a movement

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toward a system where a hierarchy of priorities is built as a result of interaction of differently directed forces, including political, economic, social, and global requirements. The key criteria of success appears to be sustainability of scientific and innovation development. What lessons can Russia learn from foreign experience? Government efforts to revitalize Russian innovation policy in 2000s brought mixed fruit: on one hand, legislation was reformed, new so-called institutions for development (ROSNANO, Russian Venture Company, etc.) created, the innovation policy tools generally comply with the standards of the developed countries, research expenditures are rising. On the other hand, statistics registers a stagnation of science and innovation indicators and a growing gap between key Russian industries and their analogues in leading economies. Russia’s innovation paradox is that a country with up-to-date science and basic research education, wide range of inherited advanced technologies and industries, considerable budgetary and professional resources is gradually losing its competitive edge. This phenomenon is due to a number of objective and subjective reasons. Experts unanimously agree that numerous R&D, industrial and innovation policy goals set long ago have not been met. Competitive allocation of budget funds for research is far from being perfect; procedures for working out large-scale Federal Target Programs (one of key instruments for budgetary funds allocation) do not allow bottom-up initiatives; amounts of funding for competitive system of public research foundations is not enough to improve the quality of research considerably; there are no clear criteria for selecting candidates for tax preferences, etc. The fundamental flaw of the Russian Innovation System lies in a low activity of the entrepreneurial sector, which fails to act as its main driver. The technological upgrade of the Russian business is slower and much less comprehensive than that in the leading and dynamically developing economies. Potential and even capacities of domestic hi-tech manufacturers are not fully utilized, dependence on imported critical technologies is rising. Interest of potential foreign investors (who own advanced technologies) in the Russian market is limited for a number of institutional, industrial, and now also international politics reasons. Russia’s largest public companies, which are monopolists on the respective market niches, lag behind global leaders with regard to the capacity of production facilities, suffer

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from excessive non-operation costs, aren`t capitalized on the global stock markets (except for private giants in oil, gas and other extraction industry sectors). Rise of activities of foreign investors is further constrained by non-transparent corporate structures, overregulation, intensive efforts to secure control over assets and markets by domestic monopolists, committed to a conservative, “defensive” business ideology. Most of these factors curb the strategic and innovation activity of Russian business and constrain the opportunities to implement efficient catching-up strategies. Russia needs to put in place a new industrial and innovation policy adequate to the current challenges. Such policy should take the shape of an interrelated network of measures and management technologies aimed to dynamically overcome the structural imbalances that impede development of the national economy. Factors of general importance are consistency and an evolutionary approach for the implementation of policy: as shown by the experience of the past two decades, revolutionary breakthroughs do not yield sustainable positive results in the long run.

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THE CORPORATE WORLD MAP Alexey V. Kuznetsov

Over the recent years, the emergence of a polycentric world has become a reality.1 This process is broader than the strengthening of regional powers or integration associations of states. In an era of globalization, the development of a truly polycentric world also considerably reinforces non-governmental institutions, which contribute to reshaping the system of international relations. Transnational corporations (TNCs), which, according to UNCTAD data, generate one-tenth of the global GDP through their foreign branches and subsidiaries,2 play an especially prominent role among such institutions. The background and the rate of business transnationalization vary considerably across countries. Thus, some states developed a strong “external sector” comparable in size with their national economies3 due to an aggressive external expansion of TNCs as early as by the 1970s–1980s. Yet, it would be erroneous to conclude that the TNCs of the leading countries merely redrew the world map, creating – either directly (via the spheres of their influence) or indirectly (as an important element of “soft power”) “new empires” in place of the old ones. As a rule, TNCs are not confined to acting simply as players of the “external sector” of a national economy serving the economic and political interests of the powers where their core businesses are located: over the decades of globalization many leading TNCs lost a considerable part of economic and political ties with their headquarters countries. This is most obviously 1 Russia in a Polycentric World/ Ed. by A.A. Dynkin and N.I. Ivanova. Moscow, Ves Mir, 2011). 2 World Investment Report 2012: Towards a New Generation of Investment Policies. N.Y., Geneva: UNCTAD, 2012. P. 23. 3 Khesin E.S. Anglia v ekonomike sovremennogo kapitalizma [The UK in the Economy of Contemporary Capitalism]. Moscow, Mysl, 1979).

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illustrated by the phenomenon of offshores. Those jurisdictions have become a strong irritant for the governments of most countries, and yet TNCs from the same countries readily make use of extremely intricate schemes to circumvent constraints on the use of offshores. TNCs, which have become self-sufficient players, shape up international trade, influence various governments, international organizations in the field of investments regulation, as well as political initiatives of regional integration. Moreover, the recent boost of TNCs from developing countries shows that the range of TNCs is too heterogeneous to reduce the impact of a globalizing business on the contemporary global development to just a few key trends. Building a full-fledged corporate map of the world would require one to generalize the findings of several detailed studies in the specifics of TNCs from dozens of countries. Such studies should not be limited to a mere review of economic operations performed by such companies. Yet, since even the description of TNCs from larger countries is still in statu nascendi,1 this chapter will solely outline the key issues related to the shaping up of a contemporary corporate world map.

Geography of “External Sector” of Various Countries First of all, it is worth noting that individual countries are involved in exports of capital through foreign direct investments (FDIs) to a varying degree. Explanations of this fact typically invoke the level of a country’s economic development (the so-called investment development path theory2) and the size of domestic market (smaller countries are more liable to developing external trade ties.) In practice, however, an extremely complex package of economic, socio-cultural, domestic and foreign-political prerequisites of business transnationalization is in play. Although usually only a highly internationally competitive (at least in some branches of economy) country can host the headquarters of large TNCs’, the exact volumes of their FDIs will 1 MNEs from Emerging Markets: New Players in the World FDI Market / Ed. by K.P. Sauvant, V.P. Govitrikar, K. Davies. N.Y., 2011 (www.vcc.columbia.edu/files/vale/ content/EMGP_-_eBook_ PDF_2_11.pdf). 2 Dunning J.H., Narula R. The Investment Development Path Revisited: Some Emerging Issues // Foreign Direct Investment and Governments. Catalyst for Economic Restructuring / Ed. by J.H. Dunning. London, 1998. P. 1–41.

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be determined by the power of the so-called mobilization factors for investors.1 Table 3.1 clearly shows that the USA is still an undisputed leader as to the scale of FDI exports. The US TNCs also play a significant role in raising foreign funds and the related transfer of technologies and management solutions, not only in neighboring countries, but also in such large nations as the UK and Japan. By contrast, neither China, the USA’s closest rival, nor Japan, which used to aspire to catch up with the USA in the past, have succeeded in reaching a high level of transnationalization. Table 3.1. Role of FDI export for economically leading countries

Country

USA

GDP in 2011, $ billion in current prices

Accumulated Recipients of FDIs exported FDI with country’s contribution FDIs at the to GDP to accumulated FDIs end of 2011, ratio, $ billion % over 50% 20–50%

Aruba, Canada, Costa-Rica, Mexico

Australia, UK, Israel, Netherlands, Paraguay, Republic of Korea, Salvador, Japan

15,076

4,156

28

China

7,298

473

6



Hong Kong, Kyrgyzstan

Japan

5,867

963

16



Republic of Korea, Thailand, Philipinnes

Germany

3,607

1,356

38



Austria, Malta

Benin, Morocco

Belgium





France

2,778

1,597

57

Brazil

2,493

135

5

1 Kuznetsov A.V. Produktivnost mezhdistsiplinarnogo sinteza dlya razvitiya teorii transnatsionalnykh korporatsii [Productivity of Interdisciplinary Synthesis for Developing a Theory of Transnational Corporations (TNCs)] // Interdisciplinary Synthesis in the Study of Global Economy and Politics / Ed. by F.G. Voitolovsky and A.V. Kuznetsov. Moscow, Kraft+, 2012. Pp. 8–29.

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Table 3.1. Role of FDI export for economically leading countries (concluded)

Country

GDP in 2011, $ billion in current prices

Accumulated Recipients of FDIs exported FDI with country’s contribution FDIs at the to GDP to accumulated FDIs end of 2011, ratio, $ billion % over 50% 20–50%

UK

2,431

1,725

71



Barbados, Zambia, Mali, Pakistan, South Africa

Italy

2,199

520

24





Russia

1,850

362

20

Belarus

Armenia, Cyprus, Moldavia

India

1,827

63

3



Nepal

Canada

1,739

670

39





Australia

1,487

344

23

Samoa, Mali New Zealand

Spain

1,480

606

41



Bolivia, Portugal, Chile

Mexico

1,154

99

9





Rep. of Korea

1,116

172

15





Source: Compiled by the author on the basis of data from IMF interactive charts (www.imf.org).

However, it is worth noting that over the recent years developed (especially European) countries have begun to lose their share in capital export to countries with swiftly growing markets, chiefly due to a heterogeneous impact of the global economic crisis. Thus, in 2009–2011 China accounted for 4–5% of global current FDI exports, whereas in 2008 its share in the accumulated amount of exported FDIs had been 0.9%.1 Regional TNCs remain the second target of research. How often do companies pursue truly global strategies?2 How relevant is the “neighborhood effect” for the FDI geography, especially in an extended inter1

World Investment Report 2012. Web tables 2 and 4 (www.unctad.org). Rugman A.M., Verbeke A. A perspective on regional and global strategies of multinational enterprises // Journal of International Business Studies. 2004. No. 1. P. 3–18. 2

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pretation including mental affinities of countries as a result of a shared history, language, culture, etc.?1 A good illustration can be furnished by two highly developed European countries with approximately equal scales of FDI exports, Austria and Sweden. According to IMF data, Austria’s accumulated volume of such capital investments at the end of 2011 was $291 billion, with that of Sweden equaling $336 billion.2 Notably, both countries acceded to the EU simultaneously, as early as in 1995, and one would have expected one and a half decade to be enough for economic effects of regional integration to become manifest. In practice, however, the predominant geographic vectors of expansion of national business go back to the Austrian and the Swedish empires that existed in the previous centuries (cf. Fig. 3.1 and 3.2). Undoubtedly, it is far from always that a direct nexus can be traced between Austro-Hungary’s strong footprint in Central and East Europe and the contemporary view of that region as a “home market”.3 Yet, annual statements of many Austrian companies show that their economic expansion in the Balkans is not guided solely by commercial considerations. The Austrian business still has the strongest footprint in Slovenia (37% of the country’s accumulated FDIs), the only republic of the former Yugoslavia to accede to the EU during the first wave of its expansion to the East. Similarly, the Swedish business views the Baltic region as its “internal” market.4 Thus, e.g. at the end of 2011 some 57% of accumulated FDIs in Finland were of a Swedish origin, although foreign capital from elsewhere does play a rather important role in that country. It is not completely clear how growing globalization will affect the balance of global and regional TNCs. Thus, the influence of the “neighbourhood effect” on the geography of FDIs of private direct investment funds or sovereign funds is far from being extensively studied. In addi-

1 Kuznetsov A.V. Pryamye inostrannye investitsii: “effect sosedstva” [Foreign Direct Investments: A “Neighborhood Effect”]. In: Mirovaya ekonomika i mezhdunarodnye otnosheniya. 2008. Vol. No. 9. Pp. 40–47) 2 Table 6-o: Outward Direct Investment Positions by All Reporting Economies Crossclassified by Counterpart Economies, as of end-2011 (interactive chart at: elibrary-data. imf.org/ Report.aspx?Report=11666811). 3 Yudanov Yu. I. Avstriya [Austria]. In: Evropeiskie pryamye investitsii v Rossii / Ed. by A.V. Kuznetsov. Moscow, IMEMO RAN, 2006. Pp. 168–171. 4 Kuznetsov A.V. Transborder corporate integration in the Baltic Sea Region // Baltic Region. 2012. No. 1. Pp. 11–18.

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Figure 3.1. Neighborhood effect in the geography of Austrian outward FDI stock

Iceland Sweden Norway Finland

UK

Estonia

Denmark Netherlands

Belarus

Poland 2

Share of Austria in accumulated FDIs at year end of 2011, %

Germany

Ireland

Ukraine

3 4 France

5

12

Hungary

7

6

Romania

8 10

20 – 40

11

1

5 – 20 1–5

Russia

Latvia Lithuania

Bulgaria 9

Portugal

Spain

Italy Turkey

Below 5

Cyprus Morocco

Numeric map designations: 4 – Slovakia 1 – Montenegro 5 – Austria 2 – Belgium 6 – Slovenia 3 – Czech Republic

Algeria

7 – Switzerland 8 – Croatia 9 – FYR Macedonia

Malta

Greece

10 – Bosnia and Herzegovina 11 – Serbia 12 – Moldova

tion, there emerges a special group of companies that have been transnational from inception (e.g., in information technologies.) The third target of research is the study of how the business carried out by TNCs and the pursuit of certain interests by their home countries are interrelated. In other words, companies may use specific mobilization factors of external expansion available in their homeland and ostensibly exhibit a national model of transnationalization, while, at the same time, TNCs (especially private) may well pursue profit to the detriment of their national economies. A graphic example of the

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Figure 3.2. Neighborhood effect in the geography of Swedish outward FDI stock

Iceland Sweden

Finland

Norway UK

Estonia Denmark

Latvia Lithuania

Netherlands

Share of Sweden in accumulated FDIs at year end of 2011, %

Belarus Poland

2

Germany

Ireland

Ukraine

3 France

40–60

4

5

12

Hungary

7

6

20–40

Romania

8 10

11

1

5–20 1–5

Bulgaria 9

Portugal

Spain

Italy Turkey

Below 5 Morocco

Numeric map designations: 4 – Slovakia 1 – Montenegro 2 – Belgium 3 – Czech Republic

Russia

5 – Austria 6 – Slovenia

Algeria

7 – Switzerland 8 – Croatia 9 – FYR Macedonia

Malta

Greece

Cyprus

10 – Bosnia and Herzegovina 11 – Serbia 12 – Moldova

latter is the outsourcing of production from leading OECD countries to countries with cheap labor unprotected by welfare state and weak environmental legislation, which results in rising unemployment. This said, government-controlled TNCs do not leave the stage; rather, they are becoming important players due to increasing business transnationalization in larger developing countries. At the same time, retired generals or politicians, whose roles are not confined to merely representative functions, can be seen among board members of NorthAmerican and West-European private TNCs.

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Regional Corporate Integration The neighbourhood effect in the geography of FDIs accounts for an important role of TNCs in regional economic integration. In fact, one can speak of two parallel and merely partially related processes, topdown political and economic integration and bottom-up corporate integration. Integration projects initiated at the state level may incentivize trans-border flows of products, services, labor and capital, as obviously demonstrated by the ever expanding EU. At the same time, as shown by numerous examples of developing countries, without prerequisites for corporate integration such projects turn out to be stillborn1. By the same token, successfully developing economic ties among corporations, especially if backed up by migration and tourist flows, may push the development of a top-to-bottom integration. Suffice it to recall that tight trade and investment relations between Russia and the EU prevented a disruption of their political dialogue in 2008. Another example is Ukraine, the fluctuations of whose orientation between the EU and the Customs Union of Russia, Belarus, and Kazakhstan are predetermined both by the so-called civilization dilemma of Ukraine and its pursuit of purely economic benefits. The development of regional integration also affects TNCs themselves. Alongside with external factors directly influencing the business of companies, such as anti-trust regulation within the framework of integration groups, harmonization of technical standards in members of customs unions, etc., internal transformations within the companies take place as well. Apparently, a transformation of the German (“continental”) holding model of capitalism was brought about by hostile takeovers by British and other European TNCs with a high market value due to the development of a shareholder model of capitalism in those countries, rather than by challenges of globalization. As a result, companies in Germany and in a number of other EU countries began increasingly to rely on financial resources raised on stock markets, rather than loans from friendly banks and their own undistributed profits. Changes in strategies resulted in a reshaping of corporate governance. Especially important in this respect is the incipient internationalization of management of the leading TNCs (Table 3.2), which, 1 Kheifets B.A. Libman A.M. Korporativnaya integratsiya: alternativa dlya postsovetskogo prostranstva [Corporate Integration: An Alternative for the Post-Soviet Area]. Moscow, URSS, 2008.)

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Table 3.2. Citizenship of board members at 12 leading TNCs of the EU Board member citizenship, %

Company

Home country

Foreign assets at year end of 2011, US $ billion

Local citizens

Citizens of the countries with the same language

Citizens of the EU countries

Shell

UK Netherlands

296.4

54 (23 + 31)

69 (38 + 31)

69

BP

UK

263.6

40

87

53

Total

France

211.3

73

93

87

GDF Suez

France

194.4

81

95

90

Vodafone

UK

171.9

42

67

75

Enel

Italy

153.7

89

89

100

Telefonica

Spain

147.9

83

83

89

E.On

Germany

133.0

67

67

100

Eni

Italy

122.1

100

100

100

Arcelor Mittal

Luxemburg

117.0

18

36

25

Volkswagen

Germany

115.1

85

85

90

Siemens

Germany

112,4

80

85

95

68

80

81

Average for 12 companies

Sources: World Investment Report 2012 (www.unctad.org); author’s calculations are based on corporate data (www.shell.com; www.bp.com; www.total.com; www.gdfsuez.com; www.vodafone.com; www.enel.com; www.telefonica.com; www.eon.com; www.eni.com; www.arcelormittal.com; www. volkswagenag.com; www.siemens.com).

however, should not be overrated, as shown by the examples of even the largest European TNCs. New board members are typically citizens of the EU or countries with the same official language (primarily Switzerland and Canada for French-speaking, the USA, the Republic of South Africa and some other countries for English-speaking countries, respectively.) The preservation of national or, at least, regional or linguistic specifics of TNCs leads, in particular, to a rather wide-spread cooperation among compatriot firms (especially smaller ones) abroad, even those

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Figure 3.3. Exported direct investments at year end of 2010 ($ billion) 0

1,000

2,000

3,000

4,000

5,000

USA UK France Germany Netherlands Hong Kong Switzerland Belgium Japan Spain Canada Italy Australia Sweden Russia Ireland Virgin Islands (UK) Singapore China Denmark Norway Taiwan Brazil Austria Rep. of Korea FDI outward stock FDI outward stock without EU intra-FDI Sources: International Trade and Foreign Direct Investment. 2013 ed. Eurostat pocketbook. P. 96 (www.epp. eurostat.ec.europa.eu); World Investment Report 2012. Web table 4 (www.unctad.org); Table 12.6.2. Positions of Dutch direct investment abroad, broken down by country, region and by economic activity (www.statistics.dnb.nl ); calculated by the author.

fiercely competing for markets in their homeland. As shown by foreign investor polls, lack of information in English, specifics of local legislation and legal practices force them to closely cooperate under the auspices of chambers of industry and commerce and similar organizations to attain competitive advantage over local firms. This applies not only to developing or post-socialist countries with an unfavorable investment climate, but also to such relatively well-off countries as Germany (in the case of Asian investors.1). 1 Kuznetsov A.V. Mirokhoziastvennye sviazi germanskikh kompanii [Global Economic Ties of German Companies]. Moscow, IMEMO RAS, 2004. P. 33).

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However many companies acting within the framework of the most successful regional integration associations, primarily, the EU, develop a sense of all member states of such associations as an internal market. The delimitation of domestic and foreign trade, internal and overseas investments is often a non-trivial research challenge. Moreover, the recent grave Eurozone crisis has shown that discrepancies persist even among tightly integrated countries owing to differences in economic structure that affect global competitiveness and determine variants of governmental regulation that shape up over decades. Taking into account only ties external to an integration grouping may dramatically underrate the actual involvement of individual countries, primarily, EU members, in international economic relations. This is already well known from foreign trade statistics (intra-trade and extra-trade) and has been recently shown by direct investment indicators (Fig. 3.3). It is worth a special note that TNCs from various countries engage in organized lobbyism abroad. This problem is still not well studied. Yet, research on the EU shows that foreign lobbyism by TNCs is becoming a self-contained and significant factor of business.1 In addition, transnational lobbyists may sometimes exert a considerable pressure on domestic economic policy even within large economic associations.

TNC Reinforcement Transforms the World Map The transformation of the world map due to an increasing transnationalization of business is going on in several directions simultaneously. In particular, strong shifts can be observed in the geography of location of leading branches of economy. This inevitably affects the socioeconomic development of individual countries or territories. The recent years have seen an accelerated transformation of economic structures and their spatial pattern, which is not unusual in the wake of an economic crisis. Besides that foreign trade relations of individual countries are being reshaped, which, through the development of “soft power”, eventually determines foreign policy priorities of different states. In effect, international relations researchers face the challenge of building a multi-layer geo-informational system that would put together 1 Peregudov S.P. Lobbizm rossiiskogo krupnogo businesa v Evropeiskom soyuze [Lobbyism of Russian Large Business in the European Union]. In: Mirovaya ekonomika i mezhdunarodnye otnosheniya. Moscow, 2009. No. 9. Pp. 49–63.

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the findings of various interdisciplinary studies on business transnationalization on a world map. One of the first elements of such a system could be the mapping of processes reflecting the transnationalization of TNCs. This does not mean that numerous shifts in the modern energy industry are due to TNCs. On the contrary, e.g., environmental requirements (in particular, the decision to discontinue the use of nuclear power plants in Germany by 2022) are developed despite the wishes of TNCs. Yet, companies are subsequently forced to relay such signals to the economic environment. Thus, electric energy and related machine-building TNCs of Germany were forced to discontinue foreign cooperation projects in nuclear energy in 2011–2012 and switch to renewable energy sources. Close attention should also be paid to changes in the global fuel and energy branch related to the activities of the leading oil and gas TNCs, their new projects in the extraction and shipping of hydrocarbons. However, even traditional oil extraction may be viewed from two angles: as extraction of vitally important raw resource by individual countries (even if the extraction is performed by foreign TNCs, those are still governed by local law, and their projects may be nationalized, as has indeed happened more than once) or as an extremely lucrative transnational business of leading energy corporations. A study of statistics by country (Fig.  3.4) facilitates the analysis of a changed role of OPEC, the constraints of selfsufficiency of such major national economies as the USA and China, economic implications of sanctions against Iran, etc. But the actual involvement of business of various countries in the extraction of oil is also extremely important for economic and political analysis. While the attractiveness of companies for investors hinges upon the oil reserves they control, the relevant indicators are often distorted by speculative assessments. Besides that, other business areas, typically including natural gas extraction, hydrocarbon processing, and chemical industry, play a considerable role in the case of diversified energy companies. Nevertheless, the current extraction of oil by individual TNCs is an independent topic of research interest. Thus, e.g., the oil extraction by the British BP (2.16 million barrels per day in 2011, including associated companies) is comparable with those of Norway and Brazil, and oil extraction by the Russian giant LUKOIL (1.84 million barrels per day) with that of Kazakhstan. Another world leader is Saudi Aramco, which produced 9.1 million barrels per day in 2011.1 Whereas 1

Saudi Aramco 2011. Annual Review. P. 16 (www.saudiaramco.com).

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11,161 10,280 7,841 4,321 4,090 3,522 3,322 2,938 2,865 2,798 2,720 2,457 2,193 2,039 1,841 1,746 1,729 1,723 1,100 942 931 930 891 858 735 607 573 509 484 479 4,951 0

2,000

4,000

6,000

8,000

10,000

12,000

Note. Names of OPEC member countries are italicized Source: BP Statistical Review of World Energy. June 2012. P. 8 (www.bp.com ).

LUKOIL, a private company, accounted merely for 1/6 of Russian oil production, although its business in the homeland was key for the company (93.5%)1, Saudi Aramco dominated oil extraction in Saudi Arabia (like most state oil and gas corporations elsewhere.) The US and the European companies do not play a significant role in raw material production in their homeland but may feature as key oil producers abroad, possibly with sharply divergent priorities of individual TNCs, as obviously illustrated by a comparison of oil production by, e.g., the British BP and the Dutch-British Shell (Table 3.3.) Shifts in the processing industry manifest themselves most strongly in the sectoral and geographical structure of foreign trade, provided that calculations are based on cross-border flows of added value, rather 1 Lukoil: Spravochnik analitika 2012 [Lukoil: Analyst’s Handbook 2012]. P. 18, 27–29 (www.lukoil.ru).

23

22

42

Australia

Algeria

Others



1.3

4.8

1.1

22.8

1.6

6.1

12.2

10.1

Country

Others

Italy

Norway

Malaysia

Gabon

Brazil

UK

Brunei

Denmark

Russia

UAE

Oman

USA

Nigeria

World

164

35

37

40

44

45

71

78

88

117

144

200

211

262

1,536



31.8

1.8

7.0

18.0

2.1

6.5

47.0

39.3

1.1

4.3

22.4

2.7

10.7

1.8

Share in total production in the country, %

Source: BP Financial and Operating Information 2008–2012. P. 64 (www.bp.com); Shell Annual Report and Form 20-F 2012.P. 32 (reports.shell.com).

Note: The list includes all countries where the production of one of the companies exceeded 20,000 barrels per day.

31

31

Trinidad and Tobago

35

Norway

Iraq

74

45

94

Argentina

10.3

113

UK

Azerbaijan

Egypt

7.0

123

Angola

5.8 6.3

453

209

8.4

USA

865

Russia

2.6

UAE

2,157

Country

World

Oil production by TNC in the country, thousand barrel per day

Oil production by TNC in the country, thousand barrel per day Share in total production in the country, %

SHELL

96

BP

Table 3.3. Comparison of BP and Shell oil production geography in 2011.

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than gross output. It is not accidental that China has been dubbed “the world’s workshop”: this and many other developing countries, especially those of Asia, although large exporters of finished products, in a great number of sectors of their economies add an insignificant value to parts and units previously imported for assembly. No less important are shifts occurring in the service sector, especially in industries with strongly pronounced transnationalization specifics. Thus, e.g. a sharpening global competition of universities and the unfolding Bologna Process in Europe call for a study of transnationalization in higher education. Notably, a mismatch between the geography of trade and information flows in the global economy results in a characteristic pattern of international relations of universities (networks of foreign branches, geographical priorities in admission of foreign students, scientific links.) Non-typical is also the geography of industries related to the development and marketing of software. On the one hand, the industry of information and communication technologies is experiencing a contraction, or “death”, of space1 due to proliferation of remote work and the fact that TNCs in that branch often get internationalized at birth, rather than later in life. On the other hand, localization may be strongly forced by dramatically tightened requirements to individual factors governing the location of a business (availability of highly skilled professionals and high living standards, advanced communications infrastructure, etc.)2.

Emergence of New Layers on the Global Corporate Map It is worth noting that not only does a more prominent role of TNCs transform the geography of traditional international economic relations, but it also create new layers of the global corporate map that are yet to outline. Thus, e.g., one comparatively new phenomenon is represented by financial flows disconnected from the real sector, a more adequate regulation of which was topicalized in the wake of the global crisis. Such “disconnection” should not, however, be taken too literally: thus, e.g. 1 Cairncross F. The Death of Distance: How the Communications Revolution Is Changing Our Lives. Boston, MA: Harvard Business School Press, 1997. 2 Dohse D., Laaser C.-F., Schrader J.-V., Soltwedel R. Raumstruktur im Internet zeit alter: Todder Distanz? Eine empirische Analyse // Kieler Diskussions beiträge. 2005. No. 416/417.

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Table 3.4. Representation of individual countries in the ranking of top 500 companies leading by market capitalization (march 30, 2012)

Country USA

Number of companies in top 500

Total capitalization, $ billion

Ratio of capitalization to national GDP in 2011, %

173

10,403.8

68.8

UK

38

2,081.1

86.0

China

22

1,635.7

23.2

Japan

36

1,344.2

23.0

France

23

1,021.8

36.8

Germany

19

913.0

25.6

Canada

25

887.1

51.0

Switzerland

15

880.2

137.5 316.0

Hong Kong

17

771.0

Brazil

12

764.2

31.7

Australia

14

640.8

42.1

Russia

10

533.1

29.0

8

369.0

33.1

India

12

367.6

18.9

Spain

6

307.4

20.5

Italy

8

277.1

12.7

Sweden

9

268.7

50.5

Mexico

6

219.0

19.0

Netherlands

7

196.7

23.5

5

187.6

40.3

40

1,268.6

8.6

Rep. of Korea

Taiwan Other 15 countries

Sources: Financial Times. July 19, 2012 (www.ft.com); UNCTAD Handbook of Statistics 2012. P. 412–418 (www.unctad.org).

TNCs take advantage of financial globalization to facilitate fundraising for investment projects, optimize taxes and management schemes through a newly emerged system of offshore centers with diverse specializations. Besides, some states successfully manage to fit into a new financial world map, as shown, e.g. by such two indicators as relative weights of countries in terms of market capitalization of companies within their territories (Table 3.4) and a world financial center index. As mentioned above, high market capitalization allows TNCs to carry out a more efficient international investment expansion, which

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ultimately helps them to build optimized configurations of cross-border production and sales chains. This boosts global competitiveness of such companies, and often, as a corollary, the economic power of their home countries. However, high market valuation of securities issued by companies from a particular country is not an accident. Most favored TNCs are those from countries that are home to the most reputable international financial centers. Thus, London, New York, and Hong Kong were on top of a 2013 ranking by Z/Yen Group, with two Swiss centers in the top ten, and the top twenty including, apart from New York, four US and four Canadian cities. At the same time, Milan and Rome were at the bottom of the top forty, and Moscow was the 65th out of 79 centers (the list was closed by Athens, the capital of a crisis-hit Greece)1. Another layers of the corporate world map is related to new forms of labor migration, including, first of all, more active cross-border migrations of skilled professionals and managers of European and US TNCs. No less important is, e.g., an all-embracing expansion of China in Africa and other developing regions, where Chinese companies seeking to develop scarce resources bring not only their investments and technologies, but also their employees. As shown by G. Hofstede, TNCs are forced to adapt their international expansion to the specifics of the cultural environment of the countries that are recipients of their capital. However, they also act as a medium for a diffusion of certain behavior patterns, e.g. as part of corporate social responsibility. Thus, given heated debates in the European Union regarding managerial quotes for women, it would be  interesting to analyze the stance of European TNCs as to this issue outside of the EU. However, many aspects of corporate social responsibility of TNCs have not been subjected to a detailed analysis so far.

*** The phenomenon of transnationalization is but one of the manifold facets of the contemporary globalization processes. Hence, building a corporate world map may require the analysis to extend on other aspects of globalization with a strong spatial dimension. One of the themes that naturally suggest themselves in this respect is the consideration of such global issues of mankind as, among others, food supply and climate change. 1 The Global Financial Centres Index 13. March 2013. Z/Yen Group. P. 4–5 (www. longfinance.net).

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Chapter 4

REGULATION OF THE GLOBAL FINANCIAL SECTOR Yakov M. Mirkin

Long-term trends in global financial regulation The global financial trends that emerged after 2007–2008, their objective nature and time boundaries cannot be understood unless viewed retrospectively from a long-term standpoint. These trends are part of developments that have continued for at least 200 years. Therefore, a review of historical material is required in order to understand them. A recurrent pattern of the development of global finance in the 19th–21st centuries has consisted in the deepening of its regulation as “financialization” unfolded in the global economy. The global financial regulatory system developed from disparate elements and simple forms to an increasingly complex, multi-tiered and all-embracing architecture matching a growing financial depth of the real economy.1 In the 19th century, financial systems were coordinated only at their “endpoints”. Cooperation of central banks began at the beginning of the 19th century (elimination of liquidity gap to prevent crises).2 The first modern-style currency bloc, the Latin Monetary Union, was established in 1865 and existed until 1926. The Scandinavian Monetary Union existed from 1873 to the late 1920s. The first wave of globalization3 brought into existence international monetary conferences as 1 The development of any object is accompanied by an adequate complication of its management system and an enhancement of its ability to respond to increasingly larger risks. Otherwise, aggravated risks, conflicts and destructio arise. The principle of adequacy of a system and its management fully applies to global finance. 2 Kindleberger Ch. P. A Financial History of Western Europe. NY: Oxford University Press, 1993. P. 66–67, 275–277. 3 Masson P.R. Globalization: Facts and Figures // IMF Policy Discussion Paper. October 2001. P. 3–4.

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a tool to unify monetary systems (Paris, 1867, 1878, 1881; Brussels, 1892.) The next phase of development of global finance regulation (the 1920s – the 1930s) brought about a great number of innovations. Financial conferences (Brussels, 1920; Genoa, 1922 – the Genoese currency system; London, 1933) proved insufficient. Regulation was institutionalized. An international financial institution capable of settling issues shared by several countries crystallized in the form of the Bank for International Settlements (BIS) established in 1930 to settle German postwar debts. Later on, it served, for the first time ever, as the basis for an international lender of last resort. The BIS acted as such for its member central banks (1931–1932). A prototype of a supra-national financial regulation authority emerged in the shape of the Financial Committee of the League of Nations. The first global acts were adopted that directly governed financial transactions (the Geneva Conventions of 1929–1931 that applied to bills of exchanges, checks, and counterfeit money.) At a new phase (from 1940 to the 1960s), like a century before, monetary systems, payments arrangements, exchange rates, gold prices, payment balances, and currency stabilization were still at the core of regulation. However, in 1944 financial regulation and its institutions for the first time ever became global, rather than regional (the Bretton-Woods system, the IMF as a “central bank” and the World Bank as a development bank.) The regulatory system became two-tiered for the first time. Its regional tier (currency zones, monetary agreements)1 were based on monetary centers of Europe and integration processes around them. The World Bank model later came to be cloned everywhere on “lower tiers”.2 The phase of a “globalization surge” and the exponential growth of the financial depth of the global system under the Jamaica monetary system (from the 1970s to 2008) resulted in a breakthrough of global financial regulation to new horizons. Collective currencies emerged (a “global” one, SDR (1969), and regional ones, ECU (1979), later the euro (1995).) A group of European economies achieved a deep integration of their finance within 1 The European Payments Union (EPU) (1950–1958), the European Monetary Agreement (1959–1972) and the European Monetary Fund established thereunder with a view of stabilization, the London Gold Pool of central banks created to stabilize gold prices (1961–1968), the British Pound zone (the 1930s to the mid-1970s),the Frank zone (the 1930s up to now; West and Central Africa). 2 The European Investment Bank (1958), the African Development Bank (1964), the Asian Development Bank(1966), the Inter-American Development Bank (1959), the Latin American Development Bank (1967), etc.

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the framework of the EU1.Global financial regulation became a three- or four-tiered system. There appeared what was to become a future “Politburo” (the Group of Seven /Group of Eight) (1975/1997), with regular meetings of finance ministers. Global and regional organizations of financial regulators were established2. After the crisis of 1997–1998, minimization of global risks and a transition towards a safer global financial architecture became a priority. To meet this end, a new collegiate body of regulators, the Financial Stability Forum under the International Settlements Bank (FSF, 1999), was established. A number of other functional bodies emerged in the global financial regulatory system as well.3 International associations also sprang into existence at a “personal level”.4 Global regulation penetrated a new area: the internal workings of national financial systems (an architecture comprising all types of activities, services, products and financial technologies, risk management, interaction with regulators), which began to  harmonize (this primarily applies to banks), plug in the “best” models (mainly borrowed from the US practices), shift to international standards, and a “smoother” marketplace was created for flows of capital, as well as trans-border mergers of financial intermediaries and infrastructure instiutions (since the early 1 The European Monetary System (1979–1998), including the European Exchange Rate Mechanism – I (1979–1998) and II (from 1998 up to now), the European Monetary Cooperation Fund (1973–1994, a fund for currency stabilization); from1994 on, the Economic and Monetary Union of the European Union – EMU). The European Central Bank (1998) and the European System of Central Banks were established; the Committee of European Banking Supervisors(CEBS, 2004); the Committee of European Security Regulators (CESR, 2001); the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS, 2003). 2 Basel Committee on Banking Supervision (BCBS) of the Bank of International Settlements (as a club of central banks, 1974); International Organization of Securities Commissions (IOSCO, 1983), International Association of Insurance Supervisors (IAIS, 1994), A joint forum of these organizations under the auspices of the Bank of International Settlements (Joint Forum,1996), the Financial Action Task Force (FATF, 1989), the Egmont Group (uniting financial intelligence services) (The Egmont Group,1995), the International Network of Pension Regulators and Supervisors of OECD (INPRS, 2000). 3 Committee on Payment Systems and Settlements of the Bank of International Settlements (CPSS, established in 1980), the OECD Work group and Global Forum for Public Debt Management (WPDM, 1990), the OECD Global Forum for tax transparency and information exchange (2000), the UNCTAD foreign direct investment program (launched in 1993), WTO mechanisms in financial services (General Agreement On Trade In Services(1995), Committee for Trade in Financial Services),etc. 4 The famous Group-30 incorporating 30 most renowned managers of the financial industry and regulators from the largest countries(established in 1978.)

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1990s.). As a result, global regulation was augmented with a large block of self-regulation and a number of associations of financial players (global, regional) that set out to develop new common standards.1 Thus, clear long-term trends of global financial regulation had transpired by the outset of the crisis of 2007–2009: • a transition to a multi-tiered, multi-polar regulatory system capable of maintaining and stabilizing “ultra-large” global finance that outgrew the real sector (with an hierarchical structure under a linear, functional, regional, and project principles); • scaling up of regulated entities as a way to ensure the manageability of finance, a regional integration of the national financial systems and their regulatory infrastructure across the globe, a “collectivization” of currencies; • harmonization of the regulatory infrastructure across the world, expanding the perimeter of financial regulation (supra-national, macro- and micro-levels, shift of focus from unification of financial structures (compatibility and openness of monetary, credit, settlement systems across the world, their infrastructure) towards stabilization of their risks.)

Imbalances of global finance and its regulatory system By the outset of the crisis of 2007-2008, sharp discrepancies emerged between the level of development of the global finance and the state of its regulation. Regulation had failed to keep pace with an exponential growth of the global economy’s financial depth. The Global Financial Assets to Global GDP ratio was at 103% in 1980, 210% in 1990, and 351% in 2007.2 This lag was further exacerbated by market fundamentalism, overemphasis of economic freedom, and deregulation as “ideological” 1 International Capital Market Association (ICMA, launched in 1969), International Investment Fund Association (IIFA, 1987), World Federation of Exchanges (WFE, launched in 1962 г.), International Swaps and Derivatives Association (ISDA, 1985), Alternative Investment Management Association (AIMA, 1990), International Securities Services Association (ISSA, 1979), IInternational Banking Federation (IBFed, 2004), International Financial Reporting Standards Foundation (IFRS Foundation) with the embedded International Accounting Standards Board (IASB, launched in 1973) and many others. 2 Calculations based on data from Mapping Global Capital Markets. McKinsey Global Institute Annual Reports 2006–2009.

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dominants of financial policy since the early 1980s. Freedom of capital flows, free currency convertibility, open financial markets, removal of any barriers between financial systems both at the international and the national levels were seen as an ultimate value (regardless of the condition of economy and the peculiarities of its structure.) Financial innovations and securitization, a “shadow banking system”, either completely unregulated or drastically deregulated, expanded dramatically. Concentration of credit and interest risks (bad debts) peaked to a maximum in a group of developed economies, primarily, the USA (negative balances of payments, low saving ratios, excessive consumption and reliance of governments and households on borrowings raised from capital imports from developing countries) with an ultra-high non-regulated market risk (bubbles in financial and commodity markets due to a long-term weakening of the US dollar.) A large part of financial markets and the risks accumulated there were non-transparent. The behavior of financial markets was marked by  sharp conflicts of interest, with predominant pursuit of short-term speculative profits. For years, global finance was tainted by an atmosphere and policy of “easy money” and low interest rates being kept by the Federal Reserve. The “financial power” was over-concentrated (the US dollar as a global reserve currency, the IMF, the Federal Reserve.) The global financial architecture was largely unipolar, built around the Anglo-Saxon model (the “New-York/Chicago–London–Offshores” triangle.) Liberalization of capital accounts, numeric expansion of convertible currencies over the years of deregulation precipitated unpredictable flows of “hot money”, financial infections, capital flights, manipulations of the markets of smaller open economies. The potential for risk and volatility built into the global finance kept growing.1 The financial crisis of 1997–1998 called for a new global financial architecture2, better monitoring of systemic risks, an assessment of maturity of financial systems; however, growing asset values and the “finan1 A detailed review in: Mirkin Ya.M. Finansovoe budustchee Rossii: extremumy, bumy, sistemnye riski [Russia’s Financial Future : Extremes, booms, systemic risks]. Moscow: Knorus, Geleos, 2011. Pp. 207–246, 313–343). 2 See e.g., Camdessus M. Toward a New Financial Architecture for a Globalized World. Address at the Royal Institute of the International Affairs. London, May 8, 1998; Report of the Acting Managing Director to the International Monetary and Financial Committee on Progress in Reforming the IMF and Strengthening the Architecture of International Financial System, IMF. April 12, 2000.

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cialization” of the 2000s brushed those issues away from the agenda and spurred unjustified optimism, which always prevails before a crisis. As a result, the scale and the complexity of global finance came into a sharp conflict with their de facto unipolar regulation and the over-concentration of the “financial power”. The system that regulated global finance no longer matched the object regulated. This was one of the root causes of the shocks of 2007–2009 and the Eurozone debt crisis of 2010–2012.

Multipolar regulation The challenges of 2007–2009 were addressed by intensifying the trend of transition to a multi-tiered, multipolar, increasingly profound system of global financial regulation. The monocentricity of regulation (see the previous paragraph) were largely broken. The group of G-20, along with the G7/G8, became a new center of financial regulation (2008). The G-20 member states account for 86 to 87% of the global GDP, whereas the G7/G8 account for approximately for 50% of the global GDP (IFS IMF). The former comprises the largest ten developing countries, the latter only one (Russia.) The G7/G8 is incorporated into the G-20 as a center of navigation (initiation of key ideas and decisions.) The G-20 represents over 90% of global financial assets and concentrates maximum financial power without losing manageability; its structure is a true symbol of multipolarity; it is the first well-balanced mechanism for resolving financial interest conflicts among the groups comprising industrial and developing economies. The G-20 became a “center of management” to generate changes in global financial regulation. It employs the mechanisms of regular meetings of heads of states, finance ministers and central bankers, sherpas, develops the financial agenda, creates the specialized commissions and working groups, issues the instructions and recommendations to international institutions of the “second tier” (the Financial Stability Board, IMF, World Bank, BIS, OECD, etc.), provides the assumption of obligations by the G-20 member states, and a follow-up thereof. In 2008–2012, financial issues accounted for 30 to 90% of items on the G-20 agenda. Another point of transit to multipolarity was the establishment of the Financial Stability Board (FSB, 2009) as an operating center for

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the G-20 replacing the BIS Financial Stability Forum (FSF), a club of 12 developed countries. The new Board includes 24 member states (the G-20 members, Asian financial centers, and the Netherlands as the direct investment hub.) Each country is represented by financial regulatory authorities and central banks. The Board comprises the OECD, the IMF, the World Bank, the BIS, the European Commission, international associations of regulators, etc. The goal of the Board is to coordinate international and national regulators, carry out macroprudential oversight, harmonize financial systems, and secure financial stability. A shift toward multipolarity was marked by a reform of corporate governance in the IMF and the World Bank (redistribution of quotes, voting rights, and top management in favor of developing economies, larger numbers of votes required to adopt key resolutions.) The last gaps are closing over in the structure of international associations of regulators and self regulatory organizations (SROs) as yet another pole of global financial regulatory framework. The International Organisation of Pensions Supervisors (IOPS) was established in 2004 and the Global Federation of Insurance Associations (GFIA) in 2012. The IMF as a “global fund” failed to respond to the challenges of global financial destabilization in 2008–2012. Therefore, the building of a second line of defense began, with regional stabilization funds as yet another form of multipolarity. The EU addressed the Eurozone crisis by establishing three stabilization funds (2010-2012),1 including the “final” permanent European Stability Mechanism (ESM, 2012). An anti-crisis fund was established by the EurAsEC (2009). In 2009, BancoSur, a hybrid of the IMF and the World Bank, was launched by the Mercosur states. The Arab Monetary Fund was established as early as 1976,2 and the Latin American Reserve Fund (FLAR) in 1978.3 Their functions and corporate governance models mirror those of the IMF. A substitute for a regional stabilization fund is a multilateral currency swap agreement between central banks (a pool of exchange reserves to keep up liquidity threatened by a financial crisis and stimulate the penetration of own currency). Such condensation of financial power 1 The European Financial Stabilisation Mechanism (EFSM, 2010) (aid to Ireland and Portugal), the European Financial Stability Facility, 2010 (aid to Greece, Ireland, and Portugal), the European Stability Mechanism, 2012 (permanent). 2 Arab Monetary Fund (AMF), membership: 22 Arab countries (2012). 3 Fondo Latinoamericano de Reservas (FLAR), as part of the Andean Community (7member countries, 2012).

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emerged in the formats “Federal Reserve – Central Banks” (US  dollar, 16 countries, 2007–2013 ), “the ASEAN central banks  + PRC, Japan, South Korea, US dollar, RNB, yen, other currencies, 14  countries, 2010–2013),1 “the People’s Bank of China + central banks” (RNB,14  countries, 2008–2013); the Asian Clearing Union – central banks of South Asia (9 countries, 2013.) Until the late 2000s, supervision of financial institutions was concentrated within states, whereas an international level was only used to work out concepts and standards of supervision and spread best practices. The crisis of 2007–2009 and the ensuing Eurozone debt crisis resulted in the creation of a second level of financial supervision from scratch as a new “pole” that heralded multipolarity in this sphere in the form of international financial supervision institutions. This innovation was pioneered by the Eurozone. In 2011, the European System of Financial Supervision (ESFS) was established. It comprises the European Systemic Risk Board (ESRB) (macroprudential regulation); the European Banking Authority (EBA); the European Securities and Markets Authority ESMA); the European Insurance and Occupational Pensions Authority (EIOPA). The European Central Bank is likely to acquire a supervisory function within the framework of a future European Banking Union and a Single Supervision Mechanism (SSM).2 This trend towards a multipolar supervision system will continue. Candidates for future “poles” include: the BRICS anti-crisis fund (or, as an option, a swap pool between central banks), other financial institutions within that country group3, the Asian Monetary Fund,4 1 The Chiang Mai Initiative, 2000 and, as part of its development, the CMIM (Chiang Mai Initiative Multilateralization, 2006) as a response to liquidity shocks during the Asian crisis of 1997. As a result, a currency swap network was created in the 2000s among central banks in Asia. 2 The Banking Union – a European perspective: reasons, benefits and challenges of the Banking Union. Speech by Yves Mersch, Member of the Executive Board of the ECB, at the seminar «Auf dem Weg zu mehr Stabilität – Ein Dialog über die Ausgestaltung der Banken union zwischen Wissenschaft und Praxis» organised by Europolis and Wirtschafts woche. Berlin. 2013, 5 April 3 An idea discussed at BRICS summits in 2012 pending practical implementation. 4 Suggested by Japan at the peak of the Asian financial crisis of 1997. Cf.: Lipsky Ph. Japan’s Asian Monetary Fund Proposal // Stanford Journal of East Asian Affairs. Spring 2003.Vol.3.Nо.1. Practical steps towards the establishment of the fund are: replacement of bilateral swaps between central banks with multilateral ones (2006), establishment, as part of the Chiang Mai Initiative, of an international institution acting as a macroprudential oversight authority (ASEAN+3 Macroeconomic Research Office (AMRO, 2011).

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the  African Monetary Fund,1 the Latin American Monetary Fund,2 swap pools in rubles and other currencies; other stabilization funds in regions and country groups sharing common interests. The global financial regulation will increasingly go multipolar not only due to the establishment of second- or third-tier institutions, but also by way of scaling up the regulated entities themselves: as a result of cloning the Eurozone, launching new currency zones and collective currencies.

Extension of Regulation Scope3 In the 1980–2000s, the scope of global financial regulation gradually extended. After the crisis of 2007–2009 and during the Eurozone debt crisis, this expansion became explosive. This is a new trend. It encompasses a transition to a tight regulation model for areas of finance that had been previously considered self-regulating or, for deliberate ideological reasons, exempted from strict governmental regulation. The unification of national financial systems shifted the focus to the stabilization of accumulated systemic risks. The key ideas of regulation related to this trend are: • uphold transparency, bring all “parallel”, shadow, unsupervised segments of global finance fraught with high systemic risks over to a regulated area; • prevent financial overheats and bubbles and, on this basis, mitigate cyclic overheat of global and national economies and, vice versa, ease economic downturns, “warm up” economies on cyclic downturns; • reduce the procyclicity of the financial system, deleverage, i.e., reduce the leverage (excessive growth of assets and debts of financial institutions as compared to equity at the growing phase of the economic cycle); maintain the liquidity of financial institutes on growing risks; 1 African Monetary Fund (AMF), in statu nascendi pursuant to the resolutions of the African Union. 2 The idea is being discussed tentatively. See: Agosin M. A Latin American Monetary Fund. Required Dimensions and Modalities//CAF/FLAR Conference. Cartagena de Indias. 2012, July 6–7 3 The source material for the study of this trend is contained in a review prepared by K. Bakhtareva, T. Zhukova, M. Kudinova, A Levchenko under the supervision and with participation of Ya. Mirkin.

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• provide stronger incentives for funding a sustainable economic growth, accumulation of long term savings, long-term growth of capital, rather than speculative short-term excesses; • prevent overconcentration and settle systemic risk. The scope of regulation has been extended in the following segments: macroprudential supervision; systemically important financial institutions and boards of regulators; the financial architecture (shadow/parallel banking system, infrastructure institutions, informational, regulatory, and tax arbitration areas); recapitalization of the financial sector, a system of private interests shaping the dynamics of financial markets. Let us examine each of these in more detail. Macroprudential oversight. The crisis and the recessions of 2007– 2013 clearly showed that the concepts of unsound management and mismanagement are applicable not only to the microlevel, i.e., an individual financial institution, but also to the financial system of a country as a whole and its major segments (macrolevel).Central banks can no longer narrow their goals to a low inflation and a stable exchange rate. Their targets have now include financial sustainability, reduction of systemic risk, and, therefore, macroprudential supervision (similar to microprudential supervision targeting a bank or another financial institution.) Is there anything new in this idea? No. This idea was brought up as early as after the crises of 1997–1998. In the 2000s, monetary authorities and financial regulators were advised to monitor systemic risk, publish financial stability reports, and prepare emergency plans for shock events, perform stress tests on banks, develop programs of collaboration and information exchange between financial regulators (both domestically and internationally.) In 1999, developed countries established the Financial Stability Forum. Since 1999, the IMF has implemented a financial sector assessment program in a number of countries. All these advisory measures, however, proved too weak in a financial euphoria of the early 2000s, failed to mitigate the crisis, and were replaced, in the post-crisis period, by a mandatory macroprudential supervision of systemic risk. Strict mechanisms of such supervision were put in place in central banks and within global regulatory structures (the Financial Stability Board,1 the European Systemic Risk Board.) 1 Financial Stability Board (FSB) with participation of Russia and other developing countries.

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Macroprudential supervision is developing in the following areas (supranational level, individual countries): • its incorporation into goal-setting machinery of central banks and financial regulators (“financial stability” had not been not included into the goals of financial policy prior to the crisis);1 • global standards (none exist as of 2013) largely as a space of individual projects, texts, generalizations);2 • indicators and analytical models of systemic risk, risk monitoring systems (still disparate practices);3 launch of a systemic risk early warning program that would be triggered by systemic risks rising to a level threatening the global economy and finance (under development);4 • a dramatically extended (as compared to the prior period) regulatory toolset of monetary/supervisory authorities that should reduce systemic risk (being implemented at the national level) (Table 4.1.) It is used for the purposes of a policy to prevent the accumulation of financial and systemic risks at the macrolevelor mitigate them if they are found significant by macroprudential supervision. An extended set of tools (Table 4.1) enables the intervention of monetary/supervisory authorities into the business of financial institutions at a scale unimaginable before the crisis of 2007–2009. Systemically important financial institutions (SIFI). The key idea is to strengthen prudential supervision over the largest institutions and the risks concentrated therein. The bankruptcy or non-liquidity of a financial institution of the second or the third rank would result in volatility, but it would never trigger a chain reaction of system risk precipitating a crisis of the whole financial system. By contrast, a troubled condition of key players would immediately cause a collapse of national or global finance. The crisis of 2007–2009 unveiled the immense power of a “domino effect” and “financial infections” that occur once a single 1

The Interaction of Monetary and Macroprudential Policies // IMF. January 2013. Macroprudential Policy Tools and Frameworks. Progress Report to G20. FSB, IMF, BIS.2011, 27 October; Macroprudential Policy: An Organizing Framework. IMF. March 2011. 3 IMF Systemic Risk Dashboard; Global Financial Stress Index (BofAMerrillLynch), the Composite Indicator of Systemic Stress (ECB), Macro Prudential Indicators (FitchRatings). 4 IMF-FSB Early Warning Exercise system. 2

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Table 4.1. Examples of tools for systemic risk regulation1 Tool

Phase of cyclic growth of economy

Counter-cyclical capital buffer

Tightened regulatory requirements to capital of a financial institution (requirement for shareholders to contribute additional capital) at the phase of economic upturn, on cyclic growth of credit and value of financial assets

Ad-hoc tightening of requirements to capital

Requirement to increase capital against operations in segments of financial market with especially high risks (derivatives, transactions without central counterparty)

Counter-cyclic changes in asset risk assessment

Tightening of requirements to capital on financial overheat, based on revision (increase) of level (weights) of risks of individual assets (in calculation of capital sufficiency, taking into account assets weighted for risk level)

Dynamic reserves

Increase of mandatory reserves maintained in the central bank, deposit insurance systems, in compensation funds on financial overheat to restrict growth of assets and liabilities of the financial sector

Credit risk and liquidity ceilings

Ceilings on “asset/capital”, “liabilities/capital”, “liabilities/income”, “borrowings/deposits”, “borrowings/value of collaterals”, “cost of servicing loans/income”, “assets/liabilities”, ceilings on positions (margin, positions in repo transactions and on forward markets.) Direct ceilings on the volume of loan portfolio. Setting ceilings at levels restricting credit expansion

Security

Amount and quality of security of transactions on markets with a heightened systemic risk (derivative markets)

Counter-cyclical changes in assets risk assessments

Tightening of requirements to capital on financial overheat, based on revision (increase) of level (weights) of risks of individual assets (in calculation of capital sufficiency, taking into account assets weighted for risk level)

Taxes

Taxes on transactions, non-core liabilities

1 At a cycle’s downturn phase the same tools applied “in a reverse direction” will mitigate the downturn, level out the cycle, “heat up” the cooling financial sector and boost leverage.

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link is dropped from a chain: global banks and markets are too tightly interwoven (the bankruptcy of Lehman Brothers in September 2008.) This issue can be addressed by prudential supervision over lists of the largest (“systemically important”) financial institutions at the national level (local regulators) or a global list (Financial Stability Board  – FSB.1) Since all these institutions are financial conglomerates2, colleges of regulators (bank regulators, securities and insurance regulators) are established to supervise them and manage their consolidated risk. International colleges of regulators (anchored to the headquarters country) are organized for global financial institutions (“transborder conglomerates”.) This expands the scope of “systemically important” institutions to include commercial banks, investment banks (brokers and dealers in securities), insurance companies and their groups, collective investment institutions, the pensions industry, rating agencies, infrastructure organizations of the financial market (depositories, payment systems, clearing and payment organizations, especially those acting as a “central depository” or a “central counterparty”.) Singling out “systemically important” institutes and establishing colleges of regulators for them is a long-known idea that has been put forward many times. What new is in all this? How can it help respond to the crisis of 2007–2009? The answer is that now these measures are made mandatory for the first time, and a two-tier (national and global levels) system for the regulation and prudential supervision of key players is created. For the first time ever, oversight targets not only financial, but also infrastructure institutions. For the first time, essentially mandatory international supervision targets the consolidated risk of the largest financial conglomerates, holdings, with dozens of member organizations with diverse financial specializations located in numerous countries, inclusive of offshores, i.e. several hundreds of companies. Finally, for the first 1 As of November of 2012 the list of systemically important financial entities (G-SIFIs) comprised 29 global banking conglomerates: Bank of America, Bank of China, Bank of New York Mellon, Banque Populaire CdE, Barclays, BBVA, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Group Crédit Agricole, HSBC, ING Bank, JP Morgan Chase, Mitsubishi UFJFG, Mizuho FG, Morgan Stanley, Nordea, Royal Bank of Scotland, Santander, Société Générale, Standard Chartered, State Street, Sumitomo Mitsui FG, UBS, Unicredit Group, Wells Fargo. 2 Holdings comprising commercial and investment banks, asset managers and investment funds, insurance companies, real estate operators, offshore entities, etc.

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time a comprehensive bulk of rules governing the supervision of systemically important financial institutions comes into being.1 Financial architecture (changes to the regulation of financial intermediaries). Prior to the crisis of 2007–2009, it had been assumed that a number of institutions that were effectively credit intermediaries (special purpose vehicles, or SPVs, private equity companies, monetary markets funds, hedge funds, investment funds and many trust entities that can use credit leverage, their managing companies, etc.), could legally act in a weakly-regulated or non-transparent environment, taking up ultra-high risks. This was seen as beneficial, in the first line, as they focused on funding fast-growing high-risk sectors of economy (high technologies, emerging markets), smoothened out (arbitrage) risks and transferred them from key financial institutions to the periphery of markets. Second, they often targeted solely professional investors (institutional or particularly dexterous “qualified” investors engaged in wealth management.) And finally, due to their modest size, they merely “spiced up” the principal flows of global finance without adding up systemic risks. All these considerations, except the last one, still hold true after the crisis of 2007–2009; however, the crisis showed that the “shadow” or “parallel” banking system had permeated the core business of systemically important financial institution to an extent sufficient to make it the largest source of systemic risk. The activity of the shadow banking system was one of the root causes of a dramatic rise of the credit leverage (debt/capital) before the crisis (“refincancing” of real estate by way of mortgage securitization, a bubble of structured products, ultrahigh leverage of hedge funds and private equity companies, securitization of bad debts against loans, over-accumulation of debts due to their “insurance” on credit default swap markets, etc.) In 2000–2007, the notional value of OTC derivatives open position rose 6.3 times and reached $595.7 trillion.2 1 See e.g., Global Systemically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement: RulesText. BIS. November 2011; Policy Measures to Address Systemically Important Financial Institutions. FSB. November 2011; Global Systemically Important Insurers: Proposed Assessment Methodology. Public Consultation Document. May 2012; A Framework for Dealing with Domestic Systemically Important Banks. BCBS. October 2012; Core Principles for Systemically Important Payment Systems. BIS, January 2001; Principles f or Financial Market Infrastructures: Disclosure Framework and Assessment Methodology. IOSCO, BIS (CPSS). December 2012. 2 BIS Semiannual OTC Derivatives Statistics 2000–2007.

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The post-crisis response is the extension of the supervision scope, incorporation of shadow banking institutions into regulatory mechanisms (licensing or registration of all types of shadow entities and their managers, requirements to capital and asset structure (liquidity, concentration of risks), constraints on financial leverage, prudential supervision, mandatory requirements to professionals, risk management systems, disclosure of information, etc.)1 The regulatory burden should, however, be less than that in the banking sector. It is still true that these institutions exist to take up higher risks, act in areas of fast economic growth and innovations (in the real or the financial sector.) One of the sources of shadow banking is the creation by traditional (commercial, savings, etc.) banks of parallel entities to expand their business, take risks off balance, evade prudential supervision. Systemically important banks, as a result, are surrounded by a gray non-transparent ring (a “mantle” around the core) of debt structures with high risks that could quickly affect the parent bank, which is, therefore, only apparently sound. A post-crisis response of regulators should be to build Chinese walls between banks and their shadows, register banks funding “shadow” institutions, disclose their relations, strengthen prudential supervision. Financial architecture. Enhancements of transparency and manageability, reduction of risks should target not only financial intermediaries, but also markets where they act and the products they create. This applies primarily to over-the-counter derivatives, or OTCs, (non-standard fixed-term contracts and their portfolios, transactions in which they are created), repos, securities lending. These markets are “corralled” into a centralized model (in lieu of a pre-crisis decentralized one).2 There is 1 See e.g., IOSCO Objectives and Principles of Securities Regulation. IOSCO. June 2010; Shadow Banking: Strengthening Oversight and Regulation: Recommendations of the Financial Stability Board. FSB. October 2011; Shadow Banking: Strengthening Oversight and Regulation: An Integrated Overview of Policy Recommendations. FSB. November 2012; Global Developments in Securitization Regulation: Final Report. IOSCO. November 2012; Policy Recommendations for Money Market Funds: Final Report. IOSCO. October 2012; Hedge Funds Oversight. IOSCO. June 2009; Hedge Fund Matrix is a database of international standards governing the business of hedge funds created by IOSCO and international associations of alternative investment financial institutions and hedge funds. 2 OTC Derivatives Market Reforms. Third Progress Report on Implementation. FSB. June 2012; Securities Lending and Repos: Market Overview and Financial Stability Issues: Interim Report of the FSB Work stream on Securities Lending and Repos. FSB. April 2012

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no novelty in the idea itself. What is new is its consistent and strict application by regulators. In a centralized model, terms of transactions, even unique ones, are subject to maximum standardization1. Transactions should be entered into via exchanges or similar electronic trading platforms (dealer, multi-dealer markets). These are licensed institutions overseen by a regulator. Systemic risks are easily reduced on such markets by imposing a  large number of requirements on their players, including admission requirements (capital, operating capability, level of risks), requirements to the quality and the limits of assets used as a collateral for transactions, to margins (prepayments for transaction settlements), the volume of positions (in terms of value, number of contracts), etc. Centralized markets make it possible to impose tighter mandatory capital and risk management requirements on dealers/market-makers responsible for market liquidity. Settlements and clearing of any derivatives, including over-thecounter (entered into outside of exchanges or trading platforms) are centralized (in one or several related organizations.) Same requirements apply to repo transactions and securities lending. A “central counterparty” structure should be introduced, which will act as a party to all transactions. This role is usually played by settlement and clearing entities with stricter capital and risk management requirements. The central counterparty and multilateral netting of positions, collective clearing guarantee funds, the singling out of the largest and most reliable financial institutions as the clearing members, aggregating the positions of other market players, remove most of counterparties’ individual risks and dramatically reduce the overall systemic risk of the market as a whole. The information on derivatives, especially over-the-counter ones, repo transactions, and securities lending should be submitted to trade repositories. These licensed and supervised entities are centralized repositories and publishers of information on the structure and results of transactions and the condition (accumulated risks) of the market. These entities, along with a flow of data from trading and settlement and clearing systems, should turn over-the-counter markets from a black box into a space transparent for information. 1 Pursuant to standard derivative agreements of the International Swaps and Derivatives Association–ISDA and standard repo agreements of the International Capital Market Association – ICMA. Event unique schemes of structured products have a standard common denominator; special terms are created by addenda.

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A similar principle should govern shares and debt securities: even if transactions are over-the-counter, clearing and settlements should be centralized, preferably, by a central counterparty, and information should be stored, transmitted and disclosed via central depositories. This is not to say that financial institutions should be denied the right to create over-the-counter derivatives or enter into over-the-counter transactions involving securities, repos, securities lending. However, a more stringent approach to evaluating risks of parties to such transactions should be adopted, and requirements to capital should be tightened, unless centralized clearing and settlements, a central depository, a trade repository are used. As a result, a centralized model (exchanges, electronic trading platforms, centralized settlements and clearing, a central counterparty, a  central depositories for shares or debt securities, a trade repository for derivatives) should prevail on financial market. These infrastructure institutions are, in their turn, established on the basis of informational transparency and licensing built in; they are also subject to higher requirements on capital and ability to manage risks. A private system of credit risk assessment built into global finance is a new target for regulation. Rating agencies fueled the 2007–2009 crisis. Credit ratings ceased to be fully objective. High credit ratings glossed over securitization schemes encapsulating ultra-high credit risks. Investors were too reliant on ratings. A conflict of interest became manifest between the commercial nature of ratings (paid by the issuer to a private rating agency) and the principle of independence and fairness of a rating.1 Financial markets were confronted with a paradox, whereby changes to a rating (as a private opinion expressed by a rating agency) could result in a global market downturn. These challenges should be addressed by eliminating external credit ratings from a financial regulatory framework and switching to own ratings and internal risk assessment models (both for regulators and financial institutions),2 licensing rating agencies, introducing a “systemically important” status, supervision over them by financial 1

Code of Conduct Fundamentals for Credit Rating Agencies. IOSCO, 2008. Principles for Reducing Reliance on CRA Ratings. FSB. October 2010; Thematic Peer Review on the FSB Principles for Reducing Reliance on Credit Rating Agency (CRA) Ratings. FSB, Standing Committee on Standards Implementation. Note by the Secretariat for the SCSI meeting on 6–7 December 2012, November 2012; Road map and Workshop for Reducing Reliance on CRA Ratings. FSB Report to G20 Finance Ministers and Central Bank Governors. November 2012. 2

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regulators, securing their higher transparency (rating methodology, no conflicts of interest). Offshores are a cardinal stone of the global financial architecture. They account for 14 to 17% of trans-border financial assets and liabilities of the world’s banks (BIS, 2011). Over 80% of the largest US corporations have subsidiaries in offshores, the number of which usually ranges between 5–20 and 300–400 (US GAO, 2007.) Offshores count in dozens (40 to 70). Up to 30% of countries have some properties of an offshore. Most “shadow” or “parallel” banking entities responsible for a credit overheating that triggered the crisis of 2007-2009 have their seat in offshores. The right of offshores to exist is not questioned. Nor is the right of businesses to select offshores for residence, as long as the laws of the countries where such businesses operate are honored. Nevertheless, the crisis of 2007–2009 resulted in a trend of sweeping offshores away from the financial architecture and exerting more pressure on them. A regulatory attack of the 1990s continued.1 The core idea lies in minimizing regulatory and tax arbitrage via offshores, dramatically reducing the opportunity for money laundering and financing of terrorism. Offshores should become transparent, enter into agreements for exchange of tax and other information with regulators of other countries2, reinforce own financial regulation in compliance with international standards. Failing this, they should be recognized as “non-cooperative jurisdictions”, put on a “black” or “gray” list, and the relations with them should be persecuted by national tax authorities and financial regulators. These processes should be orchestrated by the OECD (in cooperation with the IMF, the FATF3, the Egmont financial intelligence service group), which should also own databases and initiate international rules and agreements. 1 Towards Global Tax Cooperation. Report to the 2000 Ministerial Council Meeting and Recommendations by the Committee on Fiscal Affairs. Progress in Identifying and Eliminating Harmful Tax Practices. OECD, 2000. 2 See e.g.: OECD Global Forum on Transparency and Exchange of Information for Tax Purposes; OECD Agreement on Exchange of Information on Tax Matters; OECD Jurisdictions Committed to Improving Transparency and Establishing Effective Exchange of Information in Tax Matters; A Progress Report on the Jurisdictions Survey ed. By the OECD Global Forum in Implementing the Internationally Agreed Tax Standard 2009–2011. 3 FATF List of High-Risk and Non-Cooperative Jurisdictions; International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation – the FATF Recommendations.

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Recapitalization of the financial sector. The crisis of 2007–2009 revealed the insufficiency of the capitals of banks and other financial institutions and their inability to cover risks in the times of financial stress or absorb systemic risk. Therefore, the trend toward a smooth increase of banks’ capital base (by implementing Basel I and, later, Basel II standards for capital adequacy worked out by the Basel Committee on Banking Supervision)1 launched in the 1990s transformed into a trend toward accelerated recapitalization of banks and other financial institutions (Basel III),2 “corralling” them into strict prudential rules firmly laying out the structure of their balances (building bigger capital base, absolute and in relation to assets), elimination of risks, stress tolerance.) The minimum mandatory share of capital in assets is rising. Its quality is improving (more capital is created by shares.) A transition towards capital coverage of all key financial risks (credit, market, operational, liquidity risks) is being completed. A capital buffer (support of liquidity under financial stress) and counter-cyclical capital buffer (additional capital burden under cyclical credit overheats to brake them and reduce systemic risk) are being introduced. Regulations for financial leverage, liquidity, as well as risk concentration are put in place. Assessment of risks associated with different types of assets (speculative assets, securitization products, market risk, etc.) has become stricter. Capital is subject to mandatory stress tests and stricter supervision. Standards on risk management and internal risk assessment models are dramatically tightened. An energetic adaptation of Basel I-III to other institutions of the financial sectors in lieu of its reluctant adaptation prior to the crisis.3 1 Basel Committee on Banking Supervision (BCBS) functioning under the auspices of the Bank for International Settlements in Basel (BIS). 2 Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework, Comprehensive Version. BSBS, BIS. June 2006; Enhancements to the Basel II Framework. BCBS, BIS. July 2009, along with a package of standards and recommendations of BIS regarding individual aspect of the formation of a capital base under Basel II; Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems. BCBS along with a package of standards and recommendations of BIS regarding individual aspects of the formation of a capital base under Basel III; BIS. June 2011; Core Principles for Effective Banking Supervision. BCBS. September 2012. 3 Guidelines to Emerging Market Regulators Regarding Requirements for Minimum Entry and Continuous Risk-Based Supervision of Market Intermediaries. IOSCO. December 2009; Review of the Differentiated Nature and Scope of Financial Regulation – Key Issues and Recommendations. BCBS, IAIS, IOSCO. January 2010; Standard and Guidance Paper on the Structure of Capital Resources for Solvency Purposes. IAIS. October 2009; IOPS Principles of Private Pension Supervision. November 2010; Good Practices for Pension Funds’ Risk Management Systems. OECD, IOPS. January 2011 etc.

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System of private interests determining the dynamics of financial markets. The crisis of 2007–2009 showed that mechanisms of remuneration in financial institutions (bonus system) rigidly target shortterm profit, speculative overheat, rather than incentivizing sustainable growth of economy and its capitalization on the basis of long-term savings. It loosely coupled with the sanity of financial institutions. “Momentary greed” as a general vector of professionals’ behavior became an adverse factor. As a result, remuneration schemes (and related conflicts of interest) have been included in the scope of financial regulation. Moves such as this have been unconceivable before. In a market system, remunerations are a private matter of financial institutions and their owners regulated by corporate governance and its internationally recognized principles.1 A new remuneration mechanism includes informational transparency, a regulator’s ability to carry out restrictive intervention; due account of a high-risk orientation of remunerations when assessing the capital adequacy; coupling of remuneration with long-term, rather than short-term, results; payment of remunerations in installments over a span of several years, ability to cut remunerations if the condition of a financial institution deteriorates.2

Prospects of global financial regulation Analysis shows that the trends of financial regulation that emerged after the crisis of 2007–2009, although seemingly new in a short term, fit the long-term trends in the global finance regulation, which have existed since the middle of the 19th century. This allows some extrapolations and forecasts for a span of two or three decades. A transition towards a multi-tiered, multipolar, hierarchical system of global financial regulation will continue, reducing the concentration of power in that system. 1

OECD Principles of Corporate Governance 2004. 2 FSB Principles for Sound Compensation Practices. Implementation Standards. FSB. September 2009; Implementing the FSB Principles for Sound Compensation Practices and their Implementation Standards Progress Report. FSB. 2012, 13 June; Compensation Principles and Standards Assessment Methodology. BCBS. January 2010; Range of Methodologies for Risk and Performance Alignment of Remuneration. BCBS, BIS. May 2011.

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The system will scale up the targets of global financial regulation (regional integration of financial systems, a “collectivization” of currencies.) A further harmonization of financial system models and regulatory infrastructure will take place at the levels of countries and regions, and more uniform marketplaces for the largest financial institutions will be created. As scales and risks of global finance grow and get diversified, the scope of regulation will expand (incorporating types of financial institutions, markets, instruments, operations, as well as risks, conflicts of interest, macroeconomic impact, etc.) The development of global finance (volume, structure, dynamics, financial engineering) will, as always, inevitably run ahead of international or national regulation. As a backslash, international institutions and states will try to expand their intervention into financial sector (market admission, supervision, disclosure, direct allocation of rates, interventions.)Regulatory costs will inevitably grow, and financial sector will be subjected to ever increasing regulation. This process has been unfolding over more than 150 years. Nevertheless, it is marked by ciclycity (second order trend.) Tightening of regulation, overregulation will be inevitably followed by new waves of liberalization, to which the interventionism of financial authorities will put an end again.

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Chapter 5

USA: A POTENTIAL FOR A QUALITATIVELY NEW PHASE OF SOCIOECONOMIC DEVELOPMENT Elina V. Kirichenko Factors Sustaining Leadership The USA, with a GDP of $16.2 trillion (2012, in current prices) and a GDP per capita exceeding $50,000,1 is the world’s largest economy. Estimates by G. Machavariani, head of department at the Institute of World Economy and International Relations of the Russian Academy of Sciences (IMEMO RAN), show that the USA has an incomparably higher labor productivity (GDP per employee) than elsewhere. In 2010, it exceeded $202,000 in the USA, whereas in China, despite a  much faster growth of social productivity of labor there, it only reached $7,700. The demographics of the USA are relatively favorable. Immigration has always been a key resource for the country’s economic development. Niches have formed on the domestic job market that are filled up by highly-skilled or low-skilled immigrant workforce largely complementary to the local workforce. This is also facilitated by high geographic mobility of the US workforce. US universities, which are far richer in financial, research, and development resources than their foreign counterparts, act as “magnets” for global intellectual elite. Over the entire last century, the USA was constantly engaged in far-reaching internal reforms. Mechanisms and an institutional environment were created that helped the country lead the global economy. 1 A new methodology of GDP calculation developed in the USA recognizes research expenses as investments. This increases the amount of the GDP and the gap between the USA and other countries. US experts are also working on a methodology of recognizing volunteer work (which makes up a considerable segment of the US economy) and contribution of households to the GDP.

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In the 21st century, human potential and vigorous generation of innovations are a dominant factor of economic development in the USA. The role of intangible assets such as scientific knowledge, education, information, skills, managerial and organizational decision-making has risen tremendously. Close cooperation of the government, the private and the public sectors have helped create a diversified sector of human investment in the structure of the national economy, which crystallizes the key trends of a transition toward a human-centric growth model for post-industrial countries and changes related to such transition.1 In 2010, US healthcare spending was at 17.6% of the GDP, higher than in other OECD members (9.5% average in the OECD, 11.6% in France and Germany.) The USA spent $8,233 per capita on healthcare, which exceeds the OECD average 2.2 times ($3,680).2 The USA accounts for one-third of the global R&D spending. In 2010, US total R&D spending was estimated at $408.7 billion, as compared to $305 billion in the EU-27, $180 billion in China, and $140.8 billion in Japan.3 The following should count as factors securing the growth of the US innovation potential: a unique full-fledged multi-tiered national innovation system that optimizes the interaction of its elements; quality of resource supply critically important in an era of quickly shrinking high technology life cycles; large-scale development of venture capital and R&D enterprise; creation of regional hi-tech clusters with a global footprint; governmental incentives for R&D.4 The government, even during crises or weak upturns, has maintained the world-highest spending on fundamental research, governmental support of R&D carried out by private corporations, universities, and non-profit organizations. The government also strives to strengthen the economic impact of such research by incentivizing the commercialization of technologies, in particular, by promoting R&D cooperation (creation of clusters, hubs, public-private partnerships), as well as legal protection of intellectual property. In October 2011, 1 See chapter “The United States of America” in: Strategicesky globalny prognoz 2030 [Strategic Global Prognosis]. Ed.: Acad. A.A. Dynkin. Moscow, Magistr, 2011. 2 OECD Health Data 2012 (http://www.oecd.org/unitedstates/Briefing-NoteUNITED-STATES-2014.pdf) 3 U.S. R&D Spending Resumes Growth in 2010 and 2011 but Still Lags Behind the Pace of Expansion of the National Economy. NSF. January 2013. 4 See for more detail: Nauka i innovatsii: vybor prioritetov [Science and innovations: choosing priorities] / Ed. Acad. N.I. Ivanova. Moscow, IMEMO RAN, 2012.

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president Obama commissioned federal agencies to put more effort in  transfer of technologies and support of private sector in commercialization of new technologies.1 Both the government and business are looking for new points of growth. Existing long-term governmental and corporate programs target the promotion of qualitative shifts in conjunction with the development of social, R&D, and managerial innovations. A characteristic feature of the US innovation strategy is allocation of significant amounts toward high-risk and expensive programs. Such wide network of R&D funding has allowed “fishing” for new breakthrough technologies for commercial development. Demands of renewed age composition of the population (which are the ultimate determinants of new scientific achievements’ implementation) are the main reason for shifts in the US economy structure.2 The USA is working to integrate itself even closer into an international system of multi-dimensional, multi-tiered interdependencies based on cooperation, partnership, and competition. The country has consciously laid globalization at the basis of its strategy in the 21st century, a choice dictated by objective trends of its development. Its economic potential, market size, and involvement into global economic relations make the US an important part of a globalizing world economy, and the aforementioned relations are an increasingly important factor of growth and structural changes in the national economy. International trade in goods and services accounted for 31% of the US  GDP in 2012, as compared to 26% in 2000, and 11% in 1970.3 Individual sectors of the national economy are being integrated, to a varying extent and at a different pace, into the global economic complex. Monopolization of a whole range of innovation development is not only impracticable, but also inefficient for any economy. The USA accounts for one-third of global high technology production. Riding the innovation wave, the USA typically dominates industries whose development breaks national borders. The most graphic illustration of this is furnished by information technologies, scientific and education 1 Presidential Memorandum: Accelerating Technology Transfer and Commercialization of Federal Research in Support of High-Growth Businesses. 2011, October 28 (http://www.whitehouse.gov/the- press-office/2011/10/28/presidential-memorandumaccelerating-technology-transfer-and-commerciali). 2 See: Strategichesky globalny prognoz 2030. P. 287. 3 Economic Report of the President. Wash., 2013. P. 209.

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complexes, the financial sector. The USA shows high adaptability to structural changes in a globalizing world economy.1 US achievements are backed up by efficient use of a mixed economy’s capability of spontaneous self-development. Despite the fact that a large number of US corporations have been ousted from the list of the world’s largest companies by companies from faster-growing economies, their positions are still strong due to a fundamental retrofit of their reproduction process. US companies were among the first to take advantage of business internationalization based on intra-corporate division of labor by locating their subdivisions overseas or outsourcing certain functions to regions where they would be performed most efficiently. US corporations fit into the global trend of transition to a  network model of organization and management, new forms of international inter-corporate collaboration (offshoring, outsourcing.) Corporate social responsibility, crucial for their public image and reputation, which, in their turn, affect consumer preferences, is gradually growing into a traditional fundamental principle of US companies’ business practices.2 The USA continuously improves the mechanisms of collaboration and complementarity of large and smaller businesses that enable efficient use of the potential of all private sector players. Smaller businesses account for 70% of newly created jobs in the country and play a key role in maintaining social and economic stability. Innovation breakthrough in information technologies and communications facilitated the incorporation of US smaller businesses into a multi-dimensional system of international economic relations. The leadership of US financial capital in the global economy and its influence on international relations are well known. Fundamental factors maintaining the power of the US financial sector continue to 1 See in more detail: SShA v poiskah otvetov na vyzovy XXI veka (sotsialno-ekonomichesky aspekt) [USA in search of responces to the challenges of the 21st century (socio-economic aspects)]. Ed.: E. Kirichenko. Moscow, IMEMO RAN, 2011; Sotsialnoekonomicheskaya effektivnost: opyt SShA. Orientir na globalizatsiyu [Socio-economic efficiency: the USA experience. Orientation toward globalization] Ed.: E. Kirichenko. Moscow, Nauka, 2002. 2 См.: Shlikhter A. Napravleniya i mekhanizmy vzaimodeistviya sotsialno-otvetstvennogo biznesa s nekommercheskim sektorom SShA [Directions and mechanisms of socially responsible business interaction with the non-commercial sector in the USA]. Moscow, IMEMO RAN, 2010; Peregudov S.P., Semenenko I.S. Korporativnoe grazhdanstvo: kontseptsii, mirovaya praktika i rossiyskie realii [Corporate citizenship: concepts, global practice and Russian realities]. Moscow, Progress-Traditsiya, 2008.

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exist, despite manifest strengthening of other financial centers and the harsh lessons of the crisis of 2007-2008. The US leadership in the contemporary global financial system is backed up by an immense internal credit market, the US dollar’s role of a global reserve currency, efficient protection of intellectual rights, diversity of securities, information transparency, the ability to redistribute global savings on a global scale. High credibility enables the USA to raise debt capital at low rates, including for financing public debt. The government works to align domestic economic and foreign economic policies, the economic policy, and the foreign policy. The US government and its departments are backed up by a huge economic, technological, financial and military potential of the nation. The USA takes advantage of the attractiveness of US technologies and markets to bargain with, and exert pressure on, its partners, while maintaining strict export controls on dual use goods and technologies. Considerable financial contributions and authority enable the USA to influence the decision-making of international organizations, despite an increasing opposition on the part of other members. US non-governmental organizations play an important role in decision-making, which is bound to increase as the Internet grows into a global network. Globalization is an important factor of success of the US economy, which contributes to its growing efficiency and rising living standards. Leading the global economy opens up significant opportunities of earning rent for the nation, but, on the flipside, makes the USA vulnerable to external factors, as clearly shown by international economic conditions at the end of the first decade of the 21st century. The USA has largely resolved the issue of power self-sufficiency. In 2011, it became (for the first time since 1949) a net exporter of oil products. The development of shale gas and oil fields has been successful as well. The USA pursues the goal of complete energy selfsufficiency. New trends seem to suggest that natural gas will come to dominate power resource consumption. Oil imports will drop due to a phased tightening of energy efficiency standards and extended consumption of bio-fuels by vehicles. Dependency on power resources from abroad (almost half of the US trade balance deficit is attributable to payments for oil imports), especially from politically unreliable countries, is viewed as a threat to national security. It is worth noting, however, that the USA does not regard extended imports of hydrocarbons from the NAFTA member states (Canada and Mexico)

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a challenge to  energy security and pursues the integration of the North-American market. The dollar’s role as a global currency is a source of the country’s prestige and high status and is a natural advantage for business. This allows the US public and private sectors to carry out international transactions and borrow almost entirely in dollars. No alternative to dollar is currently conceivable. It accounts for an overwhelming share of global trade, bank assets, and liabilities. The Bank for International Settlements data show that the US dollar accounted for 84.9% in the global turnover in 2010 (of 200%), the euro for 39.1%, the UK pound for 12.9%, the yen for 19%. As mid-term forecasts predict that all components of the US economic leadership will remain in force, no considerable disruption of the dollar’s global positions can be reasonably expected. Attempts to get rid of US dollars may devalue the main bulk of investments of dollar asset holders. The USA has so far succeeded in taking advantage of the global economy’s imbalances to fuel its development by attracting global savings into the country. Large trade balance surpluses of a number of developing states enabled them to buy the most secure instruments, US  treasury bonds, contributing to the accumulation of an exorbitant debt exceeding the level previously regarded as critical. Notably, even after S&P downgraded the US rating, foreign holders started to amass, rather than divest, US treasury bonds and dollar assets.

Consequences and Lessons Learned from the Global Financial and Economic Crisis At the turn of the century, the USA enjoyed a continuous spell of upturn and a high growth rate with a relatively low inflation. Long absence of recessions spurred expert debates whether market economy development had transitioned from being cyclic to a new type of economic growth. The USA’s easy recovery from the crisis of 2001 (despite two consecutive quarters of falling, annual GDP growth rate was at 1.1%), which did not spread to the rest of the world, was also interpreted to that effect. This fostered certain expectations and instilled serenity in the US business community. Neither financial institutes nor the government were prepared for the global financial and economic crisis of 2007–2009 triggered by the so-called US shadow banking system, whose collapse pushed down

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the financial sector and the US economy as a whole. The crisis recoiled upon the global economy, making the USA the hearth of a global crisis. The crisis brought the issues of financial and socio-economic stabilization to the foreground. The unprecedented measures eventually taken by governmental institutions to mitigate the financial crisis in 2007 and 2008 were all overdue, and the government failed to keep pace with the unfolding crisis. The G.W. Bush administration, although largely blinkered by their party’s ideological agenda, strongly relied on such instruments as stimulation of demand and aid to individual financial institutions, which was quite non-traditional and ran counter to the platform of the Republicans, who had historically advocated minimum market intervention. The bail out of financial institutions in exchange for preferred stock, as well as what was essentially the nationalization of Fannie May and Freddie Mac, were even more extraordinary measures taken by a Republican administration. The government went about its anti-crisis program in a trial and error manner. The Emergency Economic Stabilization Act of 2008 initiated the Troubled Asset Relief Program, TARP, with a total amount of $700 billion. The program expired on October 3, 2010. The global nature of the financial crisis and amassing signs of economic recession forced the government to revise its strategy immediately after the adoption of the act. As part of the implementation of the banking system relief plan, the US Department of Treasury took action to recapitalize banks, rather than bailing out bad debt. However, in 2009, under Obama’s administration, the Department of Treasury returned to the strategy of bailing out toxic assets. The programs helped raise the liquidity of the banking system and improve the conditions on private credit markets, as well as reduce private long-term loan interest rates. The USA realized that closer international cooperation was needed for joint action. In order to support the global short-term credit market, the Federal Reserve expanded its swap facilities with the ECB and opened up new swap facilities with the central banks of Japan, Canada, Australia, etc. The USA and their partners also resorted to an unprecedented measure, a coordinated reduction of interest rates by the Federal Reserve and a number of Central Banks. The burden of recovering the financial and economic stability lay with the Federal Reserve. Close cooperation of the Secretary of the Treasury and the administration of the Federal Reserve contributed to  the efficiency of the policy. Having started a cycle of monetary softening in 2008,

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the Federal Reserve brought the federal funds rate down to 0–0.25% by the end of the year (the interest rate is expected to remain at the same level until 2015.) The Central Bank had no more room for maneuver with the interest rate. Yet, it undertook extraordinary injections of liquidity to the financial market by launching numerous borrowing programs. As expected, the programs initiated by the Federal Reserve to ensure financial stability began to close down as the economic environment improved. As early as by the end of 2009 most of those programs were discontinued. Having surmounted the crisis, federal regulators embarked on a number of non-traditional measures. Thus, in 2009 the Federal Reserve, in order to tighten bank supervision, carried out a so-called stress test, an examination of 19 largest banks that had received governmental aid. Dozens of banks were required to increase capital to $75 billion, which they did. This measure helped restore investor trust in the banking sector. Upon subsequent stress tests, some financial institutions were requested to refrain from dividend distribution. The Dodd-Frank Act required the Central Bank to perform stress test annually. Experts believe that the EU’s failure to carry out a similar measure on time was a big mistake. Since 2008, the Federal Reserve re-launched the quantitative softening three times. In the first round (December 2008 – August 2010), the Central Bank redeemed mortgage-backed securities (MBS) and GSE debt securities worth $1.4 trillion, and treasury securities worth $300 billion. The second round (November 2010 – June 2011) comprised purchases of long-term treasury securities worth $600 billion. In September 2012, the third round of asset bailout was launched to redeem mortgage backed securities worth $40 billion, complemented by purchases of long-term treasury securities worth $45 billion per month. The final term of the latter program is conditional upon the economic situation. The Obama administration, upon its accession to power, activated all institutions and mechanisms (both traditional and non-traditional), resorting to more resolute measures in many respects. It took the strategic decision to initiate the American Recovery and Reinvestment Act of 2009 allocating $787 billion to stimulate demand and create jobs. Not only did the program of socio-economic stabilization provide for keeping and creating new jobs and stimulating demand, but it also aimed at pushing the limits for investments in key industries of the 21st century. This should make the US economy more efficient in the long run. President Obama is deeply aware of the importance of investments in human capital (primarily, education and healthcare) and innovative

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development for the competitiveness of the national economy. This is graphically illustrated by the fact that, despite a crisis, an additional amount of $18.3 billion was allocated towards fundamental research under the aforementioned act. The bailout of Chrysler and General Motors was a crucial strategic decision. An accelerated bankruptcy procedure (under Article 11 of the US Bankruptcy Act) allowed a fast reorganization of those companies. The government provided a considerable aid in exchange for shares, simultaneously acting to stimulate demand for motor vehicles. The National Bureau for Economic Research (NBER) estimates that recession stopped in the USA in July 2009. Although the USA left the crisis in a better shape than other developed countries, the recovery of the US economy took a long time. The data of the Economic Analysis Bureau indicate a GDP growth at 2.5, 1.8, and 2.8 % in 2010–2012, respectively. From 1960 to 2007, annual real GDP growth rate per 12 quarters following recessions (totaling 7) had been 4.2%, as against 2.2% after the last crisis.1 Experts quote several reasons to account for this: in particular, the financial crisis impaired loan market; uncertainty as to future tax rate curbed the activity of corporations; investor and consumer trust was disrupted (and still not fully rebuilt so far.) On the flipside, low inflation is not favorable to consumer demand. High unemployment among economically active population continues to be an acute social and political issue, despite its reduction from a spike of 10% in October, 2009 to 7.3% in August, 2013. With 11.3 million unemployed people, long-term unemployment (with a duration of 27 weeks and longer) accounts for 37.9%, youth unemployment remains at 22.7%.2 This issue is especially difficult to resolve at this point due to cyclical and structural factors. Unemployed people who had previously abandoned the hope of getting a job started looking for a job again, thus keeping unemployment from going down. The key point, however, is that the crisis boosted labor productivity and changed job market structure. Hence, growth of employment cannot be  reduced to mere restoration of lost jobs. Meanwhile, managers of hi-tech companies deplore the lack of skilled professionals. Housing crisis has barred work force mobility. An incipient recovery of the housing market opens up more opportunities to find a job. 1 2

Economic Report of the President. Wash., 2013. Ch. 2. P. 72. Bureau of Labor Statistics. US Dep. of Labor. 2013, September 6.

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The crises of the 21st century strengthened the government’s function of fighting corruption and misconduct in business. After a series of corruption scandals, in which the USA’s largest corporations (Enron, WorldCom, etc.) were implicated, the Sarbanes-Oxley Act adopted in the summer of 2002 codified the proceedings of corporation boards and top-managers, and rules of disclosure of financial information. Audit rules were improved in the corporate sector. The global financial and economic crisis of 2008–2009 forced the government to focus on fighting misconduct in the financial sector. In May 2009, the Fraud Enforcement and Recovery Act and the Credit Card Accountability Responsibility and Disclosure Act initiated by the administration became effective. Governmental agencies launched an investigation of the activities of a number of financial companies and their managers to ascertain the degree of their contribution to the mortgage and financial crisis and engagement in financial misconduct. In July 2010, president Obama persuaded the Congress to adopt the Dodd-Frank Wall Street Reform and Consumer Protection Act. The goals of the reform are: strengthen regulation to reduce systemic risks and lower the probability of a new crisis, as well as restore the trust of investors and consumers of financial services in the new financial system. The Act required authorized regulators to develop and adopt a package of statutory instruments and rules. Many hopes were pinned on the Volcker rule, which was adopted amidst heated debates. The rule, in particular, bans investments by commercial banks in hedge funds and direct investment funds and prohibits bank employees to trade in securities on the bank’s account to earn profit for the latter (proprietary trading). The introduction of this rule is often referred to as a return to the age of the Glass-Steagal Act, adopted in 1933 and partially repealed in 1999 by the Gramm-LeachBliley Act. The Volcker rule is more liberal than the Glass-Steagal Act, which prohibited banks from entering into any investment transactions in the USA, whether at their expense or on the client’s account, whereas the Volcker rule permits trading in securities upon a client’s request.1 The finalization of the Volcker rule was stalled. 1 См.: Kulakova V.K. Podderzhanie stabilnosti finansovoy sistemy v SShA: novy instrumentary v rukakh gosudarstva [Maintanance of financial system stability in the USA]. In: Persektivy sotsialno-ekonomicheskogo razvitiya SShA posle krizisa 2008– 2009 gg. [The Perspectives of socio-economic development of the USA after the crisis of 2008–2009] Moscow, IMEMO RAN, 2012. P. 17.

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Despite a considerable progress, the financial reform cannot fully meet its goals in the short term. The development of rules and regulations has been slowed down by a financial sector lobby and a Republican opposition. The regulators themselves are forced to compromise with the financial lobby, as tightened domestic regulation may at a certain point disrupt the competitiveness of that sector. It is worthwhile reviewing the evolution of market players’ behavior. During the crisis, some financial actors started altering their statuses. Thus, in September 2008, in order to gain access to Federal Reserve credit, the largest investment companies Stanley and Goldman Sachs became, for all practical purposes, commercial banks; American Express transformed into a banking holding company. However, banks and other financial institutions opted to get square with the government. By the end of the TARP program banks paid most of the governmental aid back to the public treasure, with the Department of Treasury earning income in the form of dividend, interest rate, and proceedings from warrants. As the economy recovers, financial institutions expand their risky transactions on the secondary market again, lured by low base interest rates. At the same time, banks are reluctant to increase credit facilities and prefer accumulating cash savings instead. Bank reserves on the Federal Reserve balance grew from $11 billion in 2007 to $1,754 billion in March 2013.1 The crisis confronted business and expert communities with the issue of theoretical and practical reinterpretation of risk management in globalization. The Senate formed a bi-party group working on a bill on the activities of the mortgage-related agencies, Fannie May and Freddie Mac, which had enjoyed the status of government sponsored enterprises (GSE) and played a notorious role in the financial crisis. In 2009, the government put them under concervership, which in practice boils down to temporary nationalization, in order to prevent their bankruptcy and a collapse of the mortgage market. President Obama supported a bill to release those agencies to free market. This bill, if adopted, will change the working of the US mortgage market. The global crisis brought about new shifts in global economic relations. The European community, bogged down in debt, still labors to 1

See: Board of Governors of the Federal Reserve System. March. 2013.

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reach the recovery phase. The crisis has also showed that a global order based on the domination of a single power is unstable. As already noted, joint effort was required to surmount the crisis. Despite publications amassed on an imminent decline of the USA and the ascent of China (which, to a certain degree, acted as a locomotive during the crisis) as the key super-power, the USA is not willing to give up its leadership, especially in hi-tech and military and strategic spheres.

Challenges To preserve leadership, the USA will need to address a number of domestic and global challenges. • Inequality and dilution of the middle class are the toughest challenges for the contemporary USA. The USA has the largest income gap between the top and the bottom deciles of population among developed countries. An annual personal income below $10,990 (and family income below $22,030) is regarded a threshold of poverty (data of 2011.) Although employed population had practically surmounted that threshold at the outset of the 21st century, the issue was aggravated by a profound financial and economic crisis and a sharp growth of unemployment. The number of the poor grew to 46 million (13.2% of the population) as compared to 39.8 million in 2008. This indicator shifted during recession from 11.2 to 9.8% for white Americans, from 11.6 to 12.3 % for people of Asian descent, from 24.2 to 27.3 % for Hispanic/Latino and from 24.6 to 27.6 % for black Americans.1 It should, however, be borne in mind that US incomes per capita are still higher in the lower deciles than the relevant incomes in most other countries. • Immigration creates issues and risks that the American melting pot cannot deal with as successfully as before. The US population was 314 million in 2012: white Americans – 63.4%, Hispanic/Latino – 16.7, black Americans – 13.1, people of Asian descent  – 5.0%.2 Foreign-born Americans have a higher birth rate and until recently accounted for 82% of the population 1 2

See: Current Population Survey // US Bureau of the Census. An Overview of the US Population. 2013. http://www.Infoplease.com.

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growth. The crisis hit the economic conditions of immigrants most severely. This affected the birth rate among various groups of population. While there were 113 births per 1,000 female immigrants and 66 births per 1,000 non-immigrant females per year in 1990, these figures changed to 88 and 59, respectively in 2010: the gap clearly narrowed down.1 Over the last two decades, almost two-thirds of immigrants originated from Asia and Latin America. Unlike immigrants of a European descent, who made up the majority of newcomers previously, they are more inclined to preserve their national identity, language, and culture. Improvements of communications and transport and the spread of the Internet enable immigrants to maintain permanent ties with their homelands and have a transnational life-style. Increasing multi-ethnicity of the US society calls for a thorough development of ethnic, cultural, educational policies and brings forth the issue of a new model of assimilation. The US governmental assimilation policy is primarily based on the inclusion of immigrants in the socio-economic context.2 This policy, while extremely efficient under economic growth, fails during a crisis and weak recovery. • There is a strong feeling in the USA that a breakthrough is needed in education, the foundation of the American innovation system. Investments in education are regarded as a key contribution to human capital. School education is the weakest element in the US education system. Attempts to improve the US school education by introducing uniform standards and improving the quality of instruction have been made, over the recent decades, by presidents G. Bush, B. Clinton, and G.W. Bush. During his first term, president Obama also put forward several proposals to improve elementary and secondary education, in particular, by introducing basic standards in all states, lending mathematical instruction the status of a national priority in order to improve 1 Web-site: http://www.pewsocialtrends/org/2012/11/29/u-s-birth-rate-falls-to-arecord-low-decline-is-greatest-among-immigrants/. 2 See: Nikolskaya G. Vliyanie immigratsii na dinamiku ekonomicheskogo i sotsialnogo razvitiya v SShA. In: Migratsionnye protsessy: sotsialno-ekonomichesky aspect (na primere veduschikh stran). [The immigration impact on economic and social development dynamics in the USA. In: Migration processes: socio-economic aspect (by  the example of leading countries)]. Ed. by E. Kirichenko, M. Shkundin. Moscow, IMEMO RAN, 2007.

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teaching quality, engaging highly qualified teachers through incentivizing alumni of higher education institutions. This issue, however, is still unresolved. • Dramatic shrinkage of tax base owing to recession and huge anticrisis injections (in addition to spending on national security and expenses in Iraq and Afghanistan) resulted in a colossal deficit of the federal budget, which reached 10.1% of the GDP in 2009. The deficit began to drop in the recent years: from 7.0% of the GDP in 2012 to an expected 5.3% of the GDP in 2013. However, official forecasts predict it will grow due to increased expenses on healthcare and social security as population ages. Already now annual interest payments of on servicing national debt require considerable budget amounts ($220 billion in the fiscal year of 2012, without intrastate debt.) Non-residents account for about one-third of the holders of the US sovereign debt. This, naturally, makes the country a hostage to the largest foreign holders of public securities, particularly, China. Yet, holders of large blocks of securities, in their turn, depend on the stability of the US financial system. Heated debates surround the position of a “red line” after which the public debt will become critical even for such a powerful economy as the USA. Well-founded arguments seem to have been put forward by the reputable Russian expert M. Portnoy, who challenges the idea that the amount and the structure of the debt pose a threat to the United States.1 • The USA is confronted with the need for a reform of public social security for an aging population (despite demographic data more favorable than elsewhere). In 1967, expenses under the largest public programs, Medicare and Social Insurance, accounted for 16% of the budget. By 2013, preliminary forecasts predict a more than doubled figure of 36%.2 Since the second decade of the  21st  century, baby-boomers (people born between 1946 and 1964) will be entitled to pension benefits under 1 Portnoy M.A. Amerikanskie byudzhetnye defitsity – mify i realnye problem. In: Sovremennye problemy ekonomiki SShA i Kanady. [American budget deficits – myths and real problems. In: Contemporary problems of the USA and Canada economies]. Moscow, ISKRAN, 2013. P. 21. 2 Outlays by Superfunction and Function: 1940–2018 (www.whitehouse.gov/omb/ budget/Historicals).

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the  Social Insurance program and Medicare. Thus, beneficiaries grow numerically as life expectancy goes up and the ratio of employed and retired population drops. • The crisis clearly showed the interdependence of individual economies and the need for private sector to improve risk management, both financial and industrial (corporations have realized how fragile global supply chains are), as well as the need for international joint decisions and the difficulties inherent in such decision-making. • Globalization constantly creates new risks. International terrorism, drug business, spread of weapons of mass destruction, industrial espionage, and hacking are a threat to the US national security. Whatever the financial, economic, and technological potential of individual countries, the difficulties and the scale of challenges require joint effort and resources of all states. Nowadays, all the issues enumerated above have to be resolved simultaneously with a search for ways to stimulate economic growth and bring down unemployment.

Priorities of the Obama Administration Several points should be taken into account when reviewing governmental socio-economic policy. First, the US policy-making system (division of power and duties between the legislative and the executive branches and several levels of government: federal, state, and local) restricts the executive branch. Second, the continuity of certain challenges and issues faced by the USA requires a continuity of policy. Third, key government departments, as well as individual groups in the political elite are self-contained actors of economic policy. Rivalry of elites manifests itself in the way approaches to strategic issues are worked out. Fourth, elections (election campaigns are practically permanent in the USA), a struggle of the two main parties for power are an important factor that affects socio-economic policy. Fifth, any administration is bound by pre-election pledges and obligations to various stakeholders. During Obama’s presidency, not only did his administration outline priorities of economic and foreign policy, but also put them into

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an hierarchy based on the degree of urgency and a strategic vision of the nation’s future, plotting a vector of governmental strategy for forthcoming decades. Both continuity and new approaches can be observed here. Healthcare, energy security (including “clean energy”), alongside with climate change, education, and immigration policy were prioritized in Obama’s first presidential campaign. The crisis pushed forward issues of financial and socio-economic stabilization, as well as the need for a financial regulation reform. President Obama persuaded the Congress to adopt bills on a reform of healthcare and financial regulation. Yet, their practical application is still a serious challenge for the second administration.1 The second presidential campaign and the State of the Union address of January 24, 2012 emphasized the idea of a recovery of the manufacturing industry backed up by the “American energy, skills for American workers”. President Obama called for the businesses to return jobs to the USA. Publications appeared in press on a “re-industrialization” of the US economy. This largely electoral slogan is being partially put into action due to a number of favorable factors. First, rising wages, and, therefore, production costs, in China, result in the return of many production businesses to the USA. Second, the crisis revealed additional risks inherent in US companies’ overseas operations. Third, low natural gas prices allow reinstating some costly types of production, primarily, energyextensive, such as petroleum chemistry, in the USA. Experts believe, however, that this advantage will not be long-lasting due to a strong competition from foreign manufacturers. The president announced his plan to make America a magnet for jobs and manufacturing. The plan includes a reform of taxation, extension of R&D tax exemptions, which will become permanent, opening up international markets for US products. A key ingredient of this plan is reinforced cooperation and collaboration among government 1 For more detail on Obama’s first administration see: SShA v poiskah otvetov na vyzovy XXI veka (sotsialno-ekonomichesky aspekt) [USA in search of responses to the challenges of the 21st century (socio-economic issues)]. Ed.: E. Kirichenko. Moscow, IMEMO RAN, 2011; Perspektivy sotsialno-ekonomicheskogo razvitiya SShA posle krizisa 2008–2009 gg. [The Perspectives of socio-economic development of the USA after the crisis of 2008–2009] Ed.: E. Kirichenko. Moscow, IMEMO RAN, 2012; Sovremennye problemy ekonomiki SShA i Kanada [Contemporary problems of the USA and Canada economies]. Ed.: V. Supyan. Moscow, ISKRAN, 2013.

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agencies, companies and universities in investments into cutting-edge technologies. It is planned to create a fund under the auspices of the Departments of Labor and Education that will grant municipal colleges resources for training 2 million workers. This will help companies find skilled workers they need. Obama pledged to activate measures to raise more investments in the United States.1 B. Obama’s policy statements of 2013 incorporate the idea of the “revival of American manufacturing industry” into the context of his concept of improving the environment of the middle class.2 Additional spending on certain elements of infrastructure is one of the top priority areas of the “reinvestment into America” program, which will also contribute to achieving reindustrialization and supporting the middle class. “Reindustrialization” can be broadly defined as boosted development of high-technology industries. This is exactly what President Obama stresses when proposing a plan to enhance the competitiveness of the manufacturing industries. He advocates, in particular, the idea of launching 45 innovation institutions in that sector within the next decade to unite the efforts and the finances of the government, private companies, universities, and municipal colleges. A pilot project of this kind has been successfully launched in Ohio. Since a certain level of socio-economic development was achieved, structural shifts in the USA have been gradual. The share of manufacturing industry has dropped by a half since 1970; it is now stable and unlikely to grow, even if new high-technology industries start to develop. Instead, it would make more sense to speak of further shifts in the industry’s internal structure. The administration is exploring ways to reform corporate taxation in the USA as a means of “reindustrialization”. The US Treasury proceeds from corporate income tax account for 10% of the total amount of internal revenues (data of 2012.) This is partly due to the fact that they are mainly sourced from social and income taxes. At the same time, a  high statutory corporate tax rate (35%) is in contrast with the actual extent to which those taxes are collected and high US corporate revenues. This phenomenon is rooted in the fact that the existing US 1 Fact Sheet: The President’s Plan to Make America a Magnet for Jobs by Investing in Manufactur- ing (http://www.whitehouse. gov/the-press-office/2013/02/13). 2 Fact Sheet: A Better Bargain for the Middle Class: Jobs (http://www.whitehouse. gov/the-press- office/2013/07/30).

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legislation contains innumerable gaps that can be used to minimize the effective rate of corporate income tax.1 The structure of the US tax system permits paying no tax on foreign earnings until they are repatriated. As a result, US companies often opt to develop foreign operations or keep profits in cash overseas, rather than return profits of their oversea branches to the USA. Moreover, many companies locate their profit-generating operations abroad. The Obama administration has proposed a plan to reform corporate taxation by cutting the corporate income tax rate from 35 to 28% but abolishing the tax payment deferral until reinvestment of profits in the USA.2 The practice of using offshore tax havens and secret offshore jurisdictions, which plays a significant role in minimization or even evasion of tax, is currently widely spread among the USA’s large corporations and financial institutions. The Obama administration is tightening its policy to restrict tax minimization through offshore financial schemes and improve the transparency of financial information on the actual beneficiaries of offshore companies. To this effect, the Baucus-Rangel Foreign Account Tax Compliance Act was passed in May 2010. It will become fully effective in 2013. The Obama administration is seeking opportunities to enter a fundamentally new phase of socio-economic development, focusing all key efforts of economic policy on that goal. Its achievement, however, is challenged by a huge budget deficit. Barak Obama stressed the need for governmental support of R&D, education, and innovation to maintain the USA’s international competitiveness in his policy speeches (under the slogans of “investment into future” and “win the future”) with a particular emphasis on the support of small business. The administration regards investments into primarily ultra-hightechnology industries such as new technologies of energy self-sufficiency, clean energy, information and communications technologies (including broadband internet and wireless communications), bio- and 1 See for more details: Bogaevskaya O. Amerikanskie korporatsii: mekhanizmy sokhraneniya liderstva v globalnoy ekonomike [American corporations: mechanisms of preserving the leadership in the global economy]. Moscow, IMEMO RAN, 2012. Ch.. 4. 2 The President’s Framework for Business Tax Reform. A Joint Report by the White House and the Department of the Treasury. February 2012. Fact Sheet: The President’s Plan to Make America a Magnet for Jobs by Investing in Manufacturing (http://www.whitehouse.gov/the-press-office/2013/02/13).

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nanotechnologies, as well as enhancement of the innovation component of traditional industries (transport infrastructure, healthcare, agriculture) as points of growth that require reinforced government support. Issues of budget deficit and public debt remain key points of governmental economic policy. Leveraging on the budget deficit and public debt has become an important factor of the nation’s socio-economic development. The solution of the public debt problem is tightly coupled with the solution of the problem of the USA’s growing budget deficit. One of the conceptual foundations of President Obama’s socioeconomic policy is the desire to fill up the budget deficit by increasing taxes on the rich. Besides, President Obama believes that the role of governmental stimulation of the USA’s socio-economic development should not be restricted, especially at the current phase of a weak economic recovery, and emphasizes “smart state”, rather than “more state”. It is worth noting that his administration is simultaneously taking steps to support competition in the US economy (in particular, by improving the anti-trust system.) The degree of governmental intervention in the economy and the related issue of the scale of governmental social security have always been, under different guises, in the center of debates on the course of socio-economic policy. B. Obama’s policy has triggered a new round of such debates. Apart from objective economic factors, the reduction of budget deficit is largely impeded by factors related to the modalities of decisionmaking and the development of governmental economic policy in the USA. Thus, the threat of a technical default became a bargaining chip in budget policy debates. An agreement on a public debt ceiling concluded between the Republicans and the Democrats in 2011 became a trap both for the Congress and the executive branch1. Prolonged debates brought the state to the brink of a so-called fiscal cliff, which could have become a reality on January 2, 2013.2 Complex negotiations resulted in an act that, 1 The agreement contemplated spending cuts of approximately $2.4 trillion over ten years. Initial cuts of $917 billion were immediately ratified by the Congress. The  agreement required a compromise on cutting an additional $1.5 trillion, failing which the government was automatically bound to cut federal spending on defense and social programs in an equal proportion since 2013, which was viewed as unacceptable for both parties. 2 A situation of simultaneous sequester of budget spending and abolishment of tax preferences introduced by G.W. Bush in 2002 and 2003 and temporarily extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

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in fact, worked as a temporary fix for the fiscal cliff issue. Tax exemptions were preserved for college education, unemployment reliefs up to one year, as well as a number of other benefits. Simultaneously, the income tax rate was increased from 35 to 39.6% for individuals whose annual income exceeded $400,000 ($450,000 for married couples); the property tax was increased as well; in addition, taxation of high income from securities was increased (over $400,000 or, for married couples, $450,000) from 15 to 20%. However, in early March 2013, Obama, failing a compromise with the Republicans, was forced to cut budget spending by $85 billion by the end of the fiscal year. The fall of 2013 was dominated by inter-party stand-off around adopting the federal budget for 2014 and the raised public debt ceiling expiring on October 17. The nation entered the new fiscal year of 2014 without a budget adopted by the Senate, which resulted in a shutdown of public institutions. Several hours before the expiry of the final deadline for raising the public debt ceiling, the House of Representatives adopted the bill, which had been passed by the Senate somewhat earlier. The funding of the government was resumed for a period until January 15, and the US Treasury was allowed to perform its duties until February 7. Yet, this temporary victory of the administration is still a temporary fix. Prolonged debates on economic stimulation and decisions on budget deficit and public debt on the verge of a cliff undermine investor and customer trust in the government’s policy and the US economic prospects in a time when the factor of credibility is becoming crucial for the revival of the economy. The administration is torn between the necessity of new budget injections due to high unemployment rate and a slower than expected economic recovery, on one hand, and the need to address the issues of a huge budget deficit and public debt, on the other. A further pursuit of an economy stimulation strategy and the policy of a retrofit of industry and services announced by the administration will require considerable government spending. Nevertheless, the resolution of the budget deficit issue will primarily hinge upon a sustainable growth of the US economy, which will expand the tax base and reduce doles. President Obama set a number of urgent goals for the country. The adoption of an all-embracing immigration act has been declared a top priority of the President’s second term, is pending a considerable breakthrough. During his first term, B. Obama, despite

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election pledges, did not bring an immigration reform bill before the Congress.1 Currently, circumstances are more favorable for the adoption of that bill. The Republicans realized that their uncompromising stand results in the loss of Hispanic electorate. Moreover, polls show that twothirds of Americans support giving illegal immigrants opportunities to obtain a legal status. This idea is favored by 71% of Democrats and 53% Republicans.2 The new bill passed in the Senate combines liberal and strict approaches and resolves important political and economic issues. The first part of the bill addresses the improvement of border control (a  step to meet the demands of Republican conservators.) Simultaneously, the bill liberalizes visa requirements for highly skilled professionals capable of contributing to the competitiveness of the USA. This provision is currently being actively pushed by US high technology companies, as a deficit of professionals in science, technics, engineering and mathematics (STEM) exists on the domestic market. This part of the bill is supported by both parties. The third point stressed by B. Obama is the opportunity for young illegal immigrants to integrate into the American society with a simultaneous tightening of liability for employers hiring illegal immigrants. The bill preserves visitor visa for labor immigrants required by agriculture, construction, hotel business. However, the Republican majority in the House of Representatives rejected the Senate bill, following which Republican Congress members received a petition signed by over a hundred major donors of the Republican Party demanding to vote for the bill3. This issue remains politically sensitive, especially in certain states, where an influx of immigrants has heightened competition for jobs, stressed the education 1 However, in June 2012 Obama issued, without the Congress’ approval, an order based on the provisions of the Dream Act suspended in the Congress since 2001. The directive permits illegal migrants aged 31 and younger that arrived to the USA with children up to 16 years who have not committed criminal acts, completed or attending secondary school and having served in the army apply for a permission for a temporary two year legal status (this applies to search of a job, financial support of education, driver license, social insurance.) This period can be extended. 2 Poll by Brookings Institution and the Public Religion Research Institute. // The New York Times. 2013, March 21. 3 Parker А. Big-Name G.O.P. Donors Urge Members of Congress to Back Immigration Overhaul // The New York Times. 2013, July 30.

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and the healthcare systems, and the environment. Several states (e.g., Arizona) even passed their own anti-immigration legislation, which the administration had to challenge in the Supreme Court. President Obama has recently set the ambitious goal of improving all levels of education. In his address to the Congress of February 12, 2013, he particularly emphasized the need to improve pre-school education, ensure access to kindergartens for all American children, which is especially critical for the poorest strata of the population. To this effect, he is ready to cooperate with the authorities of the states. According to B. Obama’s statement, the return on each dollar invested in pre-school education will be worth 7 dollars1. The goal set in school education is to bridge education quality gaps among regions and districts. Obama also stressed the need to respond to a new challenge: school alumni should be adapted to the requirements of a hightechnology economy. He called for widening the system of vocational technical education based on a collaboration of schools, colleges, and employees. Being aware of the role of university education in the economic leadership of the USA, president Obama pays special attention to its accessibility. Attempts to reform education, especially schools, are favorably met by the society. However, they face organizational and financial obstacles. Maintaining energy security has always been a key area of economic policy. During president Obama’s first term, his administration announced that restructuring of the US fuel balance in favor of renewable and alternative energy resources was a key priority. The ideas of energy reform were embodied in the American Recovery and Reinvestment Act. Energy supply and enhanced efficiency of energy use, development of clean energy carrier production, non-conventional energy, reduced dependence on hydro-carbon raw materials remain the priorities of Obama’s second term. However, political and objective economic factors have forced the president shift accents. At first, he decoupled the development of green energy from the fight on the global warming. Later, under the pressure of oil and gas lobby and in order to gain votes of electorate apprehensive that gasoline and diesel oil prices would go up, the president started paying more attention to the development of domestic oil and gas production, still more so since in a short term the efficiency of alternative energy had failed to meet 1

See: State of the Union Address. Wash. 2013, February 12.

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expectations. B. Obama has not abandoned the idea of subsidizing oil companies, but the administration now stresses its support of “responsible” development of the oil and gas industry hand in hand with investment in clean energy. The administration continues a hard struggle for a healthcare reform. Obama succeeded, by putting at stake all his political potential, in pushing the Patient Protection and Affordable Care Act through the Congress. Republicans used all opportunities to stop the reform.1 The constitutionality of the Act was challenged in federal courts several times. The Supreme Court ruling on the constitutionality of the Act was B. Obama’s major victory. After losing presidential elections, the Republicans also lost their chances to dismantle the Act (which is one of the key points on their agenda.) Yet, they continue their struggle, trying to cut the funding of the Act and couple the implementation of this reform with the public debt ceiling issue. The achievement of the priorities will largely depend on economic conditions. Still, as pointed out before, the very nature of decisionmaking in the USA may impede the implementation of B. Obama’s economic policy. Still more so since he has been forced to bring some other sensitive issues before the Congress, in particular, tightening arms control, and an agriculture, food and jobs reform bill. A review of the socio-economic policy shows an ongoing search for the most efficient combinations of government-controlled and market mechanisms of addressing long-term challenges of economic development. The USA’s opportunities to define the strategy and tactics of international organizations shrink as their partners reinforce their positions. This calls for more flexible approaches to international standards of conduct under the motto of division of global responsibility. Nowadays, the nation is amidst a search of new approaches to multilateral trade negotiations, linking its further concessions to developing countries with their obligation to give US industrial products and services more access to their markets. The USA is actively participating in global integration processes and the formation of regional blocs. The nation has joined the talks on a free trade zone based on the Trans-Pacific Partnership (TPP) and 1 See for more detail: Zeveleva G. Gosudarstvennaya politika v oblasti zdravookhraneniya v SShA v 1992–2012 gg.: borba za reformu [The USA Governmental healthcare policy 1992–2012: struggle for the reform]. Moscow, IMEMO RAN, 2012.

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become its active member. Nevertheless, the USA has traditionally included into agenda demands to raise labor and environmental standards that previously failed to find support within the WTO framework. In his second term, B. Obama revitalized the ambitious goal to form a Trans-Atlantic free trade zone. Objective trends towards regionalization are in no way a substitute of globalization. In its long-term strategy, the USA will aim at globalization, viewing regional formations as bricks building up a global economy. This, however, does not stop the USA from using regional and bilateral free trade agreements to push its agenda in various international forums, especially the WTO.

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Chapter 6

STATE COMPANIES AND DEVELOPMENT BANKS IN THE CONTEMPORARY ECONOMY Vladimir B. Kondratiev A New “Old” Trend The global financial crisis of 2007–2008 forced many countries to increase the state’s share in private corporations. Does this herald a return of “state capitalism”? If so, what can one expect of “new” stateowned enterprises? Does this mean a return to the practices of large inefficient state enterprises privatized in the 1980–1990s? Hand in hand with a recent surge of state interventionism, new state-owned enterprises, state-supported enterprises, and “national champions” began to emerge as serious global competitors. This fact was noted by the secretary of APCAC Deborah McCarthy,1 who observed that state capitalism performed numerous functions in a modern economy. “It mobilizes resources of the state, forces joint ventures between foreign and local companies to transfer knowledge. It  exerts control over key enterprises and subsidizes their expansion and growth overseas.”2 In 2004, the Times’ list of 500 largest global companies contained no state-owned enterprises at all. In 2011, there were eleven such companies on the list. In terms of capitalization, they occupied the second (Petro China), the fourth (Industrial & Commercial Bank of China), the fifth (Petrobras, Бразилия), and the seventh (China Construction Bank) positions.3 Mexico’s Cemex, the world’s third cement company, owns more foreign assets than Dow Chemical or Alcoa. 1 Asia-Pacific Council of American Chambers of Commerce. Unites 50,000 managers of businesses, 20,000 organizations from 20 countries of the Asian-Pacific region. 2 Are State-Owned Enterprises Emerging to Become Serious Competitors? In: News Blaze. 2012, March 17. 3 FT 500, 2011 In: Financial Times. 2011, June 24.

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The value of assets owned by Brazil’s mining company Vale is higher than that of  the industry’s leaders such as Roche, Anglo-American, and BHP Billiton. The growth of state corporations and the strengthening of their positions in global ratings are registered in other sources, such as Forbes or Fortune. In 2005, 67 of 500 world’s largest corporations on Forbes list were state-owned; by 2011, their number rose to 106. In 2012, the Forbes list of the world’s twenty leading global companies contained six state corporations, whereas in 2008 it had contained none. Solely between 2004 and 2008, 117 state-owned enterprises from Brazil, Russia, India, and China were enlisted by Forbes among 2,000 global companies. Simultaneously, 239 private corporations from the USA, Japan, the UK, and Germany left the list.1 Successful state corporations can be found in almost any sector of economy. Thus, e.g., China Mobile is a mobile communications giant with some 600 million subscribers. Saudi Basic Industries Corporation is one of the world’s most profitable chemical companies. Dubai Ports is the world’s third port operator. The Emirates airlines own the world’s youngest fleet of aircraft and grow by 20% per year. Experts estimate that, despite massive privatization, the state has retained some control over 62% of privatized companies in OECD countries.2 State capitalism can legitimately claim that the world’s most successful large economy is in its camp. A reform of Chinese state enterprises initiated at the end of the 1990s resulted in either privatization or bankruptcy of smaller state companies; at the same time, large enterprises were subsidized by the state, their influence was stimulated, and they took up vantage points in the national economy. The reform proved a success in the sense that a considerable concentration of assets in large companies was achieved. The average amount of assets per state enterprise grew nine times between 2000 and 2009 (from RMB 134 million to RMB 923 million), whereas the average value of private assets only grew by 67% (from 36 to 60 RMB million; see Fig. 6.1)

1

Forbes for the relevant years. Bortolotti B., Faccio M. Government control of privatized firms. In: The Review of Financial Studies. 2009. Vol. 22. No. 8. 2

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Figure 6.1. Average assets value per enterprise in China (2000–2009, RMB millions) 1,000

923

900

800

800 700

620

600 500

450

400 380

300 200 100 0

250 134 190

200

36

37

36

38

40

45

50

55

64

2000 2001 2002 2003 2004 2005 2006 2007 2008 State enterprises

Private enterprises

Source: CN Politics. 2012, April 24.

As a result, on the average, the value of assets owned by a single Chinese state-owned enterprise exceeded that of a single private company by 13 times.1 Thus, the net earnings of China’s largest private company Huawei is ten times lower than those of the largest state company Sinopec (see Fig. 6.2). State enterprises account for 63 % of payroll, 83% of earnings, and 90% of assets of China’s 500 largest companies.2 In China, the state reinforces its influence on companies by creating so-called “vertical business groups.” In most developing countries, business groups are usually horizontal. In China, such groups completely encompass added value chains. The state incentivizes companies that create tight production links in industrial clusters by providing privileged access to contracts and stock market listings. The state also incentivizes Chinese companies creating dedicated subdivisions in the form of national holding companies, financial companies, research institutes, and foreign branches. The State Assets Supervision and Administration Commission (SASAC) usually holds a  100% interest in such holding companies. Those, in their turn, own a somewhat smaller share, e.g., 60%, in other companies and their 1 Gao Xu. State-owned enterprise in China: How big are they? // East Asia and Pacific. 2010, January 19. 2 CNPolitics. 2012, April 24.

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Figure 6.2. Net earnings per company (RMB billion)

Huawey; 185

Sinopec; 1969 Sources: CNPolitics. 2012, April 24.

overseas branches. Such a scheme enables state control over the entire chain of companies. Thus, the oil corporation PetroChina, on the face of it, looks like a typical Western company listed at the New York Stock Exchange. However, in reality it is a foreign subdivision of the giant business group China National Petroleum Corporation, the foreign head of a dragon whose body rests in Beijing. The Chinese elite views the world as the field of a ferocious battle for resources. China provided Russia with a loan in the amount of $25 billion to help Rosneft and Transneft meet Chinese oil demand of 300,000  barrels per day and entered a transaction worth $1.7  billion with Iran for the development of oil fields in the North of the country. China National Petroleum Corporation is among the few companies awarded oil field development contracts in Iraq, whereas Industrial and Commercial Bank of China led a bank consortium financing a $1.2 billion project to construct a gas pipeline from Iran to Pakistan. At the core of this activity are Chinese state companies, which have funded 4/5 of such foreign direct investments. State banks provide softterm financing. Creation of an “oil-producing” infrastructure is one of China’s pet mechanisms of expansion. China assists poor countries in building schools, hospitals, and other social infrastructure (usually funded through cheap loans and erected by Chinese state construction corporations) in return for guarantees of an uninterrupted supply of oil and other mineral resources.

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A typical member of the state capitalism camp is Brazil, a democratic state, which also shares many traits of Anglo-Saxon capitalism. Simultaneously, Brazil is the cradle of new state capitalism tools. Most of Brazil’s recent history is a story of state industrialization. A research of the early 1980s registered the existence of 500 state companies. In the 1990s, Brazil launched a privatization program to fight hyperinflation, budget deficit, and boost the efficiency of economy. However, later this process reversed: the state began to inject funding into national champions, mostly in the sphere of natural resources and telecommunications. In essence, Brazil proposed a new model of industrial policy: a  replacement of direct control and majority ownership by minority ownership and control through the Brazilian National Development Bank and its investment branch BNDESPAR over a large number of various companies. This model of minority holding has several advantages. First of all, it constrains the state’s ability to use such companies as a tool of social policy, as such attempts can be blocked by private shareholders. At the same time, this model allows influencing a large number of companies. In 2009, the total value of all shares in companies owned by BNDESPAR amounted to $53 billion, or 4% of the value of the country’s stock market. Brazilian companies are usually reluctant to invest in new production equipment due to the backwardness of the national capital markets. In such circumstances, state holdings provide them with the required funds.1 At the same time, the state tries to force companies, Petrobras in particular, to use equipment produced by Brazilian manufacturers. It also stimulates the creation of national champions through mergers and acquisitions. Such a process created BRF in food industry (by merging Sadia and Perdigao), Oi in telecom, Fibriain pulp and paper industry (through a merger of VCP and Arucruz.) Another country with a deeply-rooted practice of state capitalism is South Africa (the fifth member of the well-known BRICS group). A huge share of the country’s key infrastructure branches (railways, ports, airports, generation and transmission of electric power, utilities, radio) is completely owned by the state or by largely state-owned companies. 1 Musacchio A., Lazzarini S.G. Leviathanin Business: Varieties of State Capitalism and their Implications for Economic Performance. Boston, Massachusetts, May 2012.

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Moreover, the state is the largest shareholder in the national telecom giant Telcom. In 2002, the South-African Republic created Petroleum, Oil and Gas Corporation of South Africa (PetroSA) as a national oil company producing hydrocarbons domestically and abroad and owning and operating the world’s largest LNG plant at Mossel bay on the country’s Southern coast. Later, in 2007, the government of South Africa established African Exploration, Mining & Finance Corporation (AEMFC) as a first step towards creating a national mining company. The company is expected to become a leading producer of coal, chrome, diamonds, gold, iron ore, manganese, nickel, platinum, titanium, and uranium. Even in such pure market country as Chile, the largest producer of copper, Codelco, is still owned by the state. The US national railroad carrier Amtrak is also state-owned, as are different local and suburban carriers. In addition, the USA has state power generating companies, of which Tennessee Valley Authority is the most widely-known.1 State capitalism is on the move, overflowed with cash and stimulated by a crisis in the West. State companies account from 80% of stock market in China, 60% in Russia, and 40% in Brazil. They account for over one third of foreign direct investments of developing countries and almost 50% of largest merger and acquisition transactions. Four state companies are on top of the world’s largest corporations in terms of turnover (three from China and one from Japan) (see Table 6.1). When sovereign investment funds and development banks are added on top of this, a picture of a receding liberal capitalism emerges. State capitalism looks like a trend gaining momentum. Even young economists at the World Bank and other international institutions are beginning to discuss a new industrial policy.2 Ian Bremmer, president of the influential consulting company Euroasia Group, declares that this is the “end of free market.”3 This is an overstatement, but the invisible hand of the market indeed more and more gives way to the visible and often authoritarian hand of state capitalism.

1

State capitalism: Is it rival to market capitalism? // Mining Weekly. 2012, March 30. State Capitalism. Special Report //The Economist. 2012, January 21. 3 Bremmer I. The end of the free market: who wins the war between states and corporations? N.Y., 2010. 2

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Table 6.1. World’s largest companies in terms of turnover in 2010 ($ billions) Company

Turnover

1

WalMart (USA)

422

2

Royal Dutch Shell (Netherlands)

378

3

Exxon Mobil (USA)

355

4

BP (UK)

309

5

Sinopec Group (China)

273

6

China National Petroleum Corporation (China)

240

7

State Grid (China)

226

8

Toyota (Japan)

222

9

Japan Post Holdings (Japan)

204

Chevron (USA)

196

10

Source: Fortune 500.

Forms of Contemporary State Capitalism After two decades of intense reforms and privatization, state capitalism is still a significant factor of economy both in developed and, especially, developing countries. Moreover, state enterprises, banks of development, sovereign funds, and other instruments and forms of state capitals have taken lead in the global economy.1 Many Western experts are apprehensive of this development, as it is incompatible with the ideals of liberal capitalism. Thus, a summit of some global companies held by the Harvard Business School called state capitalism and state support of “national champions”(private and state-owned) one of the greatest threats to market capitalism.2 On the other hand, governments, especially in developing countries, try to justify the rise of this form of capitalism as a means to compensate for imperfections of the market. Private companies, in  their turn, view the emergence of new state-owned enterprises as a threat, as the state can, in their opinion, use such companies to 1

Musacchio A., Lazzarini S.G. Op. cit. Bower J., Leonard H., Pain L. Capitalism at risk: rethinking the role of business. Boston: Harvard Business Review Press, 2011. 2

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massage the  market (e.g.,  by determining their pricing strategies or providing them privileged access to resources unavailable for private companies.) In fact, there is not enough information in Russian literature on these new forms of state intervention in economy: on various institutional mechanisms through which the state exercises control, the causes and forms of reincarnation of state capitalism and its impact on the efficiency of companies and corporate governance. Moreover, there are no conceptual approaches to the understanding of contemporary state capitalism and its various forms. Broadly speaking, state capitalism means a significant influence of the state on economy through majority or minority interest in companies, privileged loans to, or other support of, private companies. Obviously, these forms of state capitalism prevailing in the 21stcentury are fundamentally different from what existed in the second half of the 20th century. Back then, the intervention of the government into the affairs of enterprises took on the shape of a command economy and direct redistribution of strategic resources. By now, paradoxically, privatization and liberalization of the 1980s and the 1990s have helped create new hybrid forms of capitalism where the state influences investment decisions of private companies by owning their minority equity. Thus, after almost three decades of privatization, state capitalism is more alive than dead in developed and developing countries. A comprehensive review of state-owned enterprises in the OECD countries carried out at the end of the 2000s revealed that the state still controlled, to some extent, a large share of private companies. The relative weight of companies under state control from 1996 to 2000 remained practically unchanged in the OECD countries.1 Another OECD research notes a large share of state companies where the state holds a minority or a majority stake. In France and Italy such companies account for up to 25% of the Gross National Product, in  Denmark and Finland for 35–37, in Germany 54, in Poland 58% (see Table 6.2.)

1 Bortolotti B., Faccio M. Government control of privatized firms // The Review of Financial Stud- ies. 2009. Vol. 22. No. 8.

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Table 6.2. Role of state-owned enterprises with majority and minority interest held by the state in the national economy

Country

Number of State-owned enterprises

Share in country’s GDP

Austria

78

27

Canada

100

15

27

37

Finland

55

35

France

100

33

Germany

37

54

Italy

25

24

Denmark

Republic of Korea

30

13

Netherlands

44

36

26

23

1,189

58

Norway Poland Slovakia Spain

115

48

40

38

Sweden

58

12

UK

80

18

Source: OECD. Corporate Governance of State-Owned Enterprises: A Survey of OECD Countries. OECD. Paris, 2005.

The economic role of state-owned enterprises in developing countries is no less significant (see Table 6.3.) The table shows that the share of state companies in economy varies from 12% in Singapore to 30% in Brazil and 34% in Vietnam. Russia’s position as to this indicator (20%) is far from leading. State capitalism is split into two broad classes of state enterprises (see Table 6.4). The first form, which is closer to a traditional notion of state capitalism, encompasses enterprises and companies where the state acts as a majority owner and manager. In majority holding companies, the state usually controls the enterprise by appointing managers and a board of directors. Presidents of some companies are representatives of the relevant government departments. The state exerts control as a majority owner by using large companies as conglomerates controlling a wide range of companies or via state holding companies.

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Table 6.3. Role of state-owned enterprises in the economies of some developing countries

Country

Number of companies with majority state interest

Number of companies with minority state interest

Share of state enterprises in economy (% GNP)

Share of state enterprises in capitalization (%)

Brazil

247

397

30

34

China

167,000

N/A

29

70

India

1,144

404

13

4,014

Russia

8,114

1,418

20

40

20

N/A

12

40

Singapore Thailand Turkey Vietnam

60

N/A

26

21

774

67

14

N/A

3,344

1,740

34

N/A

Source: Musacchio A., Lazzarini S.G. Op. cit.

Table 6.4. Forms of State Capitalism State as majority investor

State as minority investor

State enterprises and companies

Partially privatized companies and enterprises (PPF)

State holding companies

Minority stakes under the management of state-owned holding companies (SOHC) Loans and shares of state banks and development banks Sovereign funds (SWF) Other state funds (pensions, insurance, etc.)

As Tables 6.2 and 6.3 show, in many developed and developing countries the state directly owns and controls a large number of companies. Typical examples are national oil companies. Such companies are either directly owned (e.g. Aramco in Saudi Arabia or Pemex in Mexico) or controlled by the state (ENI in Italy, Statoil in Norway, Sinopec in China, Petrobras in Brazil.) Shares of companies that are directly controlled but not fully owned by the state are, as a rule, listed at stock exchanges.

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Figure 6.3. Proven oil and gas reserves of world’s leading companies in 2010 (billion of barrels in oil equivalent) Lukoil

12

Rosneft

15

NNPC (Nigeria)

18

PetroChina

20

Exxon Mobil (USA) LIBIA NOC Turkmengaz ADNOC (UAE) NOC (Irak) Qatar Petroleum Gazprom Kuwait Petroleum

25 30 45 85 90 110 115 120

PDVSA (Venezuela) Saudi Aramco (Saudi Arabia) NIOC (Iran)

230 310 320

Source: The Economist.

In fact, at the core of the state sector are national oil companies: 13 of them control three-fourths of the global oil and gas reserves (see Fig. 6.3.) It should be noted that state oil companies change their shape, like companies in other industries. Thus, e.g. the Saudi corporation Aramco, controlling over 10% of global oil and gas reserves, is managed as efficiently as private companies like Exxon Mobil. The state reduced the company’s staff, engaged professional managers, outsourced ancillary or service operations and entered into alliances with international companies.1 More generally, national oil companies no longer sit at home, and their business is not restricted to pumping oil or gas alone. They are becoming more active abroad and seek to entrench themselves as energy suppliers, creating alliances with private sector professionals in order to gain access to new ideas, expertise, and technologies. As noted above, the state also uses pyramidal structures of property or state holding companies to manage its stakes in numerous state 1

Corporate statistics (www.saudiaramco.com/).

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companies. In China, the State Asset Supervision and Administration Commission (SASAC) acts as a holding company controlling a hundred independent and holding companies. In the UAE, state-controlled companies are under an “umbrella” of two large holding companies, Dubai World and Investment Corporation of Dubai. Besides, these holding structures also own the country’s sovereign funds, Istithmar World and Dubai International Capital. The state can also influence the economy of enterprises indirectly, as a minority stakeholder or lender of private companies. It is the state’s minority interest in corporations that became a more and more widelyspread phenomenon over the recent years. The state uses several channels to exercise such minority control: holding shares in privately privatized enterprises, holding minority interest in state holding companies, providing loans, and holding shares through state banks and development banks, sovereign funds, and other state funds. The state can act as a minority investor in several ways. One option is the so-called partially privatized firms (PPF.) Such companies emerge as a result of privatization programs whereby the state tries to retain a foothold in the privatized companies, often with a view to engage qualified managers from the private sector, preserving, at the same time, the privatized companies as “national champions” influenced by governmental industrial policy. Besides, the state can hold so-called “golden shares” in such companies, securing the right to veto certain investment decisions. Partially privatized companies also emerge when the state helps carry out mergers and acquisitions via a state stake or convert previously provided loans into minority shares to maintain non-profitable but strategically important private companies. The realm of state capitalism also encompasses a large number of companies, “national champions”, which are formally private but to a great extent directly or indirectly supported by the state. This is typical, for example, of China’s informational technology sector. For instance, China’s Lenovo passes itself off as a private company. However, its start capital was provided by the Chinese Academy of Sciences (which still owns a large interest in it), and the state is continuously aiding it, e.g. in the acquisition of IBM’s personal computer division in 2004 for US $ 1.25 billion Brazil’s Vale is also regarded as a private company, but the state views it as a national champion. The state, which holds its “golden

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shares”, forced its president Roger Agnelli, who opposed the state’s strategic plans, to step down. This long list of national champions in the state’s shadow can be continued by including China’s motor corporation Geely, the telecom corporation Huawei, the manufacturer of long-life consumer products Haier. Another form of indirect state control is minority holding of shares in state holding companies. In addition, the state creates pyramidal state holding companies to manage minority interests in firms from various sectors of economy. Typical examples of such holdings in developing countries are Malaysia’s Khazanach Nasional Berhard and China’s SASAC. In 2010, Khazanah Nasional Berhad owned stock in 52 companies, out of which it held minority positions in about 26 of them, in sectors ranging from financials, transportation, and utilities.1 State banks and development banks are widely used as sources of long-term capital for private companies, and it is not surprising that they participate in managing such companies. Despite the liberalization and privatization of the 1990s, which reduced the scale of the activity of development banks, not only did such banks remain in existence, but also intensified their business in many countries. In 2011, according to some estimates, there were 288 development banks in the world, mostly in South and East Asia (30% of all banks), Africa (25%), and the countries of Latin America (18%) (see. Table 6.5.) Thus, the Brazilian Development Bank (BNDES) acts both as a lender and a minority stakeholder in a number of companies through its dedicated investment subdivision, BNDESPAR. The role of the Brazilian Development Bank as a tool of state influence used in cooperation with local state investors such as pension funds of state enterprises is graphically illustrated by Vale, the world’s third mining company. When in 2009 Brazil’s president Luiz Da Silva publicly coerced Vale to invest into local metallurgical facilities and buy vessels produced in Brazil, this move was opposed by private investors. Vale had been partially privatized in 1997. However, the Brazilian Development Bank and state pension funds retained minority stakes which collectively exceeded 50% of the controlling stake. After public debates and criticism, private shareholders were forced to give in to the government’s pressure, and the main opponent, the company’s president Roger Agnelli, was dismissed by the board of directors. 1

Musacchio A., Lazzarini S.G. Op. cit.

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Table 6.5. Number of development banks in the world in 2011

Africa North America

Development agenciesa

General development banksb

3

26

Commercial banks Dedicated funding developdevelopment ment Total projectsd for regione banksc 21

20

70





1





13

23

22

27

85

Eurasia



8

2

9

19

South and East Asia

Europe



7

3

2

12

Latin America

4

29

17

1

51

Middle East



1

3

3

7

Oceania

1

5

5

4

15

Others



20

5

3

28

21

119

79

69

288

Total

Source: Lazzarini S., Musacchio A., Bandeira-de-Mello R., Marcon R. What do development banks do? Insper Working Paper, 2012. Notes. a Development agencies include: investment agencies, support centers that provide technical assistance to certain sectors of economy, but do not provide loans. b General development banks focus on providing loans or investing into shares of industrial or infrastructure projects. They also provide security for private financing of industrial or infrastructural companies. They can be interregional, like Inter-American Development Bank, or  national, like Korea Development Bank. c Dedicated development banks are financial institutions providing loans to agriculture, smaller and medium businesses or individuals for housing purposes if no mortgage loans are available from usual commercial banks. This category includes agricultural banks, such as Egypt’s The Principal Bank for Development and Agricultural Credit or the Philippines’ The Land Bank, or banks with a wider range of objectives, such as the National Housing Bank in India. d This group includes usual commercial banks having in their portfolios capital for re-financing specific sectors of economy guided by the recommendations of the government.

State capitalism is more than just about state companies. It is also about huge capital resources managed by sovereign wealth funds (SWF.) Such funds first appeared only ten years ago in oil-producing countries and Singapore. Currently, such funds are the largest pools of capitals. Norway’s Government Pension Fond controls assets worth $430 billion, Abu Dhabi Investment Authority $400 billion, China Investment Corporation $330 billion (see. Table 6.6.) In total, sovereign

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funds manage some $5 trillion, a figure that may grow to $10 trillion by the end of the decade. Sovereign funds break up into two categories: savings funds, which look for efficient investment tools, and development funds. For example, China Investment Corporation focuses on optimizing its financial asset portfolio, whereas Abu Dhabi Investment Authority focuses on funding regional economic development to prepare for an eventual exhaustion of oil reserves. In 2008, this fund created a special foundation dedicated to investments into high-technology companies, both domestic and foreign. The fund’s first large transaction was an alliance with the US microchip manufacturer Advanced Micro Device with a view to creating the largest semiconductor manufacturer, GlobalFoundries. The financial crisis of 2007–2008 dramatically reinforced the second group of funds. China Investment Corporation suddenly discovered that all its investments in US investment banks had evaporated. Sovereign funds of oil-producing countries significantly raised investments in research and development. Funds from Kuwait, Qatar, China, Kazakhstan, and Ireland reinforced the support of domestic financial institutions. Almost all funds began to participate in the management of companies in which they held shares more actively through their membership in boards of directors.1 According to expert estimates, the development of sovereign funds of developing countries will inevitably change the global financial system and accelerate a transition from a model dominated by two global centers, New York and London, to a model with multiple interrelated centers2, a process dramatically accelerated by the crisis of 2007–2008. Today, sovereign funds prefer dealing with one another directly, rather than through intermediaries from developed countries. In 2009, China Investment Сorporation and Qatar Investment Authority agreed to create a joint venture. In 2010, a consortium of nine funds, including Singapore’s State Investment Corporation, China Investment Corporation, and Abu Dhabi Investment Council, invested $1.8 billion in the Brazilian investment bank BTGP actual, which had spun off the Swiss bank UBS. With a swift development and spread of sovereign investment funds as an alternative tool for investing state savings in items with a high rate of return, minority stakes in public companies were increasingly often targeted by such funds. Most investments of such funds are intended for foreign 1 2

Sovereign Wealth Fund Institute. State Capitalism. Special Report // The Economist. 2012, January 21.

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investments into foreign assets. However, some funds invest in companies from their own countries. Thus, China Investment Corporation buys minority stakes of Chinese companies and banks. Singapore’s fund Temasek invests over 30% of its capital into local companies, such as Singapore Technologies Telemedia, Singapore Communications, Singapore Power, Singapore Airlines.1 Mubadala, the sovereign investment fund from AbuDhabi, actively invests in large project for the development of energy industry, telecommunications, healthcare, and other sectors.2 An overview of the largest sovereign investment funds is presented in Table 6.6. Table 6.6. The largest sovereign investment funds of the world by the amount of assets managed in 2010 ($ billion)

Fund

Country

Assets managed

Government Pension Fond

Norway

431

Abu Dhabi Investment Authority

UAE

395

China Investment Corporation

China

332

Kuwait Investment Authority

Kuwait

295

Government of Singapore Investment Corporation

Singapore

185

Temasek Holding

Singapore

133

National Wealth Fund

Russia

87

Qatar Investment Authority

Qatar

70

Libyan Investment Authority

Libya

64

Source: Musacchio, Aldo, and Emil Staykov. “Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?” Harvard Business School Case 712-022, October 2011.

The role of other state funds (pension, insurance, and others) is also quite strong in the contemporary economy. Thus, India’s state Life Insurance Corporation (LIC) acts as the largest holding company. It is the nations’ largest active investor on the stock market, with investments at the level of $50 billion (in 2011.) The state controls LIC and appoints its board of directors, as well as a team of managers. It often forces the company to invest in shares in state enterprises, especially when demand for securities issued by those enterprises is not high enough during IPOs. In 2011, the state used LIC to invest capitals in 1 2

Corporate statistics(www.Temasek.comfor May, 2012.) Corporate statistics(www.Mubadala.aefor May, 2012.)

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25 companies by acquiring minority stakes, which accounted for 4% of the country’s total capitalization. As of April of 2012, as part of partial privatization, LIC made investments in shares of such Indian companies as NPC, NMDC, SJVN, Engineers India, Power Grid Corporation, Shipping Corporation of India, PTC India Financial Services, ONGC.1 In Brazil, pension funds of state enterprises, whose management is influenced by the state, often also hold minority stakes in a number of public companies, often acting as active investors co-determining the strategy of firms and even initiating mergers with companies in which such funds hold ordinary shares. All examples above prove the existence of different forms of state capitalism in the contemporary economy. The state may participate in a coalition of owners to influence the behavior of companies or redistribute loans or shares, provided that the companies meet certain goals prescribed by the state.2

Transnationalization of state capitalism A recent UNCTAD study registers a trend towards active transnationalization of state-owned corporations, which becomes a significant element of global direct investment flows, a trend that has not been widely acknowledged by the expert community, especially in Russia. According to UNCTAD state-owned TNCs are defined as enterprises comprising parent enterprises and their foreign affiliates in which the government has a controlling interest (full, majority, or significant minority), whether or not listed on a stock exchange. Control is defined as a stake of 10 per cent or more of the voting power, or where the government is the largest single shareholder. 3 In 2010 there were at least 650 State-owned TNCs, with more than 8,500 foreign affiliates, operating around the globe. 19 of them are on the list of the world’s top 100 largest TNCs. The largest 15 state-owned TNC are well known brands (see. Table 6.7.) 1 Vaidyanathan S., Musacchio A. State Capitalism in India and its implications for investors. In: Harvard Business School Papers. May 2012. 2 Such hybrid forms of state capitalism should be distinguished from “private-public partnership” chiefly used for specific infrastructure project and from public services (water supply, transport, etc.) 3 World Investment Report 2011.UNCTAD, 2011. P.28.

Home economy

Italy

Brazil

France

United States

France

Germany

Italy

Venezuela, Bolivarian Rep. of

Norway

Eni SpA

Petroleo Brasileiro SA

GDF Suez

General Motors Co

EDF SA

Deutsche Telekom AG

Enel SpA

Petróleos de Venezuela SA

Statoil ASA

China National Petroleum China Corporation Volkswagen Germany Group

Corporation

67.0

100.0

34.7

31.7

84.7

32.0

36.4

39.8

74

Petroleum expl./ ref./ distr.

17

33

44

86 75

53

40

55

68

29

78

105

5

Sales Foreign

90

92

105

111

116

117

146

178

Sales Total

Petroleum expl./ ref./ distr.

Utilities (Electricity, gas and water) Telecommunications Electricity, gas and water

Motor vehicles

Petroleum expl./ ref./ distr. Petroleum expl./ ref./ distr. Utilities (Electricity, gas and water)

Motor Vehicles

20.0

30.3

Petroleum expl./ ref./ distr.

100.0

Industryc

97

150

231

184

348

136

247

200

169

255

325

Assets Total

43

12

157

113

134

76

146

15

102

156

12

29

92

81

258

169

217

197

77

78

369

1585

11

5

43

108

58

114

96

8

40

196

30

34.4

19.0

57.2

54.1

39.0

53.7

56.5

14.2

59.2

61.9

2.7

Employ- Employ- TNI e Assets ment ment (per Foreign Total Foreignd cent)

162

Government stakeb

Table 6.7. The top 30 non-financial State-owned TNCs, ranked by total sales, 2009 a (millions of dollars and number of employees)

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Russian Federation

100.0

100.0

China

China

CITIC Group China Ocean Shipping (Group) Company

Italy

18.3

France

Renault SA

Finmeccanica Spa

10.7

Veolia EnviFrance ronnement SA

25

27

28

Transport and storage Electricity, gas and water Machinery and equipment

31

47

48

60

63

64

66

67

68

Diversified

Motor Vehicles

Aircraft Utilities (Electricity, gas and water)

Petroleum expl./ ref./ distr.

Petroleum and natural gas Transport and storage Food, beverages and tobacco Telecommunications

Industryc

Sales Total

20

22

18

11

29

29

54

28

31

29

44

38

Sales Foreign

44

83

36

315

92

72

116

126

133

42

50

79

Assets Total

29

72

28

44

30

52

72

34

73

30

39

24

Assets Foreign

73

40

72

125

121

313

120

41

167

50

425

143

32

34

4

25

66

212

75

8

64

25

258

22

62.7

84.9

49.7

23.2

50.2

66.9

71.9

30.7

47.0

55.4

68.3

34.0

Employ- Employ- TNI e ment ment (per Total Foreignd cent)

Chapter 6. State Companies and Development Banks…

30.2

100.0

22.4

France

Sweden

100

Malaysia

Vatennfall AB

26.7

50

30.5

13.4

Government stakeb

France

France Telecom SA Petronas – Petroliam Nasional Bhd EADS NV

Japan Tobacco Japan

Deutsche Post Germany AG

Lukoil OAO

Corporation

Home economy

Table 6.7. The top 30 non-financial State-owned TNCs, ranked by total sales, 2009 a (millions of dollars and number of employees) (Continued)

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India

Tata Steel Ltd

49.2

Zain

100.0

Telecommunications Telecommunications Utilities (Electricity, gas and water)

Telecommunications

3

5

7 5

7

8

10

16

20

Sales Foreign

8

12

14

22

24

Sales Total

25

23

20

27

37

24

102

Assets Total

14

18

19

23

32

16

39

Assets Foreign

4

2

13

23

29

81

60

3

1

12

10

20

47

13

67.2

78.0

92.1

64.3

73.3

65.2

48.2

Employ- Employ- TNI e ment ment (per Total Foreignd cent)

Notes. a All data are based on the companies’ annual reports unless otherwise stated. b Based on most recent data available from Thomson Worldscope (retrieved 31 May 2011). c Industry classification for companies follows the United States Standard Industrial Classification as used by the United States Securities and Exchange Commission (SEC). d In a number of cases foreign employment data were calculated by applying the share of foreign employment in total employment of the previus year to total employment of 2009.

Source: UNCTAD.

Abu Dhabi NaUnited Arab tional Energy Emirates Co PJSC

Qatar Telecom Qatar

55.0

54.4

Kuwait

Industryc

5.5 Mining and (12 golden quarrying shares) Metal and 12.9 metal products Telecommuni37.3 cations

Singapore Telecommuni- Singapore cations Ltd

TeliaSonera AB Sweden

Brazil

Vale SA

Corporation

Government stakeb

164

Home economy

Table 6.7. The top 30 non-financial State-owned TNCs, ranked by total sales, 2009 a (millions of dollars and number of employees) (Concluded)

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Figure 6.4. Ownership structure of state-owned TNC, 2011 (per cent of state-owned TNCs by size of governmental stake) 44%

32%

14% 10%

< 10%a

10–50%

51–100%b

100%

Source: UNCTAD. Notes. a The State is the largest shareholder or owns golden shares. b Includes those State-owned TNCs where the government stake is unknown, but is assumed to be majority-owned.

State control over such companies varies from full control to significant influence. In about 44% of State-owned TNCs, the state is a majority stakeholder (see. Fig. 6.4.) TNI, the Transnationality Index, is calculated as the average of the following three ratios: foreign assets to total assets, foreign sales to total sales and foreign employment to total employment. This includes company fully owned by the state that are, in essence, extensions of government departments, as well as full-fledged listed companies in which the state holds over 50% of voting shares. For 42 per cent of identified State-owned TNCs, the government had a stake of less than 50 per cent. Of these, 10 per cent had a stake of less than 10 per cent. For these firms the government is often the largest of the minority stakeholders, or holds so-called “golden shares” and therefore exerts a significant or preponderant influence on the composition of the board of directors and the management of the enterprise. Geographically, 56 per cent of State-owned TNCs worldwide are from developing and transition economies (see. Table 6.8.) South Africa, with 54 TNC is the leader. It is followed by China (50) and Malaysia (45 TNCs). Russia is deep below with only 14 TNCs  – fewer than in the United Arab Emirates, Kuwait, and India. This makes

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fears around an alleged excessive role of the state in the Russian economy preposterous. In fact, Russia has fewer state-owned enterprises  (SOE) of this kind than most European countries: Sweden  (18), Finland (21), France  (32), and Denmark (36). This point applies only to  TNCs. The number of active state companies is greater by an order of magnitude. Thus, there are 900 such companies in France and 154,000 in China.1 Table 6.8. Distribution of state-owned TNCs by home region/economy, 2010 Country Developed countries

Number

Share

285

43.6

Denmark

36

5.5

France

32

4.9

Norway

27

4.1

Finland

21

3.2

Germany

18

2.8

Sweden

18

2.8

Poland

17

2.6

Switzerland

11

1.7

4

0.6

Japan United States Others Developing economies

3

0.5

98

15.0

345

52.8

South Africa

54

8.3

China

50

7.7

Malaysia

45

6.9

United Arab Emirates

21

3.2

India

20

3.1

Kuwait

19

2.9

Russian Federation

14

2.1

Iran, Islamic Republic of

10

1.5

9

1.4

Singapore Brazil

9

1.4

Others

117

17.9

World

653

100.0

1

The Size and Composition of the SOE in OECD Countries.OECD. Paris, 2011.

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State-owned TNCs tend to be most active in financial services and industries that are capitalintensive, require monopolistic positions to gain the necessary economies of scale, or are deemed to be of strong strategic interest to the country. (see Table 6.9.) Whereas a significant role of the state in heavy industry and infrastructure is not surprising, a leadership of the financial sector in terms of the number of state-owned TNCs may be due to the fact that this sector is viewed as strategic in many countries. It is also worth noting that state enterprises in such “free market industries” as trade and realty outnumber those in motor industry, metallurgy, and chemistry. Table 6.9. Distribution of state-owned TNCs by sector/industry, 2010 Sector/industry Total Mining, quarrying and petroleum Manufacturing, total

Number

Share

653

100.0

48

7.4

142

21.7

Motor vehicles and other transport equipment

27

4.1

Metals and metal products

20

3.1

Chemicals and chemical products

20

3.1

Food, beverages and tobacco

19

2.9

Wood and wood products

12

1.8

Coke, petroleum and nuclear fuel

11

1.7

455

69.7

Services, total Finance

126

19.3

Transport, storage and communications

105

16.1

Electricity, gas and water

63

9.6

Trade

42

6.4

Real estate activities

41

6.2

Construction

20

3.1

Business services

18

2.8

Insurance

17

2.6

Other

64

9.8

In total, almost 70% of the existing State-owned TNCs are active in the industry of services, the symbol of post-industrial society, whereas 22% of them work in the processing industry and 8.6% in the mining industry(including oil production.)

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Why State Capitalism? A question that naturally arises at this point is: why does state capitalism still exist and even spread? There are several explanations. First of  all, state capitalism is an important tool that helps correct “market failures”, which make value-adding investments suboptimal. Two sources of such “falures” are currently widely known. One is related to capital market. Countries with a poorly developed financial market have an acute deficit of private investments, especially for long-term projects with a long-term return on investment.1 The state can act as a lender or a venture investor where private financing sources are not sufficient. State banks and development banks can soften credit restrictions typical in the private sector and help implement projects with a positive net discounted value that would not be implemented otherwise. Moreover, in countries with a significant deficit of capitals state funding may compensate for lacking private capital and stimulate businesses to develop new or upgrade existing industries.2 The second source of market “failure” has to do with coordination issues. Thus, the Nobel laureate Paul Krugman argues that investments in an industrial enterprise are more efficient from the point of view of a private investor where cheap raw materials and an efficient transport infrastructure are available.3 Stimulation of economic growth requires that feed-forward and feedback relations be constantly created in added-value chains. In this logic, the stimulation of coordinated, mutually complementary investments depends on an initial strong push from the state. Coordination issues are aggravated in underdeveloped financial markets. If sufficient private capital were available, the state could stimulate the creation of new industries simply by differentiating tax regimes and enforcing temporary market protections. Since, however, private capital is lacking, direct or indirect investment of state capital stimulates mutually complementary investments. Thus, state enter1 Levin R. Finance and Growth: theory and evidence // Handbook of Economic Growth. 2005. Vol. 1. 2 Bruck N. The role of development banks in the Twenty-First Century // Journal of Emerging Markets.1998. No. 3; Aghion А.de. Development banking. Journal of Development Economics, 1999. No. 5. 3 Krugman P. The current case for industrial policy // Salvatores D. (Ed.). Protectionism and world welfare. Cambridge: Cambridge University Press, 1993.

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prises and investments were a key instrument of Brazil’s industrialization in the context of insufficient private capital. State enterprises were viewed as a shortcut to industrialization in absence of sufficient funding of the private sector and the reluctance to admit transnational corporations into certain strategic sectors of economy.1 An underdeveloped stock market impedes access to capital and corporate information required to monitor their performance and the efficiency of their management. A stock market with active investors and a high liquidity reduces agency costs, making managers apprehensive of possible mergers and acquisitions. An underdeveloped stock market reduces the probability of acquisitions and provokes conflicts of management. Thus, state enterprises with a majority interest held by the state usually dominate the economy at the initial phase of an emerging stock market. Moreover, a number of studies (in particular, on India) show that private companies are not necessarily more efficient than state-owned ones in countries with a backwards stock market. The same applies to privatization.2 The state, which is not burdened by the goal of maximizing equity value, can set long-term development goals, which are irrelevant for private investors, who seek short-term profit and income. Private investors can reduce their stock or even withdraw from a firm if they are not satisfied by short-term income. Yet, it is only in a long run that many projects generate return on investment. This requires a more “patient” capital capable of withstanding market turbulence. In such cases, the state acts as a financial partner maintaining the necessary project with a long pay-off period.3 Experts emphasize that what makes sovereign investment funds special is exactly the availability of “patient” capitals. These funds are free of dog-eat-dog attitudes and can easily withstand market panic.4 1 Trebat T. Brazil’s state-owned enterprises: a case study of the state as entrepreneur. Cambridge: Cambridge University Press, 1983. 2 Sarkar J., Sarkar S., Bhaumik S. Does ownership always matter? Evidence from the Indian bank industry // Journal of Comparative Economics. 1998. Vol. 26; Bortolotti B., Fantini M., Siniscalco D. Privatization around the world: evidence from panel data. In: Journal of Public Economics. 2004. Vol. 88. No. 1–2. 3 Kaldor N. Public or private enterprise – the Issue to be considered. In: Baumol W. (Ed.). Public and private enterprises in a mixed economy. N.Y., 1980; McDermott G. Embedded politics: industrial networks and institutional change in postcommunism. Michigan University Press, 2003. 4 Musacchio A., Stayov E. Op. cit.

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The 1990s confronted state companies with new challenges. Trade protectionism faded away after most countries joined the General Agreement on Tariffs and Trade (GATT) and later the WTO. Massive state subsidizing was discontinued, especially in countries where the World Bank’s aid was conditional upon the requirement to cut state spending and ensure a balanced budget. Moreover, new opportunities of employment in the private sector opened up for successful managers of state companies, and the state companies themselves became more dependent on stock markets for fund-raising. Ironically, economic difficulties favored state companies. Reduction of state protectionism revealed inefficiency of management. At the same time, the threat of privatization opened up a new era of financial accounting. The state was now forced to thoroughly substantiate its refusal to privatize an enterprise. A choice in favor of state control is subject to close public scrutiny and review. A concept of “new state management” emerged. It focused on the use of best practices originated in the management of the private sector by state bureaucrats. In other words, the management of state enterprises has changed beyond recognition over the last two decades. Those changes passed unnoticed, but today’s leading state enterprises are quite competitive, although perhaps less efficient as similar private companies. Notable new characteristics of state enterprises are: • issue of shares on stock markets with two goals: raise additional funding and subject the management to control by way of daily assessment of market valuation of shares; • independent audit and board members; • reliable limitations on state subsidies; • engagement of staff from leading universities; • incentives for managerial staff. Perhaps the most significant new phenomenon in the activities of state enterprises is a principled improvement of corporate governance that has occurred over the past fifteen years. Many state companies changed their charters to improve internal governance and control, include independent directors in boards of directors and work out measures to incentivize managers’ efficiency. Even the US government, which became the largest shareholder of the motor giant General Motors, forced it to sell all airplanes allocated

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to top managers. A ceiling on remuneration and bonuses for leading top managers of GM was also determined by the US government. Even the former CEO of the corporation Daniel Akerson acknowledged that “they (the government) turned out to be good managers of taxpayers’ money. They are into how we are doing, but no more than other institutional investors are.”1 State companies actively spawn a more efficient and advanced generation of managers, professionals trained at the world’s best business schools with an experience of work abroad. For instance, China’s largest metals company Baosteel has sent its leading managers for MBA training to the USA over a decade. It also invites professionals from the Swiss IMD to hold specialized training courses in China. China’s oil company CNPC has also sent its employees to the USA for business training since 1999. This new generation of managers changes the style of governance in the entire state sector. One of the most interesting arguments for state capitalism is that it helps developing countries borrow knowledge and experience from developing countries easier. National champions are the most efficient educating mechanisms. The education is carried out, among others, through their listing on foreign stock markets (which provide the services of the best known analysts and bankers of the world), as well as through acquisitions of foreign companies (which may transfer unique knowledge and technologies as well.) China’s motor company Geely International gained access to the most efficient production technologies by purchasing Volvo for $1.8 billion Shanghai Electric Group increased its engineering knowledge and competences by acquiring the US Goss International for $1.5 billion and creating a joint venture with Siemens and Mitsubishi. Saudi Basic Industries became much more cosmopolitan after it acquired a dozen companies across the world. Managers of state companies like to say that they take the best of the two worlds, an opportunity to plan future and the ability to react quickly to fast changing tastes of consumers. Foreign experts, such as those from the world’s leading consulting company Booz & Company, agree that the new state capitalism is much more flexible than it seems at first sight.2 1 2

Vedomosti. July 10, 2012. State Capitalism. Special Report // The Economist. 2012, January 21.

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Even a study by the US National Intelligence Council notes that state capitalism is efficient for state mobilization of means and resources required for the development of key industries. New powers will increasingly use this tool to secure sustainable economic development. This will become even more efficient by 2025, the report states, as deficit of resources grows and competition for them sharpens.1 The development of contemporary state capitalism presents a paradox. State enterprises become richer and stronger even when the state sector shrinks, and the state entrenches itself at the vantage grounds of economy even when the private sector grows and develops. Concentration of economic power within a circle of state enterprises has been inexorably gaining momentum over the past decade. Thus, for example, in China, the value of the assets owned by 120 largest state companies grew from $360 billion in 2002 to $3 trillion in 2010, even though their share in the country’s GNP dropped. Moreover, in 2009, when the crisis in a full swing, 85% of all bank loans (worth $1.4 trillion) was provided to state companies. Simultaneously, the state is becoming savvier as a proprietor. Only a few state-owned enterprises still directly report to ministers. In most countries, the state prefers controlling state companies through shareholding. It is becoming a more prominent shareholder in all developing countries, from China to Thailand and from Malaysia to Saudi Arabia. Sometimes the state owns all shares, especially in oil companies such as Malaysia’s Petronas, or carriers like China’s Ocean Shipping Company. However, it is increasingly often the case that the state tries to dilute its stock, controlling companies through a minority interest or “golden shares.” State companies have become more efficient and productive due to a well-designed and efficient restructuring. In China, the rate of return on assets of state enterprises grew from 0.7% in 1998 to 6.3% in 2006. They became more transnational, when such companies as Baosteel and Shanghai Electric that had previously exclusively served the domestic market entered a global market. These three key trends: more sophisticated methods of control, a more efficient use of assets, and swift globalization are acting in parallel. Thus, today’s state capitalism differs strongly from its previous forms. First, it develops against a wider background: China alone is the 1 Global Trends 2025: A Transformed World. National Intelligence Council. Washington D.C., 2008.

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home to one-fifth of the Earth’s population. Second, it develops much faster. Third, it has much more sophisticated and efficient instruments at its disposal. Finally, state capitalism is much better at using capitalist tools to attain its goals. It is, of course, an exaggeration to claim that all state enterprises are efficient, or that the state’s participation in the capital of private banks and companies is always the best option. What can be stated is that the state’s return to economy will not be a repetition of a previous epoch, as the economic environment has changed, and many state enterprises have learned the lessons of the past. Rather than a struggle between capitalism and socialism, the decisive battle of the 21st century will likely be a competition of different models and varieties of capitalism.

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Chapter 7

“NONCONVENTIONAL HYDGROCARBON REVOLUTION”: IMPACT ON OIL AND NATURAL GAS MARKETS Stanislav V. Zhukov, Oksana B. Reznikova, Iskander A. Seyfulmulyukov The second half of the 2000s saw a “non-conventional hydrocarbon revolution” unfolding in the US oil and gas complex. The two key pillars of the revolution were a growth of shale gas production and a growth of light oil and gas condensate extraction. As a result, the United States has become the world’s largest producer of oil and gas since 2009. By  2020, growing oil and gas condensate extraction from lowpermeable strata may make the USA the world’s number one producer of liquid fuels, fundamentally redrawing the world’s energy map. This chapter will focus on three themes: an analysis of the phenomena of the shale gas and oil revolution, as well as its impact on the regional gas markets and the global oil market.

Shale Gas Shale gas, tight gas, and methane from coal beds are different kinds of non-conventional gas. Non-conventional gas is deposited in specific geologic formations that impede free flow of gas, its accumulation in collectors or release to the atmosphere. Low permeability of the rock renders commercially feasible production of non-conventional gas impossible without special technologies. Although the first gas well in the USA was drilled in 1821, largescale extraction using modern methods did not begin until the early 2000s. An explosive growth of extraction has been observed since the mid-2000s. Between 2005 and 2011, gas production grew 1.3 times, to 651 billion cubic meters. Currently, almost all shale gas in the world is produced in the USA and, to a very small extent, in Canada.

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What qualifies this breakthrough in non-conventional hydrocarbon extraction as a revolution are primarily its scale, the depth and intensity of its penetration of economic life. Oil and gas companies have acquired some ten percent of the US territory (excluding Alaska, Hawaii and island territories) on long-term lease for gas drilling. This exceeds the total area of land used for the cultivation of corn, wheat, and soy beans. The “shale revolution” has been promoted by four factors: first, new technologies and methods of extraction allowing the commercialization of previously inaccessible reserves; second, the exemption of new methods of oil and gas extraction from environmental law; third, simplified methods of assessment and entry of hydrocarbon reserves on corporate balances; fourth, high oil and energy resource prices, as well as a highly-developed financial market. A package of cutting-edge technologies used in shale gas extraction includes combined vertical and horizontal drilling, multi-stage fracking, downhole remote measurement, 3-dimensional seismic modeling, specialized software, etc. The core of this package is fracking by means of pumping pressurized liquor consisting of water (90%), sand, ceramic or other solid materials (approx. 9.5%), and toxic chemical agents (acids, salts, isopropene, etc.) into a horizontal well (up to several kilometers.) The US oil and gas sector is marked by high competition, including hundreds of service companies possessing specialized equipment and expertise in providing an extremely wide range of services to extracting companies. A developed market of services, leasing, and engineering services can make the most advanced technologies available for all market players almost instantaneously. High oil and gas prices (until 2008) resulted in a high rate of return for oil and gas companies, enabling them to dramatically raise investments in the expansion of production. Besides, resources for development were easy to obtain from a booming financial market prior to the financial and economic crisis. The “shale revolution” also crucially accelerated by the exemption of fracking operations from the key federal acts, including the Safe Drinking Water Act (adopted in 1974), the Clean Water Act (adopted in 1972), the National Environment Policy Act (1969), the Resource Conservation and Recovery Act (1976), the Clean Air Act (1970), the Emergency Planning and Community Right-to-Know Act (1986), etc.

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Nevertheless, environmental costs related to the extraction of shale hydrocarbons are rather high. Some studies show that if methane emissions during fracking are fully taken into account, greenhouse gas emissions from shale gas extraction are higher than those generated by the notoriously environment-unfriendly coal extraction. Besides, shale gas production is highly water-consuming: drilling a single well requires 4,000 to 20,000 cubic meters of water. Water requirements of shale gas extraction exceed those of conventional gas extraction by two to three orders of magnitude. Part of used water remains underground as toxic liquor, and a considerable quantity is accumulated on the surface as muddy industrial effluents. Despite amassed evidence of negative environmental impact of shale hydrocarbon extraction, which the oil and gas extracting industry and the lobbyists that serve its interests seek to undermine, a stricter environmental control in this sector is extremely hard to restore. The “shale revolution” has become extremely important macroeconomically for the US economy in the context of its weak recovery and high unemployment. According to IHS Global Insight estimates, the total gross added value of shale gas projects will be worth $200 billion by 2015, with their total payments to budgets of various levels at approximately $50 billion. Especially important is that fact that shale extraction has become the largest generator of jobs in the US economy, which is not confined to states where gas is extracted. In 2010, shale gas reserve development projects employed approx. One million people, and the number of jobs will grow to 1.5 million by 2015, with approximately one-fifth of those 1.5 million jobs created in non-gas producing states. Finally, the commercialization of shale and other non-conventional hydrocarbons was strongly pushed forward by the decision of the US Securities and Exchange Commission of 2008 to simplify the rules for the entry of hydrocarbon reserves on corporate balances of oil and gas companies. The key change lay in altering requirements to methods of assessment of such reserves by recognizing probabilistic, rather than normative, assessment methods. This is particularly important for nonconventional hydrocarbons, as more or less reliable methods of their assessment are yet to be developed. This change ultimately facilitated the entry of considerable reserves of non-conventional gas and oil on balance and, given the fact that US oil and gas companies are public, helped maintain or enhance their market capitalization and expand

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their opportunities to raise resources on the stock and other financial markets. All authoritative energy forecasts assume that the US shale revolution will continue. Thus, the baseline scenario of a long-term forecast by the Environment Information Administration of the US Energy Department of 2012 estimates that shale gas production will exceed 300 billion cubic meters by 2020 and 400 billion cubic meters by 2035 (see Fig. 7.1.), with the share of shale gas in the total natural gas output exceeding 50% by the end of that period. Scenarios presented by different energy forecasts exhibit a strong variation due to highly uncertain assumptions. However, even the most pessimist scenario of a low economic growth predicts that shale gas extraction will exceed 270 billion cubic meters in 2035 (see Fig. 7.2.) An accelerated technological development scenario envisages shale gas production growth to 575 billion cubic meters by 2035, which will almost equal the entire natural gas extraction in the USA in 2010. Such optimistic estimates are not shared by everyone. Detailed studies of thousands of wells at shale fields of Barnett (Texas), Fayetteville (Arkansas), and Haynesville (Louisiana), where extraction of gas as continued for several years, and projects have matured, show that production of shale gas at a new site is profitable at a price at least Figure 7.1. US shale gas production forecast until 2035 (baseline scenario) 500

60

400

50 40

300 30 200 20 100

10

0

0 2009 actual

2010 actual

2015

2020

2025

2030

2035

Share in total production, % (right scale) Production, billion cubic meters (left scale)

Sources: Energy Information Administration. Annual Energy Outlook 2012; authors’ calculations.

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Figure 7.2. US shale gas production forecast until 2035 in different scenarios of economic and energy growth (billion cubic meters) 700 600 500 400 300 200 100 0

2010 actual Low economic growth High economic growth

2015

2025

2035

Baseline High technology growth rates

Sources: Energy Information Administration. Annual Energy Outlook 2012; authors’ calculations.

$175–210 per 1,000 cubic meters. With administrative, operating, and other costs included, commercially feasible production at mature sites, where new wells need to be drilled to maintain quickly falling output, is only possible at a gas price of at least $280–320 per 1,000 cubic meters. If these assessments are correct, shale gas extraction has been unprofitable for many companies since 2009 (see Fig.  7.3.) Moreover, if the baseline scenario of the price forecast of the US Energy Department’s Energy Information Administration is realized, shale gas production will remain non-profitable until the early 2020s at new project sites and until the end of the forecast period at mature projects. This, at first glance, thwarts optimistic views on future shale gas dynamics: producers cannot extract gas to their own detriment. However, there is a rather traditional way to resolve this issue: after a while, US natural gas prices will raise to a level making its production profitable. Yet, more complex scenarios are more likely to realize. Since the 2000s, large oil and gas companies have massively entered the shale gas sector. Such giants as Exxon Mobil, Royal Dutch Shell, Chevron, BP, Total, etc. incorporate gas extraction into the overall business structure. While incurring losses from shale gas operations, vertically

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Figure 7.3. US natural price dynamics in Henry Hub and break-even price levels of shale gas production projects in 2005–2035 (US dollars per 1,000 cubic meters) 400 Actual

Energy Information Forecast

350 Break-even level for mature projects 300

250 Break-even level for new projects 200

150

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

100

Sources: Energy Information Administration; calculations by the authors.

integrated companies gain from other segments generating added value, for instance, gas liquids often extracted in parallel to shale gas. Prices of those raw materials used in oil-processing industry to produce oil products are high enough not only to set off gas segment losses, but also to make extraction as a whole profitable. Still more important is the fact that shale gas is a valuable raw material for gas chemistry industry. Leading gas and oil companies have already announced plans to build large facilities to produce polypropylene, plastics, and other chemical products. By using own inexpensive raw materials, vertically integrated companies will shift profit centers from gas extraction to their gas chemistry subdivisions.

US Shale Gas Revolution Globalization Prospects The US shale oil revolution redrew the previous forecasts of future dynamics of gas and energy markets, primarily in North America. Three circumstances are particularly definitive for the outlooks of the US gas market. Firstly, the US domestic natural gas prices have

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noticeably declined both absolutely and relatively and settled at low levels. As  noted previously, the US Energy Department expects gas prices on the US markets to grow rather slowly for the next twenty-five years. Such price dynamics heat up competition of fuels, with natural gas ousting coal from power generation faster than expected. Secondly, the US non-conventional gas reserves, especially those of shale gas, and those of conventional gas are roughly equal (see Table  7.1.) This means that the USA will be able to maintain the current level of gas extraction not for 13 years but twice longer. Canada, whose non-conventional gas reserves exceed those of conventional gas tenfold, will be able to maintain gas consumption at the current level for over a hundred years. Table 7.1. Natural gas reserves in the USA and Canada (trillions of cubic meters) USA

Canada

trln cub. m

%

Conventional gas

37

50

2

10

Non-conventional gas

37

50

18

90

Shale gas

24

32

11

55

Tight gas

10

14

2

10

3

4

5

25

74

100

20

100

Methane from coal beds Total

trln cub.m

%

Sources: International Energy Agency; BP.

Third, growth of own gas production reduces US import requirements, and low domestic natural gas prices make its export projects more attractive. In the 1990s and the second half of the 2000s, a considerable number of liquefied natural gas (LNG) projects with a view to exports to the US market were launched across the world. Since, however, a booming US shale gas production in the US made those supplies irrelevant over the recent years, LNG suppliers turned to the European and the Asian markets. Markets have absorbed those supplies so far due to a skyrocketing gas demand in the PRC and a heightened demand in Japan, which tries to use LNG to replace nuclear power generation after the Fukushima accident.

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Nevertheless, competition has got somewhat exacerbated among gas exporters on the European market. Globalization of the US shale gas revolution may exert much stronger impact on regional gas markets.

Shale Gas Production Prospects Outside the USA A few countries of Europe, Asia, and Latin America are likely to possess even larger shale gas reserves than the USA and Canada. This, in principle, creates objective prerequisites for shale gas development. Notably, large potential shale gas reserves are available in countries that do not have significant conventional gas reserves. A globalization of the US shale gas revolution may dramatically change the global gas production map. Shale hydrocarbon development is complicated in Europe due to a high density and comparatively even distribution of population and absence of underpopulated regions that exist in the USA. In contrast to the USA, where land owners or tenants own the title to discovered underground reserves of natural resources, in European countries the state is the exclusive owner of the interiors. Apprehensions are also stronger in Europe that fracking with the use of liquor containing toxic substances may pollute sources of drinking water and release heavy metals. Environmental considerations backed up the ban of shale gas extraction by means of fracking in France and Bulgaria, in both countries accompanied by a revocation of previously issued drilling licenses. Germany. Germany owns Europe’s largest reserves of shale gas. As a large consumer of natural gas, some 90% of which is imported, Germany is, in principle, strongly interested in developing its own reserves of non-conventional hydrocarbons. Not surprisingly, Germany is the first European country where foreign and domestic companies have carried intense research in the productivity of shale formation since the 2000s. After the decision of 2011 to discontinue nuclear power generation and close down all active nuclear reactors by 2022, Germany’s interest in developing own gas extraction grew even more. Test shale gas boring is carried out in North Rhine-Westphalia, Low Saxony, Saxony-Anhalt, Thuringia, and Baden-Württemberg. Prospect-

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ing is carried out by several large foreign and domestic companies. Exxon Mobil alone has acquired 1.3 million acres of land in Germany to develop shale hydrocarbon reserves. This process is impeded by environmental risks. In 2011, Exxon Mobil and other foreign companies temporarily suspended the use of fracking on their licensed sites in Germany until that technique was proven to be environmental safe. If such proofs are obtained, Germany is likely to become Europe’s first country to start mass production of shale gas, and such production can be rolled out in a short time. UK. In December 2012, the UK lifted a temporary ban of drilling introduced for 18 months in 2011. According to estimates, which, however stem from stakeholders and, therefore, may be inaccurate, a 10% extraction of discovered gas reserves may enable the UK to meet onefourth of its gas consumption requirements for 40 years, and a 18% extraction, like in the USA, for 74 years. According to Wood Mackenzie experts, prospects of commercial shale gas extraction in the UK remain rather uncertain. No exact assessment of reserves and forecasts of the sector’s development will be possible until a very large number of wells have been drilled. The governmental financial aid offered to producers will not suffice. Gas production will break even at a price of $320 per 1,000 cubic meters. Shale gas will not exert a palpable impact on the UK gas market until 2025. Poland. East European countries count on shale gas extraction for reducing their trade balance deficit and weakening their dependency on Russian gas imports whose price is tied to oil and oil product prices. Poland has the most aggressive plans in the shale gas sector. There is still high uncertainty as to the reserves of non-conventional gas in Poland. According to estimates by the US Energy Department obtained by extrapolating US reserve data, Poland’s technically recoverable shale gas reserves equal 5.3 trillion cubic meters. The country carried out active probe boring for shale gas in the 1950–1980s. Based on archive data, Poland’s Geology Institute estimated extractable shale gas reserves at 0.35–0.77 trillion cubic meters. The economy of shale gas production remains unclear, as well: while in the US drilling a 2,000  meter long horizontal well costs approximately $4 million, the costs in Poland are at $11 million Alongside with Germany, Poland is the only continental European country to have carried out prospecting works for shale oil. Since 2008,

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when shale oil became a priority for Poland’s government, over a hundred licenses have been issued for the prospecting of non-conventional hydrocarbons. Dozens of domestic and foreign companies are engaged in shale gas sector projects. Poland laid great hopes on Exxon Mobil projects. However, in July 2012 the US giant, noting a low inflow of gas to the wells drilled, withdrew from Polish shale gas projects. Exxon Mobil’s decision did not impact the plans of other investors: Chevron, Conoco Phillips, Eni, Marathon, and Talisman have continued their work. Poland’s government is trying to speed up the development of shale projects by creating a special authority that will work as a “one stop shop” and facilitate the investors’ work. Ukraine. Ukraine is belatedly trying to pursue the same course as Poland. In May 2012, Royal Dutch Shell and Chevron won tenders for shale gas prospecting in two areas in the country’s eastern and western territories, with total reserves estimated from 2.8 to 3.5 trillion cubic meters by the national geological service. Eni and the British Cadogan Petroleum acquired 50.01% shares and the status of operator in the Westgas invest consortium, which holds licenses for nine shale formations in the West of Ukraine with a total area of 3,800 square km. After stamping down the opposition of local authorities, Royal Dutch Shell signed a draft production sharing agreement with the Ukrainian government on January 25, 2013 for 50 years with a view to the development of shale deposits in eastern regions. The Ukrainian party believes that shale gas production may reach 8-10 billion cubic meters in ten years and enter a peak plateau of some 20 billion cubic meters by 2025–2030. Even under the most favorable scenario, industrial scale extraction of shale oil will not begin in Ukraine until 2018-2019. Asia-Pacific. The PRC is the only AP country to have put shale gas project to practice. Other countries, which may own large shale gas reserves, either have not yet crystallized their governmental non-conventional hydrocarbon development policy (India, Indonesia, Pakistan) or prefer to pay more attention to projects of methane production from coal beds (Australia). PRC. Whether or not the shale gas revolution will become global crucially depends on China. According to the US Energy Information Administration estimates obtained by mechanical extrapolation of data on US geological formations, China is the world’s richest with its 36

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trillion cubic meter shale gas reserves. The PRC authorities estimate potential shale gas resources at 134 trillion cubic meters, 25 trillion of which are recoverable. Since prospecting of non-conventional gas reserves is at the earliest phase, it is currently hard to determine the extent to which these estimates are realistic. China’s largest companies: CNPC, Sinopec, CNOOC, and Yanchang Petroleum did not begin shale gas development until the second half of the 2000s, and have not yet come up with their own extraction technologies. As of mid-2012, no more than 70–80 test wells were drilled in China for shale gas. In 2011, the PRC investments into this sector within its territory were a meager $222 million, chiefly provided by state-owned companies. At the same time, the development of shale hydrocarbons is so important for the Chinese government that it has allowed national private companies to participate in the second tender for their development in the fall of 2012. By  2015, the official plan of shale gas extraction has been set at 6.5 billion cubic meters. By 2020, the extraction should reach 60–100 billion cubic meters. Given a weak infrastructure, deficit of special equipment, an underdeveloped gas pipeline system, uncertain taxation outlooks, environmental and other risks, many experts doubt whether China will be able to replicate the US shale revolution in near future due to several obstacles that are hard to surmount. Firstly, as China differs considerably from the USA in terms of the geological structure of shale formations, the extraction of comparable gas volumes would require drilling much more wells. Secondly, the business environment in the oil and gas industry, which is considered strategic, is excessively regimented. Thirdly, shale formations are remote from key gas consumption centers. All these and related factors significantly increase gas shale production costs in the PRC. Thus, drilling one well would cost here 4 times more than in the USA. It is evident, at the same time, that if the existence of rich shale gas reserves is confirmed by geological prospecting, the PRC will try to roll out its mass production as fast as possible. Deficit of water may become the main obstacle to the development of shale hydrocarbons. Once shale formation development starts, China, like the USA in the past, will neglect environmental safety considerations; yet, constraints may still be imposed by physical deficit of water and the need to transfer it to potential shale gas production centers located in geographically remote, often mountainous, regions.

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Latin America. Certain Latin American countries, especially Argentina, Brazil, Chile, Paraguay, and Bolivia, are comparatively rich in shale gas. Argentina. Argentina is believed to be the world’s third richest (after the PRC and the USA) country in shale gas, the development of which would require some $30 billion. Brazil. In January 2013, the ANP, Brazil’s national energy regulator, published rough preliminary estimates of potential non-conventional gas reserves at 11.9 trillion cubic meters, which is 88% above the estimates by the US Energy Department’s Energy Information Administration. Brazil’s reserves of non-conventional gas, according to the ANP, exceed those at offshore sub-salt horizon fields. In December 2012, Brazil carried out the first public tender to allocate potentially gas-bearing shale territories with participation of a number of international oil and gas companies, such as Royal Dutch Shell. If considerable shale gas reserves are confirmed, Brazil, with its abundant water resources, may transit from being a gas importer to an exporter comparatively fast. The analysis above testifies to a significant uncertainty of global shale gas production outlooks. One can solely claim that shale gas extraction will remain chiefly a US phenomenon in the current decade, unless a large-scale environmental accident resulting from shale development causes pollution of drinking water sources, forcing the US authorities to strengthen control over the industry. Such an event would dramatically slow down shale development. If no environmental disaster occurs, shale gas production will grow in the PRC by 2020, in case the latter succeeds in transferring water resources to regions of potential large-scale production of shale gas. European countries will not begin large-scale development of shale reserves due to high environmental risks, unless future technological breakthroughs exclude water pollution. The only exception may be Poland. Even in 2035, according to a forecast by the International Energy Agency, the USA will account for some 60% of the global production of non-conventional gas (see Fig. 7.4.), and Canada for some 10%. China (14% of global production) and India (6%) will become comparatively large producers of non-conventional gas. All other countries together will account for 11% of global non-conventional gas extraction. This is, obviously, merely a probabilistic view of the future. It is noteworthy, however, that even experts that are optimistically-minded regarding

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Figure 7.4. International Energy Agency: Shale gas production forecast in 2035 (new policies scenario) by country: Share in global production (%) Others 11 India 6 Canada 10

USA 59 PRC 14 Sources: World Energy Outlook 2012; International Energy Agency.

the prospects of shale gas believe that it will remain merely a NorthAmerican phenomenon over the next two decades, with some possibilities mainly for China to join the shale gas revolution.

Shale Oil The second pillar of the US shale hydrocarbon revolution was a sharp increase of oil extraction from shale and other types of low-permeability rock. Shale oil is, as far as its physical and chemical properties are concerned, ordinary, and usually high-quality, oil. It is light, with a low content of sulfur and other toxic admixtures. Its only difference from oil extracted from traditional sites lies in the fact that it is deposited in harder, low-permeable, less porous rocks (including shale, tight sandstone, limestone, etc.) and requires special – and more expensive – methods of extraction. Although most oil and gas bearing shale deposits in the United States had been long and well known to geologists, until the 1990s were mostly regarded as source rocks for traditional hydrocarbon deposits, rather than full-fledged targets of industrygrade development.

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Similarly to non-conventional gas, large-scale development of shale oil formations became possible over the recent ten to fifteen years due to a rapid development and perfection of such technologies as horizontal drilling and multi-stage fracking. Commercial development of shale oil deposits started in 2000, but its scale has been comparatively limited so far, and shale oil has been eclipsed by shale gas. A fundamental leap seems to have occurred as late as 2011–2012, when many companies engaging in shale gas extraction were pushed by divergent price dynamics on both US oil and natural gas markets to actively join projects of shale oil development. Whereas the pressure of growing offer drove US market prices below $145 per 1,000 cubic meters at the end of 2011, oil prices remained in a range of $80–115 per barrel quite comfortable for producers. Under such circumstances most oil and gas companies shifted their investments from development of shale gas deposits to shale oil, or, in the case of gas-bearing shale deposits, to the extraction of natural gas liquids (NGL.) The refocusing of companies from gas to shale oil deposits can be graphically illustrated by a comparative dynamics of oil and gas drilling. The total volume of drilling in the USA, after a considerable downturn during the global economic crisis and a drop of oil prices in the second half of 2008 and the early 2009 rather quickly recovered already in 2010. However, not only did gas drilling fail to reach pre-crisis volumes, but it also sharply dropped again in 2011–2012. As a result, the number of rigs engaged in the gas sectors dropped four times by the end of 2012 to a 13-year minimum as compared to the peak of 2008. The volume of oil drilling, by contrast, grew sharply. Over some three years, from May 2009 to August 2012, the number of rigs used in the oil sector grew 8 times to 1,432. Whereas in the mid-2000s, when the US oil and gas companies were focused on growing extraction of shale gas, oil drilling accounted for a mere15–20% of all active rigs, that share exceeded 75% in the second half of 2012. Scaling up drilling operations resulted in a considerable growth of shale oil production in 2011–2012 from some 0.5 million barrels per day in 2010, to over one million barrel per day by the end of 2011 and, according to a preliminary estimate of the US Energy Department Energy Information Administration, two million barrel per day by the end of 2012. This equals to 30% of US total oil production and is equivalent to 11% of US liquid fuel consumption. It is also worth noting that the production of shale oil in the USA currently exceeds that of such

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OPEC member-states as Qatar, Angola, Nigeria, Libya, Algeria, and Ecuador. Although some twenty shale formations containing liquid and gaseous hydrocarbons have been prospected in the USA, Bakken and Eagle Ford formations currently account for two-thirds of oil and gas condensate from low-permeability rocks. The formation of Bakken is the largest source of shale oil located in the interiors of North Dakota and Montana, as well as the Canadian provinces of Saskatchewan and Manitoba. Shale oil deposits were first developed in 2000 in Montana, but in the second half of the past decade the region’s center of oil extraction shifted to North Dakota, where most reserves of the formation are accumulated. The shale boom increased the total volume of oil extraction in that state from 90 thousand barrels per day at the start of 2005 to 730 thousand barrels per day in November 2012, including 670 thousand barrels generated by the shale oil from the above mentioned formation (see Fig. 7.5.) In the early 2012 North Dakota became the USA’s second largest oil extracting state after Texas, surpassing Alaska and California. The state’s share in the nation’s total oil extraction exceeded 11%.

Figure 7.5. North Dakota oil production from January 2005 to November 2012 (thousand barrels per day and % of US total production) 800

12%

700

10%

600 8%

500 400

6%

300

4%

200 2%

100

0% 0 Jan-2005 Feb-2006 Mar-2007 Apr-2008 May-2009 Jun-2010 Jul-2011 Aug-2012 Bakken

Traditional fields

North Dakota, % of total US production

Sources: North Dakota Department of Mineral Resources; Energy Information Administration.

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The USA’s second important center of shale oil production at the outset of 2013 was the geological formation of Eagle Ford located in the southern part of Texas. Unlike Bakken, where oil accounts for over 90% of reserves, Eagle Ford consists of three zones rich in hydrocarbons, with oil prevailing in the first zone, gas condensate in the second, and dry natural gas in the third one. Eagle Ford extraction started in 2008 with gas, but, once gas prices dropped, operating companies gradually re-oriented to liquid hydrocarbons. Due to a fast growth of drilling, their Eagle Ford production upped from next to zero in 2009 to 158 thousand barrels per day in 2011 and 411 thousand barrels per day on the average between January and November 2012 (see Fig. 7.6.) Among other US oil-bearing shale formations, one should single out a number of geological structures attributable to the Permian basin in the west of Texas and the east of New Mexico (Bone Spring, Avalon, Spraberry, Wolfcamp, Cline Shale), as well as the formations of Niobrara (Colorado and adjacent territories of Wyoming, Nebraska Figure 7.6. Oil and condensate production at the Eagle Ford shale formation in 2009–2012 (thousand barrels per day) 450 400 350 300 250 200 150 100 50 0 2009

2010 Oil

Source: Railroad Commission of Texas.

2011 Condensate

Jan-Nov 2012

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and Kansas), Monterey (California), Mississippian Lime (Oklahoma and Kansas), Tuscaloosa Marine Shale (Louisiana and Mississippi), Anadarko (Texas and Oklahoma) and Utica (Ohio and Pennsylvania). Besides, liquid hydrocarbons (chiefly condensate and natural gas liquids) extracted at several formations with prevailing extraction of shale gas. Among such formations count, in particular, Woodford, Barnett, Marcellus, and Granite Wash. Growing extraction of shale oil looks especially impressive against the background of a weak dynamics in other segments of oil extracting industry in the USA and – with rare exceptions – the global oil industry as a whole. Such growth became possible due to a unique combination of several favorable factors. Firstly, a long period of high oil prices and the conviction of several oil and gas companies that those prices were “serious and for a long haul”. Secondly, a favorable oil and natural gas price ratio on the US market. A fast growth of shale oil in the USA eventually caused a dramatic drop of natural gas prices that, in its turn, stimulated oil and gas companies to shift investments from the development of shale gas to shale oil. Thirdly, lack of alternative attractive investment projects. Dwindling traditional US onshore hydrocarbon fields (according to some estimates, their initial extractable reserves are exhausted by 75%) and extremely high capital intensity of deep subsea shelf projects for most US independent oil and gas companies make the development of shale deposits practically the sole growth opportunity. Fourthly, a vast and well-studied resource base. The USA possesses more than twenty large shale formations containing considerable reserves of liquid and gaseous hydrocarbons. Most of them had been known and many studied in detail by geologists long before the shale boom. In the course of several preceding decades, prospecting was carried out, and numerous vertical wells drilled, in certain cases with industry-grade traditional extraction. All this enabled amassing a great deal of information on the geological structure of shale deposits and determine their most productive zones. Fifthly, a low risk of prospecting. On average, only one well in a hundred isdry when drilling oil- and gas-bearing shale deposits in the USA. Although the wells drilled may dramatically vary in debits and rate of  profit, almost all of them are productive. For comparison, the

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US-average drilling success ratio is 60% for test and 90% for production drilling, and the world-average indicator hardly exceeded 40% in the early 2000s. Sixthly, comparatively small minimum volume of initial investments and their fast payback. Projects in oil and gas industry are marked by high capital-intensity, and the development of shale deposits is no exception. Still, the minimum initial investments in the extraction of shale oil is quite feasible even for smaller companies that can profitably operate a small number of wells. It is also worth noting that, at the current oil price level, initial investments in drilling oil wells at shale deposits pay back within one to three years. This enables small and medium oil companies, which usually lack large free financial resources and resort to borrowings, enjoy a fast return of investments and can reinvest into drilling new wells. Seventhly, a fast development, improvement and spread of cuttingedge oil extraction technologies. Like in most other spheres of science and technics, the USA remains an undisputed leader in the development and the application of new technologies in oil and gas industry. The horizontal well drilling and fracking technologies had been fitted several decades long before the shale boom. These technologies are continuously perfected and tailored to the requirements of each individual oil field. Eighthly, high competition in the US oil and gas industries, a great number of small and medium oil companies that accounted for 67% of the total oil and gas extraction in the USA in 2010, including 72% onshore extraction. Over the past decades, these companies had to operate old, exhausted fields (unattractive for large vertically integrated companies) that required tinkering with new technologies of oil recovery to maintain extraction rates. Survival on the market, in such harsh conditions, is conditional on flexibility, mobility, fast decision-making, and the ability to adopt technological innovations quickly. It is precisely for this reason that smaller independent companies, rather than leading vertically integrated companies, have pioneered the development of shale deposits and effectively drove the shale revolution. Ninthly, highly developed oil field service industry, the availability of a large rig fleet, an advanced infrastructure. The USA is the home to independent oilfield services, which have spun off large vertically integrated oil companies. The industry’s largest companies have their

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headquarters there: Schlumberger, Halliburton, Baker Hughes, etc.; a great number of medium and small drilling and oilfield service companies are also active. This creates a highly competitive environment in the sector. The USA’s active rig park, which currently comprises some 1800 units (most of which are adapted for horizontal well drilling) outnumbers the fleets of all other countries taken together (except former USSR countries and China). Tenthly, in the USA, unlike in most other countries, the title to the interiors belongs to the land owner. Lease of a land plot (with an available drilling license) is an automatic entitlement to operations related to prospecting, development, and extraction of natural resources. Practice shows that land plots are much easier and faster to lease for drilling where land is owned by individuals or local authorities, rather than the federal government. This circumstance, in particular, promoted a shale boom in North Dakota, where most of land is held privately, with but a small faction thereof owned by the federal government. Eleventhly, a favorable investment climate. Many important aspects of the businesses of oil and gas companies in the USA (in particular, the issuance of licenses for oil and gas drilling and extraction), as well as the rules governing fracking fall under the state, rather than federal, jurisdiction, with the exception of the continental shelf and considerable onshore areas owned by the federal government. Practice shows that the authorities of the states where shale oil is extracted are much more cooperative with oil companies than federal agencies. This is graphically illustrated by the duration of the drilling and extraction licensing procedure. According to the data of the Institute for Energy Studies of Washington, the deadlines are: 10 days in North Dakota, 14 days in Ohio, 17 days in Colorado, as against an average of 307 days on federal lands. Twelfthly, favorable taxation. According to estimates by the consulting company PFC Energy, the effective tax burden on oil extracting companies active in two states that account for most shale oil extraction in the US, North Dakota and Texas, is 56 and 53%, respectively, at $100 per barrel of oil. This is much lower than in most other regions of the USA (except the shelf fields of the Gulf of Mexico) and elsewhere. For comparison’s sake, the tax burden at the same oil price is 92% in Alaska, 95% in Kazakhstan, 93% in Algeria and Venezuela, 88% in Norway, 82% in Russia, 66% in China, 65% in Libya, 64% in Nigeria, 62% in the UK.

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Finally, thirteenthly, the business model of the US independent oil companies relies on inexpensive borrowings and is, therefore, heavily dependent on access to cheap credit. In this sense, coincidence with a period of low interest rates promoted the US shale boom.

US and Global Shale Oil Extraction Forecasts Similar to the boom of non-conventional gas, a skyrocketing growth of shale oil extraction in the USA over the recent years caught most experts by surprise, with growth rates exceeding the most optimistic expectations. Until 2010 inclusively, oil from low-permeability strata went practically unmentioned in forecasts of global energy industry development and, in any case, was not singled out as a self-contained position in statistic reviews and forecast materials. In 2011, authors of forecasts did acknowledge shale oil, but most experts believed that its extraction in the USA would not exceed a modest 1.5 million barrels per day at the peak of expectations (between 2020 and 2030). In reality, that threshold was surpassed as early as in 2012, and the ensuing boom forced all authoritative organizations and institutions authoring global oil market forecasts to radically review their visions of shale oil extraction forecasts. According to the most recent estimate by the Energy Information Administration of the US Energy Department contained in an annual energy industry review for 2013, the US production of shale oil would reach 2.81 million barrels per day (or 38% of the total oil extraction) in a baseline scenario by 2020. The authority’s new forecast assumes a much steeper growth curve than the previous year’s baseline scenario, according to which oil extraction from eight US shale formations would grow to 1.2 million barrels per day by 2020 and peak at 1.33 million barrels per day around 2030 (see Fig. 7.7.) Upped forecasts of oil production are largely attributable to an upward review of indicators for previous periods. Nevertheless, the new EIA baseline forecast predicts a considerable downturn of shale oil production growth rate from 40% per year in 2005–2012 to 15% in 2013, 9.4% in 2014, and 1.9 in 2015–2020. Production rates are expected to drop gradually almost immediately after the peak to 2.2 million barrels per day by 2030 and 2 million barrels by 2040, as the most productive and profit-generating reserves of shale

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Figure 7.7. US shale oil production forecasts for 2010–2020 (million barrels per day) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2010

2011

2012

2013

2014

2015

2016

2017

2018

Wood Mackenzi (August 2012)

IEA (May 2013)

IEA (October 2012)

EIA (January 2013)

2019

2020

EIA (June 2012) Sources: IEA Medium Term Oil Market Report. October 2012; May 2013; US Energy Information Administration.Annual Energy Outlook 2012; 2013; Wood Mackenzie.

oil will have been exhausted, and the companies will have to operate inferior-quality and less rich deposits. On the whole, the new baseline forecast of the Energy Information Administration looks rather conservative in comparison with most other forecasts of shale oil extraction in the USA published in 2012. Whereas the International Energy Agency (IEA) predicted a peak of US shale oil extraction at 1.5 barrels per day in 2011, its new mid-term forecast assumes a growth to 2.7 million by 2015 and 3.3 million barrels per day by 2017. In its new long-term forecast of global energy industry of 2012, the IEA predicts a stable production of shale oil in the USA at 3.2 million barrels per day until 2025, with a subsequent gradual downturn. Experts of many research and consulting firms (IHS CERA, Wood Mackenzie, PIRA Energy, Bentek Energy, Hart Energy, Rystad Energy, etc.), as well as analysts of investment banks (Citigroup, Goldman Sachs, CIBC, etc.) hold even more optimistic views on the prospects of the US shale oil. They believe that the US shale oil production (including gas condensate) may reach 4–5 million barrels per day by 2020, a level, which, according to some forecasts, may persist or even grow, albeit somewhat slower, at least until 2035.

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Much attention is paid to shale oil in long-term forecasts of global energy industry published by the two largest oil corporations, Exxon (December 2012) and BP (January 2013). Whereas the Exxon forecast predicting a peak of 3 million barrels per day looks rather cautious against the general background, BP assumes that US shale oil production will grow to 5 million barrels per day at the outset of the next decade with a further slower growth until 2030. Although the EIA, the IEA and other mainstream organizations of the Western energy expert community are inclined to increasing optimism as to the outlooks of the shale oil revolution, there are still many skeptics among independent experts, who predict a sharp slowdown of shale oil production as early as in 2013–2014 followed by an inevitable decline. These forecasts are chiefly based on a sharp drop of well recovery at shale fields by 50 to 80% already in the first year of operation, which is higher than the relevant indicator for traditional oil fields by an order of magnitude. Although the authors of optimistic forecasts might be suspected of pushing a certain agenda, and skeptics can be suspected of a stubborn unwillingness to acknowledge a self-evident success of the shale revolution, it should be noted that such a wide discrepancy of views on the outlooks of shale oil and shale gas production is not without an objective cause. The sector of non-conventional hydrocarbons is a very young branch of oil and gas industry, whose long-term development patterns are yet unknown. A great number of uncertainties exist as to the geology of shale deposits, the technologies of their development, the economy of the sector, as well as its resilience under a prolonged oil price drop scenario, the development of transport infrastructure and logistics, environmental risks inherent in shale development, prospects of governmental regulation of the industry, etc. Each of these factors defies a clear forecast and may potentially have a very considerable impact on the rate of development of shale oil production. The authors of optimistic forecasts do not typically disclose the methods used for their preparation, and one can safely assume that forecast estimates are based on assumptions and hypotheses that are not well-grounded. Evidently, forecasts will be adjusted as new data is accumulated. Therefore, in our view, at present one can discuss trends of the shale industry’s development and key factors that determine them, rather than of exact figures. Uncertainty as to shale oil production outlooks is even higher outside the USA. Estimates by geological services and energy regulators

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show that considerable potential reserves of shale oil exist practically in all large regions of the world and in many individual countries. The IEA estimate of global potential recoverable shale oil reserves at 240 billion barrels looks pronouncedly conservative; in particular, it underrates Russian reserves (see Fig. 7.8.) Eventual development of those reserves cannot be excluded in a long run, but conditions for such development in most countries – except Canada – are not as favorable as in the USA. First, despite a rich resource potential, shale deposits outside North America are still poorly studied. Long and intense prospecting will be required to determine their geological properties and discover the most productive sites. Vertical exploratory or production wells through shale deposits have not been drilled so far except in some individual countries. A threshold of 30 to 50 horizontal shale wells, regarded by experts asa minimum precondition for building probabilistic assessments of resource potential has not been surmounted anywhere except the USA and Canada. Second, no country possesses technologies, rig fleet, fracking equipment, infrastructure, and qualified employees required for mass industrygrade development of shale deposits comparable to those of the USA. Figure 7.8. International Energy Agency: Recoverable resources of shale oil by region (billion barrels) Latin America 37 North America 70

Africa 33

Middle East 4

Asia/Oceania 63

Western Europe 18 Ex-USSR and Eastern Europe 14

Sources: World Energy Outlook 2012; International Energy Agency.

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Acquisition and import of technologies and special equipment, engagement of foreign professionals and oilfield service firms and some forms of partnership with US and Western companies, which have an expertise in the development of shale deposits, will result in a considerable appreciation of non-conventional hydrocarbon production and require much more time than in the USA or Canada. Not surprisingly, therefore, experts estimate that the break-even point for shale oil production outside North America may be $90–100 per barrel as opposed to $60–75 in the USA. Third, the USA is the only country to possess a numerous and highly qualified sector of small and medium independent oil companies (and a similar oilfield service sector) motivated for risk-taking and innovation. Fourth, mineral resources are owned by the state, investment climate and taxation are less favorable, and considerable bureaucratic barriers and political risks exist in most countries. Fifth, environmental law is stricter in many countries, especially in Europe, and fracking operations are banned in some countries. This is primarily due a high population density and a traditionally stronger role of environment protection organizations. Sixth, many countries with significant estimated reserves of oil from low-permeability strata are still far from exhausting reserves of liquid hydrocarbons in traditional fields, which have a higher rate of return. Second, for a number of reasons, most countries currently contemplating shale projects are primarily interested in the production of shale gas, rather than shale oil. Thus, according to the IEA data, global potential reserves of shale gas exceed those of shale oil fivefold. It is also worth noting that shale gas prices in most regions are much higher than in the USA. In Europe, prioritized interest in shale gas is also due to attempts to reduce dependence on Russian gas supplies, whereas in China it is dictated by a strategy of a sharp increase of the share of gas as an environmentally cleaner alternative to coal in energy balance. Considering the aforesaid, one can assume that the development of shale oil deposits outside North America will not go beyond pilot projects, and even if it does, industrial extraction is likely to be low. After 2020, however, a growth of shale oil production can be expected outside the USA and Canada, and experts believe a whole range of factors (primarily, resource potential) opens up the most favorable prospects for Russia, China, Argentina and, possibly, Columbia. Nevertheless, according to an IEA forecast, even in 2025 the USA and Canada (see Fig. 7.9) will account for some 90% of global shale oil production.

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Figure 7.9. International Energy Agency: Light tight oil production forecast for 2025 (new policies scenario) by country: Share in global production (%)

Canada 11

Others China Argentina 2 4 5

USA 78

Sources: World Energy Outlook 2012; International Energy Agency.

There are more optimistic views as well, in particularly, the BP forecast. According to those estimates, the world’s total production of shale oil will exceed 6 million barrels per day in 2020 and 9 million in 2030, with countries outside North America accounting for 2.5 million barrels per day. BP experts believe that Russian shale oil production may reach 1.4 million barrels per day by 2030 if tax preferences and other governmental support are put in place.

Impact of the US Shale Revolution on Natural Gas Markets and the Global Oil Market Supply and prices are the two main channels via which the shale gas revolution impacts regional markets of natural gas. Liquefied natural gas projects launched in the second half of the 1990s and the first half of the 2000s and targeting the USA have been forced to cross over to the markets of other countries. An unexpected entry of large LNG volumes on the European markets coincided with a global financial and economic crisis. Gas consumption in European economies has stagnated since 2005 and even tends to decline. Nevertheless, despite the crisis, oil prices are still high; therefore, imported gas prices, still tied to the prices of oil and oil products in continental European countries, keep high as well (see Fig. 7.10), making LNG supplies to the European countries especially attractive.

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Figure 7.10. Comparative gas prices in the USA and continental Europe in 2009–2020 (US$ per 1,000 cubic meters) 600 500 400 300 200 100 0 -100

Henry Hub and Russian gas price at the border of Germany spread Russian gas at the border of Germany Henry Hub spot Henry Hub futures Surces: Energy Information Administration; International Monetary Fund; Bloomberg; authors’ calculations.

At the same time, high growth of shale and non-conventional gas production in general in the USA contributed to market saturation and a considerable drop of US domestic gas prices (see Fig. 7.11), which, in their turn, contributed to a restructuring of electric power industry, with an accelerated transition from coal to gas fuel. Things have been different on the other side of the Atlantic. Faced with a lower demand for their products, the US coal industry had to turn to export market, including Europe and the Asia-Pacific region. Whereas gas prices linked to oil quotations in European countries are high, electric power industry in many large countries of Europe has considerably increased the use of comparatively cheap imported US coal (see Fig. 7.12.) The entry or, rather, the re-entry of US coal drives demand further down. Since European onshore gas import prices are still tied to oil and oil product prices, gas prices remain high, adding stimulating the use of coal as fuel for power generation.

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Figure 7.11. Fuel prices in the US power industry in 2006–2014 (US$ per 1 million BTU) 14 12 10 8 6 4 2 0 Jan. 06

Feb. 07

Mar. 08

Apr. 09

May. 10

Price spread

Jun. 11

Coal

Jul.12

Aug.13

Sep.14

Natural gas

Sources: Energy Information Administration; authors’ calculations.

Figure 7.12. Dynamics of US coal exports to European countries in 1980–2012 (2005 data = 100) 1,000 900 800 700 600 500 400 300 200 100 0 1980

1990

2000

2005

2006

2007

2008

2009

2010

France

Germany

Italy

Netherlands

UK

Europe

Source: Energy Information Administration. * Rough estimate by the authors.

2011

2012*

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Other processes are gaining momentum as well. On the one hand, hugely diverging prices on the European and US markets push the European Union, resolute, as it were, to liberalize gas market since the 1990s, to an accelerated transition to spot gas pricing. On the other hand, the very same price gap between the US and the European (and Asian) gas prices promotes projects of LNG exports from the USA. A number of gas liquefaction terminals built in 1990 with a view to LNG imports have initiated a complex procedure of obtaining permissions from federal authorities to readjust themselves for export. Since the summer of 2011, the US Energy Department has issued several permissions to export LNG to countries that are parties to free trade agreements with the USA. Given a depressive condition of the European economy and energy saving trends, the US gas, once it enters the European market, will keep supplier competition high. True, no real US LNG shipping to European countries can begin until the end of this decade. Yet, even so an indirect pressure of US gas conditions on the Continental Europe’s market will be palpable. A more than threefold price gap between the two markets can be used to push the idea to sever the ties of European gas prices to those of oil and oil products. A special study commissioned by the US Energy Department has shown that growing exports of liquefied natural gas will have a positive impact on the US economy and will not adversely affect households, employment or the competitiveness of the industrial sector. Morgan Stanley estimates that by the end of this decade the USA may bring LNG production up to 50 million tons per year, becoming the world’s third exported of liquefied natural gas after Qatar and Australia. By 2015, a large-scale retrofit of the Panama Canal should be completed, cutting the trade route from America to Asia by 7,500 miles and redirect energy products from North and South America to the growing Asian markets. The USA has also dramatically reduced gas imports from Canada, forcing it to seek new sales options. Canada’s National Energy Board has already issued a 25-year license to LNG Canada Development Inc. (a consortium headed by Royal Dutch Shell and Asian companies) for export of3.3 billion cubic meters of LNG per year from the Kitimat terminal in British Columbia. Clearly, these projects will not be implemented en mass until the  end of this decade for a number of natural reasons, but they may noticeably impact gas markets in a short and long term.

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A fast growth of shale and other non-conventional oil production in the USA has had, and will have, a considerable impact on the global oil market. At present, the most palpable consequences of an accelerated growth of non-conventional oil production are, firstly, the transition of the USA to net exports of oil products (see Fig. 7.13) and, secondly, decline of raw oil imports in the USA (see Table 7.2.) Yet, can one, following a number of experts, claim that non-conventional hydrocarbons have fundamentally changed the game on hydrocarbon markets forever? Since non-conventional oil and gas are comparatively young energy resources, the economic risks related to them are still not well understood. Historically, gas prices have been extremely volatile. Whether inflow of shale gas has played a role there remains an open question. Generally, the non-conventional hydrocarbon revolution, by increasing hydrocarbon supply, favors the interests of oil and gas importing countries. It also sharpens competitive struggle on the global oil market and the world’s gas markets, with net oil-importing joining the struggle for sales markets. The USA, naturally, is the main beneficiary of Figure 7.13. US oil product exports and imports in 1993–2012 200,000 150,000 100,000 50,000 0 -50,000 -100,000

Ja

n. Fe 93 b. M 94 ar . Ap 95 r. M 96 ay Ju 97 n. 9 Ju 8 l. 99 Au g. Se 00 p. O 01 ct .0 N 2 ov Ja . 03 n. Fe 05 b. M 06 ar . Ap 07 r. M 08 ay Ju 09 n. 1 Ju 0 l. 11 Au g. 12

-150,000

Net oil product export, thousand barrels Oil product export, thousand barrels Oil product import, thousand barrels Sources: Energy Information Administration; authors’s calculations.

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Table 7.2. US raw oil imports in 2000–2012 (2005 Figures 100%)

Year

Total

OPEC

NonOPEC

Gulf countries

Saudi Arabia

Venezuela

Canada

2000

90

95

85

109

106

99

83

2001

92

101

84

121

112

104

83

2002

90

85

95

100

105

97

88

2003

95

95

96

110

119

95

95

2004

100

105

95

109

104

105

99

2005

100

100

100

100

100

100

100

2006

100

99

100

98

98

92

110

2007

99

112

87

96

100

93

116

2008

97

113

82

106

104

84

120

2009

89

90

88

75

68

77

119

2010

91

95

88

77

75

74

121

2011

88

87

89

84

82

70

136

2012*

85

85

86

99

97

71

148

Sources: Energy Information Administration; authors’ calculations.

the shale revolution. This manifests itself primarily in its ability to adapt itself comparatively easily to any developments on energy markets. Amidst general economic and energy uncertainty, this is an important contribution to the global competitive advantage of the US economy.

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Section II SOCIO-POLITICAL PROCESSES

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INTRODUCTION Yevgeny Sh. Gontmakher

The end of a confrontation between two systems and the ensuing globalization failed to bring about the expected stabilization of global socio-political processes (an “end of history”, Francis Fukuyama’s famous term.) The economic crisis that began in 2007, and from which even the most advanced countries are emerging with great difficulty, drastically aggravated social issues. Debates on the ways to resolve those issues have brought the theme of questioning the efficiency of public governance and democratic institutions built on principles that had seemed set in stone some twenty years ago to the foreground of public discourse. The aggravation of socio-political tensions is also contributed to by the post-Soviet countries (including former members of the so-called “socialist community”), which failed to embrace democratic change unequivocally over the two decades following the collapse of the Soviet Union. This has resulted in a multitude of social conflicts and domestic political crises, creating yet another (alongside a depressive South) area of a global “periphery”. Can this trend be halted or is it irreversible? Answering this question requires looking at the functioning of the institution of democracy from a new angle. Economic hardships and a growing footprint of cross-border corporations often mandate harsh decisions unwelcome for the majority of the population. On the other hand, the development of the Internet and other information technologies nurtures civil society on both the national and the international scales. This adds up to social conflicts, not least because economic hardships in almost all developed countries force governments to request parliaments to cap or even cut welfare spending. It is against such background that the extreme right and the extreme left political forces gain momentum.

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Do these trends point to a crisis of democracy as an institution? Can an “enlightened” authoritarianism of a Chinese or a Singapore type be considered a viable alternative? The search for an answer to these questions has become a pressing matter. The contemporary world is experiencing an exacerbation of social issues, which is not due to transient economic hardships alone. Its objective cause lies in the aging of the population, so far affecting mostly Europe and Japan, which are experiencing, in particular, an allembracing crisis of pension systems. Healthcare, which has been the primary factor driving the increase of life span, begins to fall short of resources, the deficit of which cannot be filled up by its innovationdriven development. The build-up of systemic problems also affects a wide range of issues in education (especially vocational training), as well as social and labor relations, primarily due to an economic restructuring taking place both in developed countries and in countries trying to attain such status, whereby demand is growing for employees with new competencies, such as processing large amounts of information, maximized retraining flexibility, and communication skills. The ability of the global community to address these challenges adequately will be decisive for the future of the world’s economy. Cross-border migration, a junction of economic, social, political aspects, has become a full-fledged issue of global development over the recent years. On the one hand, developed countries (at least, at the current technological phase) face a deficit of labor resources. On the other hand, an influx of immigrants kindles ever sharper conflicts in host societies. Experts and some politicians already acknowledge a crisis of “melting pot” doctrines, tolerance, and multiculturalism. Especially irritating for the population of developed countries is the inflow of illegal immigrants, who live in a shadow and gravitate to closed ethno-confessional communities abiding by their own rules and laws. This growing rift between the host society and immigrants testifies, in particular, to a crisis of self-identification affecting a large number of nations, which largely translates into institutional and social imbalances and, ultimately, a crisis of motivation for development in contemporary societies. A person’s individual relation with politics and concrete political and governmental decisions is becoming a key anchoring factor for

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democratic institutions in an open information space. An individual’s inherent capacity of moral judgment, including in politics, encourages him or her to uphold democratic principles of social commonwealth and, essentially, to be a citizen, rather than merely be labeled one, a mindset decisive for changing the dominant social climate. Therefore, the current socio-political agenda is dominated by the themes of the personal, the individual in the mind and social behavior of man, rather than issues of economy. An individual’s interests and motivations are taking over the lead in politics, institutional and social development, as well as generally in the relationship between individuals and the society.

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Chapter 8

A NEW PERIPHERY. CHALLENGES OF POSTCOMMUNIST DEVELOPMENT Vladimir V. Lapkin, Vladimir I. Pantin, Andrey V. Ryabov

The Problem of Periphery in a New World Order Structure The collapse of the global socialist system reverberated in profound changes to the world order. A split into the first (capitalist), second (socialist), and third (developing) worlds based on political and ideological principles and a country’s membership in, and positioning with respect to, rivaling social camps has become obsolete. It seemed obvious in the 1990s that an epoch of the struggle of alternative global development projects had become a thing of the past, the ideals of liberal democracy had triumphed, and all countries would from now on advance towards those universal values. Not surprisingly, the new epoch was, albeit for a short time, labeled “the end of history”, a brisk term coined by Francis Fukuyama, once widespread both in academic literature and political discourse. It became a habitual practice to break up states into established developed democracies, their antipodes, authoritarian or totalitarian systems, the number of which constantly dropped as the “third wave” of democratization progressed, and states in transition. Transitology concepts that then dominated political science viewed the goals of the third group of countries as predetermined and boiling down to building modern democracies. Accordingly, the level of democratization came to be seen as a universal criterion of development. It became popular with researchers to plot various linear dependencies under the principle: the more democracy, the more socio-economically developed a country is; or, as another example, the more democracy, the lower corruption. Under this view, experts and politicians alike often identified the concepts of democratization, modernization, and global dynamics as a whole. The global development in the first decade of the new century changed those views. Democratic progress in most ex-USSR countries

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halted and was even replaced by a backward trend. The ultimate goals of transformation of those countries did not look as unquestionable as back in the 1990s. Moreover, post-Soviet states obviously declined economically. In fact, many countries of the Central and Eastern Europe that had carried successful democratic reforms and joined the EU did not achieve any palpable socio-economic success. Thus, the practical experience of social change showed that democracy was not a necessary condition and criterion of socio-economic progress for the states of the former Socialist bloc (the “second world”.) The relation between those phenomena is more complex and non-linear. A few examples should suffice to give an idea of that. The small Republic of Moldova, which had experienced four democratic changes of government over two decades, is by all counts a rather successful electoral democracy. Yet, this has not helped it in carrying out a socio-economic modernization: Moldova is Europe’s most underdeveloped country. By contrast, the authoritarian Kazakhstan turned out to be quite successful economically. Similar examples can be found in Asia. Mongolia, which has become an electoral democracy with a sturdy two-party system, remains a backwards agrarian country, whereas Vietnam has been showing vigorous progress in its socioeconomic development under an authoritarian rule of its communist party. Georgia was the most successful country in fighting corruption in the post-Soviet area under an authoritarian president Mikhail Saakashvili, whereas far the more democratic Moldova and Ukraine have remained the most tainted with corruption. Against this background, universal attention is drawn to the achievements of China, which, while remaining an authoritarian country under a monopoly rule of a communist party, has showed extremely high economic growth, becoming the world’s second economy by the outset of the second decade of the 21st century. It is China, rather than the developed democratic states of the “first world”, that has driven the recovery of the global economy after the global crisis of 2008–2009. These changes brought about new world-order models that had emerged from rethinking the old “three-world” gradation. Thus, according to P. Hanna, the “first world” now comprises the powers that take decisions determining the fates of today’s world (the USA, the EU, and China); the third world comprises states that are passively managed by the leading powers. Between those two worlds lies a wide transitional area of “second world” states with varying economic

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potentials, political regimes, historical and cultural traditions.1 Such world-order model is based on a comparison of the potentials of states as geopolitical and geo-economic actors. Yet, it accounts for differences among states according to a development criterion partially and indirectly. Models of world order based on a classification of states by this criterion were put forward before.2 The frameworks on which they are based split the world into industrially developed countries, a huge backwardness area or the world’s periphery exploited by the former, and a vast global semi-periphery between them. The boundaries between semi-periphery and the backwardness area were viewed as rather fuzzy. According to I. Wallerstein, semi-periphery states occupy an intermediary position ”because, under … pressure from core states and putting pressure on peripheral states, their major concern is to keep themselves from slipping into the periphery and to do what they can to advance themselves toward the core.”3 The collapse of a global socialism system and the prevalence of linear schemes of global development as a movement towards “the end of history” in both political and research circles stripped attractiveness away off world-order conceptions based on degree of development and peripherality; in fact, they seemed to have lost operationality in the 1990s. However, the events that had unfolded in the world by the outset of the 21st century showed that they were useful to explain transformations in what had once been the “socialist” world. Post-communist countries showed divergent vectors of development. Some states launched successful structural reforms in their economies, seeking higher living standards and social development quality, and clearly were climbing the way to social and technological progress. Others, by contrast, plunged into deindustrialization and degradation of economic potential, deterioration of human capital. Many of those countries, not long ago classified as “second-world” and, therefore, at least “medium-developed”, had slipped down into the backwardness area and neared a stable global periphery. 1 See, Khanna P. The Second World: How Emerging Powers are Redefining Global Competition in the 21st Century. NY, Random House, 2008. 2 The most popular is the model proposed by the American sociologist Immanuel Wallerstein. 3 Wallerstein I. World-Systems Analysis: An Introduction. Durham and London, Duke University Press, 2004. P.28.

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Thus, the concept of peripherality is gaining momentum heuristically and epistemologically, as it helps analyze non-linear processes of social dynamics and the quality of development in a wide area of countries that left the socialist “second world” and either completed or are beginning a transformation from one system to another. Given the non-stability and volatility in many of those countries, an insight into the mechanisms of their upward or downward movement appears important for forecasting the world’s fates. Such changes may reflect the logic of development of the global capitalist system, which, while seeking global domination through contemporary globalization, still can neither exist nor develop without exploiting backwardness areas, whose configuration constantly changes. Our goal is to try to see why, contrary to the hopes of the 1990s that by leaving the socialist system a country would achieve a new, unprecedented level of development, in practice we witness something different. In most countries the changes resulted in sliding down to the area of backwardness and the semi-periphery, thereby making both those realms numerically larger.

New Periphery: A Concept and a Preliminary Classification of States The main consequence of the collapse of the “communist block” between 1989 and 1991 was the disintegration of their old structures of political, economic, and socio-cultural autarchy that had determined their peculiar course imposed structural constraints on their development. After the fall of a self-isolation regime, post-communist states found themselves in a fundamentally new global, universalist institutional environment (in the spheres of economics and politics) that dictated strict requirements of direct competition for a place in a global political hierarchy and resources for global development controlled by that environment. They had to re-create, practically from scratch, mechanisms of economic and social development, mobilization of resources, market-based encouragement and regulation of investments, often having to follow in the footsteps of the interests of more competitive “first-world” powers in those crucial matters. The very criteria of success differed fundamentally from the old school “competition of two systems”. They were universal and highly formalized, but

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extremely potent and efficient. It is on the basis of those criteria that global development policies were worked out, international financial flows distributed, investment ratings of countries and regions adjusted. Such a radical change of development modality resulted in a rather long period of “readjustment” of the structures of social (economic, political) organization in all post-communist countries, casting them several levels down in global ratings built according to those new formalized criteria. This is exactly what is reflected in their conceptualization as a New Periphery. Nevertheless, enough time has passed since that catastrophe for the affected countries of the region to make it through an initial adaptation to new universal requirements of the global political and economic competition and reveal their immanent potential of political and economic integration, as well as fulfill their ability to manage the available resources, both mobilizable as part of internal social consolidation strategy and raised externally through global cooperation. The key outcome was the emergence of potent divergent trends as to the strategies and results of post-communist development in the countries of the New Periphery. Some countries of the Eastern (or, more to their taste, Central) Europe have practically completed a full integration in the European Union. Others are more or less consistently pursuing the same course. In addition, other emergent approaches to overcoming peripherality put European integration aside and look for off-kilter recipes (as, e.g. in the cases of Russia, Belarus, Kazakhstan, and Armenia.) Finally, in some countries peripherality – ever more clearly – loses all signs of transience, and well-known traits of a “third world”, a familiar global periphery lingering on the margins of progress transpire. These trends of divergence suggest that in the course of time the very concept of New Periphery will require a revision, rethinking, and reconceptualization. However, its current heuristic potential is still high enough. It allows comparing – across all countries in its scope – the initial conditions and the efficiency of development strategies selected, the results and the consistence of efforts by reformer elites, the adequacy of reform models chosen. The study of processes behind such structural divergence, as well as the advancement, within its framework, of competing integration mechanisms that either go beyond it (extraintegration) or aim to build a close cooperation based on new market and political foundations within it (intra-integration) is becoming an important target of research.

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We have selected the following reasonably reliable, generally used, habitual, and universal indicators as the most obvious criteria of differentiation of the New Periphery countries showing its scale and dynamics: (1) purchasing power parity GDP per capita (in US dollars), and (2) national product (in US$ billion) viewed as indicators of a country’s overall success in managing its development. These indicators are mainly intended to demonstrate, in quantitative terms, the scale of differentiation among the countries of the New Periphery. Nevertheless, groupings based on a ranking of these indicators are obviously somewhat arbitrary. A classification based on complex aggregate indices appears more founded1. However, in the latter case a methodological substantiation of completeness of such aggregate and the interpretation of the resulting classification, which, as a rule, cannot be directly mapped to any definite quantitative characteristic, turn out to be problematic. Since the creation of aggregate indices and their methodological substantiation seem premature at this stage of research of the New Periphery, we preferred the simplest and clearest criteria of classification. This classification is, above all, illustrative and emphasizes the trend of a growing inhomogeneity and differentiation across the New Periphery. Table 8.1 below includes countries of the Central and Eastern Europe and the republics of the former USSR, as well as some other countries that do not belong to the New Periphery but are important for comparison. It should also be borne in mind that the data of the last two years are not reflected in the table (for lack of official information), although available estimates suggest a slowdown in the countries closely involved in European integration (due to a crisis in the Eurozone), as opposed to a high rate of growth in a number of other states of the New Periphery with more diversified economic and political relations. Given a more than tenfold difference in GDP per capita in PPS across the countries of the New Periphery, the need for a differential approach to analyzing their dynamics, outlooks, and classification 1 See, e.g.: Politichesky atlas sovremennosti: opyt mnogomernogo statisticheskogo analiza politicheskikh system sovremennykh gosudarstv [Contemporary Political Atlas: The Results of Multidimentional Statistical Analyses of Modern States Political Systems]. Moscow, MGIMO-Universitet, 2007. See also: Melvil A.Yu., Stukal D.K., Mironyuk M.G. “Tsar gory”, ili pochemu v postkommunisticheskikh gosudarstvakh plokhie instituty [King of the Hill or Why Postcommunist States have Bad Institutions]. Polis, issue 2, pp. 125–142.

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Table 8.1. GDP per capita in PPS of post-communist and some developed and developing countries

Country

GDP per capita in PPS (US$) 1 2

Group

GDP in PPS + ranking (US$ bln) 3

Norway

52,238

59,100

263 (47)

USA

47,123

47,400

15,157 (1)

Germany

35,930

35,900

3,030 (5)

Japan

33,328

34,200

4,430 (3)

Greece

28,833

30,200

Slovenia

27,899

28,400

Czech Republic

24,987

25,600

270 (45)

Slovakia

22,267

22,200

127 (62)

318 (39) A

B

58 (86)

Poland

18,837

18,800

Hungary

18,815

19,000

195 (54)

Estonia

18,274

19,000

26 (109)

Croatia

17,608

17,500

Lithuania

16,997

15,900

59 (85)

Russia

15,807

15,900

2,343 (6)

Latvia

14,330

14,500

34 (101)

Mexico

14,266

13,800

1,630 (11)

Turkey

13,392

12,300

1,004 (16)

Belarus

13,864

13,400

Kazakhstan

13,001

12,500

206 (52)

Bulgaria

12,052

12,800

94 (72)

Romania

11,766

11,500

259 (48)

Brazil

11,289

10,900

Serbia

10,808

11,000

Montenegro

10,432

9,900

Azerbaijan

9,953

11,000

93 (73)

FYR Macedonia

9,350

9,400

20 (123)

China (PRC)

7,518

7,400

1 1195 (2)

С

D

754 (20)

80 (79)

141 (60)

2 301 (7) D

83 (76) 7 (147)

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Table 8.1. GDP per capita in PPS of post-communist and some developed and developing countries (concluded)

Country

GDP per capita in PPS (US$) 1 2

Group E

GDP in PPS + ranking (US$ bln) 3

Bosnia-Herzegovina

7,751

6,600

Albania

7,381

8,000

25 (112)

Ukraine

6,665

6,700

320 (38)

Turkmenistan

6,597

7,400

40 (96)

Armenia

5,178

5,800

18 (125)

Georgia

5,057

4,800

23 (117)

Mongolia

3,727

3,300

11 (142)

India

3,290

3,400

4 393 (4)

Vietnam

3,123

3,100

298 (41)

Uzbekistan

3,022

3,100

Moldova

2,959

2,300

11 (143)

Kyrgyzstan

2,162

2,100

13 (137)

Tajikistan

1,907

1,800

15 (133)

F

31 (105)

92 (74)

Sources: 1. International Monetary Fund (2010) (Data refer to the year 2009. World Economic Outlook Database-October 2010, International Monetary Fund. Accessed on December 15, 2010) (www.imf. org/external/pubs/ft/weo/2010/02/ weodata/index.aspx). 2. CIA World Factbook (2010) (GDP — per capita (PPP), Accessed on Jan. 16, 2011 (www.cia.gov/ library/publication/the- world-factbook/rankorder/2004rank.html). 3. International Monetary Fund (2011). Gross domestic product based on purchasing-power-parity (PPP) valuation of country GDP (Current international dollar) (www.imf.org/external/pubs/ft/ weo/2010/02/weodata/index.aspx).

appears obvious. Differences prevent from using strictly format quantitative grouping criteria; instead, groups are singled out by using a combination of qualitative and quantitative criteria (based on the authors’ expert assessment of success of social economic development.) The table presents six aggregate groups (from A to F) of New Periphery countries singled out by the formal criteria of GDP per capita in PPS. It is worth noting that even such preliminary classification breaks up countries into groups in a meaningful way. Moreover, analysis enables spotting new, more profound properties of their development in a post-

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communist period. The very juxtaposition of those countries as part of the proposed classification is largely due not only to initial conditions of transformations, but also to the strategies of political and institutional changes and preferences in foreign policy those states opted for. A brief review of the groupings is presented below. It enables some conclusions regarding possible further development of their members. Group A includes the three unquestionable leaders of European integration in the Central and Eastern Europe, Slovenia, the Czech Republic, and Slovakia. Those countries enjoyed special, in fact, exceptionally favorable initial conditions related to their historical background: extremely tight socio-cultural, economic, and political ties with the Western Europe, West European traditions and identification rooted deeply in the society, comparatively high economic development during the communist period, an extremely favorable social basis of post-communist institutional transformations. These states’ leading position is by no means random. In fact, they have successfully overcome temporal and situational peripherality and returned to the fold of the West-European civilization. Group B also includes three countries (Poland, Hungary, and Estonia), whose achievements in European integration are quite impressive as well, and the trend of such integration appears, for all practical purposes, irreversible. However, for various reasons, these countries have faced difficulties in their progress. Unresolved issues include national and democratic consolidation, the formation of an efficient welfare state. Characteristically, issues such as “non-finality” of state borders still dominate the public opinion in all three countries. They can be viewed as successful in their reforms, but there are still many unresolved items on their agenda of modernization. Group C is a somewhat special case. Formally, it includes Russia, two Baltic states (Latvia and Lithuania), and Croatia. A special section will be dedicated particularly to the development of Russia. The indicators of those countries are close to group B, but political differences are quite clear. In group C, unresolved issues of national and democratic consolidation are even sharper and more painful, social differentiation and latent strife are exacerbated by ethnic conflicts. Political and legal systems of these countries are still far from modern standards and brittle, shaken by constant scandals and social protests. Nevertheless, these countries have managed to advance toward stabilization and partial modernization of economy, despite grave problems.

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Group D unites, at first glance paradoxically, two leaders of Eurasian integration (Belarus and Kazakhstan), two EU outsiders (Bulgaria and Romania), three backwards European South-East countries (Serbia, Montenegro, and FYR Macedonia), and a petrodollar-flooded Azerbaijan. However, this juxtaposition is still meaningful and, once dynamics is taken into account, points to the existence of strategic alternatives in the New Periphery. The Eurasian project offers some advantages in the context of the current global crisis. In particular, this applies to countries that have managed to preserve and even somewhat enhance their industrial potential since the Soviet times. Generally, countries of this group can be characterized as retaining good growth outlooks, capable of vigorous development and successful consistent resolution of modernization challenges. All of them experienced dramatic consequences of conflicts during the collapse of “socialist empires” (the former Yugoslavia and the USSR) and inter-state cooperation structures (CMEA), but were for a number of objective and subjective reasons less successful in embracing a radical and consistent transition to the standards and practices of other leading centers of global integration. A choice of strategic goals for development is still urgent for those countries. Despite a great deal of backwardness, those countries can hardly be described as permanently stuck in the New Periphery, as they still have opportunities to overcome peripherality. Group E includes six countries that are, at first glance, heterogeneous: Bosnia-Herzegovina, Albania, Ukraine, Turkmenistan, Armenia, and Georgia. All these countries share the experience of a dramatic chain of failed attempts to build a consolidated political regime of an at least formally democratic type. Apart of Turkmenistan, a hugely notorious political specimen, all these countries have sacrificed economic development, growth of human potential and democratic involvement to a feud of political clans for leftovers of power and wealth after the fall of communism. A lack of consolidated political will to create a national development project is the key issue of this group (again, most likely with the exclusion Turkmenistan.) Finally, group F unites clear outsiders of the New Periphery: Uzbekistan, Moldova, Kyrgyzstan, and Tajikistan. All of them (perhaps except Moldova, where strong aspirations for “integration” with Romania even at the cost of loss of sovereignty are not coincidental) are stably peripheral and can hardly be distinguished from a classical periphery of the contemporary world. Over the past two decades, these countries

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have failed to work out an acceptable development strategy. Their political elites are passive when it comes to social responsibility, while their population has massively embraced a labor migration strategy (but unlike similar strata of population in periphery countries of Africa and poor countries of Asia, they migrate to a not quite well-off Russia, rather than to an affluent Europe.) To sum up, our initial ideas of a New Periphery should be modified and adjusted. This term denotes countries with a highly varying potential of development and dynamics of modernization reforms. Still, this concept has enabled us to view this important and still understudied region of a global world in its integrity in the context of its divergent trends.

Russia and the New Periphery Russia, due to its integral dimensions (area, natural and human resources, total GDP, influence on international affairs) has a special place in the array of post-communist countries. On one hand, it has been affected by peripherization – destruction of a number of industries, brain leak, deterioration of education and healthcare, degradation of social capital. Peripherization was particularly strong in the 1990s, during the breakdown of old institutions and a former “Soviet” identity, in the context of a profound ideological, political, and value split in the society and a state that had largely lost control over economic and social processes. Peripherization continued playing a clear role in the economic and political development of Russia even after 2000. On the other hand, a considerable economic (according to the World Bank data, Russia had the world’s sixth integral GDP in 2011) and military (second place in the world, although far behind the USA) potential enables Russia to stick to its role in global politics and international relations. This indicates that Russia belongs to a category of states different from periphery. Therefore, Russia is currently part of neither the New Periphery nor the developed world; rather, a world-system approach would tentatively place it in semi-periphery or, to quote P. Hanna’s scheme mentioned above, a “second world”. Moreover, despite the collapse of the Soviet Union and a significantly dropped international influence, Russia has largely retained the features of an independent center of political and economic power.

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By using its potential and old historical relations, it creates, or tries to create, various economic, political, and military integration associations in the post-Soviet area: the Customs Union of Russia, Belarus, and Kazakhstan, EurAsEC, CSTO, etc. This still makes the social and political order that settled in Russia after a few mutations of the 1990s and the 2000s, despite its defects and low efficiency, a model for many post-Soviet states. Nevertheless, the lack, or weakness, of innovative modernization, alongside with inefficient struggle with corruption will, in the course of time, make the trend of peripherization dominant and irreversible. In that case, Russia will cease to be an independent center of economic and political power and eventually join the periphery as a raw-material appendage to more developed countries. This is likely to sharply exacerbate social and ethnic tensions and conflicts and culminate in the loss of territorial integrity and the emergence of a new socially and politically troubled area on the world map. Avoiding such course of events, hazardous both for Russia and other countries, would require hard work on the part of the Russian society and the government to modernize the country and secure its innovative development. In particular, development projects need to be worked out and implemented to change the structure of the Russian economy fundamentally by strengthening its innovative branch, promoting an accelerated creation of a modern infrastructure, the preservation and improvement of human capital. Given the weakness of civil society and private business in Russia, only the government will initially be capable of working out and implementing such development projects with participation of large, medium, and small business. However, a truly efficient implementation of ambitious development projects would require and active involvement of broad strata of the Russian society: entrepreneurs, managers of different levels, professionals, skilled and non-skilled workforce, and others. In its turn, a wide involvement of population in innovative modernization crucially depends upon the elimination of existing deep value rifts, ideological and political splits in the Russian society, mitigation of social and wealth differentiation, efficient fight on corruption, a new Russian identity, a strong social policy of the government. Such an environment is yet to be created in Russia. Therefore, the country has no full-fledged innovative modernization and experiences a general strengthening of a trend toward peripherization.

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Nature and Mechanisms of Peripherization At this point, the nature and the mechanisms of peripherization are not well understood. One could solely pinpoint a few factors that played a considerable role in the emergence of a New Periphery and semiperiphery in the collapsed “socialist world”. Clearly, most small (in terms of both territory and population) former Soviet republics, with economies subsidized by the Center and the economic structure strongly skewed in favor of a single industry (e.g. cultivation of cotton in the Central Asia), had practically no chance to become modern developed states from the very beginning. Hightechnology production either did not exist (Tajikistan, Turkmenistan) or was maintained by migrants (primarily, engineers and technicians) from more developed parts of the ex-USSR and their descendants. Sales markets for the products of most Soviet republics were also artificially maintained by the Union. Once it collapsed, so did economic relations between republics and production chains between enterprises located at different ends of the disintegrated country. The economies of new independent states, deprived of subsidizing and producing goods that could not meet global demand, proved incapable even to provide minimum subsistence level for the overwhelming part of population. New ruling elites in most post-Soviet countries still placed their bets for an improvement of the social and economic conditions in their countries on the restoration of broken ties or Russian aid. The loss of momentum for vital reforms cemented anti-modernization trends in the political life of those countries. Since nationalism was the only source of consolidation of new independent states in the specific context of the collapse of the USSR and the next few years, ethnic Russians and Russian-speaking population began to leave those countries, causing a leak of the most highlyskilled professionals in the most advanced industries. This circumstance also had a negative impact on the outlooks of the former Soviet republics. In the Eastern Europe, similar developments affected chiefly the Balkan states. The loss of the ex-USSR market especially strongly hit the economy of Bulgaria. However, unlike post-Soviet states, not only were the new ruling elites of that country reluctant to any partial restoration of economic relations with ex-USSR republics until the mid1990, but they even worked hard to make that gap even deeper, hop-

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ing to irreversibly turn Bulgaria closer to the West. Romania, dried up by the neo-Stalinist experiments of the last communist dictator Nicolae Ceausescu, was socially and politically unfit for a transition towards a modern development model. Albania, ruled by a harsh Stalinist dictatorship for over 40 years, remained a backward agrarian country; in addition, it had inherited from socialism an extremely burdensome militarized economy. The modernization of most former Yugoslavia republics was disrupted by bloody ethnic conflicts that broke out in their territories (Serbia, Montenegro, Bosnia-Herzegovina) and troubled relations with neighbors (FYR Macedonia.) It would, nevertheless, be an error to think that small sizes of new independent states and broken ties with former “metropolis” economies were by themselves an unsurmountable obstacle to successful modernization. The post-communist world has seen states that, despite a small territory, had decent initial opportunities to transition to more modern models of development. Post-Soviet examples are Armenia, with its high scientific and technical potential, a ramified global diaspora, which is extremely important from raising investments, and Belarus, whose economy was an “assembly shop” of the former Soviet Union. Armenia was prevented from modernization by a long-lasting and still unsettled conflict with Azerbaijan, as well as the republic’s ensuing geopolitical isolation. The productive forces of Belarus were frozen by a neo-socialist model of economy, which, although immensely helpful in preserving production potential after the collapse of the Soviet Union, later became a brake on social and economic development. Among the New Greater Europe states, good initial conditions for becoming modern developed states existed in Latvia and, to a lesser extent, Lithuania. However, both countries, especially Latvia, took the path of creating transaction economies linking Russia and the West, evidently viewing such path of transformation as the least risky and enabling new elites to raise their initial capitals quickly. In practice, however, this very strategy largely prevented them from economic and political modernization. After ascension to the EU they lost the best part of their social capital due to mass emigration to the West. Latvia, and to a lesser extent, Lithuania, became strongly dependent on global and regional financial centers. Hence, both countries were strongly hit by the global crisis of 2008–2009, which threw them sharply backwards in terms of social and economic development.

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Theoretically, a chance to become a modern state through the use of hydrocarbon exports existed for Azerbaijan and Turkmenistan, with their rather small population. Turkmenistan was often referred to as a potential “gas Kuwait” in the literature of the early 1990s. Yet, no such historical turn happened, although these two countries eventually became important global exporters of oil and gas. Azerbaijan and Turkmenistan joined the category of classical petro-states, although Turkmenistan’s key source of budget is natural gas, rather than oil. But despite all that both countries preserved archaic structures of society and government (especially Turkmenistan, where traditional structures were artificially revived and cultivated), most population continued to live up to traditional patterns, as it was denied access to the achievements of the modern civilization. This is rooted in the special features of domestic political development or, rather, in the fact that, as a result of reforms, the main national wealth (hydrocarbon resources) went to exclusive possession of a single ruling clan. Thus, many post-socialist countries that had no large territory, sufficient human and technological potentials, and, last but not least, failed to carry out swift structural reforms of national economies to minimize damage from disruption of economic relations with former partners from the social system, were doomed to slip into global periphery and semi-periphery. Yet, there were other factors barring smaller post-soviet states from entering the community of developed modern states. These included an unfavorable international environment (global crisis), archaic patterns of social relations inherited from previous epochs and preserved during the post-communist period, as well as the wrong choice of socio-economic strategies. However, the expansion of periphery and semi-periphery in the world after a collapse of the global socialist system was not limited to smaller countries lacking considerable resources. This process involved such large (by European standards) states as Ukraine and, to some extent, even Russia. Strong prerequisites existed there for a successful modernization: a diversified economy with a significant share of high-technology sector, qualified workforce. However, a transition to a modern development model failed. The root cause should be sought in the peculiarities of transition in the post-Soviet area. Most of the population of the former USSR did not grasp the goals of the reforms initiated under Mikhail Gorbachev. Many ordinary citizens thought that the changes should shape a new model of socialism

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combining social security typical of the Soviet system with political and civil freedoms. Over the 70 years of the Soviet order, citizens had lost even rudimentary skills required in a market economy. The ruling party and managerial circles (nomenklatura), by contrast, clearly saw the transformation’s main goal in retaining political power and become a class of new proprietors. Besides, the nomenklatura was well equipped to achieve that goal: it was practically uncontrolled in running the country’s resources and, unlike most population, had managerial experience and skills. As a result of a spontaneous transformation, post-Soviet societies, regardless of size, were split into the social strata of the ruling high classes and the ruled lower classes, which almost never intersected. While the former sought fast privatization and were set on becoming a new class of proprietors, the latter faced a strategy of survival, which, in the context of disruption of former social structures and horizontal ties in the society, took on a sharply individualist flavor. Such social differentiation, inexorably growing into a political bi-sectorism, has by and large persisted into the present day. An economic boom of the first decade of the 21st century somewhat mitigated the tensions between those two planes but did not remove them as such, which is an earnest challenge to the development of the post-Soviet states and societies. The bi-sectorism of the post-Soviet social spaces was further cemented by the fact that the disintegration of the Soviet Union was accompanied by a collapse of former institutions, whereas new emerging institutions were weak and fragile. Moreover, no public demand for institutions could ever become a reality at the early stages of post-soviet societies, as the new, de-institutionalized, socio-political environment favored a chaotic takeover of key assets of national economies by the nomenclature. Mass population, left to their own devices in a completely new setting, had simply no time for institutions. The post-Soviet area, therefore, was now marked by a weakness of institutional environment, which not only impedes the consolidation of social and political actors of change, but also creates political indeterminacy due to unclear power transition mechanisms. This drastically differentiates the region from other state groups that are either in transition to a post-communist transformation or have completed it. Thus, reforms in the Central and East European countries successfully replaced old institutions with new democratic ones, with a change of government by general competitive elections with an unpredictable re-

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sult. In China and Vietnam, by contrast, socio-economic changes are carried out without a change of institutions, under the guidance and control of the ruling communist parties, with a change of government in accordance with party and state rules and instructions, including strict age restrictions for government officials at all levels. New ruling elites of post-Soviet states even largely instilled into masses indifference to politics, pushing them to private life, as such indifference facilitated taking the grip of assets. No general national consensus as to the future of a country was ever possible. The implementation of any development strategies was strongly impeded. Group and corporation interests finally prevailed over national ones. At the first phase, new elites needed to consolidate financial resources required for the following privatization. Assets uncontrollably leaked abroad, resulting in a deindustrialization. These processes were accompanied by a destruction of scientific and technical potential, a sharp drop of production, deterioration of living standards, and de-professionalization of most population, which led to a degradation of human capital. Thus, the destruction and weakening of state, a shift of elites’ focus from national strategy to group and corporate interests promoted by the collapse of pre-existing institutes, were the root causes of peripherization of the post-Soviet space. At the very inception, at the turn of the 1980s and 1990s, some economists and sociologists, mainly of neo-Marxist views, noted that uncontrolled transformations under the banner of a broad liberalization would cause the USSR to gradually slide down to a “third world”, lose social, technical and technological achievements, and result in the criminalization of all aspects of social life. These forecasts came true in full in the course of later events.1 Apart from the general factors contributing to the peripherization of post-Soviet states described above, each of them had its own special circumstances that exacerbated those processes. Thus, the Russian government circles of the 1990s were prevailingly of the view that no special modernization policy was necessary and that market and democratic reforms by themselves would mean modernization. As a result, 1 See in more detail: Krasilschikov V.A. Vdogonku za proshedshim vekom: razvitie Rossii v XX veke s tochki zreniya mirovykh modernizatsiy [In Pursuit of the Past Age: the Course of Russia’s Development in 20th century from the Point of View of Global Modernization]. Moscow, ROSSPEN, 1998. Pp. 216–234.

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the destruction of the country’s scientific and industrial potential and human potential continued. Social and economic renovation of Ukraine was impeded by a lack of political and geographic unity and weak consolidation. The preservation of a generally state-dominated economy in Uzbekistan, the ruling elite’s reluctance to take advantage of favorable circumstances to develop private enterprise in agriculture, persistence of petty bureaucratic oversight of economic activity resulted in freezing the existent economic structure and crystallized an authoritarian regime seeking to preserve a status quo in society and policy. Similar developments unfolded in Turkmenistan, the sole difference being that the latter did not possess such a potential of agricultural development. As a result, Turkmenistan failed to use the “gas factor” as a tool of modernization. Kazakhstan and Belarus appear to stand apart from other post-Soviet countries, each in its own way. Kazakhstan is probably the only post-Soviet state to attempt its own modernization project. As part of its implementation, the country succeeded in creating a favorable investment climate, efficient instruments of managing the economy, especially the financial sector, initiated a policy of planned “cultivation” of a new elite via the channels of modern education. All that helped Kazakhstan to use hydrocarbon and metal exports as a locomotive of economic growth. However, even such partial success failed to help Kazakhstan move on to a modern model of development. The country stalled. It failed to carry out a structural change of the economy; a gap in the quality of development between the capitals and the oilproducing regions, on one hand, and the old industrial and agricultural regions, which became an internal periphery, on the other hand, started to grow. The country’s regime of political authoritarianism, too, began to lose ability to pursue a policy of development and drift toward conservatism. After the global crisis of 2008-2009, Kazakhstan started showing clear signs of stagnation. Belarus placed its bet on maximum preservation of its economic potential inherited from the USSR, which was favorable for a subsequent modernization. It was the only post-Soviet country to build a national state through the preservation and the deepening of cooperation with Russia, which helped minimize losses from disruption of economic relations. However, although the country had preserved, at the first phase of building a national state, the necessary economic potential, especially in industry and agriculture, Belarus eventually

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failed to launch the mechanisms of transformation. The inertia of a neo-socialist economy with a total domination of state nomenclature, the interests of an authoritarian political regime seeking self-perpetuation proved a decisive and still unsurmountable obstacle on the nation’s way to modernization. The global crisis of 2008–2009 demonstrated low competitiveness of Belarussian products. Hand in hand with cuts of Russian subsidies, this circumstance triggered a strong shock for the national economy. As a result, the ruling regime was forced to widen the scope of application of market mechanisms and gradually shift to a  state-capitalist transformation of the Belarussian model. Simultaneously with a structural simplification of an overwhelming majority of post-Communist states, they repositioned themselves in the  global labor division system as suppliers of raw materials and cheap labor. This lent the new order a stable basis. Such circumstances called for the appearance of a social and political actor capable of setting development goals and leading the change. By the start of the 1990s, all post-Communist countries had found themselves in the category of states of catching-up development. As such, they to some extent pinned their hopes for the future on a deepened cooperation with, and even integration into, the “first”, democratic, Western world, which was at the time viewed as a specimen symbolizing “the end of history”. However, solely the countries of the Central and Eastern Europe (notably, small and countries without significant international ambitions) agreed to accept the rules of the game written in the “first world” even at the price of a partial loss of sovereignty. Some of those countries associated the “Greater Europe” with previous historical, cultural, and political ties, democratic traditions and high role of civil society in political life (the states of the  Central Europe and, to some extent, Baltics.) Other countries were apprehensive of facing the challenges of a changed outside world and new threats emanating from neighbors (the Baltic states) alone. Integration into the European Union provided the Central and Eastern Europe countries with additional opportunities (but not guarantees!) of a transition to a more modern development model. The bulk of the post-Soviet states did not have a similar opportunity for a number of reasons (being part of another political tradition, weakness of democratic institutions and the  civil society, etc.), which further narrowed the outlooks of their modernization.

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Outlooks of the New Periphery The prospects of a structural differentiation of the New Periphery are closely coupled with the ability to generate actors of a development policy able to set goals of development and lead the change, as well as with the strengthening of integration, either going beyond the New Periphery or aiming to build cooperation within it on a new market and political basis, such as the EurAsEc and the Customs Union. The reinforcement of regional and global integration has a significant impact on the crystallization of actors of a policy of development, who act both within a habitual format of a national state and new formats promoted by the processes of globalization, regional and global migration, the imperatives of an open society. It appears that deliberate “cultivation” of new elites by the state is an important ingredient of such policy. It is the quality of elites that is invariably required to work out and implement future-oriented, but realistic strategies of development, which would include the involvement of post-Soviet countries in various integration projects. Elites with a modern mindset, education, and professionalism are crucial both for generating demand for new stable and efficient institutions and building such institutions as such. No exit from the New Periphery seems realistic without such new but stable institutions. Another important task is gradual involvement of an ever increasing share of population into modern economic patterns. It enables an efficient anti-backwardness policy and helps avoid the widening of social gaps to the point where they become cultural and civilizational, disrupting modernization. Modernization, a transition to a new development model, is only irreversible when backed up by the masses. However, this is hard to attain in practice due to a number of objective factors such as the structure of the national economy and employment, professional and cultural skills, the choice of an optimum strategy of development that is fit for the specific country. It is therefore worth examining to what extent the experience of other countries with a fast pace of economic and social development is applicable to the post-communist periphery. China and India, which have worked out efficient strategies of modernization with gradual involvement of traditional population into new economic and social patterns are graphic examples of such development. Apart from China and India and some other Asian states, whose development is

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a self-contained topic of research, one could speak primarily of such countries as Brazil (according to the IMF data, it had the world’s eight GDP in 2011) and Mexico (eleventh GDP; see table 8.1.) Despite fundamental differences between post-Communist countries and the fast-growing countries of Latin America, some similarities leap in the eye.1 In particular, both are plagued with a considerable social and wealth inequality, social and economic institutes are largely borrowed and often inefficient. Democratic regimes crystallized recently and retain the traits of a “managed democracy.” At the same time, Brazil, after the fall of an authoritarian military regime, succeeded in creating a rather efficient bi-sector economy.2 One sector comprises state enterprises, whereas the second sector of private enterprises is linked to transnational corporations, attracted to Brazil by cheap labor, which locate production there. This sector is growing extremely fast. Based on a consistent development strategy adopted several decades ago, Brazil has been carrying out a successful policy to overcome the backwardness of individual social groups and whole regions. Instead of distributing money, which is a typical practice in post-communist countries, massive state investments have been undertaken in education and the formation, on its basis, of new development goals in backwardness areas. Mexico shares with Russia and other post-communist states a long existence of a one-party system: over decades, Mexico was ruled by the Institutional Revolutionary Party, which, however, carried out rather efficient structural reforms in the mid-1980s that led to a sharp numeric decrease of state enterprises (from 1,156 in 1982 to 80 in 2000.). A considerable share of privatized companies ended up in the hands of foreign investors. Over the past decades, Mexico, a member of an economic association of North American countries (North American Free Trade Association, NAFTA), like Brazil, has attracted transnational corporations, which move there their operations from the USA or other countries. As a result, Mexico, which used to be an exporter of oil and 1 See: Semenov V.L. Latinoamerikansky opyt mozhet byt polezen Rossii (LatinAmerica’s Experience Could be Useful for Russia]. In: Latinskaya Amerika. 2010. Vol. 1. 2 See: Simonova L.N. Braziliya Luly: ot neoliberalnoy transformatsii k natsionalnoorientirovannoy ekonomike (Brazil of Lula: from Neoliberal Transformation to Nationally orientated Econmy]. In: Latinskaya Amerika. 2010. Vol. 2; Braziliya I Rossiya: Razlichnye traektorii dvizheniya [Brazil and Russia: Different Trajectories of development]? In: Mirovaya ekonomika i mezhdunarodnye otnosheniya. 2012. Vol. 10–11.

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raw materials, has become an exporter of mostly processing industry products (82% of exports in 2011)1. Thus, the experience of Brazil and Mexico shows that fast change is possible for a peripheral country. To some extent, and with significant adjustments needed to account for differences, this experience can be applied to the New Periphery countries. True, the issue of creating actors of a development policy able to develop and efficiently implement projects of economic, social, and political modernization has not been resolved in Mexico, Brazil, or post-Communist countries. Nevertheless, the development of new, more modern elites in those states is a promise of good chances in the future. Existing elites are, so far, concerned with the preservation of status quo in most countries of the post-Soviet world and the South-Eastern Europe. Objectively, they are not interested in the involvement of traditional social strata in new patterns, which may undermine their domination. One can assume that current elites will be replaced by new, more dynamic and modern ones in most post-communist countries as large-scale technological, economic, and political shifts occur in the world.

1 See: Sheremetyev I.K. Meksika: “voskhodyaschy gigant” v strategicheskom “kapkane” bloka NAFTA [Mexico: “Ascending Giant” in Strategic Trap]. In: Latinskaya Amerika. 2010. Vol. 5.

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Chapter 9

DEMOCRACY AND CHALLENGES OF A CHANGING WORLD Gregory I. Vaynshteyn, Nikita V. Zagladin, Andrey V. Ryabov

“Desovereignization” of Democracy The history of democracy has been marked by a constant search of optimal forms of its institutional structure ensuring efficient management of social processes. Although the different forms and mechanisms of democratic politics that emerged from this search across the world vary in their efficiency, by and large democracy proved its vitality over the past century by finding solutions for crises and responding more or less successfully to the challenges of time. Meanwhile, the new reality of this century not only stresses the imperatives of renovation of a democratic system, but also puts its adaptability to an ever serious test and brings the fundamental question on the agenda: Can contemporary problems be resolved by reforming traditional forms of democracy and gradually improving their institutional design? Today’s issues of democracy are largely due to the trends of globalization. One of the most striking manifestations of this relation is the objective shrinkage of representative democratic institutions’ sovereign power in a modern state. As is well known, historically, the development of democracy was coupled with the establishment of a space of democratic politics within the borders of a national state and a shift of power from the local to the national level. It is in the course of that process that the concept of “nation” first acquired a precise sense, which naturally enabled the implementation of a canonical democratic system, “government by the people for the people”, by contemporary democracy. However, the contemporary world is experiencing a new fundamental change, a shift of power from national states to supra-national structures. The increasing dilution of sovereignty of a number of national states,

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growing “transparency” of their borders and the development of their interior life from external factors that restrict the powers of national institutions and significantly reduce the opportunities for them to function in compliance with the fundamental principle of a democratic rule. Numerous international organizations, as well as transnational industrial and financial corporations in their totality make up a system of supra-national rule that is informal, ramified and non-accountable to the people. This system regulates the flows of capitals, products, services, workforce, cultural products, etc and ultimately restricts the powers of the institutions of national states. True, it would be wrong to overestimate the trends of erosion of sovereignty of contemporary national states. However, the reality is that in a great number of cases decision-making at the level of national states is determined by quite rigid frameworks determined by the above mentioned structures. A “relocation” of centers of power, caused by globalization, is becoming a factor of a new transformation of democracy fraught with an obliteration of the role of its representative institutions. As acknowledged by Western experts in political science, it becomes ever clearer that “globalization may pose a threat for the existence of democracy”1 as the specifics of contemporary social development are revealed in more detail. As global and regional interdependency of modern states deepens, the vitality of traditional democratic models of managing many socio-economic and social processes seems to weaken. Over the recent years this tendency has quite clearly manifested itself, in particularly, in the economic and financial crisis in Europe, where the governments of a number of countries had to take anti-crisis action guided by decisions taken by the authorities of the European Union, ignoring the demands of their citizens. When a key role in decision-making at the level of individual states is played by economic imperatives of globalization and international commitments, rather than the will of the  citizens expressed by way of global procedures, the role of democratic institutions in regulating a number of aspects of life is becoming limited and formal to a great extent.

1 See: Platner M. Globalization and Self-Government // Journal of Democracy. July 2002. Vol. 13. Nо. 3. P. 54.

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Autonomization of Politics and its Consequences Meanwhile, alongside with the globalization-driven objective narrowing of the space for democratic politics there exists a “subjective” dimension of globalization’s impact on the democratic process. Not only does globalization “force” ruling elites to adopt certain patterns of behavior by constraining decision-making to an externally prescribed “corridor of opportunities”, but it also increasingly obviously instills in a large portion of those elites an internalized propensity for such behavior. In essence, significant changes in the mentality of the ruling circles are taking place in today’s globalized world. As a result, many political decisions are now motivated not only by the elite’s egoist desire to fulfil their own group interest without paying due attention to the demands and views of mass population, but also by a completely new interpretation of national interests by the elites. The elite strata of the society are breaking up into two camps, nationally-oriented and cosmopolitan. The cosmopolitan factions of national elites increasingly often view a policy guided by the imperatives of globalization as the only right way to ensure social progress and meet broad social interests efficiently, rather than an unpleasant, but inevitable condition of existence of a national state in a contemporary world. The changes occurring in the mindsets of this faction of elite and elite-forming strata of the Western society lead to increasing differentiation between them and ordinary citizens as to their views of numerous issues of domestic and foreign policy and, therefore, in a deviation of governmental policies in a number of democratic states from the demands and preferences of mass population. A deepening rift between actual policies and social demands, which is to a varying degree manifest in the socio-political life of many democratic states, enables characterizing one of the trends of contemporary democracy as “autonomization of politics.” Objective imperatives of globalization and globalization-driven changes in the ruling circles’ views make their policy more autonomous from the will of the masses and less dependent on their interests and demands. The scale of this discrepancy between policy and mass demands can be judged, in particular, by the results of a poll carried out at the end of 2011 in EU member states. On the average, only half of the citizens of 27 EU member states replied affirmatively to the question whether they believed that their vote made any difference for the policy of their country. In such countries as Italy and Greece,

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a positive answer was given by an extremely small part of respondents, 18 and 15%, accordingly. Only 33% of Europeans believed their vote to count in the policy of the European Union.1 Regarding the attitude of the Europeans to the decisions by their political leaders, an average of 89% of respondents in all EU countries said that a “big gap” existed between those decisions and the public opinion. In France, Spain, and Italy this view is shared by 93 to 96% of respondents.2 A trend toward an increasing discrepancy between mass preferences and the policy pursued by ruling elites per se defies an unambiguous interpretation. On one hand, autonomization of politics is a clear sign that contemporary democracy is losing its representative nature and ability to efficiently embody the principle of political accountability that differentiates it from all other forms of government. On the other hand, in a time when solution of many problems of the contemporary society is impossible without unpopular and sometimes painful measures that have long-term targets and do not fully match the desire of a considerable part of population to preserve an existing socio-economic status quo, a deepening gap between real policy and immediate requirements of the masses seems inevitable. Autonomization of politics is also to a great extent driven by systemic changes in the workings of political institutions, their roles in the structures of contemporary democracies. In an informational epoch, satellite television and, later, the Internet became powerful political actors that largely take over the functions of traditional parties (ideology, integration, mobilization.) The contemporary mass media, with their ramified feedback relations with the society, retain independence in shaping their agenda and informational policy. The dependence of the parties themselves on voters is also weakening for a number of reasons. Thus, the role of numerous experts and consultants that work out party strategies in the sphere of public politics and relations with large businesses is growing. These people are not elected to their positions and are, therefore unaccountable, sometimes even unknown, to their voters. A large-scale development of contemporary information technologies in political management eliminates the need for numerous low-level party activists who previously bridged the gap between party leaders and voters. Due to changes in the social structure and radical shifts on 1 See: Future of Europe. Special Eurobarometer 379, European Commission. April 2012. P. 25, 23. 2 Ibid. P. 28.

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the job market, the role of trade unions and other organizations of population significantly dropped. Even a noticeable upturn of mass protests during the European debt crisis of 2011–2012 failed to produce a palpable impact on the policies pursued by national governments. Autonomization of politics is also driven by the fact that the existing mechanisms are oriented towards national politics, whereas key strategic decisions are taken at the regional or global level, often without any democratic accountability. Signs of a crisis in the way contemporary democracies work are largely the result of shifts in the system of global capitalism over the past decades. Having lost an opponent and competitor represented by the global socialist system, global capitalism felt free to become less socially oriented, more elitist, and pay more attention to upholding social equity. The new capitalism of the 21st century has been marked by a precipitous growth of social inequality. The growth of contemporary information technologies, especially in finance, as well as globalization of world finance, strongly reduce opportunities for public control over economic policy. The emergence of an international stratum of the ultra-rich, targeted by a global industry of status consumption, the reduction of the role of the traditional middle class, its economic and political weakening undermine the foundations of contemporary democracies and strengthen elitist trends in political life. True, autonomization of politics is not unconstrained. In particular, political elites cannot afford to lose sight of the hazards associated with political destabilization that may result if certain limits of “indifference” to mass opinions and demands are stepped over. Truly electoral considerations play a significant role in political decision-making as well. Jean-Claude Junker, the prime-minister of Luxembourg, which until recently presided over the Eurozone member states, aptly expressed the problems faced by European politics who sought a solution to the economic crisis: “We all know what to do, we just don’t know how to get re-elected after we’ve done it.”1 In addition, one should not disregard such factors as flexibility and high adaptability of party systems in developed democracies. Once mass voters lose their trust in traditional parties, existing mechanisms open up a wide range of opportunities to create new parties, which can quickly enter the “political market” and pervade governmental institu1

Cited in: Nelson Fr. Europe’s hit squad // The Spectator. 2011, November 12.

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tions. Suffice it to recall the success of “pirate parties”, which opposed any attempts to limit freedom in the Internet in some EU countries (Sweden, Germany), the Palikota Movement in Poland taking a strongly anti-clerical stand in a country with a traditionally powerful Catholic Church. In this context, one should also mention electoral blocs and associations that unexpectedly achieved high results on the surge of protests in European states during the debt crisis (SYRIZA in Greece, the Five Star movement in Italy.) Although a decisive role in their fast ascent was played by populist leaders and agendas, one cannot deny that even organizations of that kind, as long as they honor the rules of public competition, can play a positive role by mitigating the adverse impact of the crisis on the credibility of the political system. However, the severance of the political process from the demands of wide masses is an earnest trend of contemporary democracy with far-reaching implications, which manifest themselves in a drop of credibility of governmental institutions, a decline of mainstream political parties, and, accordingly, a crisis of the parliamentary system; the population’s growing political apathy, loss of interest in participation in political life, a shift of significant factions of the population to alternative expressions of socio-political views, including support of populist or extremist movements as a way of immediate articulation of their attitudes. Currently, as shown by the experience of South Europe and France, a grave issue is ripening: it is extremely difficult to persuade ordinary citizens of the countries that are either hit or threatened by the crisis that such measures as raising retirement age, abolishing bonuses (such as the thirteenth or fourteenth monthly pay in Greece), embracing part-time employment, putting up with a growing unemployment, especially among young people, etc. are an imperative dictated by the circumstances. Risks of a surge of both leftist and rightist populism accompanied by the advancement of leaders deliberately giving exaggerated social pledges that cannot be kept up in principle are growing. Such leaders can be brought to the forefront either by traditional left parties that try to revive radical slogans of the past in order to achieve immediate success or by some new socio-political movements. In Greece, at the elections on June 17, 2012, voters showed common sense by giving a majority to the right-centrist New Democracy party inclined towards an adaptation to the realities of the Eurozone’s globalized economy (109 seats of 300 in the national parliament.)

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A more complicated situation unfolded itself in France. The presidential elections of 2012 were won by the socialist François Hollande, with left parties winning 527 of 577 seats in the parliament after the elections on June 17, 2012. The issue faced by France, Europe, and the world in general, is that the success of the left was due to a designedly infeasible populist agenda, which cannot be implemented just because there is not enough money. Hollande’s attempts to obtain the necessary amounts from the European Union have failed. The future remains uncertain. The left are guaranteed to stay in power for the next five years according to the existing Constitution. What will they do? Will they give their electoral agenda an easy ride, driving the country to destabilization? Or will they break down the European Union, provoking an unprecedented European and, later, a global, crisis? Or will they open up the gates to power for even more radical left or right organizations? These points beg the question whether even the modern advanced contemporary model of democracy is guarded against a takeover of power by populists in a way similar to the case of Germany and A. Hitler’s National Socialist Party in 1932. Whether it is even possible to set up an efficient protection against a victory of populists deliberately leading the society into a deadlock is a debated question. One should, however, bear in mind that until recently constraints on radical, populist, and extreme nationalist parties have been rather efficient in advanced democracies. They are based on a time-proven ability of elites to consolidate themselves in a decisive moment to block radicals that threaten the foundations of a democratic rule, the values deeply rooted in the public opinion, its rationalism, which has not been shaken even by the recent crises. Although radical parties sometimes won seats in parliaments or even in governments, they never obtained access to key decision-making. Suffice it to recall the recent political histories of Austria, the Netherlands, and Finland, where rightist nationalist parties failed to change the internal policy in any fundamental way, or a spectacular failure of the French nationalist leader Jean-Marie Le Pen in the second round of presidential elections in France in 2002.

Democracy and Development: New Aspects Significant fundamental changes in the functioning of democratic systems put the ideology and the practices of representative democracy to

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a serious test. One should not, however, lose sight of the fact that the future of representative democracy largely hinges on whether its institutions and mechanisms are in principle capable of swift and adequate resolution of contemporary society’s complex problems without mass resentment. Can it be that a dangerous gap is forming itself between traditional procedures of democratic politics and the need for rational and fast responses to new challenges? In other words, does democracy retain the ability to ensure development, as formulated already by John Stuart Mill, or is it beginning to lose to authoritarian bureaucratic capitalism in terms of socio-economic development and economic efficiency? These questions, which seemed far-fetched in the 1990s, began to gain political momentum already at the outset of the 21st century, especially after the global crisis of 2008–2009.1 The extent to which democratic countries will be successful in addressing the issues of development will be largely decisive for the outlooks of spread of democracy to other countries. In the first decade of this century, this spread clearly slowed down after a fiasco of an attempted new wave of democratization in the post-Soviet area. At the same time, the Chinese model of development based on authoritarianism and state capitalism is becoming more attractive for emerging markets. Democratic transformations of the 21st century in North Africa and South Asia, spurred by external military interventions (Iraq, Afghanistan) or a combination of external and domestic factors (Tunisia, Egypt, Libya) can hardly testify to the universality of democratic values across the modern world. The fall of authoritarian regimes in North Africa was caused by a simultaneous attack by forces that pursued divergent goals. Many representatives of urban youth and middle class could no longer tolerate the power of corrupted bureaucracy, which was unable to take advantage of globalization to boost the development of their countries on the model of Asian states. However, mass protests were joined by adepts of “Islamic revolutions”, who believed that the best fit to the interest of most population was sharia law. The first democratic parliamentary elections of 2011 after the collapse of H. Mubarak’s regime in Egypt brought to power the Muslim Brothers, an international religious and political association banned in the country already by G.A. Nasser and classified as an extremist and 1 See: Karaganov S. Novaya epocha: chto delat [A New Epoch: What Is to Be Done?] In: Rossiyskaya gazeta. September 12, 2007

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terrorist organization in the USA and Russia. However, the first steps toward islamization of Egypt resulted in sharp protests verging on riots in large cities, where a faction of population connected by the Internet and inclined towards a European development model was highly capable of self-organization. Should Assad’s regime collapse, a similar internal conflict is quite likely in Syria. Options for the development of Egypt and a number of other countries of the Islam world that experienced the so-called “Arab spring” are extremely hazy. The likelihood of Islamist regimes coming to power with a more or less pronounced fundamentalist orientation and the danger that such regimes may stay in power for a long time is high. Fundamentalists, by using contemporary brainwashing technologies, can indoctrinate generations of young people, including well-educated ones, instilling a persistent hatred for former colonizers and their democratic values. On the other hand, sharpening conflicts in the Islam world make it rather likely that power will be taken over by top army officers, who will create a technocratic, pragmatic regime focusing on resolving urgent socio-economic problems without any ideological foundation whatsoever. The second scenario appears even more likely, given that a strengthening of technocratic tendencies is a global trend. An instructive example is furnished, in particular, by technocratic trends in the policy of some European countries that transpired during the current economic crisis. Notably, some recently proposed philosophical frameworks put forward a new form of government, “epistocracy” (a rule of experts) as an alternative to existing socio-political forms.1 To a large extent, this is a response to the frustrated hopes of the 20th century associated with an allegedly important role of “participatory” democracy in transforming contemporary societies. In some sense, “epistocracy” reflects disappointment in participatory democracy and a swing of the pendulum of political thought from one side (idealization of the will of the majority) to the other (prioritizing the rule of the “the chosen few”, the professionals.) It is also illustrative that the Internet debates a return to a classical liberalism of the 19th century with access to elections limited by a system of qualifications (property, age, gender, or race.) Such option does not seem very plausible: on one hand, the criteria underlying the quali1 See: Estlund D. Why not Epistocracy? In: Reshotko N. (Ed.). Desire, Identity and Existence. Kelowna, BC: Academic Printing and Publishing, 2003. P. 53–69; Estlund D. Democratic Authority. A Philosophical Framework. Princeton University Press, 2008.

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fications of electoral rights are extremely hard to define; on the other hand, people deprived of electoral rights will feel outcast and become a broth for extremist and terrorist movements. The ideas of “electronic democracy”, or Internet vote with nearly legislative powers, return politics back to “direct democracy” of the Ancient Greek Athens or the Russian Novgorod. While useful for public opinion polls or a more efficient municipal management, they automatically cut off people who either do not have the skill of using the web or have not access to it; besides, the outcome of such poll, if it acquires a socially significant role, can be rigged up with the use of contemporary technology. However, even today the application of “electronic democracy” in small and homogeneous countries with a strong democratic tradition can stimulate and enhance representative institutions. An example is furnished by today’s Iceland, where a draft constitution was actively and efficiently developed, by and large, on the Internet. Nevertheless, one has to admit that such experience will only be applied in a limited number of countries in a short term. This is not to say that contemporary representative democracy system cannot be further improved. One possible novelty could be a system of legal provisions and institutions around the impeachment of the head of state and the dissolution of the parliament not only for breach in the fundamental laws but also for a failure to keep up electoral pledges within, say, a year (except major force circumstances caused by economic, environmental or other emergencies.) The right to initiate such a procedure (in a situation of populists controlling both the legislative and the executive branch) should probably be vested in a neutral dedicated political body and be subject to a preliminary approval via a web referendum.

Democracy, National State, and External Threats In an age of globalization, issues of democratic societies are exacerbated by a growing impact of external factors on their internal life. Over the second half of the last century, adverse trends in the countries of Western democracy and the difficulties of their functioning were chiefly due to largely internal changes in the countries themselves, in particular: • an evolution of social structure affected by structural shifts in the Western economy;

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• socio-psychological changes resulting from growing educational level and living standards, which spurred changes in the standards and motives of social, economic, political behavior of mass population toward further individualization; • “closeness” of ruling elites and their inability or reluctance to carry out a policy matching the interests of wide masses; • an objective reduction of socio-economic opportunities for governments overloaded with social commitments, etc. However, the specifics of the issues faced by today’s democracy lie in a growing impact of external factors, such as terrorism, immigration, international crime, dilution of national cultures and ways of life by external stimuli, on its internal life. The experience of the past decades shows that democracies have learned to cope with many internal challenges in quite an efficient way, but seem unprepared for a number of external developments. Significant changes in the social situation in Western developed countries are triggered, for example, by an inflow of millions of people from non-Western societies. Alongside with a broad penetration of Western cultural and socio-political standards in non-Western societies, globalization has resulted in a large-scale infiltration of Western democratic societies with the bearers of anti-Western values and behavior patterns, including radical opponents of such societies, who directly threaten their socio-political stability. Being unable to let go their ethnic identity, they continue to sympathize with the world they have left behind and approve of behavior patterns that are legitimate in the context of the values of their home civilization but run in the face of the values of a their new environment. Shifts in ethno-national structure of Western (primarily European) countries triggered by such immigration lead to new social conflicts and social tensions that have not yet been efficiently remedied. Such conflicts are sharpened in European countries by the fact that they create a completely new reality of a growing cultural and religious diversity that is essentially alien to most of those nations, which jeopardizes Europe’s civilizational identity. As stressed by authoritative Western political scientists, the goal of “the integration of immigrant minorities – particularly those from Muslim countries – as citizens of pluralistic democracies», is «the more serious longer-term challenge facing liberal democracies today.”1 1 See: Fukuyama F. Identity, Immigration and Liberal Democracy. In: Journal of Democracy. April 2006. Vol. 17. Nо. 2. P. 5–6.

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The demographic transformation of a number of Western, primarily West-European, democratic countries strengthens and vitalizes forces that challenge traditional institutions of democratic politics. Today, these are largely radical right political parties backed up by a growing concern of the native population of the Western countries with the negative consequences of a growing immigration. At the same time, some trends that are destructive for a democratic process are quite likely to sharpen themselves and acquire new twists as new ethnic factions of population inevitably grow more active politically. True, it is still too early to judge what impact this process will eventually have. However, speaking of Europe, integration into political life will be as painful and difficult for a significant mass of its “new inhabitants”, primarily from a Muslim diaspora, as their integration into social life. Many of them do not accept the principles of democratic politics prevailing in the Western society or, at least, interpret them differently than most native population. Therefore, if Europe fails to incorporate its “foreign-culture minorities” into its general democratic culture by replacing a failed multiculturalism model, the presence of such category of citizens in the European society will become a ticking time bomb. Many Western expert believe that «it is bound to provoke an even sharper backlash from nativist or populist groups and may in time threaten European democracy itself.”1 A scenario that seems quite real today is a replacement of social and class conflicts that used to determine the political process in Western democracies over most of the past century with socio-cultural conflicts triggered by a growing ethno-national and confessional heterogeneity of the society. This will put democracy to an extremely harsh test, since ethnic conflicts, as noted by many experts, are the hardest to resolve in a democracy. During class conflicts of the past, democratic systems worked out rather efficient mechanisms of settlement of such conflicts. However, democracies have no similar tools for settling ethnic conflicts and, more generally, tensions caused by ethnic or cultural differences. Another ingredient of “external influence” on Western democracy is international terrorism. Unlike changes in ethnic structure of the Western society that jeopardize its social stability, the activation of international terrorism is a direct threat to its public security. The transformation of international 1

Ibid. P. 15.

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terrorism into a key factor of contemporary reality poses a serious challenge for the adherence to the values of liberal democracy and priority of human rights and freedoms traditional for Western citizens. The public opinion began to realize that in today’s world public security requires certain constraints on individual freedoms, a more rigid police control, and some breach of privacy. As is well known, democratic countries have had an experience of limiting civil freedoms before. But such limitations were due to emergencies of war and, ultimately, did not lead those countries to abandoning the principles of liberal democracy. The Western world is facing a radically new situation today. While previous “states of emergency” were transient, temporary, the current war on international terror is likely to continue indefinitely, requiring, in essence, a permanent subordination of the liberal values of individual freedom to the imperatives of public security. The description of the difficulties faced by the democratic system today due to a sharpened conflict between the values of individual freedom and public security will not be complete without new issues triggered by the development of information technologies, especially, the Internet. The practice of a spontaneous and uncontrolled development that has emerged over the span of its existence has enabled huge flows of information; yet, it also opened opportunities for abuse of democratic freedoms by various anti-social forces, including extremist and terrorist underworlds. In the light of a recent activation of international terrorism, the issue of control over the web is becoming particularly sharp. The difficulties are due to the fact that regulation of the web is extremely hard owing to a great number of legal, socio-psychological and purely technological obstacles that are hard to surmount. It is also true that the need to work out a legal framework regulating the functioning of informational technologies per se confronts contemporary democracy with yet another challenge, as a revision of Internet practices to fight abuse of democratic freedoms is hardly possible without making the decision to limit such freedoms. In other words, in this case, like in many others, the maintenance of the vitality of a democratic society turns out to presuppose some infringement of democracy. Essentially, the issues faced today by democratic systems as regards management of social processes, social stability, and public security enable one to associate the defects of such systems not only with a lack of democracy, but also with some “excess” of democracy. In some cases, excessive democracy binds democratic insti-

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tutions hand and foot and impedes their swift and efficient response to some new challenges of today’s reality, in particular, by reducing their ability to counteract the blind force of a globalized economy.

Democracy’s Future It follows that, in the context of today’s world new realities, chances to overcome the contemporary problems of democracy within the existing paradigm of democratic process born in previous epochs look increasingly dubious. Due to this, the current changes in the democratic system are acquiring a completely new dimension, the essence of which is still largely unclear. One of the most fundamental but hardest questions regarding the future of democracy is: what is behind its current changes? Is it a transformation of democracy, which means a renovation of its traditional institutions, or, on the contrary, an erosion and crisis that strengthen the positions of competing ideologies (such as technocratism, nationalism, populism, religious fundamentalism, “authoritarian capitalism”)? A number of other questions follow from there. Can democracy find responses to the challenges of a new epoch without dismantling its foundations? Is it a crisis of democratic system in general or a crisis of its “liberal” component? In this conjunction, the question arises to what extent democracy is identical with liberalism. One has to clarify, on one hand, whether we are witnessing the birth of a more rigid (or at least less liberal) structure of a democratic order that will be a better match for the realities of today’s world and, on the other hand, how and where is one to draw a line between a “stricter” democracy and the existence of democracy as such. As mentioned before, there are no obvious answers to any of these questions so far. There is quite a broad range of judgments as to the nature of the processes experienced by the democratic system today. However, the existing views, despite their differences, share common points. One point that is being increasingly acknowledged is the realization that improvements to mechanisms regulating social processes require a certain revision of the existing liberal democratic model underlying the political institutions of the Western society. Doubts whether such model is the sole option are, as it seems, no longer stigmatized by the intellectual establishment of the West as an ideological heresy. In their reflections, many Western political experts more or less

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openly express the idea that strict adherence of democratic institutions to liberal policy principles reduces the ability to counteract the blind forces of globalism fraught with dangerous destructive energy. Many experts also share the view that the forms and mechanisms of democratic politics created in the past are increasingly at odds with the reality of today. To quote some authoritative Western authors, “representative government is no longer as compelling a proposition as it once was. Instead, a search for new institutional forms to express conflicts of interest has begun.”1 A characteristic example of such interpretation is, in particular, the concept of the so-called post-democracy.2 Striking are not so much the views of its adherents that a “decline of mass democracy” and a considerable reduction of the citizens’ influence upon the political process are the clearest signs of a shift of the Western political systems to a “post-democratic” state, as their judgments as to the causes and some specifics of such trends. They speak, in particular, of a decline of organized social movements (labor movements and political parties expressing its interests), which could oppose an increasing concentration of power in the hands of professionalized political elites and trans-national corporations. This circumstance gives grounds for predicting a stable trend described above as “autonomization of politics” and casts doubts upon the outlooks of a revived political engagement of the masses. At the same time, some prospects of the strengthening and development of democratic systems can be associated with a spread of direct democracy, for which today’s informational era provides additional opportunities. In this conjunction, one should mention a spread of “electronic government” in the practices of democratic countries (Russia’s attempt to apply this system, cannot, unfortunately, be called a success.) Quite interesting examples are the experience of Iceland, mentioned above, whose new constitution was, for the first time in history, developed through the engagement of broad masses of population via the Internet; as well as Estonia, which introduced new forms of direct democracy at the municipal level. In broader terms, all this points to an opportunity to strengthen feedback in modern democratic societies and expand participatory democracy, which may help contain elitist tendencies. 1 Dahrendorf R. Afterword // Pharr S.J., Putnam R.D. (Eds.). Disaffected Democracies: What’s Troubling the Trilateral Countries? Princeton, 2000. P. 311. 2 See: Crouch C. Post-Democracy. Cambridge, 2004; Rorty R. Post-Democracy // London Review of Books. 01.04.2004. Vol. 26. Nо. 7.

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All this having been said, existing trends do not give politicians and experts much grounds for optimism regarding the future of the democratic system. One could say that the key particular feature of its development in the contemporary epoch is that, contrary to the past, it leads to an “ebb” of democracy, the obliteration of a democratic principle in political systems, rather than to the deepening and improvement thereof. This is due to objective imperatives of the democratic systems in a changed world, rather than egoist interests of ruling elites. A single, but significant, reservation should be made in this respect. The development of a democratic society is (especially nowadays) a process with many unknowns. Although many factors influencing this process seem well established and stable, it would be wrong to speak that the outlooks of contemporary democracy are predetermined. Speaking, for example, of globalization that affects democracy negatively, it is unknown how long it will retain its present nature or whether they it transform itself into something else or even reverse and move towards autarchy. Some time ago, at the outset of the past century, trends of globalization (which, however, did not have such a broad scale) were, indeed, reversed. Faced with new difficult or even dangerous issues created by the contemporary globalization, the masses and even the ruling circles of political and economic elites may realize the need for “curtailing” such trends. Ideas of an alternative globalization emerge both in the public opinion and governmental policies of some developed countries, creating prerequisites for some slowdown or even reversal of globalization processes. The trends of cutting of the masses from policy-making should not be overrated either. In particular, as the European integration shows, it is clearly too early to dismiss the masses as an active force able to determine the future of a political process despite the desires of political elites. In particular, the rejection of the European Constitution worked out by the EU leaders at referenda of 2005 showed the non-viability of political decisions made by elites without due regard for the demands of ordinary citizens and the continuing significance of democratic will-expressing mechanisms. Of course, the example of the European Constitution testifies to the power of plebiscitary, rather than parliamentary, democracy. Yet, the very fact that a democratic mechanism retains the ability to counteract technocratic pragmatism of the elites is impressive enough.

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Chapter 10

TRANSCULTURAL MIGRATION AND THE FUTURE OF MULTICULTURALISM Irina P. Tsapenko, Irina S. Semenenko

International Migration in a Global World-Political Context A swift growth of the global economy over most of the recent two decades has resulted in a strong surge of international migration of workforce and other strata of population. Characteristically, even the latest global crisis, despite its short-term impact on the scale and the direction of migration flows, has failed to disrupt a steady trend of a gradual numeric increase of international migrants,1 which reached the level of 214 million people per year in 2010.2 The Western countries play a dual role in the international exchange of population. As sources of emigration,3 they inevitably suffer from its adverse impact such as outflow of labor resources and brain drain. But above all they are the largest recipients of immigrants. In the 2000s, they experienced an extremely fast growth of foreign-born population. This trend was universal and comprised all developed countries (excluding a slight and transient drop of immigration to the USA and Germany at the peak of the recent recession.) As a result, the share of immigrants in the population significantly grew everywhere, especially in Spain and Ireland, where it grew by almost 10  percentage points. 1 The term “international migrants” and its synonym “foreign-born population” apply to individuals who reside outside of their countries of origin, i.e. foreign-born, including naturalized descendants from other countries. 2 Whereas the number of international migrants grew by approximately 15% in the 1990s, it rose by 20% in the 2000s (see: World Migration Report 2010. The Future of Migration: Building Capacities for Change. Geneva, 2010. Р. 115.) 3 Over 3.4 million natives of Germany, 3.3 million natives of the UK, 2.6 million natives of Italy, 1.3 million natives of Portugal, 1.2 million natives of the USA, 1.1 million natives of Canada and France reside in the OECD member states outside their countries of origin (Trends in International Migration: 2004 Edition. P.: OECD, 2005. P. 147).

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Immigrants have become an important ingredient of the demographic structure of recipient states, exceeding one-fourth of the population in Australia and Switzerland (see Table 10.1). Moreover, the percentage of residents with immigrant background almost doubles if children of immigrants are included.1 Table 10.1. Stocks of foreign-born population in selected OECD countries and the Russian Federation (2000–2010) Foreign-born population (thousands) Country

2000

2010

5,994.1

23.0

26.8

1,315.5

10.4

15.7

4,666.9

7,056.0

7.9

11.5

10,256.1

10,591.0

12.5

13.0

328.7

772.5

8.7

17.3

Spain

1,969.3

6,659.9

4.9

14.5

Canada

5,327.0

6,777.6

17.4

19.9

Netherlands

1,615.4

1,868.7

10.1

11.2

New Zealand

663.0

1,013.0

17.2

23.2

Australia Austria UK Germany Ireland

Norway USA

2000

2010

4,412.0 843.0

Percentage of foreign-born population (%)

305.0

569.1

6.8

11.6

30,273.3

39,916.9

10.7

12.9

Switzerland

1,570.8

2,075.2

21.9

26.6

Sweden

1,003.8

1,384.9

11.3

14.8

11,891.8

12,270

8.1

8.7

Russia

Source: International Migration Outlook: SOPEMI 2012. P., 2012. Р. 336. Adapted by the authors.

1 In the USA, migrants of the first and the second generations totally accounted for 22.5% of the country’s population in 2010, and their share may rise to 30.5% by 2040 (see: Projections of the U.S. Population, 2010–2040 // Immigrant Generation and Foreign-Born Duration in the U.S (www.usc.edu/schools/price/futures/pdf/2011_PitkinMyers_Projections-Immigrant-Generations-and-Foreign-Born_Executive-Summary. pdf ). In Sweden, some 25% of population had at least one parent born abroad in 2012 (See: Hammarstedt M., Marten Palme M. Human capital transmission and the earnings of second-generation immigrants in Sweden // IZA Journal of Migration. 2012. No. 1.) In France, first- and second-generation immigrants account for 20% of population (see: Simon P. French National Identity and Integration: Who Belongs to the National Community? Wash. DC: MPI, 2012. P.14.)

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Mass immigration is an important factor in resolving demographic problems. It helps level out structural disproportions on the job market and boosts economic growth. At the same time, it contributes to radical changes in the ethno-cultural composition of the recipient societies and their religious and confessional landscapes. Such changes both fuel development and result in sharp socio-political tensions. An increasingly demographically skewed contemporary world is fueling a precipitous growth of migration flows from the South to the North, from poor regions to the countries of the so-called “golden billion”, that are both geographically remote and ethnically and culturally alien to the former (North America, Europe, Australia, New Zealand, Japan) (see Fig. 10.1.) The share of descendants from the Southern countries in the overall immigration to the USA and Canada has reached 84% and is fluctuating about that level. Their average share in the total number of newcomers per year grew from 53% between 1990 and 1999 to 59% between 2000 and 2009 in Australia and New Zealand and from 36 to 43% in Europe, respectively.1 This process was accompanied by a geographic diversification of migration routes, which further mingled their ethno-cultural composition2. Figure 10.1. Number of international migrants by region of origin and destination between 1990 and 2010 (million people) 74.3

73.2 59.8 53.5 42.1

39.9

13.3 13.3 South-North

South-South 1990

North-North

North-South

2010

Source: Population Facts. 2012. No. 3.

1

Secretary-General’s Report on International Migration and Development 2012. For example, whereas in 1992 migrants from 187 countries and territories arrived to the USA, this figure grew to 203 in 2010. New channels of immigration to the USA emerged due to the so-called Diversity Lottery, which awards winners residing in countries with a low/zero level of emigration to the USA with US permanent residence visas. 2

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Russia is also experiencing a growth of a “southern stream” of immigration, which changes the look of labor migration. In 2010, the share of immigrants from Asian developing countries among guest workers exceeded 80%, almost doubling since 2000. The foreign workforce is numerically dominated (55%) by immigrants from Uzbekistan, Tajikistan, and Kyrgyzstan,1 mostly young people, whose socialization took place in the post-Soviet years in a cultural and linguistic environment different from the Russian one. This has created a huge cultural gap between the newcomers and local Russian population, sparking social tensions and giving rise to new kinds of xenophobia. Mass immigration of people with different cultural and ethnic background has implanted a trend toward a global demographic AfroAsiatization into the developed states and strengthened the influence of foreign-culture identities in the Western civilizational area. It has strongly amplified the cultural inhomogeneity of the recipient societies. A high reproductive potential of newcomers from the South was conducive to a swift spread of new ethnic and confessional minorities in the developed countries. The percentage of immigrants from the South in the foreign-born population of the countries of the North grew from 49% in 1990 to 58% in 2010,2 exceeding 85% in the USA. Significant differences in the prevalence and the composition of foreignculture population across countries and continents have a strong impact on the specifics of the issues related to its integration in recipient societies. The growth of a mobile middle class in non-Western countries has amplified the cohorts of immigrants that are better educated and more adaptable to the local cultural milieu. Thus, 63% of immigrants from India, 52% from Philippines, 45% from China living in the OECD countries aged above 15 have a tertiary education, with the respective employment figures of 67, 70, and 55%.3 However, the share of people that do not have any education whatsoever is exorbitant among immigrants from developing countries, especially former immigrants residing in the OECD states: 70% of immigrants from Mexico and almost 60% of 1 Calculations based on: Rossiysky statistichesky ezhegodnik [Russian Statistical Yearbook]. 2012. Moscow, Rosstat, 2012. P. 138. 2 Calculations based on: Secretary-General’s Report on International Migration and Development 2012. 3 Dumont J.-Chr. Global Profile of Diasporas. Tenth Coordination Meeting on International Migration. New York. 2012, 9–10 February.

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immigrants from Morocco and Tunisia.1 A low level of education among a considerable part of migrants, which impedes their socio-economic integration, is superimposed on their attachment to a different culture. This lends cultural differences particularly sharp and stable forms, reinforcing socio-cultural rifts within the recipient societies.

The Transcultural Dimension of Migration Contemporary migration is nothing like a completely unilateral or unidirectional movement accompanied by a loss of historical roots and bonds with homeland and, ultimately, a step-by-step integration into the recipient society. A large number of immigrants who failed to adapt to a new country return to their homeland along with temporary guest workers, etc.2 The remaining immigrants join diasporas, which hold onto numerous social relations with the country of exodus. Such relations create deterritorialized inter-state communities, where compatriots stick together. Such “worlds” (a “British world” within the bounds of the British Commonwealth, a Francophonie world comprising descendants from former French colonies, Hispanidad as the common religious and cultural heritage shared by the Spanish and the descendants from former Spanish colonies in Latin America, an “Armenian world”, etc.) are based on shared identities bridging up the past and the present. A special phenomenon of the “Russian world” has emerged from several heterogeneous waves of emigration from Russia and several fundamental changes of political regime and institutional order in the past century. On the other hand, the number of “nomadic” immigrants wandering from country to country, with their cosmopolitan identity, is growing as well. These include employees of TNCs, who travel the world almost without limits (“citizens of the world”, of “invisible” migrants), a large share of highly-qualified professionals invited to work overseas on a fixed-term contract, etc. 1

A Profile of Immigrant Populations in the 21st Century. P., 2008. P. 84. The percentage of immigrants admitted to developed countries with a long-term residence permit and having resided there at least five years but returning to their homelands varies from 20 to 50%. Thus, one-third of immigrants leave the USA, whereof 20% do it within the first decade of residence in the country. 2

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Such migration, termed “transnational”,1 is accompanied by a transfer of social practices from place to place and leads to a diversification of socio-economic institutions such as language, lifestyle, behavior patterns, the emergence of hybrid forms thereof, etc. In the sphere of culture, this process takes up the form of “transcultural migration.” One of the authors of this term, D. Hoerder, defines it as follows: “Transculturalism denotes the competence to live in two or more differing cultures and, in the process, to create a transcultural space which permits moves and linkages back to the evolving space of origin, entry into the evolving space of destination, connections to other spaces, and the everyday praxes of métissage, fusion, negotiation, conflict, and resistance. In the process of transculturation, individuals and societies change themselves by integrating diverse lifeways into a new dynamic everyday culture.”2 Life at the intersection of different cultures is especially typical of megalopolises, which are transformed into global transcultural cities by global human traffic. Immigration, as a key component of demographic globalization, results in an inter-cultural interaction, integration, and gradual fusion of different ethnic groups and cultures, creating populations (race and ethnic, as well as cultural and civilizational, groups) that have never existed before. Examples are the US, the Canadian, the Australian, and the New Zealand nations, the Latin American super-ethnos, etc.3 Transcultural immigration, which has played an immense role in creating those nations and super-ethnoses, has, in essence, become a system-forming foundation of the US as a state: it shaped and built the American “nation of immigrants”. “The USA has transformed itself into a completely new community... The USA is on its way from being part of the Western Civilization to becoming a ‘universe country’, a snapshot of the whole world ...”4 At the same time, as will be shown below, once the inflow 1 Schiller N., Basch L., Blanc C. From Immigrant to Transmigrant: Theorizing Transnational Migration // Anthropological Quarterly. 1995. Vol. 68. No. 1. Р. 48–63; Glushschenko G.I. Transnatsionalizm migrantov i perspektivy globalnogo razvitiya [Transnationalizm of migrants and the perspectives of global development]. In: MEiMo. 2005. No. 12. Pp. 50–57. 2 Harzig Chr., Hoerder D., Gabaccia D. What is Migration History? Cambridge: Polity press, 2009. Р. 84–85. 3 See: Naseleniye i globalizatsiya [Population and Globalization]. Мoscow, Nauka, 2004. Pp. 173, 199. 4 Menk A. Stary Svet i “strana-vselennaya” [The “Old World” and “ Country –Universe”]. In: Rossiya v globalnoi politike. 2004. No. 6 (www.globalaffairs.ru/number/n_4207)

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of immigrants exceeds the acceptable threshold of admission to a new society defined by that society’s ability to “digest” newcomers, the opposite, disintegrational trends in the society may emerge (as shown by the situation in the US southern states.) Dramatic socio-cultural shifts spurred by immigration of people with different cultural background are taking place in Europe. The formation of transcultural societies existing, as it were, above culture boundaries, manifests itself in a number of ways. First, the native population of developed countries gradually accepts their society’s cultural diversity, and shows, at the level of mass consciousness, a growing preparedness for inter-cultural interaction. In 2011, 44% of EU residents quoted the values of cultural diversity as the most firmly established values in the EU, 56% mentioned the values of tolerance and openness to others. The significance of these values grew approximately by 10 percent points as compared to 2007.1 Polls show that most residents of the European countries regard the presence of different races, religions, and cultures in a society as beneficial. Growing ethnic diversity enriches the recipient societies with new forms of culture and social organization. Ethnic art, customs, cuisine, clothes, festivals, and holidays transcend the boundaries of migrant quarters, pervade the lifestyle of the local population and become part and parcel of the look of whole cities. The so-called “ethnic economy”, due to the use of “ethnic resources”,2 exhibits an amazing vitality that manifests itself even in such niches unattractive for local businesses as narrow, specific, low-income markets located in areas with a high crime rate. By using the same ethnic resources, migrants successfully develop transnational trade that meets their compatriots’ demand for special products habitual in their homelands: beverages, music, etc. Scientific research views cultural diversity and tolerance thereto as a prerequisite for the development of a creative economy.3 An interre1

Special Eurobarometer. 2012. No. 379. “Future of Europe”. Ethnic resources include multiple systems of social, primarily, family and kinship, relations, a common culture, religion, and language, ethnic solidarity and trust, national traditions and values of enterprise, psychological satisfaction with “non-assimilation” and a job in an enclave. Relationships of co-ethnic economic agents built on trust and ethnic solidarity help reduce transactional costs and enable businesses to earn a higher profit. 3 Florida R. The Rise of the Creative Class. And How It’s Transforming Work, Leisure, Community and Everyday Life. N.Y.: Basic Books, 2002. 2

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lation can be traced between the diversity of employees’ cultural backgrounds and the efficiency of R&D.1 Second, the area of inter-ethnic and intercultural interaction expands in the everyday life of the population. The share of EU residents having friends or acquaintances among people of a different faith grew from 64% in 2009 to 67% in 2012, and those having friends or acquaintances among people of a different ethnic background grew from 57 to 59%.2 As is well known, more frequent contacts of different ethnocultural groups often contribute to mutual enhancement of image and relations between them. Third, mixed marriages are becoming more frequent. In the USA, the share of new marriages between people of different ethnic or national origins grew from с 6.7% in 1980 to 14.6% in 2009. Between 1994 and 2007, the share of descendants of immigrants from Asia born in the USA, whose spouses belonged to another ethnic or racial group varied from 40% among men and 50% among women.3 Fourth, the migrant lifestyle combining living in two or more cultural spaces in different national jurisdictions (born in one country, residing and employed in another, children’s education in a third, friends in a fourth, etc.) and interaction with people of different cultural and civilizational origin create a double or multiple transcultural identity and loyalty. As shown by a poll of 2008-2009, in France, 45% of migrants who arrived to that country as adults, 58% of migrants who arrived as children, and 66% of descendants of migrants (both parents are immigrants) identify themselves simultaneously as French and representatives of another ethnic group.4 Such transcultural identities reflect special  – transcultural – forms of cultural diversities in recipient countries, which further transform themselves into hybrid cultures and collective identities. To quote late French president F. Mitterrand, “To be French today means to be a bit of an Arab, a bit of an Italian, a bit of a Senegalese, a bit of an Indo-Chinese, and even a bit of a Spaniard.”5 1 Niebuhr А. Migration and Innovation. Does Cultural Diversity Matter for Regional R&D Activity? IAB Discussion Paper No. 14/2006. Р. 21 (doku.iab.de/discussionpapers/ 2006/dp1406.pdf ). 2 Special Eurobarometer. 2012. No. 393. “Discrimination in the EU in 2012”. 3 Jiménez T. Immigrants in the United States: How Well Are They Integrating into Society? Wash., DC: Migration Policy Institute, 2011. Р. 15, 17. 4 Simon P. French National Identity and Integration: Who Belongs to the National Community. Wash., DC: Migration Policy Institute, 2012. Р. 10. 5 Naselenie i globalizatsiya [Population and Globalization], p. 195.

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Figure 10.2. Beliefs about the content of American identity, 2004 Respecting other people’s cultural differences

96.7

Being able to speak English

94.1

Having American citizenship

93.7

Seeing people of all backgrounds as American

92.7

Feeling American

90.1

Blending into the larger society

73.4

Carrying on the cultural traditions of one’s ancestors, such as the language and food

72.7

Being born in America

51.3

Source: Jiménez T. Immigrants in the United States: How Well Are They Integrating into Society? Wash., DC: Migration Policy Institute, 2011. P. 17.

The same trend of cultural fusion can be traced in the views on the content of the American identity highlighted by a US poll in 2004. This poll showed that “being a true American” required not only being a US citizen, speaking English, having a self-identification as an American, but also respecting cultural differences among people, seeing people as Americans regardless of their descent and keeping forefathers’ cultural traditions (see Fig. 10.2.) Transculturation, by ensuring a growing permeability of boundaries between cultures, promotes the mobility of the spaces they take up and results in their diffusion. It also creates new identities. However, these processes are far from being unidirectional. Socio-cultural appropriation of new territories by immigrants and their socio-cultural expansion result in collisions of values and customs of different cultures and civilizations, dilute the common grounds of national identities being the foundations of nation-state communities. Social and cultural rifts in recipient societies are deepening, and the potential of their internal conflicts is growing.

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Migrant Integration Issues: Risks, Tensions, Limits Different categories of migrants and their descendants are included in intercultural interaction to a varying degree, which may also vary significantly over the span of their residence in the recipient country. A considerable share of immigrants, perhaps most of them, are transcultural. At the same time, being transcultural is often a transitional phase to complete integration, which consists in taking roots in the new society and, upon naturalization, prevailingly identifying oneself with, and being loyal to, that society. However, large cohorts of migrants are very difficult to integrate and remain alien for the recipient society. Even after emigration they continue, as it were, to live in a re-created culture of the country, sometimes even the locality, of their origin, hedged from the culture of recipient countries, remaining a closed, alien and, therefore, outcast, element in the recipient society. Ethnic enclaves that form in areas predominantly populated by immigrants are dominated by an ethnic economy employing exclusively people of the “right” ethnic group and serving a specific demand of co-ethnic consumers. Such locations perpetuate the language, culture, customs, and behavior patterns characteristic of the socio-cultural milieu and the countries of their origin, including television and radio broadcast in the mother tongue. A transcultural lifestyle dominated by the orientation toward the homeland and home culture constraints an immigrant’s adaptation to the new country to the limits of his or her ethno-cultural group and presents itself as an alternative to integration into the mainstream economy and society or hinders such integration. This issue exists in various guises in all recipient countries. In the USA, where descendants of Latin America account for 50% of foreign-born population (including 29% descendants from Mexico), a share growing steadily over the last 50 years, the key issue of sociocultural integration is related to the hispanization of population (see Fig. 10.3.) The USA’s rapid growing Spanish-speaking community already exceeds 16% of the population. Lack of command of English among a significant share of Hispanics is one of the main barriers impeding their full integration into the American society, creating a potential threat of the introduction of a second official language being lobbied in the USA, etc.

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Figure 10.3. Structure of US foreign-born population by region of origin in 1960–2011 (%)

Source: US Census Bureau, 2012 (www.migrationinformation.org/datahub/charts/fb.2.shtml).

The lack of command of the language is, in its turn, closely related to a heightened share of poorly-educated strata among immigrants typical for all recipient countries (see Table 10.2.)1 Another aspect of the issue lies in the fact that many are reluctant to becoming “true Americans”, perceiving this as a loss of their identity. The values of a consumer society associated with the American way of life and the “American dream” run counter their religious beliefs and cultural choice. In Europe, despite significantly smaller scales of immigration of people with different cultural background (in 2010, descendants from developing countries accounted for 44% of foreign-born population on 1 In the early 2000s, some 40–50% of foreign-born population of France and Portugal aged 25–64 had not completed secondary education, the education of 20% was limited to primary school (See: Jobs for Immigrants. Vol. 2. P., 2008. Р. 30).

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Table 10.2. Immigrant and native working age population (25–64) by education level and English proficiency, 2010 (%)

High-skilled bachelor’s degree or higher

Mid-skilled high school graduate, some college or associate’s degree

Low-skilled less than high school graduate

Native born

30

61

9

Foreign-born

28

42

30

Percent with limited English Proficiency

26

51

84

Recent Arrivals (2000 or after)

32

38

30

Percent with limited English Proficiency

36

67

90

Source: Singer A. Investing in the Human Capital of Immigrants, Strengthening Regional Economies. Wash.: Brookings, 2012. September. P. 3.

the continent), issues related thereto are much more acute and harder to resolve than elsewhere, due to qualitative specifics of immigration and the attitude to it in recipient societies: the American melting pot model for cultures and identities has never worked there. Over 70% of immigrants from the South residing in Europe are descendants from Afro-Asian countries1 and mostly belong to nonChristian confessions. Whereas in 2010 Christians accounted for 74% and Muslims only for 5% of foreign-born population in the USA, a completely different ratio of those religions had developed in the European Union. There, Christians (including descendants of EU countries) accounted for only 56% of the total number of immigrants, whereas Muslims accounted for as much as 27% (see Fig. 10.4). These figures were even closer in the case of immigrants from third countries (outside the EU): up to 42 and 39%, respectively.2 Mass immigration from the Muslim East has made Islam the continent’s second religion in terms of the number of adherents, and an Islamization of the society became the most acute issue in the socio-cultural integration of migrants in the region. According to the Pew Research Center 1

Calculation based on: Population Facts. 2012. No. 3. Faith on the Move. The Religious Affiliation of International Migrants. Pew Research Center’s Forum on Religion & Public Life. 2012. Р. 52, 54. 2

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Figure 10.4. Religious composition of immigrants in the European Union Percentage and estimated number of all foreign-born populations in the European Union by religious group Christian 26,370,000

Other Religions 1,430,000

Unaffiliated 4,570,000

56%

3%

10%

Jewish 140,000 Evropeiskie novosti.

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cohesion and solidarity within the EU, i.e. for so-called cohesion funds, like, for example, the Fund for Growth and Jobs.1 In addition to expanding the single market and a new social vision for Europe, analysts and federalist politicians believe it necessary to finally develop a common immigration policy, including the asylum policy. Immigration issues have long reached the point where they became a paramount political problem for the EU, fueling the existing tensions between the EU citizens and migrants and the xenophobic sentiments in the EU. It is quite clear that the establishment of a political union is inevitably a lengthy and step-by-step process, while in the short term the Eurozone will serve as a center of new integration initiatives, a kind of pilot ground in this respect. To put it differently, the political and institutional reforms in the EU prove to be a steady trend in the progress of European integration which reflects the better realization by the European politicians of the fact that the EU will only be able to cope with crises, whether internal or the ones shaking the outside world, if it pursues its European integration project.

EU’s Сommon Foreign policy: Shift in Priorities? Opinions differ regarding the extent to which the Eurozone crisis has affected the EU common foreign policy and its role on the international arena. Some experts believe that its impact was minimal and purely momentary, others uphold that the crisis has had a substantial effect on the EU common foreign policy, primarily as far as its fundamental principles are concerned. Article 21 of the Treaty of Lisbon stresses that as far as its common foreign and security policy goes, the EU should be guided by the principles that are fundamental for it, for its development and enlargement. Such principles include democracy, the rule of law, the universality and indivisibility of human rights and fundamental freedoms, respect for human dignity, for the principles of equality and solidarity, compliance with the UN principles and the provisions of international law. To put it another way, European values are proclaimed to be the basis of the common foreign and security policy (the so-called “value-based policy”). The main purpose of the Common Foreign and 1 Rebuilding Greater Europe (infoeuropa.eurocid.pt/files/database/000053001000054000/000053224. pdf).

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Security Policy is to carve out the Union’s positions and plans of actions on any issues and to adopt common strategies. Some European analysts believe1 that although support for security and democracy continue to be the EU Common Foreign and Security Policy (CFSP) priorities, the crisis has nevertheless managed to shift Brussels’ foreign policy priorities. Political scientist Richard Youngs, director of a major European think tank based in Madrid, describes this as commercialization of diplomacy. The focus now is on economically motivated initiatives, assessment of potential risks and geo-economic options for the EU, as well as on the influence of geo-economic imperatives on global management and security dilemmas.2 The economization of the EU foreign policy is going hand in hand with renationalization, which shows in some EU member states’ inclination to act unilaterally. For example, France has condemned the Ottoman Empire’s genocide of Armenians, making it illegal to deny it, and this complicated the general relations between Brussels and Ankara. Germany had blocked the European Investment Bank’s loans to the Middle Eastern and North African countries, undermining possibilities for the EU to support the countries enveloped in the Arab Spring. The Italian government led by Silvio Berluscone backed the exclusion of the South Stream pipeline project from the Third EU Energy Package adopted by the EU, thus undermining the rival Nabucco project, which was expected to diversify European gas supplies. The United Kingdom is waging a “guerilla warfare”, seeking to undermine the influence of the European External Action Service (EEAS).3 The renationalization equally manifests itself in the bilateralization of the European foreign policy: the departure from the common policy, with individual EU states opting instead for entering into bilateral relations with third countries. BRICS members and the Gulf countries are the targets of this policy. To put it otherwise, the renationalization undermines the efforts to implement the common foreign policy. The commercialization and bilateralization of the EU foreign policy is also visible in the approach chosen towards Russia. Even though the 1 See: European foreign policy scorecard 2012. European Council on foreign Relations. Р. 18 (wwecfr.eu/…/european_foreign_policy_s…). 2 Challenges for European Foreign Policy in 2012, What kind of geo-economic Europe? Ana Martiningui and Richard Youngs (Eds), © FRIDE 2011. Р. 14–15. 3 See: European foreign policy scorecard 2012. European Council on foreign Relations. Р. 18 (www. ecfr.eu/…/european_foreign_policy_s…).

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EU’s consistent backing of Russia’s WTO membership, as well as reaching a common stance towards Moscow, are seen as its joint success, the economic priorities of individual EU member states often prevail over common interests. This trend is essentially in line with the interests of Russia, who traditionally placed greater emphasis on the partnership’s economic components and on its bilateral relations with individual EU countries. Depoliticization of the EU-Russia relations inherently facilitates economic interaction, but also introduces rigid framework for them, depriving these relations of both strategic vision and fundamental goals. Besides, as evidenced by the disputes around the Third Energy Package, the subordination of relations to economic interests would not guarantee problem-free cooperation. And even though the EU chooses not to bring too much attention to its political differences with Russia, primarily with regard to human rights and basic freedoms, there is reason to believe that Brussels is demonstrating something that could be described as “Russia fatigue” and that the cooperation pattern between the two partners in the foreseeable future will follow the “à la carte” principle of selective interaction. There likewise exists, however, a contrary opinion regarding the impact of the crisis on the EU’s foreign policy. The fundamental goals (maintaining security and promoting democracy) and principles embodied in the Common Foreign and Security Policy (the value-based policy) remain unchanged, while the shift in priorities is of a temporary, purely circumstantial nature. A big success of the EU common policy was the decision to introduce far-reaching sanctions against Iran. This decision was made by the European Union, which incidentally buys 18% of Iranian crude oil, during the very harsh economic crisis and had required overcoming economic arguments and differences.1 All in all, throughout 2011 the European Union had imposed a total of 69 sanctions against 26 countries2. Just for comparison, the year before the EU had imposed 22 sanctions. EU sanctions are multi-faceted 1 Under the approved plan, by July 2012 all EU members purchasing oil from Iran shall fully cease its import from this country. The EU sanctions also provide for a ban on entering into new oil contracts with Tehran. Additionally, the new measures include freezing all contacts with the Central Bank of Iran via which all oil transactions are performed. 2 Afghanistan, Belarus, Bosnia, Myanmar, China, Democratic Republic of the Congo, Cote d’Ivoire, Egypt, Eritrea, Guinea-Conakry, Guinea Bissau, Haiti, Iran, Iraq, North Korea, Liberia, Libya, Moldova, Serbia, Somalia, South Sudan, Syria, Tunisia, the US and Zimbabwe (see: European Commission: Restrictive measures – sanctions – in force, versión del 4 de diciembre de 2012).

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and include arms embargo, restrictions on trade and on specific types of financial operations, visa bans for specific individuals responsible for human rights violations or implicated in financing illegal activities, attachment of their property. The crucial sanctions imposed by the EU were prompted either by human rights violations (as was in the case of Belarus and Burma), or by threats to peace and stability (Iran, Libya, and Syria being notable examples of the latter). For all that, as far as the EU response to the Arab Spring goes, here the results of its democracy promotion line were rather ambiguous. On the one hand, the EU member states signed in May 2011 a common strategy of support for the reforms in the region, that strategy being based on the three principles of money, markets, mobility. It is, however, obvious that the EU countries have not been able to fully implement their assistance strategy. Experts from the European Foreign Affairs Council believe that a new Marshall plan was not destined to be because financial aid was provided chiefly in the form of loans and not in the form of debt remission or direct assistance.1 The bulk of the aid was provided using the EU funds intended for Asian and Latin American countries. The plan was to allocate extra funds on account of redistribution of the European Investment Bank’s loans in line with the Neighborhood Policy from the East to the South, and this provoked objections from Germany, Poland and Slovakia. The implemetation of the free mobility principle had boiled down to relaxing visa requirements for students, due to fears of radicalization of public opinion and of growing nationalistic sentiments in the EU countries. The question of whether the EU markets should be opened for the South Mediterranean countries has been left open due to the obstruction on the part of the EU’s Mediterranean members who fear rising competition in the market of agricultural products.2 But, most importantly, the EU has been unable to develop a new long-term concept in its relations with its neighbors to the south, the reason for this being its reliance on the respective experience in Central and Eastern Europe where the situation was dramatically different from that in the Arab world. Renouncing the pragmatic status quo policy which helped to keep the secular authoritarian regimes in power, the leaders of the biggest EU members were never able to reach agreement on which forces are the more demo1 See: European foreign policy scorecard 2012. European Council on foreign Relations. Р. 12. www.ecfr.eu/…/european_foreign_policy_s…). 2 Ibid.

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cratic ones in the Arab world and whether unconditional support should be extended to the revolutionary movements only because they fiercely oppose to the existing authoritarian regimes. The largest rift was observed over the military campaign against Libya which split the European unity. Germany, for one, was from the very onset of the crisis in Libya disinclined to extend its recognition to the opposition, let alone to take part in the military campaign, while France and the UK were decisively backing military intervention. The  differences in the stance on Libya were taken into account when reaching the EU position on Syria, when the Syrian opposition was recognized as “a legitimate representative for the aspirations of the Syrian people”, and not as “the (sole) legitimate representative of the Syrian people”. That said, the EU members were unable to reach agreement on lifting the arms embargo on Syria, leaving it for each member to decide for themselves.1 A still harsher test for the EU’s value-based policy was the Egyptian president Mohamed Morsi’s ouster, whose resignation had been demanded by a significant part of the country’s population angered by his Islamization policies. On the one hand, Mohamed Morsi came to power through democratic elections and was overthrown by a military coup. On the other, the well-known Islamization of Egypt had resulted in sharp destabilization of the domestic situation, which is in turn fraught with civil war as a result of curtailment of democracy, while the military acted as a guarantor of stability. EU Representative for Foreign Affairs Catherine Ashton believes that “it is of utmost importance that Egypt returns rapidly to a legitimate government and democratic structures responding to the democratic and socio-economic aspirations of the Egyptian people.”2 This appeal does not, however, make it any clearer just what is to be deemed legitimate in this situation the non-standard format of which brings the EU to a non-plus. It is quite obvious that the European Union continues to be faced with the need to find a suitable basis for common interests and joint actions, to develop a common strategy in respect of the Arab world, renouncing illusions concerning possibility of rapid democratization of that region. Forecasts to the effect that the EU foreign policy in the aftermath of the crisis will be marked by greater pragmatism and by lesser emphasis 1 2

RIA Novosti (ria.ru/world/20130528/939822597.html#ixzz2ZCII7uvL). http://www.1news.az/world/20130714090137460.html”

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on values appear to be questionable. Firstly, because an essential component of the national interests of just any international actor is the aspiration to create maximum comfortable conditions for itself, meaning that economic interests and calculations are always involved. There is nothing new here. And, secondly, even if during the crisis the EU did not fully renounce the fundamental principles of the Common Foreign and Security Policy, there will be fewer reasons still to renounce them in a more favorable situation. Strengthening the European Union as a  community sharing common values is proclaimed as one of the principal goals in the “Future of Europe” report. The fact that the formulation of a European foreign policy will require, as the Arab Spring has proved quite conclusively, a revision of the traditional concepts of democracy, support for the democratic process in different regions and finding an appropriate balance between political realism and the valuebased policy – that is quite a different matter altogether.

From the Common Security and Defense Policy to a Defense Union Throughout the 90s and the early 00s both the US and the EU countries viewed globalization as a window of new opportunities for the West, primarily of global modernization via technological progress, economic interdependence and spread of the Western norms and standards on a global scale. The US was given the role of an engine of globalization, while the accessory role of the EU was that of the most successful and effective to date model of regional integration. The global economic and financial crisis had equally brought to light the negative effects of globalization. It had moreover coincided with a crisis in the allied relations within NATO, outlining new imperatives requiring reinforcement of the common security and defense policy (CSDP), which is an integral part of the common foreign and security policy. The Common Foreign and Security Policy as it is now, with its objectives including the progressive framing of a common defense policy, the enhancement of its civil and military capabilities as far as crisis management and conflict prevention go, was formalized by the Treaty of Lisbon. The Petersbergs Tasks were supplemented with new, further reaching objectives: among them, joint disarmament operations, humanitarian and rescue operations, military advice and assistance,

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conflict prevention and peace-keeping, combat forces’ participation in crisis management, including peacemaking and post-conflict stabilization; fight against terrorism. It was decided that the CFSP/CSDP shall maintain its intergovernmental nature, without ruling out, however, permanent structured cooperation between individual EU member states in defense security. This would open a possibility to create a more stable military and political vanguard in the defense in the form of flexible integration not requiring the participation of all or of a majority of the EU member states. According to the Treaty of Lisbon, any two EU members may enter into a permanent structured partnership. Interested Member States “whose military capabilities fulfil higher criteria and which have made more binding commitments to one another in this area with a view to the most demanding missions shall establish permanent structured cooperation.”1

The Imperative of Curtailing Defense Spending The crisis, which imposed limitations on defense spending, was bound to affect EU’s military policies, as well as the relations between the EU countries, which are NATO members, and the US, since the EU’s defense policies have two dimensions – the European and the Atlantic one. This dichotomy2 was precisely one of the factors impeding the CSDP implementation. The fact that most EU countries are also NATO members, with their principal resources being deployed in the framework of the latter, makes independent development of Europe’s military component quite impossible.. European NATO member states together have deployable 1,800,000 military personnel, yet only some 3–5% of that number can be deployed at a strategic distance from Europe to take part in stabilization and peacekeeping operations. The current and planned reduction in defense resources in the UK, France, Italy, Spain, the Netherlands and Germany and other NATO member states will result in major reductions of their armed forces. That said, the new generation armaments 1

Article 42(5) of the European Union Treaty as quoted in the Treaty of Lisbon. Evropeiizm I atlatizm v politike stran Evropeiskogo Soyuza [Europeism and Atlantism in the EU member states’ policies] / Ed. by N.K. Arbatova. М.: IMEMO RAN, 2009. P. 118. 2

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spending doubles every 15–20 years. The deficient quality of armaments could be partially compensated for by their quantity, yet enhancement of military cooperation between all EU member states remains imperative. The United States acknowledges in its turn that without significant reductions in the defense spending there could be no question of coping with the vast budget deficit and the public debt, even though in practice the US continues to be the chief donor of personnel and infrastructure resources for the NATO armed forces. US military expenditures take up 4% of its GDP, while among their European allies only four countries (France, UK, Greece and Albania) spend more than 2% of their respective GDP on the military; the defense budgets of the rest being even lower than this.1

Crisis of the EU-NATO Alliance The economic recession coincided with a crisis in the allied relations with NATO which had its roots in the early 1990s due to the collapse of the antagonistic “Eastern pole”. Despite NATO still being perceived as a security umbrella for the West, the diversification of threats to security and the growing number of tasks it has to deal with contribute to the erosion of the common strategic goal. The disappearance of the common enemy has relieved the allies from the necessity to counter the military threat emanating from the Socialist Camp, bringing Europe’s and the US own interests to the foreground, which are far from invariably overlapping and, moreover, not infrequently contradict each other. This can be observed from the differences that the allies have on a whole number of specific issues, such as the war in Iraq, the Kyoto Protocol and the competences of the International Criminal Court. Furthermore, the ties stemming from the common cultural heritage are dissolving as the percentage of the US population with European ancestry and cultural roots shrinks. The pursuit of their country’s strategic interests compels the US leaders to refocus their foreign political strategy and resources on Asia Pacific due to their concern about China’s growing military might. 1 Kontseptsija “umnoi oborony” i sammit NATO [The Concept of “Smart Defense” and the NATO Summit].www.rus.ruvr.ru/2012_05_23/75681914/.

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This tendency on the one hand indicates that, despite all its difficulties, Europe continues to be one of the safest parts of the world. Yet, on the  other, it inevitably leads to gradual US military retrenchment in Europe and to selective response of the US leaders to challenges to Europe’s security. Even though American troops continue to be stationed in Europe, by 2013 their strength had been downsized to 30,000  against 270,000 personnel 25 years ago.1 Some European analysts believe that even though the China factor appears to play a less dramatic role in the Euro-Atlantic relations than the rift over Iraq in 2003, it may nevertheless have far-reaching consequences for NATO’s future and for the future of the Euro-Atlantic relations on the whole. The lessons drawn from the military campaign in Libya have undoubtedly served as a catalyst of disputes within NATO. All in all, Libya’s case has demonstrated very well that the EU, which had always praised itself for its successful experience in crisis management, proved to be unprepared to put to use its potential envisaged by the CSDP. The military campaign in Libya has moreover once again demonstrated how limited the military capabilities of the European NATO member states are. France and the UK played the vanguard role in the military intervention in Libya, yet it was still the US that had backed 100% of missions involving electronic battlefield, provided 80% of air refueling, 75% of air surveillance, 75% of precision-guided munition.2 In June 2011, just while the Libyan campaign was in full swing, United States Secretary of Defense Robert Gates warned of the US potential withdrawal from the NATO, lest its military potential reduction is stopped.3. The Libian military compaign will go down in the history of the allied relations as a “small war with big consequences”. Acting as a mouthpiece for the US frustration with its allies, Robert Gates in fact gave an ultimatum to them asking: unless the European side manages to mend up that gap, just how much longer will the US see NATO as a useful military partner?4 Former United States Permanent Representative to NATO Kurt Volker pointed out that when the ruling elite in the US talks of NATO, in actual fact it talks about Europe, as if the 1 Yves Boyer. Avtonomiya alyansu ne pomekha [Autonomy doesn’t hinder the Alliance ] // Rossiaya v globalnoi politike. Special issue. 2013. P. 144. 2 Taylor Cl. Military Operations in Libya 24 October 2011 // Commons Library Standard Note – UK… http://www.parliament.uk/ 3 Traynor I. US defence chief blasts Europe over NATO // The Guardian. 2011, 10 June. 4 NATO’s sea of troubles // The Economist (www.economist.com/node/21551464)

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US was not a NATO member itself.1 The new defense strategy of the US outlined by President Barack Obama and Secretary of Defense Leon Panetta in January 2012 confirmed the US is steadily drifting away from Europe and that its future presence in the regions bordering it will be rather limited at best.2 In other words, the traditionally allied relations are increasingly transforming into relations between the US and the European Union. The concept of Smart Defense, which became central on the agenda of the Chicago NATO Summit 2012, was the first attempt at radical restructuring of NATO as a kind of response to the crisis in the transatlantic solidarity. The essence of the NATO reform consists of introducing a kind of division of labor, meaning each member state will be responsible for a specific segment of military logistics and maintenance, thus making up a multiple system of defense. One of the resolutions adopted at the summit was to start patrolling the Baltic airspace in order to enable Baltic states to concentrate their efforts and resources on the campaign in Afghanistan. The ground surveillance system is going to be jointly financed by 13 countries. That was how the optimization of the NATO members’ defense budgets was planned to be accomplished. This idea is nothing new. All in all, NATO and the EU had together conceived approximately 100 projects on multilateral cooperation (20 of those were bilateral). However, the efficiency of those projects was extremely low, plus they did not provide for the integration of military capabilities. A qualitative shift was only achieved in the EU with the adoption of Pooling and Sharing.

Pooling and Sharing – a new European defense dimension The signing of the Treaty of Lisbon was followed by a powerful renaissance of bilateral and multilateral defense initiatives among the EU countries, which were essentially all examples of permanentstructured cooperation, even though this was not officially recognized: • 2010 UK-France Defense Cooperation Treaty; • The Visegrád Four cooperation, 2011 (the Visegrád battlegroup); 1 Hallams E., Schreer B. Towards a “post-American” alliance? NATO burden-sharing after Libya (www.chathamhouse.org/…/88_2hallamsschr). 2 Marrone A. The next US President and Europe’s defense // Aspenia Online. 2012, 23 February.

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• The Weimar Triangle (Germany, France, Poland) 2011, (the Weimar Combat Group by 2013). What has, however, become a real breakthrough was the Ghent Initiative of the Council of the European Union dated September 2010, because it provided for the participation of all of the EU member states in the military cooperation. The Ghent Initiative was preceded by two Directives – dated 2008 and 2009 respectively – on the liberalization of the EU defense equipment market, facilitating free competition and equal access for the member states to each other’s internal markets. A decision was reached at the meeting of the EU defense ministers in Ghent in 2010 that with the defense budgets being universally cut due to the raging economic crisis, all member states should launch cooperation on enhancing their military potential, primarily with regard to concentration of military resources and their joint management. To this end, systematic assessment of each country’s military capabilities was planned, along with identifying the domains within which military cooperation with other member states could potentially develop. Special emphasis was placed on the role of the European Defense Agency in identifying the areas for military cooperation and building relevant expert teams. The Ghent Initiative basically laid the foundation for a new integration project dubbed Pooling and Sharing (P&S), a European alternative to Smart Defense aimed at rational pooling and sharing of more military capabilities of the EU states based on task sharing. The concept provided for more efficient use of military capabilities resulting in smaller expenditures, the concentration of the EU members’ military resources and their joint management: • joint weapons and military equipment procurement, as well as joint use of the research base (e.g., A400M military tranport aircraft); • joint use, via partial or complete integration of the defense structures (e.g., the infrastructure for holding military exercises), and creation of joint units and operational formations; • task sharing (for example, Germany performs naval observation in the Northern Sea, releasing the Netherlands from the need to do this).1 1 Mölling Chr. Pooling and Sharing in the EU and NATO. (www.swp-berlin.org/…/ europes_defence_p…)

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The actual P&S implementation is naturally a rather lengthy process riddled with economic, organizational, military-technical and operational obstacles. It was noted, for example, that this project will require a high level of trust among its participants and their readiness to sacrifice their national sovereignty in such a sensitive aspect as national security. Another point of discussion was whether the European Defence Agency (ЕDА), which is in charge of coordinating P&S projects, will be able to ensure the achievement of all these goals or whether new structures were required for this. Many pointed out that there was a risk of it duplicating NATO’s Smart Defense. Military experts moreover voiced fears regarding possible decrease in the European states’ strategic flexibility as far as their participation in non-EU or non-NATO peacekeeping operations goes, as a long-term impact of task sharing. Uncertainty also arises with regard to how the task sharing principle will be applicable to Germany which objects to getting involved in military campaigns like the one in Libya. That nonewithstanding, despite all difficulties and uncertainty, the Ghent Initiative has outlined the sustainable and, in actual fact, invariable tendency in the development of the European defense potential and, in the end, of a European Defense Union. Despite both projects – Smart Defense and Pooling and Sharing – positioned as mutually complementary and aimed at creating a European ‘pillar’ for NATO, there is a fundamental contradiction between them. Virtually immediately after the EU Summit in Ghent the question of creating a permanent body – a Conference on Boosting EU Military Capabilities – arose. This was followed by other suggestions which voiced the need for a permanent European Defence Council1 or even a Defense Union to be established for the EU. Below is, for example, an extract from the “Future of Europe” report: “Our defence policy should have more ambitious goals which go beyond “pooling and sharing”2. The creation of a European ‘pillar’ would mean that political decisions on where and when European countries will need to put its military potential to use will be henceforth made by the European Union, which will in turn require a structure similar to the Supreme Headquarters Allied Powers Europe (SHAPE). To put it differently, the point here is not so much the deliberate polarization of the allies as the natural and 1 2

Ibid. See. регнум.рф/news/1572990.html#ixzz2LoHqNDlD.

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objective centrifugal processes, both global and domestic, which drive in a wedge between the US and Europe as far as working for security in Europe is concerned.

Conclusion The global economic and financial crisis has undoubtedly come as a challenge for the European integration process. Along with that, the crisis has served as a kind of turning point, opening new opportunities for promoting new breakthrough projects in areas which, prior to the crisis, were deemed as extremely complicated or hopeless with regard to furthering European integration. It is quite indicative in this connection that, amid the crisis, the creation of a Political union continues to serve as a compass for the European integration, alongside the imperative of fundamental restructuring of the Economic and Monetary Union, since the EU political scene is dominated by the opinion that the context of globalization dictates for progress of economic integration to be only possible when going in parallel with political integration. Today’s debate within the European Union about the future of Europe spans both further institutional development at the EU level and the conceptual support of its reformation along the three key lines: the  restoration of democratic legitimacy, the identification of the  differentiation parameters (flexible geometry) and the statement of priorities in the economy, which list is topped by the need to improve the competitiveness of the entire EU economy. Contrary to the opinion popular among neo-liberal economists and politicians that in the aftermath of the crisis the European Union will cut on welfare, European economists and politicians are increasingly voicing a contrary opinion. The dismantling of the welfare state in the EU is not possible, because equally impossible are political freedom or democracy in the absence of solid financial and material security for the population1. According to prominent Polish economist Grzegorz Kolodko, one of the architects of the economic reforms in Poland, a new paradigm of economic development must be based on interdisciplinary, non-traditional approaches with a focus on people’s well-being.2 1

Future of the welfare state: prospects for Europe (dialogs.org.ua/ru/cross/page20748.

html). 2

G. Kolodko. New Pragmatism Versus Failing Neoliberalism (opec.ru/1362132.html).

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In the long term, the EU’s role of an independent center of power on the international scene will hinge upon the restoration of its economic strength, its “soft power”, and the general appeal of the European model. Along with that, the EU acts as one of the principal international centers of power when it comes to settlement of regional conflicts and maintaining security at both the European and global level. Its functions include peace enforcement in local ethnic and religious conflicts, peacekeeping through military and civil operations, combating global terrorism, piracy, cross-bordert crime, proliferation of weapons of mass destruction. The consolidation of the EU resources, technologies, including those used in operational planning, to achieve all of the above is precisely the main goal of the common defense policy. The global economic and financial crisis has come as a major challenge for the future of the European integration project, and for Europe and the global internatinal relations in general. The crisis which hit Europe has deprived national governments of a convenient possibility to hide behind the weak leaders in Brussels… Now, if they wish to avoid possible collapse of the European Union, they will be compelled to fundamentally revise the concept of Europe itself, taking into account the crisis of both effectiveness and legitimacy. From the very beginning, the European integration progressed under the influence of recurrent crises. Yet, ensuring that such crises become sources of energy instead of producing a paralyzing effect would require maximum adequacy on the part of the political leaders. The era of conservatism is a thing of the past; we are entering the era of renovation”1.

1 Mark Leonard. Kak reorganizovat Evropu [The Reinvention of Europe]// Pro et Contra. 2012, January-April. p. 30–31.

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Chapter 15

NEW TRENDS AND CONTROVERSIES OF TRANSATLANTIC RELATIONS Feodor G. Voitolovsky

Recovering from the crisis of allied solidarity The financial and economic crisis of 2007–2009 and its aftermath has contributed considerably to reducing the foundation for the US global military and political leadership and has changed conditions of its implementation. The results of the unilateralist approach to exercising the US leadership pursued by the first and in many aspects by the second administration of George W. Bush were quite destructive for  transatlantic relations. This course has protracted military campaigns in Afghanistan and Iraq, has stimulated contradictions with the  Western European countries, has paralyzed institutions and has provoked crisis of its relations with Russia. The spillover of the economic crisis to the EU countries meant further drop in the European allies’ motivation within the coalition forces in Iraq and Afghanistan for participation together with the US in the conclusion of both campaigns, as well as the growing interest of the European elites in reducing their military spending. This situation also had its negative results, both political and psychological – the faith in US leadership was shattered within the US itself, as well as in the eyes of its allies. Attempts made by the second George W. Bush administration in 2006–2008 to overcome the crisis in its relations with its allies by way of renouncing the unilateralist model of the US leadership did not prove its worth. Barack Obama’s team took a pragmatic stance with regard to its transatlantic policies gravitated towards moderate multilateralism.1 Such an approach corresponded to the key objectives pursued by the 1

Obama B.”Renewing American Leadership,” Foreign Affairs, 2007, Vol. 86, Nо. 4.

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new administration and related to stabilization of the national financial and economic system and overcoming the social implication of the crisis.1 This required both enhancement of the state participation in the US economic process and substantial efforts aimed at development of new international financial and economic regulation mechanisms and improving the efficiency of the already existing ones. This required new approaches to the development of coordinated anti-recessionary measures not only in conjunction with the key partners –the EU members and other OECD countries,2 – but also with such partners as China and Russia.3 The new president had to demonstrate to the American people his readiness to put an end to the wars and to restore the country’s relations with its allies. Moreover, dialog with its partners, including Russia, was to be fostered. A change of the vector in pursuing each of these objectives required not only political will, but also time to overcome the inertia which was the legacy of the previous administration. This became an obstacle on the US leadership’s path to rapid reduction of the defense budget (such reduction was only implemented in 2011) and to speedy achievement of changes with regard to the foreign political agendas, including the Transatlantic one. The domestic and international consequences of the crisis have become an important factor for the development of transatlantic cooperation – voters in the West no longer wished to pay for NATO’s global role out of their own pocket. The ambitious initiatives related to NATO’s active involvement into tackling challenges beyond its zone of responsibility were replaced with the strategy of economy and pragmatism, which, however, did not mean that the European members of this organization were no longer interested in extending their influence to the regions adjacent to the Euro-Atlantic zone. On the one hand, the necessity to mend the transatlantic relations was recognized on both sides of the Atlantic, which in 2009–2012 enabled the US ruling elites and their European allies to achieve a positive political and psychological climate essential for intensification of the 1 S.Sh.A. v poiskakh otvetov na vyzovy XXI veka (sotsialno-ekonomicheskiy aspect / Pod red. E.V. Kirichenko [E.V. Kirichenko, ed. The US in pursuit of answers to challenges of the XXI century (the socio-economic aspect)]. Moscow, 2010. P. 21–25. 2 Ibid., p. 31. 3 Amirov V.B., Kanayev Ye.A., Mikheyev V.V. Tikhookeanskaya Aziya; ekonomicheskiye I politicheskiye posledstviya globalnogo finansovogo krizisa [Asia Pacific: Economic and Political Consequences of the Global Financial Crisis]. Мoscow, 2010. P. 7–17.

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dialog. On the other, the overly optimistic expectations of the Western European allies served to hinder the efforts of Obama’s team with regard to transatlantic cooperation. Those expectations could well become a positive factor for President Obama, but due to the impact of the economic crisis causing opportunities for the European allies to be an effective and reliable partners for the US on the global arena have been drastically reduced. Many European politicians and experts saw Obama as a successor of Bill Clinton as far as transatlantic strategy is concerned, this opinion being reinforced by Hillary Clinton’s appointment as Secretary of State. For all that, the lack of material and political resources necessary for the new administration to revive the multilateralist globalism was clearly underestimated – such revival was not the intention of either the US public, nor the country’s ruling elite. Western European political elites believed that President Obama would support the strengthening of the NATO’s European pillar and would also make the US–EU dialogue a priority not only in financial and economic, spheres but also in international politics.1 This may explain some form of political support provided to Obama in advance, including the Nobel Peace Prize awarded to him in rather comic circumsrtances. Particular enthusiasm with regard to Washington’s turning towards Europe was demonstrated by the activity of France, which has officially returned to NATO military structure in 2009 (this reintegration having been announced the year before). French President Nicolas Sarkozy (in office: 2007–2012) sought to continue to increase the significance of NATO’s European component due to, on the one hand, seeing special potential in the French-German economic tandem and, on the other, seeking furtherance of military and political cooperation with the US and the UK. He evaluated the transatlantic policies of the new US administration precisely from the perspective of their conformance to the goals of strengthening the European pillar of the Alliance.2 German Chancellor Angela Merkel took a more reserved stance with regard to the possibility of strengthening NATO’s European pillar, yet the German political elite also hoped that the new US president will be more 1 De Vasconcelos A..”Responding to the Obama Moment: the EU and the US in a Multipolar World.” In: A. De Vasconcelos, M. Zaborowski, ed., The Obama Moment. European and American Perspectives. Lisboa, Paris, 2009. P. 11–16. 2 Simons S. “France’s Return to NATO: Sarkozy Breaks with De Gaulle and Tradition,” Spiegel Online, 2009, 03.12. http://www.spiegel.de/international/europe/frances-return-to-nato-sarkozy-breaks-with-de-gaulle-and-tradition-a-612840.html/; Bremner Ch. “Nicolas Sarkozy puts Barack Obama in the doghouse,” TheTimes, 2009, April 19.

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mindful of Berlin’s and Paris’ opinion and coordinate his line on EuroAtlantic and global issues with them.1 Along with stepping up the political cooperation within the NATO framework, the US administration of Barack Obama’s first term was quick to seek strategic dialog with the European Union. Unlike its predecessors – the Republicans – this president’s team did not see the developing European integration and the entry into force of the Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community to be a step towards cooperation with the US. On the contrary, representatives of the Obama administration emphasized their concern for the EU to pursue consolidation as one single partner in global affairs. However, the leaders of the major European powers and the Brussels bureaucracy voiced their discontent with the President Obama’s lack of focus on the US–EU cooperation during the first two years of his term. The key reasons behind this reaction were financial and economic ones, since it was in these sectors that the US government was not prepared to actively cooperate with the EU as far as tackling problems resulting from the crisis have gone.2 The dialog between the Obama administration and NATO’s Eastern European members progressed with greater difficulty than with the Western European leaders. The governments of Poland, the Czech Republic and the Baltic States perceived the new president Obama as a potential threat to their special status as beneficiaries of Washington’s policies in Europe. Eastern European and the Baltic allies were disappointed to see a ‘reset’ of the relations with Russia and apprehensive about the new US administration’s possible intention to carry the ‘reset’ policy over to the Russia-NATO cooperation, which, according to President Obama’s team’s vision, was expected to provide an institutional mechanism for Russia’s multilateral engagement.3 The change in Washington’s stance on the calendar for NATO’s further enlargement also met with a negative reaction on the part of its Eastern European 1 Merkel A. (Federal Chancellor, Germany). Speech at the 45th Munich Security Conference. 2009, February,7. (http://www.securityconference.de/?id=216). 2 Prikhodko O.V. “Obnovlenie I preemstvennost v otnosheniyakh S. Sh. A. s Yevropoy (Glava 6) [Renewal and continuity in the relations between the US and Europe (Chapter6)]. In: V. A. Kremenyuk, ed., Vneshnyaya politika administratsii B. Obamy (2009– 2012) [Obama administration’s foreign policy (2009–2012)]. Moscow, 2012. P. 141–142. 3 Biden J. (Vice-President of the US). Speech at the 45th Munich Security Conference. 07.02.2009(http://www.securityconference.de/en/activities/munich-security-conference/ msc-2009/speeches/joseph-r- biden/).

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allies, since it meant not only postponement of the prospective membership for Georgia and Ukraine perceived by many Eastern European, for example, Polish, politicians as ‘favoured’ countries, but also a halt in the consolidation of the political weight of the bloc’s Eastern members.1 Following the example of the US Republicans, they hastened to accuse Obama of betraying their interests and making concessions to Russia.2 For the Obama administration the political outcome of the ‘reset’ in the relations with Russia was of tremendous importance – among the goals to be achieved was making Russia sign a new strategic offensive reductions treaty, relieving tensions resulting from the ABM issue, reaching agreement with Moscow with regard to ISAF transit. Nonetheless, despite its intention to put mending its relations with Russia on the list of its foreign policy priorities, the administration of Barack Obama chose to avoid poisoning the relations with its Eastern European allies and to make some concessions to them. Some circles within the US political and military elite deemed it reasonable to set a long-term goal of achieving Russia’s deeper engagement into cooperation with NATO, including eventual granting of the ally status. The proponents of that scenario suggested another option envisaging engagement without application of the provisions of Article 5 of the North Atlantic Treaty, and some went as far as proposing full-fledged engagement. Such was the vision of some US and European Atlanticists, who viewed Russia as a kind of another Turkey,3 and of the experts and officials who considered partnership with Russia not so much from the angle of Euro-Atlantic security, but rather from the angle of the US potential interests in Asia Pacific.4 This kind of approach to getting Russia engaged together with the ’reset’ policy, was intended by the Obama administration to become part of its more comprehensive political strategy of NATO development 1 Pecinka B. Uzhin s Obamoy (“Reflex”, Chekhia) [Lunch with President Obama. (Reflex, Czech Republic)]. http://inosmi.ru/europe/20100405/159035898.html/. Original publication: “Večeře s Obamou,” Reflex, 05.04.2010, http://www.reflex.cz/clanek/ politika/36663/vecere-s-obamou.html/; An Open Letter To The Obama Administration From Central And Eastern Europe, July 16, 2009. http://wyborcza.pl/1,98817,6825987,An_ Open_Letter_to_the_Obama_Administration_from_Central.html. 2 Kramer D.J. “No ‘Grand Bargain’,” Washington Post. 2009, March 6. 3 Brzezinski Z. Strategic Vision: America and the Crisis of Global Power. NY, 2012. 4 Yesin V.I. “Sostoitsya li proyekt YevroRPO?” [Is European segment of ABM System To Be Deployed?], Voyenno-promyshlennyi kurier, 2011, 19 January, No 2.

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and revision of the boundaries of the Euro-Atlantic security community. The leading experts sharing pro-Atlanticist views suggested developing effective and sustainable political formats for cooperation with the partner states who were not NATO members – this included Russia, – as well as with international organizations. Since it is in line with the liberal and globalist trends in Atlanticism, this approach conformed to the aspirations of the Obama administration to generate a totally new model of the US leadership, with it now being coordinated with the allies and partners and enjoys their support, while providing for their greater independence in action.

New Conceptual Foundations for Allied Partnership At the end of 2009, the process was launched of working out a new Strategic Concept for NATO, which was to map out the guidelines for the development and operations of the Alliance for the next decade. At the same time, another document was being drawn up that was of even greater importance for the foreign policy and security policy of the United States: the new National Security Strategy, which, as always, pinned significant attention on transatlantic cooperation. The US National Security Strategy was presented in May 2010. The Obama administration’s foreign policy ideology began acquiring a clearer outline. As was expected, it was based on multilateralist approaches to exercising US leadership, though these underwent substantial changes under the impact of the increasingly complex structure of the world order. The strengthening of the new centres of the world’s economy and politics, the impact of global financial and economic crisis, the protracted rise out of recession and the difficulties associated with the consequences of unilateralist power politics formed new cognitive, psychological and ideological foundations for a new Washington’s foreign policy strategy. The Strategy’s conceptualization of globalisation and the nature of its impact on the economic and international political conditions for ensuring the security of the United States were no longer weighed down by the glowing stereotypes of the 1990s or the logic of aggressive unilateralist globalism of the 2000s. The National Security Council experts interpreted globalisation as a contradictory process with a whole bunch of negative phenomena and effects, including those that might impact the US security, which could

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be resolved through active collaboration with allies and partners.1 In contrast to the 2006 Strategy, let along that of 2002, the 2010 document did not take US global leadership for granted. Although the range of threats and challenges outlined in the document has not changed fundamentally compared to the previous Strategies, there has been a  substantial change in the US leadership’s perception of the country’s capabilities for counteracting them. In this connection, the document formulated a new approach to fulfilling the United States’ leadership role: “The burdens of a young century cannot fall on American shoulders alone – indeed, our adversaries would like to see America sap our strength by overextending our power. In the past, we have had the foresight to act judiciously and to avoid acting alone. … But America has not succeeded by stepping outside the currents of international cooperation.”2 The new US National Security Strategy provides a consistent formulation of the multilateralist understanding of priorities in the relations with European allies and their significance for the American security policy. NATO is called “the pre-eminent security alliance,” on the structure of which as well as partnership relations with other countries Washington intends to rely in ensuring regional and global security. Yet the Strategy does not dwell particularly on transatlantic relations, which are considered within the context of the broader policy of relying on allied institutions and partners.3 The Obama administration proceeded from the limited capabilities available when endeavouring to overcome the financial crisis.4 The US NSC experts who drew up the document noted the importance both of bilateral cooperation with the members of the bloc and of multilateral collaboration within NATO and along US–EU channels. The Strategy stresses that the new Strategic Concept being drafted for the Alliance should constitute a conceptual basis for renewing the forms of cooperation between the allies in countering new threats. The Obama administration considered the collaboration with the NATO allies in a broader context: as one of the most important spheres for implementing institutionalist foreign policy approaches. Those who 1 [Preface by the President B. Obama]. National Security Strategy. May, 2010. P. III (http://www. whitehouse.gov/sites/default/files/rss_viewer/national_security_ strategy.pdf ). 2 Ibid. P. IV. 3 Ibid, P. 41. 4 Ibid. P. 32.

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compose Obama’s foreign policy started devoting more attention to universal international institutions, in an attempt to form links between these and the allied structures. This was manifested in an attempt to attach new significance to the United Nations and, at the same time, to link its competence in matters of use of force to the powers of NATO. Even so, the new National Security Strategy casts doubt on the effectiveness of the United Nations. The document comes up repeatedly with the thesis that the international institutions forged in the wake of World War II are no longer fit for the tasks of countering the new types of threat engendered by globalisation.1 The Alliance thus became a necessary and effective addition to the UN Security Council. The Strategy states that Washington is prepared to decide matters of using military force in humanitarian and international crises, working with such institutions as NATO and the UN Security Council.2 The US National Security Strategy 2010 reflects in full the shift of focus of the US leadership towards two regions of future interest from the perspective of economics, energy and security: Asia-Pacific and the greater Middle East. The activity vector of collective institutions was correspondingly orientated: the Obama administration demonstrated a growing interest in the activities of the Alliance in Africa and the Middle East to project power and political influence to the regions bordering on the Euro-Atlantic security space. The document made special mention of NATO’s relationships with the countries of the Istanbul Cooperation Initiative and collaboration between the United States and its allies, on the one hand, and the countries of Africa, on the other.3 Alongside NATO and the United Nations, the Strategy named the African Union as a major international institution on which Washington is prepared to rely in supporting world peace and security.4 The ground has been prepared for involving the United States and/or NATO in the situation in the Middle East and North Africa, which were ready for the revolutionary changes that had developed several months ago. More active collaboration between the allies in this direction was to help in overcoming the legacy of the crisis in allied solidarity. Back in 2009, the NATO Council session in Strasbourg and Kiel resulted in a special Group of Wise Men being convened. It was headed by 1 2 3 4

Ibid. P. 40. Ibid. P. 22. Ibid. P. 45. Ibid. P. 48.

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former US Secretary of State Madeleine Albright. This group of experts, consisting of specialists and retired officials, drew up a list of proposals for the bloc’s future strategic development. The open document published upon the results of the group’s work has the self-explanatory title “NATO 2020: Assured Security; Dynamic Engagement.”1 It reflected the new trends that were emerging in the thinking of the transatlantic expert and political community and were subsequently embodied in the proposals for the new NATO Strategic Concept. For the purpose of ensuring greater international legitimacy of the new conceptual foundations for NATO operations, the members of the Group of Wise Men who drafted the preliminary report tried to proceed from a broader dialogue with all stakeholders while drawing up the recommendations for the concept. The group of experts held the first ever consultations with representatives not only of all countries of the Alliance but also partner countries, including Russia. The consultations on the new Strategic Concept at the official and expert levels also went beyond the bounds of the work of the expert group in 2010 with such NATO partner countries as Australia, New Zealand, Japan and South Korea. This was the first time that such an approach had been applied to discussing the Strategy. During the elaboration of recommendations for the Concept Madeleine Albright herself and members of the group made several visits to Moscow and met with representatives of the Russian government and expert community. Members of the Group gathered official and unofficial opinions about the Alliance’s activities and the prospects for its relations with Russia. The NATO leadership used such methods in an attempt to demonstrate its readiness for dialogue with Russia on a number of matters during formation of the new Strategic Concept. The members of the expert group included among the topics for expanding the dialogue with Russia: non-proliferation of WMD, arms reductions, the struggle against international terrorism, ballistic missile defense issues, crisis management, peacekeeping operations, maritime security and combating drug trafficking.2 This approach complied with the logic of resetting relations with Russia initiated by the Obama administration. Russia’s engagement was also one of the main priorities pursued by the leading European members of NATO (Germany and partly France 1 NATO 2020: Assured Security; Dynamic Engagement: Analysis and Recommendations of the Group of Experts on a New Strategic Concept for NATO. 2010, May 17 (www.nato.int/cps/en/natolive/topics_56626.htm). 2 Ibid. P. 10.

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and Italy). Expanded cooperation with Russia in the economic sphere secured the interest of these countries’ elites in preventing new crises in Russian-NATO relations (later the Ukrainian crisis showed that politics can prevail logic of the economic ties). Influential experts from the FRG called for US tactical nuclear weapons to be removed from German soil and from Europe as a whole. They saw this step as a way of overcoming the legacy of the Cold War and even counterposed this position to the conclusions of the official NATO task force headed by former Secretary General Robertson, insisting on US tactical nuclear weapons remaining in Europe.1 A number of European politicians even began suggesting that Russia should be drawn into NATO.2 These ideas were also supported by certain US analysts, who saw new prospects for Euro-Atlantic security in full revision of the principles behind the relations with Russia and development of institutionalised cooperation, if not in Russia becoming a full member of the Alliance.3 The expert dialogue based on the Obama administration’s striving to extend cooperation with Russia, launched during preparation of the recommendations by the Group of Wise Men, went further. An unofficial trilateral commission was set up (in the Russia – US – European NATO members format): Euro-Atlantic Security Initiative (EASI).4 This project was supported by the governments of the United States, a  number of NATO states and Russia. During 2009–2011, the Initiative served as an important channel for informal expert political dialogue on the economy, historical legacy, ballistic missile defense and other military security issues, following the lines of the official dialogue at the NATO–Russia Council (NRC). This platform allowed for an informal dialogue between Russian and NATO experts (including those belonging to M. Albright’s expert group) on many topics, including ones that were difficult to discuss at the official level. The participants in the EASI not only held expert consultations but also spoke actively in the media on a broad range of 1 Ischinger W., Weisser U. “NATO and the Nuclear Umbrella,” The New York Times. 2010, February 15. 2 Ruher F., Naumann K., Elbe F., Weisser U. “Time to invite Russia to join NATO,” Der Spiegel. 2010, September 3 / Russian translation from the German by INOSIMI (www. inosmi.ru/europe/20100309/158512473.html). 3 Kupchan Ch. How Enemies Become Friends: The Sources of Stable Peace. N.J., 2010. P. 397–398.; Idem. “Can NATO Nudge Russia Westward?” Council on Foreign Relations. 2010, October 20 (www.cfr.org/europerussia/can-nato-nudge-russia-westward/p23191). 4 Toward a Euro-Atlantic Security Community.Final Report EASI.Wash. D.C., 2012 (carnegieen- dowment.org/specialprojects/?fa=list&id=1183).

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matters relating to Euro-Atlantic security, focusing on relations between the US and NATO, on the one hand, and Russia, on the other. The new policy of expending collaboration with Russia was interlinked with practical steps taken by the Obama administration in the military sphere. In February 2010, the administration adopted the “Phased Adaptive Approach” as the conceptual basis for implementing the ballistic missile defense system in Europe and the Asia-Pacific region, the fundamentals of which were set out in the Ballistic Missile Defense Review Report.1 In contrast to the plan of the previous administration, which was initially orientated on creating a strategic BMD system, the new approach presupposed a phased (four stages) deployment of the ballistic missile defense architecture to respond to the rate and nature of missile threats in accordance with an increase of their threat level. The document stated the readiness of the United States to develop cooperation with Russia on ballistic missile defense. The NATO Strategic Concept adopted at the end of 2010, which became known as “Active Engagement, Modern Defence,”2 largely continued and developed the logic of the US National Security Strategy, a whole series of interlinks being identifiable between the two documents. This time, this vital document for the Trans-Atlantic Alliance was formulated somewhat differently from the traditional pattern: the fact that partner countries but not members of the Alliance were involved in discussing the Concept was not only a result of the demonstrative openness of the bloc and the policy of resetting relation with Russia. By this means, the US and European Atlanticists additionally stressed and politically legitimised the fact that the Alliance, while remaining predominantly a regional security structure (relevant claims were reduced in accordance with the economic capabilities of the allies), was acquiring global significance as a political institution. The political and ideological importance of each NATO Strategic Concept lies not only in the way it heralds a certain landmark in the evolution of the bloc and secures the position of the member countries, reduced to a common denominator, in relation to security criteria 1 Ballistic Missile Defense Review Report.Department of Defense. February 2010. P. 24–25, 31–32. 2 Active Engagement, Modern Defence. Strategic Concept for the Defence and Security of the Members of the North Atlantic Treaty Organisation adopted by Heads of State and Government in Lisbon. December 2010 (www.nato.int/cps/en/SID-7461673F13F69F56/natolive/official_texts_68580.htm).

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and  principles, but also serves as a long-term conceptual foundation for their vision of the international political conditions for joint actions. The 1991 Strategic Concept formulated a readiness to retain the common goals and values of the NATO participants, as well as to continue their alliance, despite the beginning of a new era in the development of the entire system of international relations.1 The 1999 Strategic Concept was based on an expansive, globalist understanding of the Atlanticist principles of security and approaches to implementing them. The Concept set NATO goals of an unprecedented scale, identified a corresponding range of interests and conditions for ensuring the security of the members. It initiated extending the bloc’s activities beyond the boundaries of Euro-Atlantic security defined during the Cold War.2 Yet the experiences of the 2000s showed that the assessments of the military-political capabilities and level of consolidation of NATO, as a collective institution and instrument for ensuring security, were substantially exaggerated. The globalist understanding of the goals and methods of the Alliance’s activities turned out to be too expensive for the member countries in financial, military, political and organisational terms. The  constant expansion of the range of military and political tasks, the bloc’s membership and its sphere of responsibility in many areas entailed a change in the Alliance’s image in the wake of the Cold War, with new groups of interests emerging. These included the Eastern European members, the growing Transatlantic bureaucracy, and the part of the Alliance’s military and civil administration, whose status, activities and interests were interlinked with expeditionary operations and the expanded zone of responsibility. Yet only the favourable economic situation allowed the appetites of these interest groups to be satisfied. The goals and tasks of Euro-Atlantic cooperation set out in the Strategic Concept 2010 were reserved in form and pragmatic in content. Alliance’s high officials did not depart from the expansive understanding of ensuring the security of the Transatlantic community.3 However, they did try to adapt the ideology to the current international political and financial-economic circumstances. Given the substantial revision of 1 The Alliance’s New Strategic Concept agreed by the Heads of State and Government participating in the Meeting of the North Atlantic Council. 07 Nov. 1991 – 08 Nov. 1991 (www.nato.int/cps/en/SID-19CA8E91-D4AD357F/natolive/topics_56626.htm). 2 The Alliance’s Strategic Concept. Approved by the Heads of State and Government participating in the meeting of the North Atlantic Council in Wash. D.C. 24 Apr. 1999 (www.nato.int/cps/en/SID-E0F58132-58260C04/natolive/official_texts_27433.htm). 3 “Core Tasks and Principles,” in Active Engagement, Modern Defence…

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the  NATO globalisation strategy debated in the early 2000s,1 the principles behind the partnership needed to be optimized. For the first time in NATO history, the thesis was formulated that the threat of a conventional weapon attack was extremely low. This understanding of NATO security was a logical continuation of the thesis that the Alliance did not consider any country as its opponent. This same thesis was repeated separately with respect to Russia. At the same time, the Strategic Concept secured precisely the position of the Alliance regarding the fact that “deterrence based on an appropriate mix of nuclear and conventional capabilities remains a core element of our overall strategy.”2 The Strategic Concept named the following key new threats to the security of the NATO members: proliferation of nuclear weapons and other weapons of mass destruction, and their means of delivery, missile technologies and ballistic missiles; terrorist attacks; cyber threats; climate change; health risks; water scarcity; and increasing energy needs. The document reflected a shift in the NATO security priorities towards non-military threats and challenges, meaning also expansion of the relevant spheres of activity. Included among these were threats related to technology and infrastructure (transport, communications), as well as those connected with ensuring maritime security, particularly in connection with fuel and energy supplies.3 The Concept did not conclude which actions the Alliance would undertake, should the energy security of its members be undermined, but stated expressly that these threats have the potential to significantly affect NATO planning and operations. The understanding of the limited capabilities of the bloc’s members, including even the United States, has done much to promote a  greater focus by NATO on dialogue with external actors. The Concept reflects a striving towards greater cooperation with states that do not belong to the transatlantic community and with other international institutions. Like the US National Security Strategy, the NATO Strategic Concept 2010 was distinguished by focusing particular attention on the United Nations and international institutions, emphasising the special nature of the cooperation between NATO and the UN in ensuring security and conducting operations throughout the world.4 These ideas 1 2 3 4

Daalder I., Goldgeier J. “Global NATO,” Foreign Affairs. 2006. Vol. 85. Nо. 5. “Defence and Deterrence,” in Active Engagement, Modern Defence… “The Security Environment,” in Active Engagement, Modern Defence… “Partnerships,” in Active Engagement, Modern Defence…

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reflected the obvious inclination of US and European Atlanticists to review liberal-institutionalist ideas. By appealing to the authority of the United Nations, they endeavoured to raise the international political legitimacy of  the Alliance. The reference made in the Strategic Concept to the UN/NATO Secretary Generals’ Joint Declaration on UN/ NATO Secretariat Cooperation signed in New York back in September 2008 also complied with this approach. This document, which was not officially made public owing to dissatisfaction on the part of some permanent members of the UN Security Council with the rapid expansion of the UN Secretary General’s powers, presupposed development of mechanisms for collaboration and consultation between the United Nations and NATO on international security issues and possible coordination of actions in crisis situations and “unforeseen circumstances.”1 Alongside the United Nations, NATO also named the European Union as a “unique and essential partner.” The document stresses the growing significance of the European component in ensuring transatlantic security, which could not but be to the liking of France, the UK and the FRG. Two additional preconditions emerged for such attention to the role of the Alliance’s European component. First, a decision was taken in March 2010 to liquidate the Western European Union and transfer its functions under the Lisbon Treaty not so much to European structures (predominantly future ones) as to NATO, which was designated as the security mechanism for both the NATO members and other countries of the European Union.2 Second, grounds arose for actual formation in Western Europe of a new military political tandem: the UK and France, which demonstrated an interest in cooperating with the United States. Shortly before the Strategic Concept was adopted in November 2010, France and the UK signed a Declaration on Defence and Security Cooperation, which, though it does not actually mention the US, stresses the significance of cooperation within the scope of NATO.3 Having returned France to the NATO military organisation, 1 NATO’s relations with the United Nations (www.nato.int/cps/en/natolive/ topics_50321.htm); Joint Declaration on UN/NATO Secretariat Cooperation. 2008, December 4. Unofficialpublication (www.emg.rs/en/news/region/71702.html). 2 Zhurkin V.V. Yevropeyskaya armiya: porazheniya I pobedy. Obshchaya politika bezopasnosti I oborony Yevropeyskogo soyuza [The European Army: defeats and victories. The general security and defence policy of the European Union]. Мoscow., 2012, P. 158. 3 UK–France Summit 2010 Declaration on Defence and Security Cooperation. Prime Minister’s Office, 10 Downing Street. 2 November 2010 (www.gov.uk/government/news/uk-france-summit-2010-declaration-on-defence-and-security-co-operation).

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the Sarkozy Government began acting in accordance not so much with Europeanist ideological principles as Atlanticist ones: while maintaining an intensive dialogue with Germany on economic matters, it began building up a Paris-London-Washington triangle. This line was continued by a new agreement, signed one year later, on strategic partnership between the UK and the US.1 Despite the crisis of the unilateralist practice of military intervention, the United States and its allies did not give up the possibility of intervention as such, as was soon confirmed in Libya. The Strategic Concept twice mentions that crises and conflicts beyond NATO’s borders can pose a direct threat to the security of the Alliance and expresses readiness to “engage, where possible and when necessary, to prevent crises, manage crises, stabilize post-conflict situations and support reconstruction.”2 The striving to expand the practice of intervention by the Alliance correlates to the readiness expressed in the US National Security Strategy to intervene in both military and humanitarian crises. NATO reserved the right to intervene in any crisis, either international or domestic. The political and ideological foundations for expeditionary operations under NATO auspices were retained and strengthened for the purposes of “humanitarian intervention” outside the traditional area of responsibility if instability there is deemed a threat by NATO. Moreover, the NATO operation in former Yugoslavia was conducted on a similar conceptual basis, though at that time the point at issue was merely an area adjacent to the Euro-Atlantic zone. This approach to legitimising political and military intervention is closely linked with the principles of the concept of “Responsibility to Protect.” In accordance with these principles, state sovereignty may be limited and any country subjected to intervention if the ruling regime there cannot cope with the tasks of keeping the people safe and observing human rights. The  grounds for intervention list genocide, crimes against humanity, war crimes and ethnic cleansing, which are often equated to violations of human rights and freedoms. Given such interpretation, threats to peace and security often retire into the background and are equated to human rights problems.3 1 Kremenyuk V.A. (ed.) Vneshnyaya politika administratsii B. Obamy (2009–2012) [The Obama Administration foreign policy (2009–2012)]. Мoscow, 2012. P. 125. 2 “Security through Crisis Management,” in Active Engagement, Modern Defence… 3 The Responsibility to Protect.Report of the International Commission on Intervention and State Sovereignty.December 2001 (www.iciss.ca/menu-en.asp).

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Since the beginning of the 21st century, many politicians, experts and non-governmental organisations from NATO countries have considered the concept of “Responsibility to Protect” and its modifications as an ideological basis for “humanitarian interventions.” The US National Security Strategy 2010 says that Washington and its allies are prepared to work both multilaterally and bilaterally to mobilise diplomatic, humanitarian, financial, and – in certain instances – military means for implementing the principles of “Responsibility to Protect.” The document makes the reservation that these measures may be applied by Washington and its allies when sovereign governments prove unable or unwilling to take necessary action to prevent or respond to “genocide or mass atrocities” inside their borders.1 The Obama administration thus officially designated its readiness to rely on the concept of “Responsibility to Protect” in conducting acts of violence that, in accordance with the multilateralist principles, presupposed participation by allies. No account is taken of international law or resolutions of the UN Security Council: a humanitarian crisis is considered by those who support these ideas as grounds for using force. US and European Atlanticists are not as radical on this issue as those who support liberal globalism; they are prepared, be it formally, to rely on resolutions of the UN Security Council but, as in the cases of Yugoslavia and Libya, retain the right to interpret them. Interventionist states unambiguously take the side of one of the forces in a conflict, act to the detriment of the declared goals and do nothing to achieve peace. Such intervention results in regime change (as in Libya), separation and sovereignisation of areas densely inhabited by ethnic and religious-cultural groups, with other communities being ousted (Kosovo). The supporters of the “Responsibility to Protect” concept apply efforts to introduce its principles into the positions of the developing countries and their alliances. Officially, those principles are secured as grounds for intervention in article 4 of the Constitutive Act of the African Union2 (one signatory of this document was Libya’s leader M. Gaddafi). These principles served as one of the grounds for the NATO operation in Libya, which was supported by the African Union and relied on an expansive interpretation of the relevant UN Security Council 1 National Security Strategy.May, 2010. P. 48 (www.whitehouse.gov/sites/default/ files/rss_viewer/national_security_strategy.pdf ). 2 “Article 4,” in The Constitutive Act of the African Union: adopted in 2000 at the Lome Summit (Togo). 2001. P. 7 (www.au.int/en/about/constitutive_act).

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resolution. The concept of “Responsibility to Protect” is applied as ideological justification for political and military actions in relation to individual countries. In essence, however, broader international political goals are pursued: transformation of the basic principles of use of force in world politics and legitimisation of these actions. The interventionist principles set forth in the Alliance’s Strategic Concept 2010 occlude the approach secured in the UN Charter to the question of selecting grounds for intervention. In relation to inter-state conflicts and situations jeopardising international peace and security, there exists a developed international legal and institutional framework for legitimising collective military intervention: Chapter VII of the UN Charter and resolutions of the UN Security Council. In a bipolar world, the majority of international military operations to intervene in domestic conflicts and crises were launched on precisely this political and legal basis. The principles and mechanisms for international agreements and collective military actions in situations when there is no direct threat to international peace are far less developed. Such a political and legal gap creates a temptation for states with global military and political resources to conduct voluntaristic military actions in the name of the international community and attempt to give them political legitimacy in the guise of propaganda cover. These principles were soon tested in practice: in 2011, in the operation in Libya. Here NATO made expansive use of the existence of two imprecisely formulated resolutions of the UN Security Council (Nos. 1970 and 19731) for conducting an air operation and actions to intervene in the conflict between the Libyan government and the rebels, which went far beyond the mandate. In its actions, NATO relied on cooperation with the Libya Contact Group, which was not a legitimate body for regulating the crisis and was not vested with relevant authority.2 This created yet another precedent for using resolutions of the UN Security Council as a basis for NATO intervention in crisis situations. Politically, the Libyan operation constituted a sort of test of the new model for applying allied instruments for the policy of intervention. It was conducted precisely in accordance with the “Responsibility to Pro1 UN Security Council Resolution No. 1970, adopted at its 6491st session on February 26, 2011S/ RES/1970 (2011) (daccess-ods.un.org/TMP/8703118.56269836.html); UN Security Council Resolution No. 973, adopted at its 6498th session on March 17, 2011. S/RES/1973 (2011) (daccess-ods.un.org/ TMP/533999.986946583.html). 2 Libya Contact Group: Chair’s Statement. Statement by Foreign Secretary William Hague following the Libya Contact Group meeting in Doha.2011, April 13 (www.fco.gov. uk/en/news/latest- news/?view=News&id=583592582).

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tect” concept and was based on multilateralist principles, being carried out by the forces of NATO and associated EU countries (though their contribution was merely symbolical) and relying on the UN Security Council resolution. Yet, at the same time, the operation was also based on a fundamentally new, unprecedented scenario for US participation, which may be described as a policy of “remote leadership.” Washington preferred to take advantage of the interest of the new UK-France tandem within the European nucleus of the Alliance for raising its own status in order to delegate them the authority to conduct a limited military intervention in the situation. The UK and France demonstrated great enthusiasm back at the political and diplomatic preparatory stage of the operation. Together with the United States and Portugal, they supported resolution No. 1973 of the UN Security Council, in contrast to the FRG, which abstained from voting, alongside Russia, China, India and Brazil. Then they assumed the  leading role in planning and conducting the operation within the framework of the NATO structures and made the decisive contribution to the actual military actions.1 The supporters of liberal globalism within the community of Atlantisists consider the series of political precedents for using informal legitimisation tools, possibly in conjunction with or instead of UN Security Council resolutions, as a way of securing politically the practice of this type of intervention. They believe that the veto rights of the other permanent members of the UN Security Council are too restrictive on the freedom of action of the United States and its allies and disrupt the primacy of values in justifying military actions. This point of view has found support within the US expert community as a result of the confrontation that developed in 2012–2013 in the UN  Security Council over the adoption of several draft resolutions over the situation in Syria.2 Even so, here too, another approach predominated in the Obama administration’s actions, being based on economies of funds and a sparing attitude towards political resources. Having supported application of the principles of the “Responsibility to Protect” concept in Libya, the Obama administration began taking more care in providing a political justification for legitimisation of use of military force. This circumspection is explained by reluctance 1

Zhurkin V.V. Ibid. P. 174–176. Beehner L. “The UN’s Fossilized Security Council,” World Policy Journal Blog. 2012, June 6 (www.worldpolicy.org/blog/2012/06/06/uns-fossilized-security-council); Corboy D., Courtney W., Yalowitz K.Russia’s Veto Diplomacy // New York Times. 2012, August 14. 2

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on the part of the  Obama administration to assume additional costs and political risks connected with conducting an operation on a much larger scale than that in Libya. In addition, the US leadership proceeds from the need to maintain relations with the permanent members of the UN Security Council who disagree with the policy of intervention in Syria: Russia and China. Since 2011, the strategic shift by the United States towards the AsiaPacific – so called “Pacific pivot“ – has been a foreign and security policy priority for the Obama administration. The European powers were signalled to the effect that new opportunities were opening up for them for providing more active support for US policy in the AsiaPacific and coordinating actions in the region and globally. This was first mentioned in June 2011 by US  Secretary of Defence Robert Gates in his speech at the NATO headquarters. At the same time, he reproached the allies for being passive and reluctant to bear a due portion of the economic and military burden connected with ensuring European security.1 The United States’ shift in priorities towards Asia aroused an ambiguous reaction within the European expert and political community: from accusations that Washington was sacrificing allied collaboration to the current situation to calls to enter Asia together and involve the Alliance in more active cooperation with allies of the United States in the Asia-Pacific Region. At the conceptual level, the Obama administration identified new priorities for its Euro-Atlantic policy in a short conceptual document entitled “Sustaining U.S. Global Leadership: Priorities for 21st Century Defense” presented by the Pentagon in early 2012.2 Even though it was prepared under Pentagon rather than NSC auspices, this memorandum changed the balance of defence matters and political issues involved in the defence and security strategy in favour of the latter. The document not only designated the long-term benchmarks for the US defence and security policy in the Asia-Pacific Region and South Asia, as well as the Middle East and North Africa, but also formulated a new view of the model for developing relations with the European allies against the background of transformations in the world order. The Pentagon expressed its readiness to participate further in en1 Secretary of Defense Robert M. Gates, Brussels, Belgium, Friday, June 10, 2011. The Security and Defense Agenda (Future of NATO) (www.defense.gov/Speeches/ Speech.aspx?SpeechID=1581). 2 Sustaining US Global Leadership.Priorities for 21st Century Defense.Department of Defense.January 2012 (www.defense.gov/news/defense_strategic_guidance.pdf ).

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suring Euro-Atlantic security and sustain NATO capability, whereas its strategists noted that European members of the Alliance had themselves become “security producers” to a greater extent than “security consumers.” On the basis of this provision, the memorandum concluded that the changed strategic landscape allowed the United States to review the correlation of the scale of its own military expenditures on implementing its security policy in different regions. At the same time, the allies were recommended not only to demonstrate activity in resolving security tasks but also to expand engagement with Russia in this sphere.1 During the 2012 presidential campaign, President Obama focused particular attention on domestic social and economic problems, prioritising the “strategic pivot” towards the Asia-Pacific Region and an end to the war in Afghanistan on the foreign policy agenda. At the end of 2012 and beginning of 2013, the cut in military spending and the need to overcome the consequences of the financial and economic crisis forced the Obama administration to call on its NATO allies to become more independent in fulfilling common transatlantic tasks in the economic and security spheres. The US leadership hoped to achieve a financial and political contribution from its NATO allies in implementing the European segment of the ballistic missile defence system. The enduring financial and economic recession in the Eurozone meant, however, that these calls found no support in the European capitals. Nor could the European members of the Alliance take the initiative in expanding the dialogue with Russia, particularly with respect to the ballistic missile defence problem. Here NATO’s role is naturally a secondary one. The 2013 decision by the new Obama administration not to deploy the fourth stage of the ballistic missile defense system in Europe helped bring the discussion of cooperation models between the United States and NATO, on the one hand, and Russia, on the other hand, out of its impasse in the sphere of ballistic missile defense. Following the US announcement that ballistic missile defence in Europe would not include deployment of interceptors capable for bringing down strategic missiles, both the United States and European NATO members, and Russia began sending signals to each other of the possibility of such a renewal from the beginning of 2013.2 The rele1

Ibid. P. 3. “Rossiya gotovitsya k razgovoru s NATO. Intervyu postpreda Rossii pri NATO A.V.  Grushko” [Russia prepares for dialogue with NATO: Interview with Russia’s NATO presidential envoy A.V. Grushko], April 19, 2013 (www.interfax.ru/txt.asp?id= 302587&sec=1483). 2

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vant dialogue was launched between Minister of Defence of the Russian Federation Sergei Shoigu and US Defence Secretary Chuck Hagel. At the same time, in 2013, official representatives not only of the West European NATO members but also the East European ones began, for the first time, to come out in support of developing cooperation with Russia in the sphere of ballistic missile defence. However, a considerable number of contradictions remained between the parties. The dialogue between Russia and the US/NATO over ballistic missile defense continued until the Ukrainian crisis but it was not really prepared and aimed to achieve any specific agreements on new cooperation principles. The slow rise of the US economy out of recession, the financial and economic problems facing the European allies deriving from the crisis in the Eurozone and the difficulties in concluding the operation in Afghanistan have erected additional barriers to promoting long-term initiatives in the military-political sphere. Even so, the second Obama administration that came to power in 2013 has been able to offer a new approach to developing transatlantic relations. The key to this was found in political means for encouraging collaboration between the United States and the European Union in the economic sphere: the idea of deeper transatlantic economic integration, which both the US Atlantisists in the expert community and the government of the United States have called for repeatedly since the early 1960s but which has never been implemented. Officially, newly-elected President Obama came up with the initiative in his first State of the Union Address to Congress on 12 February 2013.1 The US leadership proposed setting up a transatlantic free trade and investment zone uniting the United States (and, subsequently, probably all NAFTA members) and the  EU  – Transatlantic Trade and Investment Partnership (TTIP). Consultations between the US and the EU concerning the possible principles for the functioning of such a free trade zone began back in 2011, but discussion of this idea hardly spread to the public political sphere.2 At the beginning of January 2013, the idea was cast into political circulation 1 President Barack Obama’s State of the Union Address.2013, February 12 (www. whitehouse.gov/the-press-office/2013/02/12/president-barack-obamas-state-unionaddress-prepared-delivery). 2 Speech by J.M.D. Barroso, President of the European Commission to European Union Heads of Delegation Annual Conference of EU Heads of Delegation, EUSR and Chargés d’Affaires. Brussels, 2012, September 4 (europa.eu/rapid/press-release_ SPEECH-12-585_en.htm).

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at  the highest expert and political level by former NATO Secretary General Javier Solana, who called on the United States and the EU to draw closer together in the political and economic sphere.1 The United States put forward a new transatlantic political and economic project in an attempt to create the world’s biggest consumer market and ease the conditions for mutual investment and activation of trade links with the EU. The US leadership regarded the creation of a transatlantic market for goods, services and investment, regulated by collective institutions and functioning on common foundations, as a possibility for overcoming the problems that arose during the Doha round of negotiations with respect to developing the WTO regimes. The WTO principles require a consensus between the various interstate interest groups, which often blocks US attempts to take the initiative in settling trade disputes between China and the countries of Latin America. The simultaneous launch of two strategic trade and economic initiatives: the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership, reflects Washington’s striving to form special conditions for cooperation with the allies. Relations in one sphere should, according to the ideologists behind such integration, supplement and invigorate the dynamics of collaboration in other spheres2. The Transatlantic Trade and Investment Partnership project was met with enthusiasm in the European Union. It was supported by President of the European Commission José Manuel Barroso, who announced the launch of official negotiations on setting up a free trade and investment zone.3 The US and European expert and political community also met the project with considerable enthusiasm. The high level of politicisation of this initiative prompts the assumption that both the new Obama administration and the leaderships of the key EU states, as well as the top European officials, had considerable political will to implement it. At the same time, such political and ideological optimism could create excessive expectations, which were very typical of transatlantic relations in the past. This might create a situation of a political initiative on a global scale and of global significance coming up against persistent 1 J. Solana. “Transatlantic free trade?” European Voice. 2013, January 4 (www.europeanvoice.com/article/2013/january/transatlantic-free-trade-/76092.aspx). 2 Haas R. “The Irony of American Strategy,:” Foreign Affairs. 2013. Vol. 92. Nо. 3. 3 Statement by President Barroso on the Transatlantic Trade and Investment Partnership. Speech № 13/121.2013, February 13 (europa.eu/rapid/press-release_ SPEECH-13-121_en.htm).

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contradictions between the United States and the EU at the interstate level and the level of business interests, which could take many years to overcome. The more than 12-year restrictions on exports of EU beef to US markets are a typical example. Given the continuing financial and economic difficulties within the EU and the relatively slow rise of the US economy out of recession, it is an open question whether it will prove possible to overcome these contradictions.

Conclusion of the ISAF Operation in Afghanistan Over the years since the beginning of the military campaign in Afghanistan, this war has become a heavy political burden for the governments of the countries contributing to the International Security Assistance Force (ISAF). This is especially true of the United States which bore the brunt of combat operations throughout all these years, defraying the bulk of expenditures related to the nation-building in Afghanistan. The fatigue of the American public with their country’s military campaigns manifested itself through the outcome of the 2008 presidential elections in the US when the victory was carried by the Democratic presidential candidate Barack Obama who had promised to bring the US soldiers home. He was planning to keep his pledge during his second term – this is what his voters are expecting from him. The decision to withdraw the ISAF troops from Afghanistan on the eve of the coming presidential elections of 2012 was crucial for the Obama administration – the public were longing for the campaign to be concluded.1 The leaders of the European NATO member states have an even stronger political motivation than the US to withdraw the ISAF from Afghanistan. Here the domestic political factors are supplemented by the effect of financial and economic hardships. However, both Brussels and Washington would like to ensure respect by all parties to the campaign of the arrangements reached at the NATO Chicago Summit regarding the deadline and the stages of the military withdrawal. The decision of the new French President François Hollande to withdraw his country’s troops ahead of the planned date met with apprehensions 1 “In Toll of 2,000, New Portrait of Afghan War,” The New York Times. 2012, August 21.

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on the part of Washington and Brussels influenced on the decisions of other European members of the coalition.1 The situation in the Islamic Republic of Afghanistan continued to top the transatlantic relations agenda in 2009–2013. The ISAF operation in Afghanistan continued to be the principal military and political challenge for NATO and for its strategic priorities. As far as NATO’s new strategic priorities are concerned, of special significance is the fact that the ISAF operation was conducted with an authorization from the UN Security Council and among its participants many were not even NATO members. The difficulties that the US and its allies faced in Afghanistan showed that NATO’s ability to act beyond its traditional zone of responsibility continues to be rather limited. The allies are quite capable of launching long-distance airstrikes, yet experience major difficulties when it comes to ground operations. Transport and logistical support of the ISAF operations required back in 2005 assistance of a whole number of countries that did not even participate in the operations as such, and Russia was one of those. It was only to be expected that the transit first of non-military and then of military cargo for the ISAF via Russia’s territory in 2009–2013 became one of the key milestones in the ‘reset’ of the US-Russia relations, as well as of the dialog in the framework of the NRC. The deterioration in the US-Pakistani relations in 2008–2010, as well as repeated attacks on caravans with equipment and cargo for the ISAF on their journey along the southern route, confronted the US and NATO leaders with the need to search for other possibilities. Back in April 2008 at the 2008 Bucharest summit of the NATO-Russia Council, a framework agreement was reached between NATO and Russia on non-military transit of cargoes for the ISAF through Russian territory. An agreement with NATO was expected to replace bilateral agreements between Russia and specific European countries pursuant to which transit was carried out. The war in South Ossetia got in the way of signing of such an agreement, yet new steps towards cooperation were made by the US, NATO and Russia quite soon, in the spring and summer of 2009. Arrangements were made reached during Barack Obama’s visit to expand the transit of ISAF cargos via the Russian territory. Those arrangements were formalized in a  joint statement by the presidents of the US and 2 “François Hollande repeats troop pullout pledge on surprise visit to Afghanistan,” The Guardian. 2012, May 25.

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Russia.1 Cargo transit for the coalition forces’ needs started in August 2009 and ended in May of 2015. NATO’s readiness to perform in Afghanistan the political and other non-military functions that had not been part of its agenda before proved to be rather low. Despite certain progress as far as the Afghan police and army training and holding the elections are concerned, it had become clear that NATO is unable to meet the key challenges, like that of creating a system of public administration, let alone that of fighting corruption, drug production and trafficking, to say nothing of building a viable economy. Some moderate success was achieved in promoting education and training of the Afghan security forces. The termination of the campaigns in Iraq and Afghanistan had great political significance for President Obama – for one thing, US voters had to be appeased, and for another, the goal was to avoid the impression that the termination of these campaigns can be equated to a total defeat on the part of the US and its allies. Officially, the Iraq campaign ended in 2010, with the US troops having officially left Iraq by the end of 2011.The definitive withdrawal of the instructors units may take an extra few years. The allies’ assistance to the US efforts at the final stage of the operation in Iraq was but indirect. A NATO-led training mission operated in Iraq between 2004 and the early 2012.2 Throughout 2009–2013 the Obama administration had repeatedly requested from its NATO allies to boost the strength of their troops and step up its involvement in combat operations in Afghanistan. However, due to the impact of the financial and economic crisis and the rather strong domestic opposition to the war, the European members of the ISAF continued to show but restrained enthusiasm with respect of the US appeals. They preferred to use their units for training the Afghan army and police force, dealing with security and auxiliary tasks, and for minor 1 Sovmestnoye zayavleniye Prezidenta Rossiyskoy Federatsii D.A. Medvedeva i Prezidenta Soyedinennykh Shtatov Ameriki B. Obamy po Afganistanu. Moskva, 6 iyulya 2009 goda [Joint Statement by President of the Russian Federation D. A. Medvedev and President of the United States of America Barack Obama Concerning Afghhanistan. Moscow, 6 July 2009 (www.kremlin.ru/text/docs/2009/07/219076.shtml). In English: Joint Statement by President of the United States of America Barack Obama and President of the Russian Federation D. A. Medvedev Concerning Afghanistan. http://www.whitehouse.gov/the_press_office/JOINT-STATEMENT-BY-PRESIDENT-OF-THE-UNITEDSTATES-OF-AMERICA-BARACK-OBAMA-AND-PRESIDENT-OF-THE-RUSSIANFEDERATION-D-A-MEDVEDEV-CONCERNING-AFGHANISTAN/. 2 NATO’s Assistance to Iraq (www.nato.int/cps/en/natolive/topics_51978.htm).

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local operations. The US contingent had increased noticeably between March 2010 and June 2011 – the period of the most active combat operations – from 50,590 up to 90,000 personnel. The German contingent has grown by an additional 477 personnel (from 4,335 up to 4,812 personnel). The UK military contingent, the second largest after the US, remained unchanged (9,500 personnel). The Italian armed forces contributing to the ISAF grew by an extra 720 personnel (from 3,160 up to 3,880 personnel), France – by a mere 200 personnel (from 3,750 to 3,950 personnel.)1. Over the next two years this ratio remained about the same – despite the US repeatedly addressing its allies with the request to boost their military presence. The reductions in the US forces in 2012–2013 (down to 68,000 personnel) were immediately followed by most of the contributing allies reducing their respective troops (the UK, France, Italy, Canada), with the exception of Germany (4,400 personnel), Poland (1,741) and Georgia (1,561).2 In the early 2011 the US and NATO officials announced the deadline for the withdrawal of the ISAF troops from Afghanistan as the end of 2014. The then US Secretary of Defense Robert Gates accused his country’s European allies of passivity, suggesting that the allied troops stay longer in Afghanistan.3 The majority of NATO’s European members, except Poland and the UK, distanced themselves from active participation in the combat activities in Afghanistan,4 and throughout 2010–2012 insisted on speedy conclusion of the campaign.5 Back at the 2010 NATO summit in Lisbon the intention was announced to gradually transfer the responsibility to maintain order and security in Afghanistan from the coalition troops to the national security force. The  European allies not only backed the Obama administration’s intention to withdraw the troops by 2014, but even put some additional pressure of their own on it. General David Petraeus had voiced 1 International Security Assistance Force (ISAF). Key Fact sand Figures. March 2010 (isaf.nato.int/troop-numbers-and-contributions/index.php); International Security Assistance Force (ISAF). Key Facts and Figures. June 2011 (www.isaf.nato.int/images/ stories/File/Placemats/110606-isaf-placemat.pdf). 2 ISAF troop numbers and contributions. 2013, April 22 (http://www.nato.int/nato_ static/assets/pdf/pdf_2013_04/20130422_130422-isaf-placemat.pdf). 3 Interview with Defense Secretary Robert Gates by James Rosen / FOX News. 2010, September 2 (foxnews.com/politics/2010/09/02/transcript-fox-news-interview-defensesecretary-robert-gates-james-rosen/). 4 Drozdiak W. “NATO’s Last Stand.” IPJournal. 2010, January 1 (ip-journal.dgap. org/en/ip-journal/topics/nato%E2%80%99s-last-stand). 5 Spiegel P. “Defence: NATO’s Troubled Terrain.” Financial Times. 2011, June 27.

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his concern and caution with regard to possible fixing of the date to withdraw US  troops. He was nominated as commanding general of the International Security Assistance Force in Afghanistan in August 2010,1 following the resignation of General Stanley McChrystal who was even more pessimistic about the prospects of speedy conclusion of the campaign. The lack of both personnel and financial resources to intensify the operation in Afghanistan and to achieve military superiority necessary to wage anti-partisan warfare, as well as the 2012 presidential elections in the US, were the reasons why the decision to withdraw the troops in 2014 had political and not military motivation behind it. The deadline was backed by Brussels as well. However, considering the current situation in Afghanistan, the pace of developments raises enough skepticism among many military and civil experts, particularly, in the US. Termination of the mission by the coalition troops in Afghanistan has become a key item on the agenda of the Chicago meeting of the heads of state and government of the North Atlantic Treaty Organization in May 2012. Considerable amount of space was devoted to it in the outcome declaration of the summit and in the special statement by the ISAF member states. Both documents stipulated the explicit deadline and the procedure for the withdrawal of the troops – the end of December 2014, as well as the subsequent actions of the NATO member states and other coalition members once the mission is completed, along with the commitments assumed in respect of Afghanistan.2 The outcome documents of the Chicago summit explicitly stipulated that once the troops are officially withdrawn, NATO will not stay on the sidelines of further developments in the ‘heart of Asia’, staying there for some other 10 years at least. Faithfulness to this line was reaffirmed at the NATO Defense Ministers Meeting in2013.3 By the end of 2014 only military advisers 1 Gen. David Petraeus interview. Meet the Press transcript for August 15, 2010 (msnbc.msn.com/id/38686033/ns/meet_the_press-transcripts). 2 Chicago Summit Declaration. Issued by the Heads of State and Government participating in the meeting of the North Atlantic Council in Chicago on 20 May 2012. Press Release (2012) 062 (www. nato.int/cps/en/natolive/official_texts_87593. htm); Chicago Summit Declaration on Afghanistan. Is- sued by the Heads of State and Government of Afghanistan and Nations contributing to the NATO- led International Security Assistance Force (ISAF). 2012, 21 May (www.nato.int/cps/en/natolive/ of- ficial_texts_87595.htm). 3 Press conference by NATO Secretary General Anders Fogh Rasmussen following the meeting of the North Atlantic Council in Defence Ministers session. 2013, October 22 (www.nato.int/cps/en/ natolive/opinions_104257.htm).

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and civil personnel involved in state and economy building will stay on the territory of Afghanistan. The countries taking part in the coalition forces intend to maintain wide economic and humanitarian presence in Afghanistan. The necessity of withdrawing the troops, however, dictates the need to look for new patterns of cooperation with partner states who may be interested in maintaining stability in Afghanistan and the entire region following the ISAF withdrawal. Here the US and their allies are considering a variety of patterns to ensure the involvement of NATO’s partners into maintaining the stability of Afghanistan’s political system created while the coalition troops were in the country. The US and NATO are looking for economic instruments to ensure continuity in Afghanistan’s political development once the ISAF troops withdraw. Suggestions to the effect that Afghanistan should become a new major transport and logistics hub in Central and South Asia are regularly voiced in the Western media.1 In 2011 the idea of a New Silk Road, which had been impregnated by the experts since 2007, received support at the level of the US government and became the focus of NATO’s agenda.2 The plan to create on the territory of Afghanistan infrastructure necessary for cargo transit from China, India and Pakistan into Central Asia, etc. – via the Caspian and Turkey into Europe  – has been reiterated in many different forms and versions. This appears to be in line with the scenario suggesting more active engagement of the region’s countries – Pakistan, India and China – and, possibly, Russia into maintaining stability in Afghanistan.3 Despite the wide-scale US media campaign for the New Silk Road, any projects envisaging far-reaching reforms of Afghanistan’s economy and infrastructure appear rather utopian for the time being. The socio-economic and political outlook for Afghanistan after the planned withdrawal of troops, even despite the promised active assistance of the West with the country’s development, seems to be much less rosy than the NATO leaders or the governments of the leading coalition members are willing to acknowledge. 1 The New Silk Roads Transport and Trade in Greater Central Asia / Ed. by S.F. Starr. Wash. D.C., 2007. 2 Hormats R.D. Under Secretary for Economic, Energy and Agricultural Affairs. The United States’ «New Silk Road» Strategy: What is it? Where is it Headed? 2011, September 29 (www.state.gov/e/rls/rmk/2011/174800.htm). 3 Kawato A. The China Factor in Afghanistan-2014. Carnegie Endowment for International Peace. 2013, October 25 (carnegie.ru/eurasiaoutlook/?fa=53424).

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Still, despite all attempts to lay some kind of groundwork for future cooperation, the US and NATO leaders are faced with a dilemma – to shut their eyes to the developments in the country’s situation after 2014 and withdraw whatever it takes or to try and create a political framework for maintaining stability in the country on the whole and separately in each of its provinces. The latter scenario is preferable for Brussels and Washington if they hope to maintain its influence in this country and, on a wider scale, in this region. The former scenario answers the current situation and basically means admitting defeat; the latter suggests the existence of strategic goals in the region. The major obstacle in the way to its implementation, however, is the situation in Afghanistan itself, just as well as the domestic situation in the major ISAF countries. In Afghanistan, the basis for the implementation of the latter scenario may only be in place in the event of reconciliation between the elite that has emerged over the years of war and at least some fractions within Taliban, as well as on the condition of improvement in the relations between the central authorities of Afghanistan and the more influential of the tribal leaders al the local level. Experts regularly debate on the hypothetical possibility to establish in 2014 a government of national consent which would respect and accommodate the interests of various ethnic groups, tribes and political parties. Successful implementation of such projects is, however, jeopardized by the rampant corruption in Hamid Karzai’s government and the fact that it has little authority in the eyes of the Afghan society in the context of the Taliban’s ongoing activity. Grounds for even partial continuity of forces loyal to the US and NATO in the Afghan government, once the coalition troops withdraw are few so far. The US is prepared to see the more moderate of Taliban members, who since 2010 are referred to in the US rhetoric as “opposition”, become the new Afghanistan leaders, once the government of Hamid Karzai’s resignation in 2014. Attempts have been made to enter into negotiations with them in Qatar, and informal consultations with them have been held in Japan. These negotiations are being conducted with virtually zero involvement of the Afghan authorities, to the great annoyance of the latter. The task of reconciliation involves not only “the moderate Taliban figures” with which the US is currently engaged into semi-official negotiations, but also third parties which are in opposition to both the government of Hamid Karzai and the Taliban. Such forces mainly mean the elites of the ethnic Tajik, Uzbek and Khazar

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populations of the northern and north-western provinces, which previously were part of the Northern Alliance.1 Until 2014, while the government of Hamid Karzai is still in power, the prospects of reaching national consensus, which would guarantee political stability in the country, are rather vague. Taliban representatives refuse to enter into any negotiations with the representatives of the Afghan authorities, saying that the US is the only force with which reaching some kind of agreement would be feasible.2 Once the current Afghan government inevitably goes out of power, with the ISAF troops withdrawing from the country at just about the same time, the country will enter the challenging period of forming the new government. Both Brussels and Washington have come to realize the need to maintain a balance between different ethnic and other interest groups within the Afghan society and of keeping the political process within tendencies leading to the creation of a government, be it even an Islamist one, building a long-term partnership with which would be possible. Should compromises between the interests of various forces and ethnic groups fail to be achieved, the power in Afghanistan may again be seized by the Taliban, which, despite having undergone major transformations over the war years and the interests of many of its leaders having diverged with those of the Al Qaeda supporters, will at any rate decline to maintain any friendship or cooperation with the US. Should Taliban also prove to be unable to consolidate its forces to a sufficient extent to return to power at the federal level, an even more undesirable scenario for the West would be an end of Afghanistan’s existence as a single state. This possibility is not to be ruled out altogether, and represents the worst possible scenario not only for NATO, but also for the former Soviet Central Asian republics. The breakup of Afghanistan into several quasi-public entities divided on ethnic grounds may further contribute to Iran’s and Pakistan’s growing influence in the region. Many military and civil experts from the NATO member states doubt the ability of Afghanistan’s national security forces to independently exercise military and police functions, ensuring a political climate in the country which will allow forming something like a coalition government after the 2014 elections. The efficiency of Afghanistan’s 1 Afghan ethnicities. Strategic Geography // Afghanistan to 2015 and Beyond / Ed.by T. Dodge and N. Redman. L., 2011. Р. X. 2 Biddle S., Gwertzman B. Gloomy Prognosis for Afghanistan. 2012, August 22 (www. cfr.org/af- ghanistan/gloomy-prognosis-afghanistan/p28852).

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law enforcement units remains rather low. Only a few of them are capable of acting independently, without the involvement of NATO’s military advisers. The process of achieving the target strength of the army and police forces takes a lot of effort to be achieved and is in train albeit slowly. By the end of 2011 the numerical strength of the Afghan national security forces exceeded the planned 305,000, reaching almost 350,000 people.1 However, as early as in the spring of 2012 the allies realized that the quality of training should not be sacrificed for the sake of quantity. It was resolved to reduce the number of Afghan military and police personnel down to 230,000 people while working to improve the combat capacity of the units. This may be insufficient for effectively waging an anti-guerilla war against Taliban whose ranks currently include 55,000 members.2 Since 2013 the national security forces mostly took over the task of conducting police and anti-terrorist operations in the majority of provinces, as well as of maintaining security along Afghanistan’s borders.3 In practice, however, this transition has proved to be not as rapid as was hoped. Particularly hard to achieve is effective operation of Afghan security forces in the eastern provinces of the country, where Taliban maintains strong presence, due to receiving constant fare from the so-called Federally Administered Tribal Areas over which Pakistani authorities have little control. And regarding this aspect of nation-building in Afghanistan the US and NATO again try to stake on getting the partner states involved in forming and maintaining the capability of the Afghan army and police.4 Both Brussels and Washington perfectly realize just how complex the situation is, yet the capabilities of the allies to display initiatives that would be applicable to the after-2014 perspective are extremely limited. The ISAF contributing nations are ready to defray the best part of expenditures related to maintaining security in the Islamic Republic of Afghanistan and to financing the Afghan security forces. 1

Afghanistan to 2015 and Beyond… Р. 126–132. Nessar O. Bitva bez pobednogo kontsa. Afganistan obrechyon stat zhertvoy amerikano-iranskogo konflikta [War without Victory. Afghanistan is Deemed to Become a Victim of US–Iran Conflict]. Nezavisimoye voyennoye obozreniye, 2012, May 25. 3 Chicago Summit Declaration on Afghanistan. Issued by the Heads of State and Government of Afghanistan and Nations contributing to the NATO-led International Security Assistance Force (ISAF). 2012, May 21 (www.nato.int/cps/en/natolive/official_ texts_87595.htm). 4 NATO Allies and Partners Stress Support for Afghan Security Forces. 2013, October 23 (www. nato.int/cps/en/natolive/news_104252.htm). 2

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NATO documents offer estimates to the tune of USD 4.1 billion,1 but that amount will at any rate be lower than the current expenditures on the military campaign. At the same time, the challenge of creating corruption-proof mechanisms that would allow the army and the police to receive these funds is still there. The task of scaling down the costly military presence in Afghanistan is one of the important objectives on the US military budget curtailment agenda. Within the US political establishment the lobbyists from the military and military industrial sector would rather accept such curtailments than limitations on the US Navy and Air Force rearmament spending. It is little surprise that unlike the US intelligence and many of the experts, the military demonstrate a way more positive assessment of the situation in Afghanistan and do not contest the date of the troops withdrawal. Such differences between the stances of the military and the CIA are explained by the fact that the scaling down of the military presence will result in a greater load of work and responsibility on the intelligence services, who are also in charge of unmanned aircraft operations. The new international situation demonstrates to the US and NATO the need to find a fundamentally different solution to the Afghan deadlock. The US leaders are faced with a necessity of, on the one hand, withdrawing the bulk of the troops, and, on the other, of retaining influence over the situation in the region. The challenge is to withdraw in a manner that would retain the infrastructure necessary for rapid deployment and build-up of military presence, should there be a need to return. The concern of both Washington and Brussels was initially due to them realizing that, as a result of its geographical location, ethnic and religious diversity and the excessive engagement of the twilight zone of the global economy, Afghanistan will continue to be the center of a complex convergence of many countries’ and of many non-governmental actors’ interests. The situation in this country has a direct effect on the security not only of its immediate neighbors, but also that of the adjacent regions. Regardless of their party affiliation, the US diplomatic and political elite perfectly realizes that complete or even partial withdrawal of the US and NATO from Afghanistan will inevitable turn this country into an arena of conflict of interests of the neighboring nations. 1

Chicago Summit Declaration on Afghanistan…

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The growing influence on Afghanistan on the part of Iran and China, or even Pakistan, which continues to be a US ally, officially at least, goes against Washington’s interests. However, the factors all of which have to do with its domestic political, economic and financial situation, prevent the US and NATO from retaining their presence in Afghanistan on a scale necessary to prevent the situation of ‘power vacuum’ in the region. The strategic goal to maintain long-term US presence and influence in Afghanistan – a country which has been deemed as a key to influence over the Central and South Asia since the XIX century British colonial wars at least, was one of the key goals behind this campaign as well. Back at the NATO 2010 Lisbon Summit the political groundwork for long-term cooperation between NATO and Afghanistan was laid with the adoption of the Declaration on an Enduring Partnership.1 The2012 Chicago summit reaffirmed NATO’s readiness to continue to contribute to equipping and training of the Afghan security forces, and to provide other aid after 2014. In 2013 all of these intentions were reaffirmed at the meeting of the North Atlantic Council (NAC) at the  level of Defense Ministers.2 At the same time the US is building the required infrastructure and creating political conditions necessary to be able to rapidly build up military presence on the territory of Afghanistan should a need arise for military and other special operations in the neighboring regions. A strategic partnership agreement was signed by the US and Afghanistan in the early May 2012, pursuant to which the US undertakes to provide financial aid and assist with security maintenance in Afghanistan over the period until 2024.3 Under this agreement, Afghanistan was granted the status of a Major Non-NATO Ally, like Pakistan. In exchange, the US received the right to maintain military presence in the country after the ISAF withdraws in 2014. This means not only presence of military advisors who train the Afghan army and police force, but also access for the US to the use of military facilities on the territory 1 Afghanistan and NATO’s Enduring Partnership. 2010, November 21 (www.nato. int/nato_static/assets/pdf/pdf_2011_04/20110414_AfghanPartnership.pdf). 2 NATO’s support to Afghan army sustainment takes shape. 2013, April 23 (www. nato.int/cps/en/natolive/news_99889.htm). 3 Enduring Strategic Partnership Agreement between the Islamic Republic of Afghanistan and the United States of America. 2012, May 1 (www.whitehouse.gov/sites/ default/files/2012.06.01u.s.-afghan-istanspasignedtext.pdf ).

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of this country and control over its key airports. This ensures the conditions necessary to ensure logistic capabilities for rapid deployment of considerable forces required to conduct air operations. This may first of all be relevant in respect of Iran which is viewed by Washington as a target of military political pressure, and of Pakistan which, despite the recent signs of improvement of its relations with the US leaders, is no longer perceived by the latter as a loyal ally.1 Despite the US foreign policy priorities gradually shifting towards Asia Pacific, maintaining political influence and military presence in Central and South Asia continues to be an important objective for the US leaders. This region gains special significance for the US precisely in the context of the increasingly manifest rivalry with China, the latter also seeking to expand its influence here. It is in the light of this that Washington will endeavor to retain its presence both in Afghanistan and the neighboring Central Asian countries after the  ISAF troops are withdrawn. Likewise, in the framework of implementation of the long-term strategy for this region an attempt was made to once again build clientelist relations with Islam Karimov’s regime in Uzbekistan, even though it has already withdrawn from cooperation with the US once. Unlike the US itself, which hopes to reinforce its influence on Afghanistan for the period after 2014, its NATO allies are unlikely – despite all proclamations to the contrary – tо stick to pro-active policies with regard to this region in the next few years during which the aftermath of the global financial and economic crisis will continue to be felt. Their involvement will in all probability boil down to participation in humanitarian projects. The difficulties which NATO faced in the course of the protracted war in Afghanistan have revealed the growing controversies between the conceptual framework of its operation that has been established since the end of the Cold War and its military political practice. Even though the political outcome of the ISAF operation in Afghanistan appears to be rather dubious, to say the least, its military results 1 See.: Belokrenitsky V.Ya. Mezhdu indiyskim molotom I afganskoy nakovalney Chast 2 [Between the Indian ‘beetle’ and the Afghan ‘block’. Part 2]. Novoye vostochnoye obozreniye. 2011. October (www.ru.journal-neo.com/node/9845); Topychkanov P. Pakistanskiy factor v politike Rossii v oblasti bezopasnosti na yuzhnom napravlenii [The Pakistani Factor in Russia’s Security Policy in the Southern Rregions]. Novoye vostochnoe obozrenie. 2011. August (www.ru.journal-neo.com/ node/8112).

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cannot be described as decisively adverse. NATO has acquired practical combat skills in a new environment and of anti-guerilla warfare in general and fine-tuned the principles of coordination and allocation of functions between the allies. NATO’s departments and specialists have practiced the performance of auxiliary military, organizational, administration and political functions. Priceless combat experience was gained by the 1.5 million military personnel over the 10 years of participation in combat activities. There have also been achievements, albeit ambivalent, with regard to fine-tuning the principles and methods of action coordination between the troops of the specific countries making up the coalition. New communication and troops management equipment was tested. Their efficiency is best evidenced by the relatively low level of losses. Useful experience was earned by NATO with regard to non-military activities as well – the principles of interaction in construction operations, development of large logistic schemes and route security were developed; mechanisms for creating and training local private and governmental security agencies were created. As far as political projects implemented under the NATO auspices are concerned, here the situation is somewhat more complicated. Despite some achievements, like holding national elections, it has become quite clear that it is not up to NATO to cope with the key tasks related to building a system of public administration, let alone fighting corruption or building a viable economy. Substantial problems arose at the stage of fostering cooperation between NATO and the United Nations Assistance Mission in Afghanistan. The ISAF operation has moreover served as useful experience for the NATO leaders, showing them that extended expeditionary campaigns is impossible in the absence of transportation and logistics assistance from its partners. It was to a considerable extent precisely due to the campaign in Afghanistan that by the end of the 2010s the Trans-Atlantic community came to realize how limited NATO’s military and political capabilities are, as well as that its members are far from being ready to finance the organization’s new functions and operations outside of its traditional zone of responsibility and the neighboring regions. The difficulties which the ISAF encountered in Afghanistan made the US and European Atlanticists clearly understand that it is absolutely impossible to find any justification of those immense material and political efforts that the global expansion of NATO’s functions

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would have necessitated on the part of its members. Realization of the limited nature of NATO’s members’ capabilities, and this is true even of the US, became a powerful incentive for NATO’s strategic shift towards greater inclination for compromise insofar as global security issues and dialog with foreign partners go. But the Ukrainian crisis has shown that such motivation could be very limited. However, even at the time when the ISAF troops were being withdrawn from Afghanistan, NATO had failed to show due interest in cooperation with Russia beyond the cargo transit. The same can be said about the regional security dialog between NATO and the CSTO in the framework of which NATO manifested in 2012–2013 the intention to partly shuffle off the responsibility for the developments in the situation in the region after 2014, without intending to enter into partnership relations before the operation is concluded or to join efforts in countering drug production and trafficking.1 Even if the political process in Afghanistan after 2014 will not develop in accordance with the most negative scenarios and the level of governability in the Afghan provinces will remain at least at the current level, the high risks for the neighboring countries will remain. The threat of Islamic fundamentalism and resulting terrorism, further criminalization of the economy of this entire region as a result of the growing influence of drug traffickers, transformation of inter-tribal tension into ethnic conflicts capable of spilling over to the neighboring Central Asia – all of these problems will not go anywhere and will only build up. In this context Russia and the CSTO need to work out a precise long-term plan of action aimed at minimizing the negative implications of the ISAF troops’ withdrawal from Afghanistan in 2014. It is still open to question whether constructive cooperation with the US and NATO in this respect continues to be possible.

*** Throughout 2009–2013 signs of changes appeared with regard to the use of new ideas and approaches of the US leadership to developing the  relations with its European allies both within the NATO framework and within the framework of the US-EU partnership in the Euro1 Nikitina Yu.A. Vtoroy shans ODKB [A Second Chance for the CSTO]. May 15, 2012. RSMD. Postsovietskoye prostranstvo. Analitika [Russian International Affairs Council, The Post-Soviet Region. Analytics (russiancouncil.ru/inner/?id_4=393).

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Atlantic and transatlantic cooperation. The financial and economic crisis and the following recession, which enveloped the US and the EU economies, were and continue to be an important factor impacting the development of the conceptual framework for transatlantic relations. The Obama administration and the European governments will have to proceed under the extremely adverse economic conditions, the worst since the end of the Cold War. The working out of new goals and objectives of the US transatlantic policy not infrequently proceeds on a case-by-case basis – without defining and setting long-term priorities. And that is why the dynamics of changes remains rather low. Too many are the problems and obstacles in their way at both the transatlantic and global level, and, therefore, the bulk of political and practical results are only intermediary. In the context of the economic crisis the US leaders did not succeed in achieving greater involvement in the implementation of NATO’s military and political projects on the part of the allies. The US did not succeed in shifting a greater share of expenditures related to tackling security and defense challenges onto the shoulders of its allies either. The  only notable exception was the military intervention in Libya which was carried out chiefly by European forces. The majority of the European members of the Organization, except the UK, were unable to maintain their defense spending at 2% GDP in 2009–2013, whereas the US military expenditures of the same period reached almost 5%. The Obama administration was able to take advantage of the crisis to an extent to achieve optimization of the US military spending, including the spending on the security of the allies. The aggregate expenditures of the bloc’s European members account for about 30% of the US military spending.1 Before the Ukrainian crisis and developing of elements of new confrontation between Russia and the West the Obama administration and the NATO headquarters had a hard time trying to persuade the European members to cut their military spending in such a way that it would account for a similar percentage of their respective budgets. In the coming years, however, especially if the Euro zone 1 See: Financial and Economic Data Relating to NATO Defence. Defence expenditures of NATO countries (1990–2010). Press Release (2011) 027. 2011, March 10 (www.nato.int/cps/en/natolive/ news_71296.htm); The Implications of Military Spending Cuts for NATO’s Largest Members. Brook- ings Institution Analysis Paper. July 2012 (www.brookings.edu/~/media/research/files/papers/2012/7/ military%20 spending%20nato%20odonnell/military%20spending%20nato%20odonnell%20pdf ).

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will continue to be affected by major trouble, this ratio may be upset, even despite the Pentagon budget cuts. Although consequences of the Ukrainian crisis reduced the dynamics of military spending cuts planned for 2014–2015, as well as a shift in the US security policy priorities in Asia Pacific, but the US ability to finance NATO’s activities without adequate support from European members will be still very limited during next 3–5 years. At the same time, 2009–2013 saw the conceptual basis being laid for the strategy of adapting the transatlantic relations to the changing international situation in the context of strengthening new centers of the global economic and political development and increasingly complex world order.

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DIALECTIC OF THE USCHINA RELATIONS Vasily V. Mikheyev, Feodor G. Voitolovsky

Political Contradictions in the Context of Economic Interdependence The US-China relations are characterized by the intertwining of multidirectional rivalry and cooperation elements, the growing economic interdependenceof the countries, the expanding scale and the increasing diversification of the ties between them and the undulating dynamism. In line with its concept of “responsible leadership” in tackling the constantly globalizing security and development challenges, the Obama administration sees China as one of the potentially most significant global partners of the US. China’s growing domestic demand was crucial for the recovery of the US economy, as it was for the economies of Washington’s key partners in the Asia Pacific Region:Japan and South Korea. That said, China’s financial allocationshave sustained many other economies of the world as well. The US administration has not, however, been able to find the right balance between the two approaches to Beijing: one favoring the cooperation and engagement of China into joint work on regional and global security and development challenges, the other calling for containment. Hence the strategically multidirectional nature of the development of the US–China relations. Despite the lack of breakthrough success with building the concept of “comprehensive strategic partnership”, in the past 4 years the USChina relations have attained a totally new level. The previous format of Strategic Economic Dialogue (SED) has been transformed into a Strategic and Economic Dialogue (S&ED). This has helped to expand the agenda on account of adding global and regional security challenges.

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Today we are witnessing the stage of potential accumulation in the US and China’s “comprehensive strategic cooperation” and of developing mechanisms for adaptation of the traditionally controversial topics to its framework. A political reform, the need for which has recently been increasingly acknowledged in Beijing, could well reduce the dependence of the US-China cooperation on the standard political bones of contentions. The prevailing trend towards cooperation between the US and China– while retaining the wave-likeand contradictory nature of their relations– is most markedly manifested in economy. The commodity turnover between the two countries has growntenfold over the 10 years since China became a WTO member. And even though the protectionist sentiments with regard to Chinese products are still strong in the US, not only did China’s accession to the WTO weaken the thresholds put up by the US, but it also helped to solve the political challenge of preventing the translation of trade disputes into political conflicts, if such disputes can be settled in the framework of the WTO proceedings. For China the US is the principaltrading partner, for the US China is one of theprincipal trading partners, alongside the EU and Canada. The US direct investmentsinto Chinese economy have exceeded USD60billion. Chinaholds a considerable percentage of US Treasuries in its foreign exchange and gold reserves. The recent years haverevealed new approaches employed by the parties to deal with the traditional economic “points of irritation”: • China has opted forgradual yuan revaluation (20%over the past six years despite the US insisting on 40%)and an increase in the import of American products to achieve a reduction in the US foreign trade deficit. • The US has been gradually loosening the restrictions on purchase of American corporations by Chinese transnational corporations and on access tomodern non-military technologies. • The last year has revealed a new trend for partial return of American capital from China to the US due to the rising cost of manpower in China. Chinese investments into the US production sector also continue to grow. All of these help to create new jobs in the United States, partially counterbalancing the competitive advantages of Chinese products in the US market.

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The result of the corporate mergers and acquisitions is that the mechanisms of the US-Chinese capital’s influence on the global economy are beginning to take shape. The gradually expanding transfer of non-military technologies, the wide-scale practice of inviting US researchers to visit China and of sending Chinese researchers to the US for fellowshipare laying the foundations for futuretechnological partnership. Issues related to strategic stability continue to be the most sensitive area within the framework of the global US-China cooperation development. The mutual perception of each other by the Chinese and the US military and political elites as being “politically alien” and, moreover, as a potential military threat continues to fuel deep-rooted mistrust as far as military security is concerned. China’s nuclear missile capabilities continue to lag far behind the  US and Russia’s potentials, which factlimit opportunities for  Beijing to join the US-Russian dialog on strategic security.China views the  global plans of the US with regard to creation of an ABM system primarily from the angle of potential damage that this may cause to the strategic security of China itself. That said, so far as the ABM radius covers only Europe and the Middle East, China will exhibit restraint in its criticism of the anti-missile measures taken. A considerably more harshand negative reaction from China comes in response to attempts to create a regional ABM systemin North East Asia. Beijing interprets such attempts as targeting its interests regarding Taiwan and undermining its potential of military and political pressure on the island. The US list of objectives in the region is dominated by their seeking support from Beijing for its policies on Iran and North Korea and neutrality from it with regard to its Middle Eastern policies. The strategic interests of both China and the US as two nuclear weapon powers subscribing to the nuclear non-proliferation regime overlap: both of them uphold that the possession of nuclear weapons by Tehran or Pyongyang is absolutetly out of question. Differences mostly pertain to tactical aspects of problem resolution. China is striving to entrench its economic presence in the Middle East and to assert its political interests, which consist in prevention of any form of foreign intervention into the countries’ internal affairs. The latter concern may in fact be a projection of Beijing’s own domestic situation.

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Washington’s stance on Iran is evolving towardsexchange tactics. It may, for example, consider relieving its pressure on the RMB exchange rate in return for support for its sanctions against Iran. With regard to North Korea, the US policy tends towards acknowledging China as the key player on that scene and towards active cooperation with it. Pyongyang’s last failed attempt to fire ballistic missiles circumventing the UN resolutions and the seizure of a  Chinese fishing boat for ransom back in May have hardened Beijing’s position.China is gradually becoming more open to cooperation with the US, as well as with Japan and South Korea as far as military security on the KoreanPeninsula and searching for a North Korean solution. The regular exacerbations of the US-China relations because of arms shipments to Taiwan have a temporary effect and chiefly affect the US-China military cooperation, each time slowing downits development.Quite tellingly, while advancing extensive dialog withthe Kuomintang government, the officials in Beijing, despite their traditional criticism of thesupplier of the arms,say nothing about the buyer  –Taipei. This fits into the strategy of intensive and deep economic and cultural integration of Taiwan pursued by China,which, in a lnger view, will lead to smooth and gradual restoration of sovereignty over the island. This peacemaking scenario does not strategically contradict the US interests. China and the US have not so far worked out a definitive format of their relations with the Central Asian countries.In the mid-term it will, therefore, most likely continue to be a regionprovoking wavelike relationships of two powersrather than a China-US cooperation zone. The format of China-US cooperation on Afghanistan has not been worked out. The converging interests of the two countries when it comes to bringing the situation back to normal and suppressing drug trafficking and terrorism have not so far transformed into real military and economic cooperation between them. The India-Pakistani agenda represented from twoangles. • The actual territorial disputebetween India and Pakistan. Here is one domain where one should expect to see a lot of cooperation between the US and China. That said, the special relationship between China and Pakistan does not basically contradict the American approaches.

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• The US-India relations in the context of China’s national security interests. Beijing perceives the developments in the US-India cooperation as a threat to itself, considering that such cooperationmay lead to China finding itself somewhat «encircled» by  the  political and military alliances between the US, Japan and South Korea in the south-east, with Australia in the south and India in the south-west.Its neighbors to the north(Russia) and north-west (SCO) are viewed by Beijing as a kind ofpolitical counterbalance tothis kind of scenario. The course of events in 2013 have been overshadowed by the most explosive of the issues in the US-Chinese relations – the South China Sea dispute. The exacerbation in its relations with the Philippines (the maritime conflict in the disputed zone)and Vietnam (plans for development of a gas deposit in cooperation with Gazprom in the disputed zone) makes China extremely sensitive to the US military presence in the region. Beijing would like territorial disputes to be settled solely between the countries of this region, with no US or any other foreign involvement. Power shiftsin Beijing and Washington in 2012–2013 will not lead to any drastic changes in the complex andmultidirectional nature of the US-China relations. The trend for cooperation despite persisting wavelike movementsand inconsistencies in the relationswill dominate, while changes may indeed occur, but only in respect to minor aspects. Obama’s victory revived the plans for a “comprehensive strategic partnership”between China and the US. Its wave-like dynamic will be henceforth marked by a low amplitude of fluctuations. The trend towards economic cooperation and partnership in technological innovations, creation of a new global architecture of financial and economic cooperation and of global and regional security will clearly hold, even though significant breakthroughs are unlikely in the next four years. In the midterm,the global economic cooperation between the US and China will be significantly impacted by the RMB being made freely convertible. The swap agreement between Japan and China to strengthen direct trading between the yen and the yuanand to expand the scope of financial operations in national currency,which took effect on July1, 2012, has become a milestone in the process of internationalization of the yuan.

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The new Beijing leaders will be guided by the new strategic foreign policy objectives, which will begin to emerge after thepower shiftin China. Those objectives will consist in China – once the global role of its economy has been acknowledged by the global community – striving to enhanceits own global political role as well and, consequently, to achieve a new global status which would put it on a par with the “global leaders”. Hence, China is going to be even more persistent, active, and perhaps even more aggressive in defending its interests in its relations with the global leaders, primarily with the US. Becoming an equalpartner of the US as far as having its say in global matters goes will, in the Chinese leaders’ book, mean enhancement of China’s political and economic role on a global scale. The perception of the US-China relations prevailing in Russia is rather inadequate. On the one hand, hopes of playing the China cardagainst the US persist and such hopes fail to take into account the general trend in the relations between Beijing and Washington. On the other, alarmism is being fanned with regard to the concept of a‘big two’ (G2)and, in particular, to the Strategy 2020. This controversy results in Russia’s image in the media increasingly becoming that of an uncooperative and controversial country, due to its attempts toplay upon contradictionsbetween China and the US, while being clearly apprehensive about their rapprochement.

US Strategy in its Relations with China – “Engagement” and “Containment” In its relations with China the US leaders continue to stick to the same model combining “limited engagement” and “selective containment”, which has proved its value in the past two decades. A certain kind of balance between these two componentsof this model has been achieved, in which now one, now the other tips the scales. All in all, the debate by US experts and political figures about the prospects of the US-China relations that has been ongoing in the recent years has identified two factions– those supporting China’s deeper “engagement” and those advocating tightening the policy of containment. Advocates of China’s greater engagement into cooperation with the US seek to expand commercial and investment channels, as well as

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the possibility to coordinate the financial and economic measures tentatively developed in the process of overcoming the consequences of the economic and financial crisis. They see thecontradictions between the two countries’ stances on the global policy and security challenges as being of minor importance and are ready toseek common grounds and interests. Representatives of the US financial circlesperfectly realize that even a minor failure in the established system of relations would deal a substantial blow to the economic systems of both countries. There are also contradictions between the US and China related to the divergence of interests when it comes to globalfinancial and economicregulation. The US is striving to maintain its leading positions as far asestablishing institutions and global management principles are concerned, while China is seeking to enhance its involvement into these processes. While searching for ways to overcome the global financial and economic crisis, back in 2009 US establishment representatives supporting China’s engagement came up with the concept of G2. It was suggested to develop principles of closer bilateral cooperation between China and the US as far as controlling global financial and economic processes is concerned. 2011–2012 saw the this concept falling out of active political usein the US. This, however, does not mean that the initiative envisaging to hold regular talks between the US and China – “the US–China Strategic and Economic Dialogue”,– launched during the  economic recession, will be abandoned. Talks will evolve around the cabinet-level consultations between the two countries covering economic policies, trade, and access to technologies. Despite growing US-China competitionin Asia-Pacific and other parts of the world, a significant part of the US transnational business sector is oriented towards enhancement of cooperation with China. American transnational corporations and banks invariably welcome stability in the relations between the two countries. They require political frameworkfor trade and economic relations, investment guarantees, financial commitments, stability and transparency of markets. The recent decision of the Chinese government to give foreign banks easier access to its market was welcomed by Washington.That said, the  struggle for revaluation of the theyuan’s undervalued exchange rate pursued by the US for several years now has not produced much tangible result so far.

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Apart from the big business whose interests compel it to have firm ties with Chinese economy, the policy of engagement is advocated by many representatives of the US intelligence services and seniorforeign policy makers. They are well aware of the social and economic significance of the existing interdependence for both countries, as well as of the dropping, in the context of the ongoing globalization, efficiency of the traditional military and political rivalry instruments. This part of the political elite, who are ready to be guided by the principles of soft and intelligent power, retain their influence over the Obama administration and oppose thebuildup of military and political confrontation with China, urging, however, to consider in all seriousness the emergence of aggressive elements in China’s foreign policy. According to the 2011 US National Security Strategy, the situation in the US economy will critically depend on the dynamics of economic growth in Asia-Pacific. The document proclaims the intention to cooperate with China in all domains, including security. Along with that, the Strategy asserts the intention of the US to monitor China’s armed forces modernization program with a view to guarantee security for its allies in the region. Those advocating China’s engagement insist on expansion of confidence and cooperation-building measures in education and science. The policy of engagement is also reflected in the US foreign and security policies – four frameworks for dialog on key issues have been developed. Firstly, the annual US-China defense consultations. Secondly, meetings of navy sailorsand diplomatsin the framework of implementation of the Sino-US military maritime consultations. Thirdly,dialog on coordination of the US and China’s defense policies is conducted on an annual basis. Fourthly,in addition to the said dialog, the Dialog on Strategic Security was launched in 2011 in the framework of the US-China Strategic and Economic Dialogue. The proponents of the “engagement» realize that greater political and military rapprochement between the US and China is not possible because of thefundamental political and ideologicalcontradictions and the intensifying vying for influence in Asia Pacific.They are prepared to upholdnot only the existingeconomicinterdependence,but also the involvement, albeit limited, into certain aspects of politics and security,to advance dialog on issues in respect of which the interests and positions of the two countries are not in conflict:the situation in Afghanistan, North Korea, the struggle against global terrorism,maritime piracy.

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The US leadership’s concern to see China’s military developmentand planningbecome more transparent urges it to pursue the initiatives aimed at expanding information exchange and contacts between the two country’s military, which are regularly suspended.In Washington many believe that engaging China into cooperation will not only help to influence its policies, but will also serve as a deterrent. Parts of the US political elite supporting China’s engagement are convinced that a strategy based on the Economy first, politics later principle is capable of gradually smoothing over the differences on security issues. One other motive behind their stance is that such engagement may well prompt political reforms in China. This approach is based on the conviction that development of market economy, entrepreneurship, expansion of private property and Western business practices will contribute to strengthening civil society institutes in China, promoting democracy and political freedoms. Proponents of US–China rapprochement believe that China’s integration into the  global (and constantly globalizing) economy and the promotion of democracy in China may become a guarantee of its non-confrontational foreign policy. Advocates of China’s engagement insist on the necessity to maintain a “normal” political climate for the sake of maintaining trade and economic relations at the present level (in 2011 the trade turnover between the US and China totaled456 billion USD, while 2012 is expected to bring a 5–6% increase of these figures) and stand for further advancement of the dialog with China in the framework of multilateral institutional formats (APEC, Six-party talks on North Korea). They see no harm for the US foreign policy interests in engaging America’s allies (Japan and South Korea) into the US-China dialog in the framework of ASEAN +3. At the same time, even ardent supporters of China’s engagement acknowledge the necessity to develop regional economic initiatives without China’s participation. A milestone step in this direction was taken by the Obama administration when it presented in November 2011 draft multilateral trade agreement envisaging promotion of economic ties, which was dubbed “Trans-Pacific Partnership” (TPP). Consent to participate in this US initiative was voiced by Australia, New Zealand, Malaysia, Brunei, Singapore, Vietnam, Chile and Peru. The said initiative is treated by the US as supplementary to the already long existing trade agreement with South Korea.

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US-China Competition Growth Potential in Asia Pacific In the coming years political and economic developments in the AsiaPacific will be greatly affected by the dynamics in the US-China relationships. Forecasts to this effect abound, yet far from all of those seem to fully consider the complexity and the broad diversity of relations, as well as the interior and the exterior parameters characterizing the  developments in the relations between the two superpowers and the world’s largest economies. It would be wrong to work under the delusion that the undertaken, and much advertised by the Obama administration, “strategic pivot” to Asia Pacific indicates sharp aggravation of the confrontation with China. It was to a great extent brought about not only by the urge to limit China’s growing influence, but also by the intention to demonstrate to the traditional allies of the United States its firm resolution to respect its earlier commitments. The positions of the proponents of a hardline policy on China among the US political elite are indeed showing a tendency for consolidation. That said, even among the hardline supporters of tightening the China policy barely a few of the more radical ones are voicing alarmist opinions. Experts and political figures playing the “Chinese threat” card in the US are not infrequently lobbyists of the military industrial sector’s interests. Major defense contractions fear further reductions of the defense budgets and want more long-term costly state-sponsored programs. The policy of containment in respect of China may provide them with certain guarantees of demand. “Containment” suggests consolidation of the US naval power in the Pacific region, deployment of ABM systems, air forces buildup, as well as implementation of military space projects. All of these require presence of a rather strong “potential adversary”. The positions of the advocates of stepping up the military and political containment of China among the US political elite are also strong and showing a tendency for consolidation. Over the past 1.5–2 years the proponents of «selective containment» among both the expert community and the US leadership have largely gained strength. Even the  fiercest advocates of containment do realize that the US-China economic interdependence will continue to be a reality for quite a while as yet. At the present stage, the ideology of confrontation does not exercise a decisive influence on the official policy, yet

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the US strategic planning is increasingly considering the possibility of the «China challenge» transforming into the “China threat”. However, in the mid-term, we can only speak of the policy of «selective containment» being stepped up in certain areas and with regard to certain aspects. The policy of reinforcing deterrence is backed by the interest groups linked to the military industrial sector and the Pentagon. The buildup of confrontational elements in the military and political aspects of the US–China relations in Asia-Pacific and enhancement of competition in other regions may bring about significant material and political benefits. The strengthening of the military component of Washington’s policy in its relations with China serves as a rationale for maintaining the current high level of defense spending in the US. The  Obama administration maintains it intends to cut the military budget, yet even in the  post-recession context of deep cuts in the budgetary allocations the US government could not possibly opt for drastic reduction of the defense spending1 since this would have met with fierce protest on the part of the Republican-controlled Congress, as well as on the part of the military-political establishment. In the past couple of years the  growing discussions on “the China threat” in the media were closely attended by the struggle of the US military industrial complex’s lobby to achieve an increase of the government’s military spending. Taking into account all of the above, the US government intends to implement a diversified reduction of its military spending, considering the shift in the defense planning priorities into the Asia-Pacific. In view of the growing importance of maritime security in the context of the US-China relations and in the context of the entire region, in the coming years the military programs financing priorities will gradually shift in favor of the navy and air forces under the Pacific Command. This was confirmed by the US Secretary of Defense Leon Panetta in early July2013 who, speaking at the Shangri-La Dialogue 1 According to official data, the US military spending in 2009 was $666.3 billion, rising then to $690.9 billion in 2010. In 2011 it dropped slightly, down to $687 billion, whereas the 2012 budget provided for the first since the beginning of the recession significant reduction down to $645.7 billion. Despite reductions under certain items of military spending, the Obama administration chose to raise spending under other items, as well as in related aspects of national defense. The 2013 plan envisages a greater reduction still – down to $613.9 (comptroller.defense.gov/defbudget/fy2013/FY2013_Budget_Request_Overview_Book.pdf ).

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in Singapore, reported the intention to redeploy 60% of the US Navy, including 6 out of the 11 aircraft carrier groups, to the Pacific theater of operations. The ideology commanding China containment and the US military force projection in Asia-Pacific is precisely the basis keeping a whole lot of military sector research and development institutes and programs afloat. Today’s considerable defense spending of the United States cannot be explained solely by defense planning goals. All the more still, China’s current role in it should not be overestimated. To an extent, large military spending has always been a tested method of priming the  rebounding US economy. For all that, in the US, advocates of containment of the “China threat” would be much more interested in further build-up of China’s military forces for reasons political no less than other. This would have provided more grounds still for barring political rapprochement between China on the one side and Japan, South Korea and Taiwan on the other; the latter three having traditionally been allies of the US, as well as between China and the ASEAN member states. Controlled fomenting of tension in the US-China relations would slow down the economically motivated growth of China’s interdependence with other countries. These countries, moreover, continue to be markets for American weapons and military equipment. The positions of the supporters of greater military and political containment of China from among the US political elite and expert community are showing a tendency for consolidation. That is to say, however, that only some radicalized few among them represent the voices of alarmism, even though it is precisely their views that the media often choose to give most coverage. The rise of discussions of the  “China threat” in the media goes hand in hand with the intensification of the  US military industrial complex lobbyists’ struggle over the size of the national defense budget. The same will happen when time will come to determine the exact parameters of reductions of the US defense spending for 2014.The increase in China’s military spending in2013 and the implementation by it of new development and army rearmament programs, primarily those for the navy, will contribute to consolidation of the positions of the hardliners in the US. In the Congress, the Pentagon and the expert community the proponents of maintaining defense programs financing at the earlier levels oppose attempts by the Obama administration to cut funds allocated

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for the enhancement of military capability and armaments modernization. This primarily regards the following costly projects: • construction of two Ford-class aircraft carriers, due to be completed in 2015 (Gerald R. Ford) and in 2018 (John F. Kennedy)– they are expected to replace the retired first nuclear-powered aircraft carrier USS Enterprise and one Nimitz-class supercarrier; • completion of construction of 6 Virginia-class submarines which lasted between 2012 and 2015/2017; • fine-tuning and construction of a fifth-generation jet fighter F-35; • deployment of land and sea-based components of ABM systems, including the construction of 4 Arleigh Burke-class destroyers equipped with the Aegis system. China’s growing military spending1 and the implementation of new army development and rearmament programs, particularly the ones targeting the navy, are contributing to consolidation of the US hardliners’ positions. The role of the Chinese factor in the US defense planning is constantly growing. According to the new defense strategy «Sustaining U.S. Global Leadership: Priorities for 21st Century Defense» presented in January 2012 by the President Obama and his Secretary of Defense, the growing Chinese military strength makes it necessary for the US to more expressly formulate its strategic goals in the Pacific. The document states the two countries’ concern about peace and stability, yet views China’s advancement as a factor increasingly affecting the US national security. Taking into account China’s endeavor to avoid rivalry with the US in nuclear missile defense, as well as the necessity of military power projection across the vast Pacific and Indian oceans, the US leadership places primary emphasis on enhancing the defensive power of its Navy and Air Force. The US Pacific Fleet (which includes the 3rd, 5th, and 7th Fleets) becomes a backbone of the structure of the United States armed forces. Of the US Navy 7th Fleet’s 70ships, there are 23 ships forward deployed to U.S. facilities in Japan, including the carrier USS George Washington and Guam. It also has 300aircraft. That said, the  2013–2014 military budget cuts caused by the necessity to 1 According to official figures, 2012 China’s military spending was 11.2% higher than the 2011 figure – from $95.6 billion to $106 billion.

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overcome the  financial and economic crisis may significantly impede the buildup of spending on presence in Asia Pacific and, primarily, on the US Pacific Fleet modernization programs. Washington plans to enhance its military presence in South East Asia on account of re-establishing its bases in the Philippines which were withdrawn back in1992. Some smaller steps are also being taken in the same direction, such as, for example, reaching agreement with Australia on the deployment in of a US contingent and a Marine battalion at the RAAF-Base Darwin. The prospects of creating a joint US– Australian base for surveillance drones on Australia’s Cocos Islands in the Indian Ocean is being discussed. In implementing large-scale military technical projects, such as, for instance, the development of the Pacific segment of the ABM system, the US is pursuing its own major political goals. A system like that will provide a new technical and institutional basis helping to cement the ties with its allies in the region. Japan is already taking an active part in the creation of the Pacific segment of the US ABM system. South Korea has also shown interest in it. This system may, however, pose danger for China’s nuclear forces only in the event that the third (scheduled to be accomplished by 2018) and the fourth (to be accomplished by 2020) stages of implementation of the Phased Adaptive Approach are reached, because it is at those stages that interception of strategic missiles shall theoretically be ensured. This project, however, is already giving rise to concerns in Beijing, which complicates its relations with the US allies. Aside from the military industrial sector and some representatives of the military, pursuing the containment policy with regard to China suits the interests of theprotectionist-minded US business circles. They are discontented with the way China uses WTO regulations and criticize the Obama administration for lack of action to reduce investments into the Chinese economy. These circles are supported by American companies which are being pressed by Chinese manufacturers from the foreign markets and from the US domestic market. These forces voice their frustration with the perceptible imbalance in favor of China in the US–China trade. Their interests are beginning to be taken into consideration by the Obama administration. A provision stating the need to eliminate this imbalance was even included into the 2011 US National Security Strategy. In his annual message to the Congress in January 2012 the US President described China’s trade policies as unfair and unacceptable. The said actors, which

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mostly share pro-Republican sympathies, are further backed by some representatives of the commodity business pressed by Chinese companies from the Middle East and Africa. The coming years promise gradual, smooth tipping of the balance between the two foreign policy approaches in favor of the China containment policy. The situation will on the whole depend not only on the political clout of both countries’ domestic lobbies seeking to exacerbate tensions, but also on the actually increasing US-China rivalry in Asia Pacific. The administration of Barack Obama will take some steps to outreach to China’s new leaders, maintaining cooperation in all aspects, including security. At the same time, the US “strategic pivot” to Asia in 2011–2012 will be pursued in2013. The furtherance of contacts between Washington and countries that were not previously viewed as priority partners (Vietnam, Myanmar), along with the implementation of the military cooperation programs in conjunction with its traditional allies (Japan, South Korea, Taiwan), as well as the US efforts to revive military cooperation with the Philippines, will inevitably provoke invariable frustration on China’s part. Despite the pace of the “Trans-Pacific Partnership” transregional integration project development having been slowed by the aftermath of the recession, the US leaders are clearly disinclined to scrap it, which is not quite in line with China’s economic interests. As far as the US-China relations in the coming years are concerned, a lot will depend not only on the course pursued by the two countries, but also on the overall dynamics of the situation in Asia Pacific – on developments in their relations with other countries in the region. Of particular importance for the US-China relations can be the degree of contradictions between China and other countries of this region when it comes to sea borders and areas of influence in the South China Sea. Of no lesser importance will be differences between Washington and Beijing over the situation in other parts of the world. This is first and foremost true of the stance taken by the US and its allies in respect of Syria and Iran. Further on, of major significance for the prospects for the US-China relations will be the disagreements between the two countries over issues of global importance, such as for example, the developments in Iran. The expected tightening of the US foreign policy with regard to China will not lead to large-scale military and political confrontation in the mid-term. The financial and economic

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interdependence, as well as the variety of available formats for dialog on security, will serve as deterrents in this respect. Moreover, China’s increased ability to respond to the US policy of military and political containment through financial and economic measures is also a significant factor for the US. The Chinese political elite can also boast of having in its ranks some advocates of building up the military potential and of using it as an instrument of political pressure on some of its neighbors with whom China has unsettled territorial disputes. There are also proponents of creating a counterbalance for the US military presence. Beijing’s military potential growth has gained momentum in the recent years. However, the 18th National Congress of the Communist Party of China showed that the new Chinese leaders are more concerned with the challenges of the country’s social and economic development. China’s political elite realizes that a key condition for their country’s successful development are the deepening of China’s involvement in the economic globalization processes and cooperation with the scientifically and technologically advanced countries, including the US. Tendencies towards enhancement of competition between the US and China in Asia Pacific and beyond it do indeed exist. Yet the reality in the US-China relations at present is that they are characterized by high financial and economic interdependence. Business sectors in both the US and China seek widening of cooperation. The governments of both countries want to see their economies – two major economies of the world – successfully overcome the post-recession hardships. It is in both sides’ interests that the global economy should recover after the recession, for this means a recovery of markets, of international trade and investment activity. The coming years will see this ineradicable reality having a stabilizing effect on the US-China relations. Interdependence does not mean that the financial and economic aspects of the relations between the two countries are free from controversies. Washington’s perennial concerns – the imbalance in favor of North Korea in their bilateral trade, as well as the yuan’s undervalued exchange rate, which contributes to the competitiveness of China’s industrial sector – are not a thing of the past. The Obama administration has repeatedly criticized China’s protectionist trading policies and its choice of non-market measures to support its industry and export. In 2012 the US President promised a partial return of the US manufacturing from Asia to the US as part of his policy of reindustrialization

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of the US economy. What this means in practice is that conditions that large American transnational corporation need to bring, at least partially, manufacturing back from China and other Asian Pacific countries will be created. Such a system of tax and other measures will take a few years to implement. It is not quite clear whether the US transnational business sector will be particularly eager to respond to these efforts on the part of the country’s leaders. China’s leaders and business sector continue to voice their concern with regard to the restrictions on the import of machinery and equipment that can be used in arms and munition production into China imposed by the US. Hi-tech equipment is vital for China if it wishes to occupy higher positions in the international division of labor system’s hierarchy. Beijing strives to expand its access to the US scientific and technological achievements and innovations. Washington, however, continues to demonstrate wariness in this respect. It is extremely important for all countries of this region, including Russia who seeks deeper economic integration into Asia Pacific, that the spirit of cooperation and not that of rivalry should prevail in the  US–China relations. And this can be achieved through the creation of such Trans-Pacific security architecture, which would make it possible to solve regional issues and disputes on the basis of accommodation of interests and to avoid the militarization of international relations in the Pacific region.

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Chapter 17

AFPAK ZONE AS A SOURCE OF INSTABILITY IN THE REGION AND OF THREATS TO INTERNATIONAL SECURITY Gennady I. Chufrin, Vilya G. Gelbras, Andrey G. Volodin, Nikolay I. Kozyrev, Dina B. Malysheva Introduction The early years of our century brought a major aggravation of the international situation in Central and South Asia or, as this region is referred to in Western sources, – the Great Central Asia. That scenario was prompted by the build-up of activities of radical Islamists in Afghanistan, under Al Qaeda’s command, which drew support from the local ruling Taliban regime. These forces had been accused of having planned and perpetrated a whole series of terrorist attacks in various countries of the world, the biggest and most notorious of which were the September 11, 2001 terrorist attacks in New York and Washington. At the end of that year a large-scale international military campaign against Afghan Islamists was launched led by the US, with quite a few different of countries taking part in it. Some of those, – the actual NATO members, – took direct part in the creation of the International Security Assistance Force (ISAF), sending their troops to Afghanistan. Others – among them were some former Central Asian Soviet republics – provided the US and its allies with a possibility to set up their military bases on their territory. Others still merely granted the right of military and non-military cargo transit via their territory for the needs of the ISAF. The results of that international campaign, unprecedented in terms of scope of international solidarity, were the speedy military defeat of Taliban and the downfall of its regime in Kabul. This notwithstanding, the counter-terrorism operation that had started with so much success did not lead to an ultimate overthrow of the Islamist forces.

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Following their military defeat in Afghanistan, the radical Islamist groups retreated to the territory of the neighboring Pakistan, where they were able to realign, to set up numerous militant training grounds and camps and to modify their tactics, switching to guerrilla warfare. In process of time they resumed their armed raids in the south of Afghanistan, gradually expanding their operation zone and restoring by the end of 2008 actual control over almost half of the country’s territory. Moreover, the Islamists moved on to active hostilities in Pakistan as well. As a result, the conflict the epicenter of which is the Afghanistan + Pakistan zone (or the AfPak), threating to spill out into the neighboring countries, has basically become a regional problem. No fundamental changes for the better were observed in this situation after the build-up of US expeditionary corps in Afghanistan by one third – up to 100,000 personnel in 2010. Despite their resounding advantage over Al Qaeda and Taliban militants both in terms of numerical strength of their armed forces and the quality of munitions, the US and its allies have not so far succeeded in settling the conflict by military means. The lack of convincing achievements on the battlefield was accompanied by failures on the part of the US to restructure Afghanistan’s socio-political, social and economic development in accordance with the norms and principles of Western democracy. The repeated attempts to this effect proved to produce minimum result or, else, simply failed when it came to solving the crucial issues, such as ensuring stability of the political situation inside the country, in the relations between the center and the provinces, in the relations between the tribes, creation of combat-capable national armed forces and effective security forces. The ruling regime, backed by the US, proved to be ridden by corruption. The social hardships endured by the population continued to multiply. In these conditions the probability of Taliban and their allies returning to power is now quite high, which may drastically affect not only the course of Afghanistan’s further political, social and economic development, but also its relations with its neighbors and the overall situation in the region. The situation in Afghanistan and more broadly – in the AfPak– also has a major impact on the level of threats to international security, which acquire an essentially global scale these days. For example, an important feature of the conflict development was the notably rising

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probability of religious fundamentalists in Pakistan. There is also a growing realistic threat as far as maintaining nuclear security in the region is concerned, namely, the threat of the militant Islamists seizing nuclear weapons or radioactive materials for their subsequent use in major terrorist attacks. Hence the goals related to the settlement of the conflict consist not only in reducing tensions and in achieving maximum stability in the situation in the AfPak, but also in mitigating the negative effect of this conflict on the socio-political situation in the neighboring countries and on their national security. The need to achieve progress in conflict settlement is becoming more urgent still in view of the upcoming withdrawal of the bulk of the coalition troops from Afghanistan by the end of 2014.

Prospects for Resolution of the Conflict in the AfPak and the Positions of Regional Players The number of regional countries whose national interests are to any extent affected by the prospects for resolution of the conflict in the AfPak is rather large – from Pakistan and India to the former Soviet republics in Central Asia.

Pakistan-India Pakistan officially stands for a peaceful resolution of the conflict and for the general stabilization of the situation in the region, yet consistent implementation of this strategy is impeded by the lack of stability in the country’s domestic situation, which is characterized by a havoc in the social and political life, deregulated administrative and economic activities, and the inability of Pakistan’s political parties to normalize the activities of political parties in their country. The principal characteristic of the modern-day Pakistan is the virtual absence of the middle class (in its intellectual and spiritual expression, as well as in terms of welfare and finance) and, as a result, underdeveloped economic, social and political civil society structures. And this, in turn, contributes to the politicization of the dominant religion – Islam, – which externalizes itself in extreme forms of Wahhabi teachings.

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Crisis developments in the country’s domestic situation have received an extra impetus on account of the spillover of the conflict in Afghanistan to Pakistan’s territory. The result is the growing number of emerging local radical Islamist parties and movements, as well as terrorist organizations who have close affiliation with the latter. Such include: • sectarian groups who are hostile to other groups or who proclaim their own supremacy and eminence in the relations with other religious groups and in the political domain; this category includes such organizations as Sunni Sipah-e-Sahaba, Lashkar-e-Jhangvi, and Tehrik-e-Jafaria (all of these groups operate solely on the territory of Pakistan proper); • anti-Indian groups, such as Lashkar-e-Taiba, Jaish-e-Mohammed and Harakat-ul-Mujahideen (based predominantly in the Pakistan –administered Kashmir); • the Afghan Taliban led by Mullah Mohammed Omar and the Quetta Shura; • Al Qaeda and affiliated organizations with bases on the territories inhabited by the tribes, which also have their own branch organizations and are actively involved in terrorist activities in the Central Asian countries and the Xinjiang Uygur Autonomous Region of China; • the Pakistani Taliban led by Hakimullah Mehsud, operating in South Waziristan and seeking to establish control over the Mehsud tribe’s territory and a number of affiliated groups.1 Presently, both the official Pakistani authorities and the Pakistani society on the whole lack a clear understanding of the strategy and tactics of that war on terror that their country is waging. That said, the restoration of socio-political stability in Pakistan will eventually depend on the ability of the civil society to organize itself, to develop a common recipe for consent and consensus above the national, ethnic and political affiliation barriers. The central role in this process belong to the military leaders who traditionally act as an arbitrator in the coun1 The term “Pakistani Taliban” usually refers to an umbrella organization, which unites various Islamist groups operating in the north-west of the country. Its key proclaimed goals include: erosion of the pillars of the Pakistani state, introduction of their own interpretation of Sharia law into the existing social and cultural framework, as well as consolidation against the ISAF forces fighting in Afghanistan.

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try’s domestic political life, the leaders of the political parties and of the tribes inhabiting Pakistan. It appears that Pakistan’s ruling circles have no choice given the extraordinary situation but to instigate their own Pakistani version of the Kemalist revolution, i.e. transformations reproducing a  “Turkish scenario” of the 1920–1930s, under the leadership of the most advanced and internally-structured force – the Pakistani army, naturally, with due adjustments and considerations for the international and domestic context of this century’s Pakistan. Should stabilization in the political situation in Pakistan fail to take place in the foreseeable future, by way of substantially curbing the activity of Islamic fundamentalists and arresting the activities of various terrorist groups, whether of religious or simply sectarian profile, this will not only have an extremely negative impact on the economic interests, including its attractiveness for foreign investors, but may furthermore encourage certain members of the global community to carry out a humanitarian intervention on the pretext of the need to “protect Pakistan’s nuclear arsenal from terrorists”. Based on the above, it appears that in its relations with Pakistan Russia shall be guided by several strategic principles: firstly, stimulating Pakistan’s economic growth and development as an essential condition for its predictable and sustainable growth and, secondly, promoting by all means available the development of the civil society through supporting and backing the advancement of those political parties and civil society associations and movements which oppose the radical fundamentalists and the terrorist groups. It is also advisable to step up contacts with the Pakistani army, considering its position of a leading social and political force in the society capable of preserving Pakistan’s unity and territorial integrity. From this angle, cooperation with the military will not come into conflict with the cooperation with Pakistan’s civilian authorities, but will supplement such. India also wishes to see the conflict in the AfPak settled at last, particularly considering the probability of the religious and extremist forces maintaining their positions both in Afghanistan and Pakistan. That is why eliminating the threat of international terrorism is viewed by India as one of the essential conditions of the conflict settlement. Alongside this, India continues to pursue its strategic goals in this region, namely, that of general consolidation of its positions, including with respect to Pakistan.

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Ever since the actual split of the Hindustan Peninsula into India and Pakistan back in 1947, the relations between these two countries were marked by a high degree of tension. The hostility between India and Pakistan persisted, despite all geographic, historical, cultural and demographic affinities characteristic of their common South Asian civilization space. The powerful inertia of the mutual mistrust felt by the elites in both countries persists to this day. For all that, as far as its political strategy with regard to Pakistan goes, the current government of India proceeds from the assumption that the Pakistani society is changing under the effect of the current profound systemic and structural crisis. It is believed in Delhi that the major flaws in Pakistan’s economy and its political system, which persist despite the massive assistance from outside (from the United States, China, and Saudi Arabia), are bringing Pakistan to a kind of “moment of truth”, a rather peculiar one, where it will have no other choice but to revise the fundamentals of its social and economic policy and its priorities insofar as its foreign policy and foreign economic ties in a long run are concerned.1 Now and again Indian media report about tensions within the Pakistani army, for example, between the Punjabi and the Pashtuns, which, in the opinion of the Indian side, undermines its role as Pakistan’s main political force.2 Delhi believes that all of this will, after all, require drastic, fundamental changes in Pakistan’s government’s policy, and that will inevitably entail a “strategic shift” in its relations with India. This, however, does not change the fundamentals of the threepronged approach adopted by India in its bilateral relations with Pakistan, namely: a) maintaining a high degree of alert of the national armed forces and a high level of their “deterrence potential”; b) getting Pakistan involved into joint business projects at all levels of foreign 1 In the pursuit of their own goals in the region, India’s ruling elites rely on the following: 1) the unviability of the development model chosen by Pakistan; 2) its inability to build, in a long run, a system of “two-party” democracy and/or on the general failure of representative democracy in Pakistan on a broader scale; 3) a certain degree of “fatigue” experienced by the Army in connection with the need for it to constantly intervene into the chaotic economic and civil processes in the country 2 See: www.jamestown.org/single/?no_cache=1&tx_ttnews%5Btt_news%5D=953. Stephen Cohen of the Brookings Institution believes that here the problem obviously lies in the growing percentage of Pashtun officers among the army’s officer corps (between 15 and 22%, which is higher than the percentage of Pashtuns in Pakistan’s total population), as well as among the private corps(20–25%) and their therefore growing influence, which results in certain psychological discomfort for the country’s largest ethnic group – the Punjabis.

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economic ties; c) readiness on the part of Delhi to provide an adequate response to changes in Islamabad’s positions on the key aspects of their bilateral relations, including the so-called Kashmir issue.1 It is, however, to be taken into account that the “corridor of possibilities» offered by the official Delhi’s compromise line in respect of Islamabad is rather limited, taking into account the harsh criticism from its own political opposition that it comes under in this connection. Moreover, Pakistan’s role in the settlement of the conflict in the  AfPak  – a particularly sensitive issue for India – may change significantly as a result of the US-Saudi-Pakistani rapprochement the  goal of which is to limit Iran’s influence in the Greater Middle East, to achieve which purpose the Saudis have apparently made up their mind to choose Afghanistan as the focus of its efforts in this region. What is actually envisaged here it the restoration of the Saudi-Pakistan alliance that existed back in the 1990s.2 And this is why India, which does not have a common border with Afghanistan, will not be able, even despite being the largest (apart from China) regional donor, to play an important independent role in the framework of the settlement in Afghanistan. The position taken by India in its relations with Pakistan, as well as with regard to the resolution of the conflict in Afghanistan, opens certain possibilities before Russia with regard to expanding the scope of countering the proliferation of Islamic extremism from the AfPak into the Central Asia which is an area of vital interests for it. India and Russia show virtually identical approaches to the settlement of the conflict in Afghanistan. These approaches are based on the principles of polycentricity of the world order, opening in theory unlimited opportunities for cooperation between the two countries in a variety of global and regional formats. Certain subtle differences are found, however, in the positions on both sides which should be better taken into account if the cooperation ties between our two countries 1 Fully realizing the complexity of the “Kashmir issue” for Islamabad at the domestic level, Delhi is prepared to wait, obviously realizing that the situation in the south of Central Eurasia is gradually becoming more and more dynamic and that the status quo cannot hold for long. 2 In the 1990s, for example, the Saudi-Pakistani alliance helped Islamabad to develop nuclear weapons (that is to say, the projet was financed by the Saudis). At present, several thousand Pakistani servicemen are deployed on the territory of Saudi Arabia and performing “defense” functions. Saudi Arabia was also the country to provide extensive aid to Pakistan during the disastrous 2010 floods.

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in the domains of global and regional politics are to become more constructive. For example, the goals and objectives of India’s activities in the AfPak conflict zones consist in it seeking to fundamentally consolidate its economic, political and possibly military positions in the region, primarily in its relations with Pakistan. It would seem highly unlikely that the United States will be the country to provide critical assistance to India in this regard, for a number of objective reasons and due to apparent limitations, whereas cooperation with Russia – both in Afghanistan and in Central Asia (the situation in which is always a sensitive issue for Indians) – may produce the desired result, for example, if India will obtain, with Moscow’s assistance and perhaps via the mechanisms offered by the Shanghai Cooperation Organization (SCO), active access to the international North-West transport corridor, being built with China’s financial assistance, i.e. to the shortest and the most economical route into Europe, Russia and Central Asia.

Iran Among the regional countries whose national interests are to some extent or other affected by the prospects for resolution of the conflict in the AfPak Iran is probably among the first to be named. Iran (formely Persia until 1935) and Afghanistan always were and continue to be very close from the geographic, historic, economic, as well as religious, ethno-cultural and national standpoint; to the point where events happening in one of them have a direct impact on the situation in the other. Following the talibanization of Afghanistan in the late 1990s, Iran’s involvement into its affairs had increased noticeably. The war that broke out between Taliban and the Northern Alliance had clearly demarcated during its very first phase the foreign allies of either side. It is well known that the Taliban movement which had come into existence and grown thanks to the support on the part of the US and Pakistan, was initially actively backed by its “patrons”, while the Northern Alliance was supported and backed by Russia and Iran. The latter continues to view Talibs as its political adversaries. For all that, the opportunities and influence that Tehran has in Afghanistan, particularly its Western provinces, have compelled the US to attempt using Iran and its influence over Afghanistan in its campaign against Taliban. Attempts to this

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effect have been made similarly to the dialog that was conducted behind closed doors between the US and Iranian diplomats (or, rather, intelligence services) based on the Iraqi agenda. This is, however, greatly impeded by Iran’s situation due to its nuclear program, as well as by the hostile anti-Israeli policies of the Iranian government, its assistance to groups like Hezbollah and Hamas, and lately by the arms supplies to the Syrian government to support it in its struggle against the armed opposition backed, in its turn, by the West and the conservative Arab regimes. In view of all this, the Iran card is played by the US with an ambivalent objective. On the one hand, with a focus on its national interests and geopolitical objectives, the US administration plans to use the new outpost in Afghanistan to deliver possible military strikes against Iran, if things come to that. The US military presence on the territory of Afghanistan which is planned to be kept after 2014 by virtue of the so-called Strategic Partnership Agreement between Washington and Kabul attests in favor of this scenario. At the same time, the persistent military threat to the Iranian regime emanating from the territory of Afghanistan coupled with similar threats emanating from Turkey (which is a NATO member state), as well as from the Persian Gulf, where US warships are deployed, must, as the US hopes, compel Iran to be more flexible and collaborative in the negotiations on its nuclear program. On the other hand, the US would like to get Iran involved and use the influence it has on Afghanistan to achieve a compromise between the Taliban and the current regime. In this regard the US proceeds from the assumption that such compromise would serve Iran’s own as well, since one of its consequences would be an end to the foreign, i.e. primarily the US military presence in the country. It cannot therefore be ruled out that the statement made by the US Vice President Joseph Biden at the Munich conference on February 2013 to the effect that the US is ready to resume the dialog with Iran provides for US-Iranian discussion of a broad range of issues, including the situation in Afghanistan. The United States are, however, not alone in trying to use the Iran factor to their own advantage. Other regional and global players (the Central Asian countries, China, India, and Russia) also want to get Iran involved into a variety of processes in the framework of the Afghan conflict settlement, the efforts to prevent thespread of terrorism and religious extremism from the territory of Afghanistan, as well as to combat Afghanistan’s drug industry.

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Apart from bilateral contacts, such efforts are chiefly made in the framework of the SCO and the Dushanbe Four (Russia, Tajikistan, Pakistan, and Afghanistan). It is equally not to be omitted that an important factor which had prompted the current SCO members to unite was precisely the situation in Afghanistan, with the normative framework for its activities with regard to the Afghanistan having been set and institutes require to undertake such activities having been established as early as in the first years of this organization’s operation. The SCO 2002 Summit Declaration for the first time ever stressed that security in Central Asia directly depends on the prospects of the peace process in Afghanistan; and further firm resolution was declared to further cooperation in assisting the post-war political and economic restoration of that country. The Afghan agenda henceforth invariably appeared in the outcome documents of the SCO leaders’ annual meetings. The SCO work on the Afghanistan agenda is important since it gets other parties involved, particularly on the regional level. For example, the SCO observers who are rather actively involved in the work of this organization has Iran among its members, beside India, Pakistan, Mongolia and Afghanistan. The former cannot qualify for admission as a full-fledged SCO member because of the UN sanctions against it; this, however, does not stop it from taking part in the extensive public discussion of issues of the UN agenda, and such naturally include Afghanistan. For Russia the Iran factor in the settlement in Afghanistan is of special significance. Both Russia and Iran are concerned to forestall Taliban’s return to active participation in Afghanistan’s government institutions. Russia and Iran had earlier together backed the Northern Alliance in its struggle with Taliban, and today too their interests as far as the Afghanistan issue is concerned again to a great extent overlap. This primarily means that both Russia and Iran would like to have a peaceful and friendly Afghanistan as their neighbor, with no threats of terrorism and extremism emanating from that region. That said, both Russia and Iran would like to see the revival of Afghanistan as an independent, neutral state whose territory would be free from the presence of foreign troops. All of this gives reasons to believe that with respect to the Afghan issue there is room for Russian-Iranian cooperation and such needs to be availed of. For example, Russia and Iran must in all evidence do all they can to preclude a unilateral agreement between the United States

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and Taliban under which the former obtain the latter’s consent to keep the US military presence in Afghanistan in exchange for closing its eyes to Taliban dominating the Afghanistan’s government institutions, and that would entail the danger of Islamic extremism returning into the country’s foreign and domestic policies. This scenario would go against the grain not only with Russia and Iran, but equally with the Central Asian countries and China. This all could only be prevented through joint motion to convene the Afghan International Conference under the UN aegis and by active involvement of the leading global and regional players into organizing such. And this needs to be done today, without further ado, before the attempts of different parties seeking each their own interests to reach agreements with Taliban result in undesirable consequences. By such attempts we mean, as was mentioned above, the possibility of compromise being reached between the US and Taliban, as well as Hamid Karzai’s conflict resolution plan developed in conjunction with the Pakistani side. This plan, for instance, envisages signing peace with Taliban until 2015 and the removal of the Afghan militants from the “black list” to vest them with perfect legitimacy to enter into negotiations with Afghanistan’s ruling regime. It appears that all of these separate plans only serve to disunite the global community, playing into the hands of Taliban. In this connection, the suggestion by the SCO, backed by its observers, including Iran, to convene an Afghan Peace Conference under the UN aegis could become a productive step on the path to settling the crisis in Afghanistan, equating the chances of the rival parties in this process to receive mutually acceptable solutions. To sum up the above, whichever scenario takes place in Afghanistan today, the Iran factor continues to be an important element which all parties involved in the settlement in Afghanistan have to take into consideration. In any event, for Russia, just like for the other SCO members and for this organization as a whole, Iran may become a worthy ally when it comes to solving the Afghanistan issue. The United States cannot ignore the Iran factor and, despite all its contradictions with the Iranian regime, is compelled to seek its support as far as the anti-Taliban campaign goes, just like it was in the case of Iraq. The current ruling regime in Afghanistan finally gets an opportunity to use the Iran factor to suit its own goals, being able to count on

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Iran’s support so far as combating Taliban and eventually liberating the country from the foreign dependence are concerned. For Iran itself the Afghanistan agenda remains one of the priorities of its foreign policy. Whether Afghanistan will again find itself under the control of Taliban or whether US military presence will be kept under the new coalition government – this is a realistic concern for Iran. Changes in Afghanistan’s situation will at any rate require an appropriate response on its part with a focus on the protection of its political interests.

Central Asian countries The Central Asian countries show apparent interest in the resolution of this conflict being achieved. The year 2014 is to become pivotal for Central Asia with regard to the challenges and threats posed by the AfPak. For the Central Asian states, which are strategic partners for Russia in the framework of the Collective Security Treaty Organization (CSTO), the SCO and the emerging Eurasian Union, it is of no minor importance whether Central Asia following the withdrawal of the international coalition forces from Afghanistan will become a region of turmoil and unrest or whether an acceptable level of stability will continue to be maintained here; what the parameters of the US/NATO military and political presence in the post-Soviet Central Asia, whether it will be scaled down or, on the contrary, expanded; whether cooperation will be fostered between the Western military political organizations and the long-established in Central Asia security organizations under the aegis of Russia in this region; what forms and mechanisms can Russia’s and other regional countries’ (India, Iran, Pakistan) participation in energy, transport and military-political projects connecting Central Asia with Afghanistan and South Asia and contributing to stabilization across this vast region take. It is therefore extremely important for Russia and the Central Asian countries to take into proper consideration the multitude of development scenarios for Afghanistan once the US troops and the International Security Assistance Force withdraw, to consider possible destabilization in the AfPak and its accompanying phenomena, such as transnational crime, international terrorism, religious extremism and rise in drug trafficking. These external threats to the regional politi-

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cal stability are also greatly aggravated by the internal factors, such as the rapidly accumulated critical amount of internal problems in Central Asia. They include the following: • lack of domestic social and economic stability, which is due to such factors as interethnic and inter-tribal tensions, bickering and strife between the country’s regional elites and clans, the impoverishment of the population, the widening income disparity, the growing social inequality, high unemployment, corruption, low effectiveness of the government institutions; • the radical Islam, which is ready to rear its head should any breach in political stability provide it with a chance to do so and which takes ample advantage of the existing social problems and hardships to discredit the ruling secular regimes; • the growing influence of the drug mafia and of religious fundamentalism which is partly nurtured from this source; • the lack of stability of the legitimate authorities and possible consequences and processes possibly resulting from the weakness of these authorities. The interstate contradictions contributing to Central Asia’a conflict potential are still there. This refers primarily to the “division of power resources” resulting from struggle over water and energy resources. Secondly, such include unsettled border disputes becoming a serious challenge to security in Central Asia. These disputes are a reality for almost all republics in this region, but Uzbekistan, Kyrgyzstan and Tajikistan are particularly affected, since their ethnic diversity and lack of generally recognized borders are exacerbated by a lack of land and, which is even more critical considering the arid climate, water resources, adding distinct socio-economic overtones to the frequent conflicts. Thirdly, it is the incomplete complex processes of nation-building and development of official ideologies, not an infrequent element of which are territorial claims to neighbors or some country’s (and this is more the case of Uzbekistan) claims to regional leadership. To put it otherwise, the source of the main security challenges in the Central Asian region are the domestic social, economic and political problems of its countries. All in all, in the foreseeable future, no direct connection can be traced between security in the Central Asian states (except Tajikistan) and the processes taking place on Afghanistan’s domestic arena – the struggle for power, interethnic and religious

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conflicts. It is also hard to imagine that Talibs would turn out to share Pashtun nationalistic sentiments and seek to expand their area of influence to include the neighboring Central Asian republics whose population is ethnically alien for them and where they cannot fully count on support and understanding. And even if Taliban returns to power in Afghanistan – which is quite likely, – it is at the same time highly unlikely that their immediate plans envisage an invasion into Central Asia to seize territories there or to set up a caliphate in that area. It is a different matter altogether that a much more realistic threat to the Central Asia’s security may emanate from Al Qaeda cells and other terrorist organizations based in Afghanistan and Pakistan, among such the Islamic Movement of Uzbekistan which tends to hide under a variety of names. They are quite capable of stepping up their activities and beginning to play a rather destructive role in Central Asia once the US principal troops and the International Security Assistance Force leave Afghanistan. And it is because of this that it becomes so important for the Central Asian countries to secure guarantees of protection from threats posed by the situation in Afghanistan, among which are the spread of fundamentalist religious teachings, terrorism, and rise in drug trafficking. For example, in Kazakhstan, which was long believed to be the most stable and peaceful of all Central Asian countries, several incidents related to Islamic fundamentalists’ activity have occurred in the recent years. In Kyrgyzstan where the southern provinces of the country are traditionally a hotbed of Islamic fundamentalism, the radical religious groups, like Hizb-ut-Tahrir and Tablighi Jamaat, which have been prohibited as extremist in many countries, including Russia, have also intensified their activities. Certain evidence of deterioration of the religious and political situation exists in Turkmenistan as well, even though little is known about its domestic problems since this country is extremely closed to the outside world. Nonetheless, according to reports, Islamic fundamentalist groups are gaining influence in some places in the Caspian part of this country, the income of such groups being made up by profits from drug trafficking.1 In Tajikistan not only has the drug flow intensified, contributing to the rising crime rates in the republic, but also intensive penetration of Islamist groups from 1 Shustov A. “Arabskaya vesna” v Tsentralnoi Azii?[An “Arab Spring” in Central Asia?] (www.stoletie.ru/geopolitika/arabskaja_vesna_v_centralnoj_azii_2011-10-26.htm).

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Afghanistan has been observed in the context of the intensification of the general Islamization process among the local population. Particularly dangerous for Central Asia is the combination of potential external challenges (emanating from the AfPak) with the objectively rising domestic political risks, as well as the possible combination of the social and the religious factor. That said, an “Islamic revolution» (like what has been happening in the Middle East) is hardly a feasible threat for any of the republics in this region, even though in Uzbekistan and Tajikistan, for example, political Islam traditionally played a great role. A far more probable scenario would be “Afghanization” or “Kyrgyzation», when in the context of prolonged instability and clan warfare, the Islamists, being nurtured by the proceeds from drug trafficking and assistance from abroad, from their brothers in faith, begin to play a prominent role in contributing to general chaos. To counter this scenario, the countries of this region need not only a strong army, but also specially trained rapid response forces, strategies of response to internal and external challenges and risks – both elaborated on a collective basis and national ones. It is worth noting here that the not fully established security architecture of Central Asia is characterized by a complex multi-level structure. A regional security level is represented by such organizations as the Collective Security Treaty Organization (CSTO), whose Central Asian members include Kazakhstan, Kyrgyzstan and Tajikistan, and the SCO whose members include the three Central Asian republics plus Uzbekistan. Among the problems associated with collective response to emergencies in its zone of responsibility, the CSTO specifically lists the situation in Afghanistan, which is described as “unstable and difficult to predict” in the mid-term. Considering that in Afghanistan “the terrorist activity of intransigent armed opposition does not subside. It even builds up in some regions of the country”, that “the struggle with drug production has hardly produced any result, the corruption is rampant, and the national armed forces and security forces are not yet fully prepared to maintain national security, at its Moscow session of December 19, 2012 the CSTO Council of Collective Security passed a series of resolutions on countering the intensifying threats from Afghanistan. These resolutions stipulated measures aimed at “reducing the detrimental effect of the situation in the Islamic Republic of Afghanistan on the situation in the CSTO member states following

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the withdrawal of the main troops of International Security Assistance Force in 2014.”1 The CSTO intends to step up the involvement of its relevant structures into the pursuit of designated goals. Such structures primarily include the Collective Rapid Reaction Force created in May 2001 by virtue of a resolution adopted by four of the CSTO member states – Russia, Kazakhstan, Kyrgyzstan and Tajikistan.2 Being an important element of the CSTO activities, it is intended for accomplishment of combat mission exclusively in the Central Asian region. Created in February 2009, the Collective Rapid Reaction Force (KSOR) comprising task force units from Armenia, Belarus, Russia, Kazakhstan, Kyrgyzstan and Tajikistan, is vested with more complex tasks: it is suggested that the KSOR be used for repelling military, executing special operations against international terrorism, transnational organized crime, drug trafficking, as well as for emergency response and recovery. That said, the military component of the KSOR is made up of forces and units of constant alert capable of fast deployment in any point in the CSTO responsibility area. At the same time, the KSOR forces under the banners of the CIS and the CSTO remain under national command of their countries. Even though it is not a military organization or platform to maintain regular discussion of security issues, the SCO lists struggle against terrorism, separatism, religious extremism and drug trafficking among its priorities. Apart from Russia and China, other SCO members include all Central Asian countries (except Turkmenistan), the observer states (Afghanistan, India, Iran, Mongolia and Pakistan) and the dialog partners (Belarus, Turkey, Sri Lanka). This potential makes the SCO a powerful instrument for tackling complex regional security challenges, which includes challenges generated by the situation in the AfPak. Involvement in maintaining global security consists in the UN and OSCE membership of the Central Asian countries, their cooperation with NATO and participation in some of its programs. This is how, in the framework of their multivector foreign policy the Central Asian 1 See: On the results of the CSTO Council of Collective Security summit of December 19, 2012 (odkb-csto.org/news/detail.php?ELEMENT_ID=1536). 2 These include the Russian military base in Tajikistan (formerly – the 201st Motorized Rifle Division), a Russian air base in the town of Kant (Kyrgyzstan), as well as two battalions from Kazakhstan, one from Tajikistan and one from Kyrgyzstan.

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states receive guarantees of military security not only from Russia and the CSTO, but also from NATO, with the latter often acting as a CSTO and SCO rival in Central Asia. In view of the approaching completion of the military campaign in Afghanistan, the US and NATO have uncovered new opportunities for enhancement of military cooperation with the Central Asian countries. The framework of such cooperation includes allowing overflight of the coalition air forces and lend-lease of military facilities to the ISAF member states. Among such is the US air base at the Manas airport which was renamed into Manas Transit Center in 2009; the deployment of French troops in Dushanbe (Tajikistan); a German air base in Termez (Uzbekistan); transit of French military property and personnel via Shymkent airport in the south of Kazakhstan during their withdrawal from Afghanistan. The national security strategies of the Central Asian countries and, consequently, their approaches to tackling the Afghanistan problem vary significantly. The security policies of Tajikistan, Kyrgyzstan, and Kazakhstan, both in general and with regard to the Afghanistan problem, combine participation in joint projects in military and political cooperation with the US/NATO with retaining the main focus on the CSTO and the reinforcement of allied ties with Russia. Tajikistan continues to be the most vulnerable of all Central Asian states in terms of security due to its longest common border with Afghanistan, which is furthermore largely unguarded due to it passing on rugged mountainous terrain. After 2014 this republic may experience an influx of Afghani refugees represented mainly by ethnic Uzbeks and Tajiks, who will be fleeing the civil war in their own country. Tajikistan is moreover more than its neighbors exposed to attacks by religious fundamentalists from the Islamic Movement of Uzbekistan and Al Qaeda. To avert this negative scenario resulting from such perilous proximity, the Tajik authorities endeavored in the recent years to strengthen their military political positions with the help of extra-regional forces. They, for example, sought EU assistance with protection of their external border with Afghanistan which the former could theoretically provide in the framework of its Border Management Program for Central Asia. However, in view of the European countries’ attention and efforts being focused since 2011 on struggling with the economic and financial

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crisis in their own countries the outcome of which and the future of the Eurozone are far from being predictable for the EU itself, Tajikistan never eventually came to receive massive support from the EU. Some assistance with enhancing Tajikistan’s defense capacity was provided by the US and NATO, who set up the National Combat Training Center, new communications built, and built a bridge over the Panj river with border and customs points along the Tajikistan-Afghanistan border. Such concern on the part of the US and NATO politicians and military for Tajikistan’s security is explained, however, not so much by their eagerness to protect Tajikistan from infiltration by militants from the territory of Afghanistan, but chiefly by what the US believed to be an opening opportunity to establish an extensive military infrastructure of its own on the territory of this Central Asian country. Massive pressure was at the same time exerted on the Tajik authorities in an attempt to make them abandon their military cooperation with Russia and the national security maintenance model that it offered. In response, Dushanbe entered into new military agreements with Moscow during the official visit of the Russian President Vladimir Putin to Tajikistan on October 5–6, 2012, without refusing, however, the financial assistance from the West. Under the agreements signed, the 201st military base deployed in the republic will stay there until 2042, with a possibility of extending its term of deployment in this country. Moreover, the status of the military personnel of the base and of members of their families was equated to that of the administrative staff of the Embassy – similar status was conferred on the personnel of NATO’s Manas Transit Center in Kyrgyzstan. An important role in Tajikistan’s choice in favor of cooperation with Russia as a strategic priority for itself was played by the following two factors. Firstly, the republic’s strong interest in maintaining money inflows from its nationals who work as labor migrants in Russia (a total of 1.3 million Tajik nationals makes Russia the largest labor market for Tajikistan). According to the World Bank, in 2011 their total money transfers accounted for 47% of Tajikistan’s GDP. 1 Secondly, it is precisely with Russia’s help that Tajikistan hopes to replenish its own rather limited resource base: military, economic, and financial. As a response to these wishes, Russia undertook in 2012 to refit Tajikistan’s armed forces, provide personnel training for the Tajik 1

See: http://www.ca-news.org/news:1052206.

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army, and allocate funds for fighting drug traffic, supply Russian gas to the Tajik domestic market free of duty. In the case of Kyrgyzstan, with its permanent domestic instability and unresolved problems in the south of the country, any perturbations caused from the outside, regardless of their provenance, are likely to become a trigger for a new political or inter-ethnic conflict. Possible build-up of the activities of extremist and terrorist groups in this region is also viewed as a serious challenge to security in Kyrgyzstan. Hence its interest in getting assistance from abroad to be able to stand up to such threats and challenges. Consequently, in keeping with the multivector foreign policy characteristic of all Central Asian countries, Kyrgyzstan strives to maintain broad cooperation with both the US/NATO and Russia/CSTO. Even though the US intends to scale down the bulk of its military operations in Afghanistan as early as in 2013, it does not jettison the intention to keep the Transit Center at Manas after 2014. An extension of its lease, which is presently running out, was discussed at the 2013 talks in Bishkek which were part of the Assistant Secretary of State Robert Blake’s agenda on his tour of South and Central Asia. The Kyrgyz government plans, however, to convert this military facility into a civil airport, and not into an air force base of any other country. The tentative shift since the autumn of 2012 in Kyrgyzstan’s policy toward enhanced cooperation with Russia gives reason to assume that the altering of the Manas base to a joint Russian-Kyrgyz joint logistic center is quite possible. The Bishkek authorities hope that the capital’s airportwill become a major hub, helping to greatly reduce the flight time between Western European countries and South East Asia. Kyrgyzstan’s plans to convert the US transit center may also indicate the republic’s intention to opt for participation in Russian security projects instead. Another evidence of this were the results of summit talks between Russian and Kyrgyzstan held in September 2012 in Bishkek where agreements establishing Russia’s military presence in the republic were signed. Among such agreements is the Agreement between the Russian Federation and the Kyrgyz Republic on the Status and Conditions of Deployment of the Joint Russian Military Base on the Territory of the Kyrgyz Republic which is to take effect in 2017. The joint Russian military base will comprise four military facilities: a weapon test range in Karakol, a signals center in Kara-Balt, a radio-

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seismic laboratory in  Mayly-Suu and a Collective Security Treaty Organization airbase in Kant. The writing-off of a multi-million debt, the allocation of no lesser amounts towards sustaining Kyrgyzstan’s budget, the coming of Russian companies as a major investor into the republic’s energy industry also indicate Russia’s determination to intensify its foreign policy efforts in Kyrgyzstan. In the case of Kazakhstan, its geographic remoteness from Afghanistan makes the level of threats and risks for it in connection with possible outbreak of a civil war in Afghanistan significantly lower than in the case of any other Central Asian country. Nevertheless, an aggravation of the situation in Afghanistan and the uncertainty of its political future after the withdrawal of the bulk of the US troops and International Security Assistance Force may have a very negative impact on the situation in Kazakhstan whose southern regions have close ties with the rest of Central Asia. Under an adverse scenario the destabilization in the Central Asian countries bordering on Afghanistan may well spill out beyond their borders, affecting Kazakhstan directly or indirectly. In the event of direct military threat from Afghanistan, the probability of which is, however, rather low, one should expect some kind of efforts on the part of Russia to protect Kazakhstan from this threat. Kazakhstan, which was long seen as an island of stability in the whole of Central Asia, has recently been experiencing security problems. In May 2011, a terrorist attack was perpetrated for the first time in the country’s recent history in the city of Aktobe. Further terrorist attacks occurred also in big cities: in Astana, Almaty, Taraz. Responsibility for those terrorist attacks was claimed by previously unknown Islamic group “Soldiers of the Caliphate” which had links with Al Qaeda and trained militants for this international terrorist organization. Sources in Afghanistan and Pakistan reported that militants from these countries  – mostly ethnic Kazakhs – have been actively arriving in Kazakhstan in the recent years with the purpose of recruiting new members and bringing pressure on the authorities. It is worth noting that the terrorist attacks in the country coincided in time with the buildup of political struggle for the office of the president of Kazakhstan. Attacks perpetrated with the involvement of the Islamists have also become more frequent and fierce after Kazakhstan opted in favor of a radical pivot to Russia, joining the Customs Union to build a common Eurasian space together with Moscow.

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The Kazakhstan authorities leave open the possibility of the republic’s territory being used for arms smuggling and drug trafficking, and this may be happening with active involvement of Islamist organizations and groups. Furthermore, in the southern parts of Kazakhstan, where the existing Uzbek diaspora is already large and continues to grow on account of illegal labor migrants arriving from Uzbekistan, rapid radicalization of the followers of Islam is being observed. Intelligence services have reported Hizb-utTahrir activity there. To sum it up, the above plus the appearance of leaflets containing pro-Islamist rhetoric and appeals against the government and many other facts indicate that Kazakhstan will not be spared either by the Islamization trends which manifest themselves in the rise in religious extremism; and here the danger lies in the probability of the Islamic fundamentalists taking advantage of the social discontent and unrest in the country. Until recently, Kazakhstan ranked on top of the US strategic priorities list for Central Asia. However, since the creation of the Customs Union and the Single Economic Space, of which Kazakhstan is a member along with Belarus and Russia, this Central Asian country began to be viewed by the US/NATO chiefly as an exporter of energy commodities. This situation may hold during the transition period (until 2014), which does not rule out possible attempts to put pressure on the leaders of Kazakhstan in the future using the local pro-Western elite as a possible instrument, aiming to re-balance the republic’s focus on programs financed and lobbied by the West instead of Eurasian integration projects. In contrast to the situation in Kazakhstan, Kyrgyzstan and Tajikistan, the foreign policy of the large Central Asian country – Uzbekistan – shows a tendency for isolationism and reliance on its own resources insofar as its own national security goes. In the recent years, however, this line has been supplemented by certain efforts to foster military cooperation with the US and a number of NATO member states. An important role here was played by the fact that Uzbekistan was assigned the leading role in the framework of the Northern Distribution Network used for the US and NATO cargo transit from Afghanistan. To anticipate this scenario, the US Congress lifted in September 2011 the restrictions on military aid to Uzbekistan which had been in place since 2004. The territory of this republic is viewed by the United States as the most convenient location for building major regional transport

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hubs and military facilities which may operate on either permanent or temporary basis. There appears to be nothing accidental about Uzbekistan’s decision in June 2012 to suspend its CSTO membership, the reason for it being the hope to receive guarantees of security once the coalition troops are withdrawn from Afghanistan in exchange for this step, as well as the fact that Uzbekistan had been promised to the bulk of military equipment and armaments evacuated by the coalition troops from Afghanistan. The military aspect of the CSTO activities is not likely to be affected by this “walk-out” on the part of Uzbekistan since the latter was virtually uninvolved in the military cooperation in the framework of this Organization, and in 2009 President Islam Karimov refused to sign the agreement on the Collective Rapid Reaction Force. This may, however, make the struggle with drug trafficking rather complicated for Uzbekistan, which borders not only on Afghanistan, but also on the other four Central Asian republics. In August 2012 the Uzbekistani parliament passed a law banning foreign military bases and facilities on its territory, thus eliminating the question of possible foreign military presence on the country’s territory from the agenda, which indicates Tashkent’s attempts to pursue a balanced policy which consists in maximum distancing itself from the global and regional players vying for influence in Central Asia.. It can also be assumed that the reduction in the US-NATO troops in Afghanistan and the changing role of those remaining there after 2014 will in all probability have no impact on Uzbekistan’s domestic situation, so long as the ruling elites reach agreement on continuity of power. And that is how Uzbekistan will manage to avoid major political turmoil in the future. But by 2014 the leaders of the republic intend to actively develop the military and political cooperation with the US, if only to contain forcefully internal threats and to block possible attempts from beyond to destabilize the home situation. And finally one other Central Asian country, Turkmenistan, is planning to avoid the negative impact on itself of the situation in Afghanistan on its own domestic situation by way of maintaining neutrality in its relations with other countries in the region. Being extremely closed to the outside world, this republic will in all probability be able to maintain stable relations with Afghanistan regardless of who will seize the power there, just like it has been able to do this in the past

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couple of decades when, unlike its neighbors, it chose to distance itself from Afghanistan’s internal strife. The construction of a gas pipeline for transportation of Turkmen gas and other power resources from Central Asia into Pakistan via Afghanistan will contribute to cementing such relations between Turkmenistan and Afghanistan. Turkmenistan will, by the look of things,, remain one of the key routes for transit of Afghanistan’s commercial cargo to foreign markets. In its turn, Afghanistan will continue to depend on Turkmen petrol, liquefied gas and electricity on which several of its provinces currently subsist for quite a while yet. Turkmenistan itself chiefly attracts the leading global players thanks to its immense gas potential, as well as thanks to important projects initiated by Turkmenistan in the areas of power and transport. Among them is the TAPI project (Turkmenistan-Afghanistan–Pakistan–India), which, if implemented, will lead to major geopolitical shifts in Central and South Asia. It is equally evident that issues related to democratic rule and the human rights situation in Turkmenistan are not going to become a subject of particular concern in the West. On the whole, it has to be granted that the “doubling” of security in Central Asia due to the presence of external forces and structures impedes a coordinated action of Central Asian states aimed at addressing external challenges and threats and is not helpful in resolving issues created by a geopolitical aggravation. The countries of Central Asia are in all probability reluctant to finally and irrevocably entrust regional security to the CSTO and its structures, as well as the CSO. There are several reasons for that. Firstly, the adoption of a “multivector” policy by the Central Asian members of these organizations, which in practice infrequently boils down to blatant foreign policy maneuvering between different global and regional centers. The second is the enduring phobias nurtured by some representative of the region’s political elite, fanning – whether deliberately or working under the effect of the Western propaganda – the allegations about Russia’s purported imperial ambitions. The third is the rather passive (within the SCO framework) attitude of China to potential military threats to the region, its leaders in Beijing choosing to limit their presence in Central Asia to mainly economy and trade. Despite all that, the Central Asian countries are being drawn into a new round of the geopolitical games driven by their desire to counterbalance China’s influence, and some may be willing to counterbalance Russia’s influence as well – with the US presence. The consequences

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of such maneuvering do not seem to be carefully considered. Loss of own sovereignty to a significant extent, or perhaps even the loss of it, are just some of possible consequences. The processes developing in Central Asia at the final stage of the Afghanistan campaign greatly complicate the challenges confronted by Russia who has officially declared the CIS, including its Central Asian segment, to be a key area of its foreign policy1. The upcoming withdrawal of the combat units of the International Security Assistance Force from Afghanistan and the transfer of responsibility for national security to the government in Kabul confront both Russia itself and the security structures under its auspices – the CSTO and the SCO – with serious challenges. They are expected to play a greater role in stabilization in Afghanistan in the future, this goal becoming not only an item on its agenda, but furthermore a target of practical efforts on the part of its dedicated structures. An important factor which will help to alleviate the tensions in Afghanistan and prevent the spread of instability from there into the neighboring countries and regions would be the transfer of extensive authorities (as well as foreign aid) to local regimes. The involvement alongside with the UN structures of the South and Central Asian countries and their regional organizations targeting poltical and economic, rather than military, cooperation with Afghanistan will contribute to maitaining regional security. Vast opportunities in this connection open before those economic, energy, and road traffic projects in which Afghanistan can participate jointly with the Central Asian countries, Russia, China, Pakistan, India, Iran,  – i.e. with the countries which are already members of either the SCO, BRICS, or the G20. Efforts by the US/the West to deliberately exclude some of them (Russia, Iran or China) from the scope of such projects (TAPI, for example) on ideological and geopolitical considerations, will preclude such projects from fulfilling their full potential and will be anything but helpful in making the situation in the region return back to normal. The Central Asian countries, just like Russia, India or Iran, could well be helpful as allies for the non-Pashtun population of Afghanistan, helping them in their struggle to achieve representation in the repub1 O merakh po realizatsii vneshnepoliticheskogo kursa Rossiiskoi Federatsii [On Measures to Implement the Russian Federation Foreign Policy]. 07.05.2012 (news.kremlin.ru/acts/15256).

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lic’s government bodies and containing Taliban’s possible expansion into the Central Asian region. These countries may well step up their involvement in the conflict resolution in Afghanistan by stepping up regional cooperation in combating terrorism, extremism, organized crime and illicit drug trafficking. Should the US and NATO presence in Central Asia both military (bases) and economic, be expanded through the transformation of the existing “Northern Network” into a transnational network covering all of the former Soviet space, this will serve to facilitate the achievement by the US and their allies of their broad strategic objectives. Such military strategy objectives will include restraint of China, control of Afghanistan, the erosion of Russia’s economic positions in the region and the re-orientation of the Central Asian countries’ security institutions and agencies from the post-Soviet ones to NATO. Yet, as the experience of other countries and regions convincingly proves, the NATO structures are less interested in maintaining political stability – whether domestic or international, – than (speaking in the terms used by A. Bogaturov) in “coercion to partnership” as its policy in respect of such countries, in drawing them as satellites into the Western political orbit. US military facilities already operating in some countries (Kyrgyzstan) or the ones which may appear in others (Tajikistan) may perhaps instil some confidence in the governments of these countries. Yet the US is unlikely to be prepared to take the risks in the event of escalation of the domestic political situation in these countries or to commit themselves to provide long-term security guarantees to their new-old strategic partners. The currently prevalent in Central Asia assumption that the Western military structures will turn out to be more efficient than the CSTO when it comes to protecting from external and internal threats may indeed prove to be an illusion. Using Russia as a factor of pressure on the US partners also has its limits: such multivector foreign policy threatens to backfire later against those who have been employing it. It is quite obvious that the Central Asian countries will hardly be able to work out an external challenge and risk response strategy by themselves. Such assistance may indeed be provided by Russia who fully realizes its special responsibility and tries to act proactively in Central Asia, using a variety of means: from the CSTO structures to economic integration projects (the Customs Union, the Single Economic Space).

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The Prospects for Resolution of the Conflict in the AfPak and the Positions of Global Players China One of the global players active in the framework of the situation in the AfPak is China whose role as such notably increasing in the recent years. An analysis of China’s plans for the future shows that it strives to secure its leading role in the political, economic and cultural processes taking place in this region in view of the upcoming withdrawal of the ISAF forces from Afghanistan in 2014 and is working to achieve this in compliance with its long-term plans which envisage the establishment of “strategic cooperation and partnership relations” with the regional countries, including Afghanistan and Pakistan, the enhancement of cooperation with regard to development of natural resources, construction of infrastructure, power industry, personnel training, participation in the efforts to restore Afghanistan’s economy ruined by the war. One of the key items on China’s plan of action is to make the Xinjiang Uygur Autonomous Region (XUAR) an economic bastion and a central political platform oriented towards the bordering countries. This was announced by the Premier of the State Council of China Wen Jiabao speaking at the opening of the China-Eurasia EXPO in September 2012 in Urumqi (capital of XUAR). In his speech entitled “Towards New Glory of the Silk Road” he stressed that “Xinjiang will become an outpost [italicized by the editors] of development in China’s mutually beneficial with all countries of Asia and Europe, primarily with its neighbors”. XUAR had already embarked on the road to transforming into a major regional center of industry and agriculture. Its rich mineral resources and natural deposits provide the region with a sound basis for economic development. Large-scale economy-building policies have been implemented here aimed at considerable expansion of economic ties with the neighboring countries. Pursuant to a special resolution of the Central Committee of the Communist Party of China, the development of XUAR has become the charge of the central national agencies, with active engagement of other provinces of the country. As a result, investments into this region

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are growing annually, with the 2011 and 2012 growth rates surpassing the total national figures.1 As a result, in 2008–2011 XUAR’s gross regional product was growing faster than the country’s GDP. The 2010 GDP growth was 10.4% and in 2011 it was 9.3%, whereas XUAR’s gross regional product growth for the same period stood at 10% and 12% respectively.2 Construction of a transport infrastructure. Building a modern “Silk Way” is an important component of China’s plan of action related to expanding the trade and economic ties with the whole of Eurasia and to preparations for changes in the situation in and around Afghanistan after 2014. The implementation of China’s plan was greatly aided by the construction of new railways and of more than 2,500 km of highspeed thoroughfares in the XUAR3. The Chinese government actively supports the Central Asia Regional Economic Cooperation (CAREC), of which its country is one of the 10 members (along with Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan, Azerbaijan, Afghanistan, Mongolia, Turkmenistan and Pakistan), and intends to begin the practical implementation of China-Kyrgyzstan-Uzbekistan railway construction project. This route is expected to connect Chinese railways crossing Kyrgyzstan and Uzbekistan, and further on across Afghanistan, Iran and Turkey, with the European railway network. The planned mileage of the Chinese section is 165 kilometers, of the Kyrgyzstan section – 268.4 kilometers. The construction of this traffic artery has been under discussion for some 15 years and is now drawing to its logical conclusion. In late October 2012 the 11th CAREC Ministerial Conference was held in Wuhan (Hubei Province, China),4 where the so-called Wuhan Action Plan was adopted, stipulating the goal to speed up the implementation of the CAREC-2020 Strategy the basis of which is international cooperation in such sectors as transport, trade and power industry. 1 See: Zhongguotongjinianjian, 2012 (China Statistical Yearbook, 2012). Tab. 5-3 (electronic version). 2 Ibid.Тab. 2–1, 2–14. 3 russian.news.cn/economic/2012-12/28/c_132069347.htm. 4 Development of a CAREC mechanism was launched in 1997 by the Asian Development Bank(ADB). In 2002 CAREC upgraded its status to that of a ministry. Among the CAREC partners are the ADP, the World Bank, the International Monetary Fund, the UNDP, the European Bank for Reconstruction and Development and the Islamic Development Bank.

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That strategy envisages the creation of a transport and economic corridor in Central Asia by 2020, along with the achievement of such strategic goals as “competitiveness and trade expansion». Speaking at the CAREC conference where the Wuhan Action Plan was adopted, China’s Finance Minister Xie Xuren said that the Chinese side is prepared to maximum use of its resources to step up cooperation with other participants in the interests of intensive implementation of this plan.1 The territory of Kyrgyzstan serves as a hub of the future Trans-Asian Railway. At the same time, its construction is being slowed down by the amount of the public debt, which is so vast that Kyrgyzstan cannot count on international loans. Wen Jiabao had made a special visit to Kyrgyzstan as one on the list of measures to facilitate the construction of this railway. Currently, the plans are being discussed to create a joint venture or a concession with the participation of Chinese investors or international financial organizations. Kyrgyzstan’s President Almazbek Atambayev has expressed his avid support for the construction of this railway, saying that he feels sure that it is going to play a major role in the economic development of his republic and in promoting the national and economic unity and cohesion of all its districts. Unlike Kyrgyzstan with its complicated political situation, in Uzbekistan the construction of this railway has received political approval, meaning that the country’s government fully supports the project to construct the China-Kyrgyzstan-Uzbekistan railway.2 The construction of this railway was also backed by the governments of Tajikistan and Iran. For all that, it remains unclear whether the forces that are in opposition to the government of Afghanistan will sanction the construction of this railway trackafter 2014. That is where the position taken by the United States with respect to this Trans-Asian Railway becomes quite important. In the event that it chooses to approve its construction, the United States will be able to implement relevant measures of support by virtue of its agreement with the government of Afghanistan. The US, however, inevitably realizes that this railway will help rapid enhancement of China’s status and economic prestige across the vast territory 1 Economic survey: China and its Central Asian neighbors planning to create an “economic corridor” (russian.china.org.cn/china/txt/2012-10/31/content_26959442. htm). 2 “Uzbekistan supports the construction of the China-Kyrgyzstan-Uzbekistan railway” (uzdaaily.uz/articlts-id-13383.htm).

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of Asia. And this means precisely the process which the US long considered most undesirable. China’s economic policy in Afghanistan and Pakistan. Among the  key points of China’s long-term plan of action is timely consolidation of its economic positions in Afghanistan and Pakistan. Beijing realizes that the construction and operation of a railway, as well as of industrial and other facilities being built by China in Afghanistan will yield a considerable profit for the latter, will create new jobs and help to improve the living standards. According to forecasts, a significant share of Afghanistan’s budget will be made up by proceeds from projects with Chinese investments. The plan here is to create a solid basis for China-Afghanistan cooperation and undermining the extremist, separatist and terrorist forces in both China and Afghanistan. China moreover needs considerable natural resources required for its own growing economy, and Afghanistan can offer significant amounts of those with its rich chrome, iron ore, tantalum, niobium, beryllium, coal, gems and semi-precious stones deposits. In 2008 the Chinese corporation Jiangxi Copper Co. won, together with the state-owned China Metallurgical Group Corp., a joint bid to explore and develop the vast Aynak Copper Mine south of the capital in Logar province of Afghanistan. The plan was announced to invest up to USD 3.5 billion into the development of this mine. Moreover, China has decided to spend USD 500 million on the construction of an electricity-generating plant. Half of the generated electric power will be supplied for the needs of the local population. The plan also includes the construction of a railway and an ore-processing plant with an annual production capacity of up to 220,000 tons of copper.1 The deposit is expected to begin operating at full capacity since 2014, providing 10,000 jobs for the local population. The rights to explore this mine are yet another fact in the overall picture, as are China’s significant investments into strategic Gwadar port in Balochistan province in Pakistan. These facts have prompted plans to construct a rail link connecting the Aynak Mine with the port and another rail link connecting Gwadar with the Chinese railway in Xinjiang. This port is located 400 kilometers east of the Strait of Ormuz via which 60% of China’s oil imports are transported2. 1

China’s presence in Afghanistan (aftershok.su/?q=node/18797). Chinese Dragon in Hindu Kush. China’s interests in Afghanistan (www.centrasia. ru/newsA”php?st=1241294520). 2

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In December 2011 the China National Petroleum Corporation (CNHC) won the tender to develop three oilfields Kashkari, Bazarkhami and Zamarudsay in the Amudarya Basis. Afghanistan’s Ministry of Economy forecasts the oil revenues to reach 9.75 billion Euro annually. This is an immense amount for a budget like that of Afghanistan and it will be sufficient to ensure a high level of self-sufficiency and a reduction in the dependence on the foreign aid. An Afghanistan-China agreement on bilateral technical and engineering cooperation was signed in late December 2011 in Kabul. China’s media described this agreement as part of the Chinese government’s assistance to Afghanistan, its scope covering the restoration of the Jamhuriat hospital in Kabul, building the Parwan irrigation channel, the Research and Technology Center of the Education Ministry, etc., and the opening of a Chinese Language Department at Kabul University. The plan is to provide Afghanistan’s Health Ministry with 100 ambulance cars. In 2012 there were also 30 Chinese companies operating in Afghanistan’s agricultural and mining and processing sectors. Even though China makes a point of exhibiting its choice to secure its interests in the AfPak using chiefly economic instruments, it  by no means intends to renounce the purely military methods when it comes to maintaining security in this region, including along its borders with Afghanistan and Pakistan which stretch for 76 and 523 km respectively. In 2012 Chinese government adopted measures in fortification of its common borders with Afghanistan and Pakistan. Said measures included toughening the passport and visa requirements, blocking borders with Afghanistan and Pakistan, the evacuation of the population of the Tashkurgan military district and some other regions bordering Afghanistan and deployment of troops and armed police forces, tightening security in high threat locations, etc. Additionally, in XUAR the task of combatting extremism, terrorism and separatism is imposed on the Production and Construction Corps of the Chinese Army, which in 2011 comprised 14 divisions and other military units, totaling 1.1 million people.1 1 2012 Xinjiang shengchan jianshe bingtuan tongji nianjian (Statistical Yearbook of the Xinjiang Production and Construction Corps, 2012).Tab. 1-3. Zhuiao nianfeng guomin jingji zhuiao zhipiao (e-version).

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According to reports by Taiwan and Hong-Kong media,1 Xinjiang and Lanzhou military districts are being reinforced. Several infantry divisions are being deployed at the borders . The 4th field army of the CPLA and other military units: an artillery brigade, a fighter aircraft division, radio-electronic search, detection and electronic jamming equipment have advanced to the Xinjiang military region. The command post in this district was transferred into the town of Hashe in southern Xinjiang. The headquarters of the Lanzhou Military Region and an air division were redeployed to Urumqi. China has forged close security cooperation with the governments of Afghanistan and Pakistan, along with regular supplies of military equipment into these countries. In 2013 China launched training programs for Afghan policemen. The government of Afghanistan has, in its turn, undertaken to ensure the safety of Chinese personnel and facilities located on its territory. In June 2012 the “Joint Declaration between The People’s Republic of China and The Islamic Republic of Afghanistan on Establishing Strategic and Cooperative Partnership” was signed. This declaration contains the mutual commitment of China and Afghanistan to preclude on their respective territories any activities that may harm or target the other party, to provide firm support to each other in matters pertaining protection of sovereignty, unity and territorial integrity, to jointly counter such transnational threats as terrorism, illegal immigration and the illicit trafficking in arms and drugs, and to tighten border control.

United States of America Among the foreign global players the US undoubtedly plays the central role in achieving a breakthrough as far as resolution of the conflict in the AfPak and determining its key parameters are concerned. Since the very beginning of the armed conflict in Afghanistan the US ruling circles prioritized geopolitical goals and objectives (gaining a footing in Afghanistan for its further use in the promotion of the US interests in respect of Iran, the Central Asian countries, the Hindustan 1 Regentov D. China and the military operation in Afghanistan (abrus.ru/content/ 564.623.11310. html).

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Peninsula and, naturally, in respect of China). Later on, the goal to ensure nuclear security in the AfPak was also added to the priorities. In the current situation the US continues to view Afghanistan and the AfPak as a zone of its vital interests, which it is resolved to defend using political, economic and military methods. Recently, however, due to the crisis of the unipolar management model when used for global and regional political processes, the US has no longer been able to independently and unilaterally, i.e. with complete disregard for the interests of other countries, decide on the terms of conflict settlement in Afghanistan/the AfPak. An important condition for such regulation to become effective would be recognition by the United States of the interdependence of all parties involved in such regulation and of their equal status. Recognition of this fact in  turn sets the parameters (“a corridor of opportunities”) of the complex and multivariate regulation process. Another no less significant factor with an increasing pressure on the US administration was the accumulated disappointment in the American society with the results of the country’s prolonged involvement in the longest in its history conflict beyond its borders and the resulting discontent with both heavy combat casualties and the vast financial expenditures in the context of the country’s own financial hardships gaining momentum. As for the US allies in NATO and the International Security Assistance Force, there as well pressure is growing for their troops to be withdrawn from Afghanistan as early as possible – these sentiments largely come as a response to the significant drop in public support for the participation in the military campaign in Afghanistan, particularly while combat operations there are in full swing. Taking into account the above-mentioned internal and external factors, in January 2013, during his talks with the President of Afghanistan Hamid Karzai, the US President Barack Obama introduced notable changes into the US strategy in Afghanistan. President Obama announced his intention to speed up the phased withdrawal of the US troops from Afghanistan planned for 2013–2014, curtailing their actual involvement in combat operations straight away. Also proclaimed was the US intention to transfer of the full charge of maintaining security in Afghanistan to its own National Security Forces1. 1 Obama Accelerates Transition of Security to Afghans // New York Times. 2013, January 11.

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An important outcome of the negotiations between Obama and Karzai was the US consent to acknowledge Taliban movement as a legitimate force in the context of the negotiations between Kabul and the armed opposition to find a mutually-acceptable political solution to the conflict. To step up these negotiations, the US accepted the opening of the first official overseas office in the Qatari capital, Doha. In the meantime Barack Obama has confirmed the intention of the United States to keep a limited military contingent in Afghanistan (between 6,000 and 10,000, military personnel) for the formal purpose to continue the education and training programs for the Afghan security forces and coordination of counter-terrorism operations. Should agreement on this matter be reached with the government of Afghanistan, the United States will work to secure the achievement, albeit by limited means, of not only these stated geopolitical goals, but also of its initial and broader ones. Nevertheless, despite the obvious willingness on the part of Washington to seek a compromise formula for conflict resolution, the uncompromising Afghan opposition is far from being ready to make reciprocal concessions. Moreover, Taliban’s response to the outcome of the negotiations between US President Barack Obama and the president of Afghanistan Hamid Karzai in Washington consisted in a statement released in January 2013, explicitly declaring the movement’s refusal to recognize the arrangements made and demanding an “immediate withdrawal of all foreign troops from Afghanistan”. An equally uncompromising stance was taken in respect of the US plans to keep a limited military contingent in Afghanistan. “The US government and Karzai must understand that the agreement reached between them on maintaining the US military presence in Afghanistan is nothing more than a private bargain between them, which is most emphatically rejected by our people and is legally invalid. The Islamic Emirate of Afghanistan will continue on the path of its Holy Jihad against such foreign presence, the path it has been pursuing for the past 11 years,”1 thus runs the statement. The US will obviously nevertheless seek to maintain its political and military presence in Afghanistan and in the region after 2014. Over the past decade and a half immense political, military and economic efforts were invested into establishing itself in this strategic region which the US is naturally not prepared to leave so easily. That is why even if 1 The Islamic Emirate of Afghanistan “Regarding So-Called Security Pact Between Karzai and America”. January 2013.

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Taliban and its allies end up seizing the power in Afghanistan, resulting in the US being ousted from the country, the latter will do all it can to offset its losses on account of gaining or expanding its positions in other countries of the region (this means, in Central Asian countries as well, as was discussed above). The US will also have to make up its mind with regard to the nature of further cooperation with other countries, which all have their own interests in this part of Asia. This also and to a great extent concerns the future of the US-Russia relations, which for the entire duration of the conflict in Afghanistan were marked by great constructiveness, despite all, at times rather sharp, differences and disagreements on other issues. At the end of the first decade of this millennium these relations entered the stage of active cooperation on one of the most complicated and sensitive issues for the US and its allies, namely, ensuring safe transit of cargos for the US troops in Afghanistan via Russian territory. In April 2008 tentative agreement in this respect was reached between Russia and the US. And even though the relations between the two countries nosedived following the war in Georgia in August that year, Barack Obama’s victory in the presidential elections helped to restore the bilateral dialog. The result of this “thaw» in the relations was the resumption of the implementation of the earlier arrangements, and one of its practical manifestations was the beginning of the nonmilitary cargo transit via Russia for the needs of the ISAF stationed in Afghanistan in March 2009. Another step in advancing the cooperation between the US and Russia поАфганистану was the signing during the US President’s July 2009 visit to Moscow of a supplementary agreement on air transit of the US military cargo and personnel via Russia. And, finally, in April 2012 Russia and the US reached an even more comprehensive agreement on the transit of cargo into Afghanistan and back with supplies for the International Security Assistance Force troops, as well as for the subsequent withdrawal of the troops, munitions and military equipment from that country. Starting from the second half of the same year, the Russian government sanctioned multimodal, or combined, cargo transit via Ulyanovsk into Europe and the US not only by air, but also by motor and rail. It is worth noting that that decision was far from being unanimously welcomed in Russia by its political parties and movements, coming under fire from many leftist and nationalistic organizations. Nevertheless,

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the Russian government resolved to approve this, claiming practical steps needed to be taken in its cooperation with the US and its allies in fighting global terrorism and religious extremism. The above does not mean, however, that once the international counter-terrorism operation in Afghanistan is over, the existing agreements on cargo transit via Russia for the needs of the US/NATO troops planning to stay in the country will be automatically extended. Russia furthermore finds it inexpedient tokeep thecurrently operating US/NATO transit centers or transshipment terminals for this end, let alone to have new ones set up on the territories of its Central Asian allies. At the same time Russia could well change its position on the transit, provided an agreement is reached with the US on fostering effective cooperation on combating the drug trafficking from the territory of Afghanistan. The reason for this is that among the most destructive outcomes of the conflict in Afghanistan was this country’s becoming the world’s major drug manufacturer. It is hardly a secret for anyone that over the years since the beginning of the active phase of the conflict in Afghanistan the total opium crops in this country have reached 150,000 ha, with the drug production having grown by a factor of 40.1 Most of these drugs are exported northwards, into Central Asian countries, and further on into Russia. This has made Russia the largest Afghan heroin consumer, with the scale of drug abuse in the country having risen by a factor of 9 over the past decade, while the number of drug addicts, according to some estimates, reached 2.5 million at the beginning of 2011. To put it otherwise, drug abuse has become a serious problem and a grave threat to Russia’s national security and tacking it is unarguably one of the top national priorities. And that is why countering the  drug threat and combating the drug trafficking from Afghanistan could become key venues of cooperation between Moscow and Washington.

1

www.fskn.gov.ru/fskn/index/news/[email protected]

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Chapter 18

ARMED CONFLICTS IN THE MIDDLE EAST IN XXI CENTURY Dina B. Malysheva

The Middle East (a part of ‘Western Asia’, according to the UN terminology)1 is a vast region stretching between the Suez Canal, the Bosporus Strait and the Persian Gulf. This region is the epicenter of so many disputes and negotiations, intrigues and conspiracies, the center of so many international schemes and maneuvers, the place where fierce bloodshed more and more often results in civilian casualties. Back in the early noughties the Crown Prince El Hassan bin Talal of Jordan (brother of King Hussein bin Talal, who reigned between 1952 and 1999) pointed out that the “The Middle East is sinking into the abyss of merciless violence and conflicts, which have no rational explanation … One sometimes gets the impression that it has been turned into the most worthless region of the world which is totally incapable of getting itself out of the quagmire of crisis and stagnation”.2 Yet even in the years to follow the new international political realities did not automatically relieve the Middle East of the prejudices and hostility that had been accumulated there for decades, nor did they bring the opposing parties any closer to the resolution of their conflicts, so even today the Middle East continues to be one of the most trouble parts of the world.

General Description of the Middle Eastern Conflicts and the Geopolitical Significance of This Region In terms of the number of political and armed conflicts raging on its territory, the Middle East can easily compete with Africa – the undis1 This region includes Egypt, Bahrain, Israel, Jordan, Iran, Iraq, Yemen, Qatar, Cyprus, Kuwait, Lebanon, the United Arab Emirates, Oman, Saudi Arabia, Syria and Turkey 2 Krieg oder Frieden im Nahen Osten International Politik. Bonn, 2001. No. 8, S. 1

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puted leader topping this sad rating. According to SIPRI estimates, of a total of 69 armed conflicts breaking out around the world between 2001 and 2010 eight (i.e. 12% of all conflicts) had occurred in the Middle East.1 The civilian casualty ratio here is steadily growing. For example, of the total casualties of 162,000 in the Iraqi war of 2003–2011 the civilian losses accounted for 128,000, while in 2011 alone, out of a total of 3,651 killed 388 were civilians.2 The XXI century history of the Middle East can already boast several inter-state conflicts; the practice of military solutions to conflict situations by means of international “humanitarian interventions” was also continued into the new millennium. Furthermore, in the recent years the practice of international intervention also took the form of active involvement into organization of the negotiation and transformation processes the central parties to which are the United States, Saudi Arabia, Qatar (sometimes through the UN mediation). The mediating role of such regional organizations as the Arab League, the Cooperation Council for the Arab States of the Gulf has grown. Still, the best part of armed conflicts in the Middle East are of domestic character and are aimed at resolution of socio-political, ethnic, religious or other contradictions with the use of armed violence. At the heart of most such conflicts lies confrontation between the government and an armed organized opposition seeking to seize power. This category includes civil wars and so-called ethnic conflicts occurring as a result of aspirations of groups of people who identify themselves as a separate ethnic group, and sometimes having its own religion, to achieve statehood. Conflicts like this usually develop as civil wars, yet draw the neighboring countries, interested parties and regional powers into their orbit. Conflicts and disputes leading to internal armed conflicts often result from unfair – whether actual or perceived – state budget allocation, the attitude of the authorities to economic, social, environmental problems affecting territories densely populated by specific ethnic groups. A conflict may well be galvanized by the pressing need for reforms in the context of a lack of such or a failure to implement them, which is usually attended with corruption in the top echelons of power and the impoverishment of masses. An armed conflict may also break 1 SIPRI Yearbook 2012. Armaments, disarmaments and international security. Oxford University Press, 2012. P. 15–16. 2 Ibid. P. 65.

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out as a result of dissatisfaction of specific ethnic or religious groups with their status within political systems or public authorities or with political inequality in the relations between specific religious or ethnic groups (such inequality being furthermore encouraged by the authorities), with their discrimination within the public administration system, with prevalence of representatives of a certain ethnic or religious group among military, police or security officers, to the prejudice of the others.1 Quite unlike the classic wars of the XXth century, which amounted to armed struggle seeking to destroy the adversary’s potential with a view to subsequent political and economic subjection of the latter, the armed domestic conflicts of the XXIst century are generally characterized by quite dissimilar parameters, like: the scarcity of the warring parties‘ political objectives, the tendency to bring more specific contradictions between the parties to the fore, qualitative and quantitative restrictions on use of military force, the comparatively small territorial scope of the standoff and a relatively short duration of armed confrontation. Moreover, the very substance of wars has undergone significant evolution since the beginning of the XXIst century. As Russian scholar Alexei D. Bogaturov notes, “the political component of wars became equal with the military one and even markedly exceeded it, at least, in terms of organizational, political, ideological, informational, financial, economic and other non-military resources used to achieve victory… In this century the political goal of attack has become not so much to eliminate the enemy as acquire a partner – of course, not an equal, but a junior, subordinate partner susceptible to the influence of the stronger party to this ‘partnership’”.2 A relatively new phenomenon which has manifested itself also in the Middle East was the growing number of so-called non-state conflicts. These are characterized by the involvement of non-state actors (paramilitary forces formed based on clan, ethnic or religious affiliation, as well as transnational irregular paramilitary groups like Al Qaeda or 1 For more details about typology of conflicts see: D.B.Malysheva Konflikty v razvivayushchemsya mirye? Rossiya i Sodruzhestvye Nezavisimykh Gosudarstv: religioznyi i etnicheskiy aspekty [Conflicts in the Developing World, Russia and the Commonwealth of Independent States: Religion and Ethnicity]. Мoscow: IMEMO RAN, 1997. 2 Bogaturov A.D. “Coercion to Partnership’ and the flaws of an Unbalanced World]. In: Russia in Global Affairs, 2011, No 4 (October–December). http://eng.globalaffairs. ru/number/Coercion-to-Partnership-and-the-Flaws-of-an-Unbalanced-World-15423/.

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simply armed gangs), which either fight against governments or make civilians targets of their violent or terrorist activities. So-called ‘netwars’ can also be referred to the category of “non-state conflicts”. These are waged by non-governmental organizations, opposition groups and movements– quite often with the goal of implementing democratic reforms – with the use of cutting-edge information technologies, against governments and against regimes. The factors contributing to crisis developments in the Middle East are many. Among them, the internal differentiation between the countries of this region along religious, ethnic, tribal and other lines; the clash of global forces, which are increasingly inclined to resort to military intervention. A factor peculiar to the Middle East contributing to growing tensions were the demographic changes which have led to a drastic increase in the young population, resulting in its turn in massive unemployment. In the meantime, the Middle East remains one of the backbones of the modern global economy and the entire system of international relations. Its significance for the global economy is largely due to this region being one of the principal treasuries of natural resources for the developed industrial countries, as well as for developing countries and such budding superpowers as China and India. The world’s largest energy exporters – the Persian Gulf states – produce some 19% of the world’s oil and 8% of natural gas. They moreover own 37% of the total proved world oil reserves and 25% of the gas reserves. Saudi Arabia holds the world’s biggest oil reserves, while Qatar holds the world’s third largest natural gas reserves. The forecasts promise a rise in the region’s share in the global oil production from 28% to 33% by 2020.1 So long as the bulk of the hydrocarbons from the Middle East is sold on European and Asian markets, the strategic significance of the region will continue to grow in the coming decades. The military, political and economic situation in the Middle East has, therefore, a big impact on the situation in the global energy and arms markets. What is moreover quite important is that the Middle East can be viewed as a “heart of the Islamic world”, a special religious and cultural area impacting the inter-civilizational relations in Europe and in other parts of the world – anywhere where large Muslim communities live. 1 K.C Ulrichsen “Approaching a Post-Oil Era. In: Russia in Global Affairs, 2011, No 3 (July–September). http://eng.globalaffairs.ru/number/Approaching-a-Post-OilEra-15328/.

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It is, therefore, little wonder that conflicts in a region of such immense geostrategic significance as the Middle East and the range of problems related to the fragile states affected by armed conflicts are holding top positions on today’s global agenda of international cooperation. The International Network on Conflict and Fragility which operates within the framework of the Organization for Economic Cooperation and Development (OECD) published in the 2000s a global list of 47 troubled states with a total population of over 1.5 billion people. Since the outbreak of the Arab revolutions in the Middle East and in North Africa this number has grown and these countries were included – along with Iraq and the Palestinian Autonomy – onto the list of states in need of assistance from the UN, OECD, and international banking institutions.1

The Arab-Israeli Conflict and the Iraq Conflict The political image of the region is largely associated with the decadeslong violent confrontation – the Arab-Israeli, or, as it is also known, the  Middle East conflict, which should not, in all probability, be expected to be resolved any time soon. The essence of the conflict consists in the struggle between the Palestinian Arabs and Israeli Jews for the territory which each of these two nations considers its own. This is what makes both sides so uncompromising, impeding the search for a solution to this confrontation. It is furthermore significantly exacerbated by the internationalization of this conflict during the Cold War when the Soviet Union and the US had imparted ideological overtones to this conflict by virtue of the confrontation between the two military political blocs respectively led by them at the time. The problem of Palestine, around which this conflict is basically revolving, continues to have several aspects: the national, or the Palestinian issue proper, which essentially consists in ensuring the legitimacy of the Palestinian people’s aspiration to independent development and self-determination in the context of their own national state; the regional aspect, since the unsettled Palestinian issue affects the  interests and destinies of all Arab nations, primarily, of Israel’s 1 World Development Report 2011. Conflict, Security and Development. The World Bank, Washington DC, 2011, p. 2.

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neighbors Egypt, Jordan, Lebanon, Syria; the international aspect, one of the central to which are the positions of Jerusalem being a disputed (including on religious grounds) territory between the Jewish and the Arab communities. The conflict between Israeli Jews and Palestinian Arabs was exacerbated by the growing tension within the Palestinian society proper, the differences and dissent over the ideas of Arab nationalism, a consistent adherent of which is the Palestinian Liberation Organization (PLO), and the ‘political Islam’, which is the ideology adhered to by the most prominent radical group operating on the occupied territories – the  Islamic Resistance Movement (Hamas). The ambivalent results of the democratic process in the Palestinian National Authority (PNA) consisted in Hamas coming to power in a perfectly legitimate way, through winning the January 25, 2006 parliamentary elections for the Palestinian Legislative Council. – something the secular Fatah, that had previously been a dominant force in Palestinian politics, cannot accept. The  resolution passed by the UN General Assembly on November 30, 2012 on upgrading Palestine to a “non-member observer state” within the United Nations system may serve to temporarily consolidate the shattered position of the Fatah leader Mahmoud Abbas, but is hardly likely to change the status of the West Bank of Jordan as long as Israel intends to keep it. So far Hamas and Fatah are engrossed in feuds and bickering which regularly drive the Palestinian Authority to the brink of a civil war. The situation in the PNA can hardly be deemed as settled, one reason for this being that Hamas leaders continue to deny Israel’s right to exist, making new outbreaks of violence somehow inevitable. The degree of intransigence observed both on the part of Israel and of Hamas is clearly evidenced by several recent conflicts, the principal goal in which was the annihilation of the military infrastructure of Hamas by Israel to prevent rocket fire into its territory. In December 2008 – early 2009 Israel conducted a campaign in the Gaza Strip code-named Operation ‘Cast Lead’ (and, incidentally, that time Hamas received support from Qatar, of all Arab states, which later contributed to its growing influence on this movement which has close ties with Iran). And in November 2012 Israel started Operation ‘Pillar of Defense’, the goal of which was, in particular, to test in combat conditions the new ‘Iron Dome’ mobile air defense system designed to intercept and destroy short-range rockets fired from distances of 4 kilometres (2.5 mi) to 70 kilometres. That operation also constituted a kind of

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message addressed to Iran, on the brink of war with which Israel has been balancing for several years now. Another conflict, which is to date a less protracted one than the strife in Palestine, but still quite noteworthy, is the conflict in Iraq. Its beginning was marked by the Operation ‘Iraqi Freedom’ launched by the United States on March 20, 2003. The latter was conducted in the framework of the US administration’s Global War on Terrorism campaign and following the 2001 invasion of Afghanistan. This was where the ‘Shock and Awe’ military doctrine written in the US back in 1996, which envisaged the so-called Net-Centric Warfare1, was put into practice with an emphasis on translating an information advantage into a competitive advantage through the robust computer-networking of well informed geographically dispersed forces. 49 countries took part in the Operation ‘Iraqi Freedom’, among those was even one Arab state – Kuwait, which is little surprise considering that in August 1990 it had been invaded by Iraq under Saddam Hussein’s leadership. That operation by the US-led coalition, dubbed Operation ‘Desert Storm’, marked the revival of use of military force in solving international conflicts (which obviously negated Russia’s concept of New Political Thinking of that time itself based on the concept of ‘non-violent world’). For all this, that operation was conducted in the context of unprecedented regional and international consensus: among the US allies at the time were even Syria and Egypt, while Iran and the Arab monarchies preferred to temporarily forget their differences and render political support to the coalition. Arab states did not take part in the Operation ‘Iraqi Freedom’, yet its headquarters were in Qatar, and, on the whole, despite the verbal condemnation of the invasion by some of them, no serious opposition followed on the part of the Arab world. On May 1, 2003 the multinational force led by the US completed the major combat operations; by the summer of 2009 the military forces of the US allies had withdrawn from that country, and by December of 2011 the US and the British units had followed suit. The outcome of the military campaign by the multinational forces in Iraq was nevertheless rather controversial. Among the positive achievements were the overthrow of Saddam Hussein’s dictatorial regime and the creation of some 1 For more see: Savin L.V. Setetsentrichnaya i setevaya voyna. Vvedenie v kontseptsiyu [Net-Centric Warfare and Netwars. Introduction to the concept]. Мoscow: Eurasian Movement, 2011.

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of the conditions required for subsequent democratic reforms in Iraq (this change was named ‘Purple Revolution’ after the color revolutions trend manifested in Eastern Europe following the end of the Cold War); Iraq was no longer a threat to its neighbors like it was under Hussein. On the other hand, in their democratic experiment in Iraq, the United States staked on the Shiites and the Kurds as two communities that had been the most unprivileged under Saddam’s rule (under Saddam Hussein most positions of power were filled by Sunnis), which eventually resulted in the reverse imbalance in favor of greater political representation of Shi’a clerical parties and politicians, while the presidential office was held by Kurdish politician Jalal Talabani. This met with fierce resistance on the part of the supporters of Saddam Hussein’s Party of Socialist Renaissance – Ba’ath, who were ousted from power after the fall of the Iraqi dictator as part of the deBaathification process, on the one side, and the Sunnis on the other. Among the radical Sunni groups fighting against the government in Iraq was the local branch of Al Qaeda known as the Islamic State of Iraq: this movement calls for an armed jihad, martyrdom in the name of faith in the form of terrorist attacks by suicide bombers. All in all, the political structure established in Iraq proved to be quite unstable, being further shattered by the renewed sectarian conflict which is turning Iraq into a ground for the Iran-Saudi rivalry – just like it happened in Yemen, Bahrain, and Syria where large Shi’a communities live. That said, despite remaining a possibility, the prospect of Iraq’s disintegration along the religious and ethnic lines, which is predicted by many, does not seem to be a likely scenario, even if the  Kurdish issue – being the main source of strife in the region – has not been taken off the agenda. The dismemberment of Iraq into a  Kurdish north, a Shiite-dominated south and a Sunni-dominated central region, which scenario is feared by many experts as a possible outcome of the conflict, is rather unlikely to take place.

The Cyprus Dispute and the Kurdish Conflict These two conflicts can be loosely described as “frozen”, yet maintaining their status quo well into the XXI century. As far as the Cyprus dispute is concerned, here we have a territorial dispute between the populations of Greek Cypriots and Turkish

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Cypriots. Reunification talks conducted under the UN auspices from the beginning of the XXI century, were, nevertheless, complicated by Cyprus joining the EU in 2004, which mean de facto recognition of the sovereignty of the Greek Cypriot state. The technical obstacle (even though quite a few other, more realistic obstacles exist) to Turkey’s accession to the EU is its refusal to officially recognize the Republic of Cyprus. What’s more, the unexpected discovery of a gas field in Eastern Mediterranean and the plans for its development by the Republic of Cyprus (most likely some time around 2020) have sparked yet another diplomatic conflict with the Republic of Cyprus, Greece and Israel, on one side, opposing Turkey and the Turkish Republic of Northern Cyprus (TRNC), on the other. As for the Kurdish conflict, one of the parties to it is the Turkish government which is waging an armed struggle with various Kurdish rebel groups. The death toll since the Kurdish Rebellion of 1984 has risen above 40,000, with the conflict itself being a series of escalations interchanging with periods of relative calm. Following the signing of the summer 2010 ceasefire agreement, in 2011 the conflict resumed. However, on March 22, 2013, Kurdish separatist leader Abdullah Öcalan, who’s been serving a life sentence in a Turkish prison for treason, called upon his followers to withdraw armed combatants from Turkish soil and to begin peace talks. And on March 24 the leader of the militant organization the Kurdistan Workers’ Party (PKK), which is fighting an armed struggle in South-Eastern Turkey for self-determination of ethnic Kurds and is listed as a terrorist organization by the UN, declared ceasefire. With the outbreak of fighting in Syria the Kurdish issue acquired a new dimension to it in view of the notable revival in the activity of the Kurdish population of Syria’s northern regions which share a border with Turkey. Unlike the Iraqi and Turkish Kurds, this population, living as a dispersed community, are seeking autonomy similar to what the Iraqi Kurdistan, also known as the Kurdistan Region of Iraq, has under the new Iraqi constitution, while de facto being a semiautonomous region of Iraq. The president of the Kurdistan Region of Iraq Masoud Barzani is actively involved in sponsoring self-determination for Kurds on the Syrian territory and has close connections with the Kurdish National Council. Turkey has, therefore, every reason to fear the emergence of a Syrian Kurdistan near its borders, in addition to the already existing Iraqi Kurdistan, and that would result

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in strengthening the PKK’s positions and influence, which threatens Turkey with further escalations in its conflict with its Kurdish population in the future.

The Arab Spring Since 2010 the conflict potential of the Middle East has been exacerbated by the events which were described by those actually involved as revolution, uprising, awakening1, yet came to be known beyond the Arab world as “the Arab Spring”. Starting in Tunisia and Egypt, it ended in Libya; the echo of the Arab Spring reaching as far as Yemen and Bahrain, yet it was in Syria that it changed its nature to a much less peaceful one, undergoing the complete transformation from a protest movement into a full-scale civil war, with the involvement of outside forces. The powerful social and political upsurge triggered off by the Arab Spring is at times reminiscent of the XX century national liberation movements in the Middle East. Today, just like it was then, the demands for changes, reforms, modernization and democratization of the public life became the main substance of the protest movement, which had primarily emerged as a result of social and economic problems. The situation was first of all aggravated by the global crisis out of which many developed industrial countries emerged in an even much worse situation than the developing ones. Among the consequences of this was the plummeting tourism at the Middle Eastern resorts. In Egypt, for example, this had led to rocketing unemployment and deterioration of the social and economic situation. The situation was further exacerbated by the globally rising food prices in January 2011, which was bound to have its effect on a region as explosive as the Middle East. Secondly, the archaic political structures existing in a number of countries, where the power had for decades been in the hands of “strong leaders” (Gaddafi) or generals (Mubarak) who had long outlived their era, was increasingly incompatible with the new economic 1 Naumkin V.V., Popov V.V., Kuznetsov V.A. (ed.) Blizhniy Vostok, Arabskoye probuzhdeniye i Rossia: shto dalshe? [Middle East, Arab Awakening and Russia: what next?]: Sbornik statey [Collection of papers). Мoscow: Institute of Oriental Studies of the Russian Academy of Sciences, 2012.

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realities emerging as a result of the neo-liberal reforms implemented throughout the past decade. But even those reforms had rather controversial consequences in most countries of the region: they did not help to uproot corruption, nor to make the local bureaucracy any more effective, leading instead to a rise in poverty as a result of the curtailment of many social programs. Thirdly, serious problems were brought about by the demographic situation characterized by rapid population growth. Despite its rather limited resources, the population of Egypt is growing at a rate of some 1.5 million people a year. In 1981, when Mubarak became president, the population of Egypt was 44 million people; by 2011 its population had reached 84.5 million people. That excessive population was not provided with jobs, adequate nutrition or other blessings of civilization. Nearly half of all young men aged under 25,  – which category accounts for a significant percentage of the total population in Egypt and many other countries of the Middle East and North Africa (65–70% of the population in Yemen, for example) – had not been able to find either their place in this life or an outlet for their energies. It was precisely this population group who, owing to certain age peculiarities and their predominantly emotional rather than rational perception of the world, lack of employment or any other opportunities, proved to be more susceptible to radical ideas than other population groups, whereas the government had failed to timely deal with the main sources of popular indignation: the rampant corruption in the top levels of the  society, the lack of jobs or effective nationwide social projects. As a result, the passion-driven wave, consisted primarily of the young people, swept the old rulers who had long ‘outsitted their term‘, off the throne in Tunisia, Egypt and Yemen. The role of religion as a factor in politics has come out in a new light in the Middle Eastern context. The “political Islam” mostly remained at the sidelines throughout the Arab Spring. This did not, however, mean that it had lost its influence, since in the Middle East the Islam always and invariably dominated a vast spiritual space. As it was, the deliberate policy of demonizing the Islamists had provided President Mubarak and a number of other authoritarian leaders with an excuse (”had it not been for us, the power would be seized by terrorists and fundamentalists”) justifying the political repressions in their countries, thus also making it easier for their regimes to receive support from abroad.

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In the meantime, the forces traditionally classified by the West as representatives of various branches of political Islam, and usually dubbed “Islamists”, are far from being a single organization. They include an endless variety of groups, movements and sects, whose members adhere to either radical or relatively moderate views, while remaining rather powerful and, at times, the only opposition to the ruling regimes all over the Middle East. It is not to be ruled out that those who are denoted as Islamists today will henceforth seek to implement policies of modernization, just like it is being done in Turkey by the Justice and Development Party (JDP). Or they may well follow the example of Hamas in Palestine or Hezbollah in Lebanon, implementing social programs aimed at improving the lives of ordinary Muslims. It is indicative that following Mubarak’s resignation, Egypt’s leading opposition party The Muslim Brotherhood called for a full transfer of power to a civilian government and the entrenchment of “guarantees of human rights and freedoms” in the country’s constitution. That is how, in their striving to adapt to the modernization processes taking place in the Egyptian society, The Muslim Brotherhood (just like JDP) has little difficulty in departing from the traditional religious terminology and switching to the common language of civil communication. This enhances their ability and the abilities of some other sects and groups representing “political Islam” to participate in the public life in their countries in the future as systemic political parties. The probability is also high that the “moderate Islamists” – at least, in Egypt – will make a strong emphasis on the ideas of pan-Arabism in their post-revolutionary rhetoric, since that would be necessary if domestic stability is to be achieved. The Arab Spring had upset the established architecture of the Middle Eastern society where Egypt served as a central element by virtue of its traditional influence throughout the Arab world, and its special relationship with the US, Israel and the Arab monarchies of the Persian Gulf. The transformation of the region as a result of the triumphant progress of the Arab Spring proceeded in the context of the Western efforts to build new relations with the “moderate Islamists” (the Muslim Brotherhood) in the hope of making them adopt democratic values, as well as of the unprecedented political activity on the part of the Neo-Ottoman Turkey, Saudi Arabia and Qatar. The latter two pursued their goal of restructuring the Arab East by way of replacing

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the secular regimes with religiously oriented ones that would become allies of the Sunni fundamentalists in their struggle against the Shi’a wave raised and directed, it is believed, by the traditional rival and foe of the Arab Sunni rulers – Iran. The downfall of the regimes that had for decades held power in Egypt, Tunisia, Yemen, Libya, and the probability of the Syrian regime being eventually forced to leave the political arena have contributed substantially to the uncertainty dominating the international relations in the Middle East, particularly in the context of revival of long-standing conflicts that had been somehow suppressed by the toppled secular regimes.

Syrian Civil War The armed conflict in Syria was an immediate result of the Arab Springs. It started as a political, economic and social protest, and the first demos in this country were aimed against rising food prices, as well as demanded to lift emergency rule and to put an end to the practice of torture in Syrian prisons. The first mass protest took place on January 26, 2011; March 15 was the Syrian Day of Rage which marked the beginning of the unceasing protest later escalating into a full-scale conflict. The key objective of the opposition’s protest and armed struggle were the resignation of the president Bashar al-Assad and an overthrow of his government. Whereas in the case of the Libyan crisis, the leading foreign power supporting the country’s opposition forces was France, in the case of Syria it was Turkey that had attempted to play a similar role, taking sides with the opposition and calling for Bashar al-Assad to step down, while trying to use the Syrian confrontation for its own benefit, to enhance its own international prestige, and aspiring to become a new heart of the political life of the Middle East. On August 23, 2011 the Syrian National Council, based in Turkey, was created as a coalition of anti-government forces, among them the Syrian branch of the Muslim Brotherhood,. This country has also allowed the Free Syrian Army to be headquartered on its territory – the formation of the FSA was announced on July 29, 2011. Needless to say, Ankara’s new foreign policy strategy was by no means conducive to settlement of the crisis in Syria, stabilization and development of climate of trust in the Middle East. It was moreover from the

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very start a rather risky one, in the end backfired in the summer 2013 on Turkey itself, making it the next in the series of Middle-Eastern revolutions. As civil unrest gathered momentum, Sunni fundamentalists began to play a key role in the Syrian war, with the initial conflict between the authorities and the armed opposition forces becoming increasingly sectarian in nature, considering that the power in Syria is mainly in the hands of Alawites (followers of a branch of Shi’a Islam who make up 10–12% of the Syrian population, while the majority are Sunni Muslims) from the al Assad clan. In Syria, where the total casualties of the civil war has since 2011 risen to 70,000, about a third of the March 2013 death toll of 6,000 were civilian deaths;1 with about a million persons internally displaced, and nearly 1 million are refugees who have fled mainly to Jordan, Lebanon, Turkey, Iraq and Egypt. This means that one in four citizens has either become internally displaced or a refugee. According to the UN estimates, over the period since January 2013 more than 400,000 Syrians had become refugees.2 The key singularity of the Syrian civil war is that, unlike it happens in most other armed conflicts, a prominent place in the ranks of the  opposition, rising in arms against the legitimate government and the army that has remained loyal to it, is held by transnational irregular paramilitary groups. Even though members of such do not attach much importance to each other’s nationality or ethnic origins, they nevertheless cannot be described as “classic” mercenaries. While ‘fighting for the sake of the cause, perpetrating terrorist attacks under the slogan of jihad and in search of martyrdom (self-sacrifice) in the name of faith, they consciously defy the international humanitarian law, striving to maximize the damage caused. The foreign intervention has also undergone certain modification in the case of Syria. Unlike it was in Iraq and Libya where a direct US–NATO military invasion took place, in Syria’s case the US and its European allies, joined by the Middle Eastern partners (Turkey, Saudi Arabia, Qatar), are avoiding direct military intervention. They have altogether chosen a different strategy here – that of a proxy 1 Syria’s humanitarian crisis worsening rapidly: Red Cross // Reuters. 04.04.2013 (www.reuters.com/article/2013/04/04/us-syria-crisis-icrc-idUSBRE9330O120130404). 2 Syria conflict: Refugees number a million, says UN // The BBC. 06.03.2013 (www.bbc.co.uk/”news/world-middle-east-21676542).

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war, providing in the framework of this strategy logistic and military support to the armed forces of the opposition to the Syrian president Bashar al-Assad, without getting involved themselves. The political interests of the  Syrian opposition – this chiefly goes for those forces within it which formed in November 2012 in the capital of Qatar, Doha, the National Coalition for Syrian Revolution and Opposition Forces  – are represented by the West and its partners as the Friends of Syria Group in the UN and in other international formats. And the Arab League 24th summit held at the end of March 2013 in Doha granted to the National Coalition, which is recognized by more than hundred countries as the legitimate representative of the Syrian people, Damascus’ seat at the summit. The Doha Declaration issued by the summit proclaimed the right of every member state to provide aid – including military support “to the Syrian people and the Free Syrian Army”.1 Other forms of purely indirect, yet quite effective involvement of foreign countries in the regime change in Syria are also observed. Thus, even though the EU resolution on prohibition on import soft weapons and munitions was extended on March 1, 2013 for a period of extra 3 months, the UK and French governments have already proposed to the Council of Europe that the embargo be lifted on Syria. The US has also promised additional aid to Syrian rebels in the amount $54 million, whereas the total amount of aid provided has by now reached nearly $500 million. It moreover became known in mid-March that some 300 Syrian rebels who had been trained at the US military bases by US instructors were dispatched to the Syrian territory from Jordan. The US and its European allies have not been able to reach unanimous condemnation of the al-Assad regime, as it was in the Libya’s case, in the UN Security Council because of the stance taken by Russia and China. It came out in the course of the Syrian civil war that the regime of Bashar al-Assad enjoys much wider popular support than was thought before. And this is not so much due to actual popular love for president al-Assad as to the fact that people fear possible alternative scenarios, they fear the change of Syria’s traditionally secular regime to a radical Islamic one, which poses not only a threat of viola1 Crown Prince and Arab Leaders Wrap up The Work of the Arab summit in its Twentyfourth Regular Session With Doha Declaration. Published by the website of the Ministry of Foreign Affairs of Saudi Arabia on 27.03.2013 (www.mofa.gov.sa/sites/mofaen/ServicesAndInformation/news/statements/Pages/ArticleID2013327141220927.aspx).

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tions of the minorities’ (Alawites, Christians, Armenians) civil rights, but also a threat of their actual physical destruction. The prospect of ‘Shariazation’ of Syria’s secular political and legal framework should the ruling regime be toppled is not as unthinkable as it may seem. The al-Nusra Front (designated as a terrorist organization by the US following the December 2012 attack and one of the key actors in the Syrian conflict) has repeatedly voiced its plans to build an Islamic state in Syria based on Salafi teachings. In the Middle East, where many processes are interconnected, conflicts are rarely confined to the boundaries of one country on whose territory they occur; usually invariably affecting the neighboring states or sometimes even the entire region. This was, for example, the case with the unrest in Syria and Iraq which had its impact on Jordan; the  latter being also affected by the situation on the West Bank of Jordan, where Israel refuses to offer concessions to Palestinians. The situation in Lebanon remains volatile following Israel’s military operation in July–August 2006 to disarm and destroy Hezbollah which has links with to Iran. It may see further escalation still due to the attempts to draw Lebanon into the domestic and sectarian unrest in Syria. The inter-tribal conflicts between the Sunnis supporting the Syrian opposition and the  Alawites defending Syria’s ruling regime are gathering momentum in Northern Lebanon. The Lebanese Hezbollah claims that it has the  support of Damascus, whereas the Lebanese Sunnis who are in sympathy with the Syrian opposition to al-Assad organize dispatch of new recruits into the Syrian rebel units across the Syrian-Lebanese border (just like Turkey is doing since it has de facto become a base for recruitment of new combatants for the rebel side in Syria). On March 18, 2013 the Syrian army bombed the rebel targets on the Lebanese territory in retaliation for the refusal of the Lebanese government to put an end to the practice of combatants dispatch across its border with Syria. In all fairness, Lebanon is most likely unable to control its borders or to eradicate Syrian rebels’ activities on its territory considering that its army is the weakest across the Middle East. Armed conflicts are gathering momentum in Mali and Niger in the traditionally troubled zone of Sahel in Africa, as a spillover of the Middle Eastern unrest. There are also other potential conflict zones where an acute domestic crisis may erupt at any moment. Such zones primarily include Iran, which has been living menaced by foreign intervention for several years now.

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Results and Future Outlook Should the Syrian regime be toppled, this may result in unpredictable and rather negative consequences. The ranks of radical Islamists will swell on account of immigrants from the Middle East – who oppose all possible legal forms or methods of struggle and are ready to use terror as an instrument in achieving their political goals. This will lead to an increase in arms and munition smuggling and to consolidation of the terrorist infrastructure. The spread of the radical political Islamic ideology continues. All of these represent serious challenges for Russia, which compels it to oppose vigorously the use of military force in this region. It is, however, becoming more and more difficult for the West and for Russia alike to control and exert influence on the conflicts in the  Middle East where the situation is changing rapidly. Iran is quickly approaching the creation of a nuclear bomb, which will only contribute to tensions, and not only on the part of Israel and the West, but also on the part of Iran’s neighbors – the Arabian monarchies – members of the Cooperation Council for the Arab States of the Gulf (GCC). The  relations between Israel and all of its Arab neighbors have deteriorated in comparison to the previous decade; the Palestinian conflict also gives little reason to hope for speedy resolution. Stability in Egypt which traditionally had a great political influence in the Middle East is open to question. And, finally, the intervention of outside forces, including non-state actors, into the domestic sectarian and political conflict in Syria leads to further exacerbation of the situation in the entire region. The international community has not been able to come up with an optimal strategy for solving conflicts raging in the Arab world so far. On the one hand, the West seems to believe that popular uprisings against corrupt tyrants prompted by economic hardships and the urgent necessity to modernize the state may not and shall never be brutally suppressed. For all that there is a big danger in that supporting the opponents of the ruling regimes, including by means of military force, may eventually produce results quite different from the  ones expected by the West: the power passes not into the hands of the democratic forces, but of radical Islamists who harbor the same and undiminished hostility towards their situational sponsors. It is no coincidence that Western politicians and experts more and more often

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describe the post-revolutionary developments in the said Arab countries as “Arab Winter”. The protests voiced by Russia against the regime changes in third countries reflect not only its own vision of what the world order should be like, namely, its adherence to the principle of use of forces solely with the authorization of the UN and of inadmissibility of interference into the internal affairs of sovereign states in the context of international law. Russia is primarily concerned with the negative consequences which the toppling of the old regimes inevitably entails. With regard to post-Gaddafi Libya, Afghanistan, Iraq and, most likely, Syria, Russia is most concerned about the general chaos, the disintegration of countries, the looting of the arsenals amassed by the overthrown regimes and the use of such with subversive and unlawful purposes, all resulting from the internalization of conflicts. Russia is equally concerned with the spread of radical Islam across the world and across Russia’s North Caucasus. The reason for this is that should the Islamic fundamentalists manage to achieve their goals in the Middle East, the wave of extremism is bound to reach southern Russia and its neighbors in Transcaucasia and Central Asia. Considering the immense unpopularity of the military campaigns in Iraq, Afghanistan and Libya and their generally negative result, the Western government will henceforth be way more cautious when considering the possibility of military engagement into conflicts caused by predominantly internal circumstances (conflict of interests, ethnic strife, religious rivalry, etc.). They will also cut down on the use of armed force compared to the 1990s, particularly if the conflict will require substantial on-the-ground presence and considerable financial allocations. And, at the same time, the trend for further militarization will persist in many Middle Eastern countries, which is not particularly conducive to greater stability in the region. The anti-Israeli rhetoric will not prevent the Gulf States from associating their key geopolitical risks with Iran and its nuclear program. And in this respect the interests of members of the Cooperation Council for the Arab States of the Gulf, despite their shared hostility towards Israel and the West, objectively overlap with the interests of the latter two. That is why, even if Iran will come under a military attack by the West, no serious opposition to this should be expected on the part of any of the Gulf States. Nor should anyone expect to see any practical, empirical manifestations of Islamic solidarity (even

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in the framework of the Organization of Islamic Cooperation), just as was the case during the western invasions of Iraq, the military intervention in Libya, and with the indirect US and European support for the anti-government forces in Syria. Time will tell whether the search for an acceptable and effective balance between inevitable progress toward change and the need to maintain stability in the Middle East will be successful. For the time being the Middle East continues to be immersed into yet another complex round of turbulence, and it is only to be hoped that the countries of this region will succeed in emerging from it, in which case the number of troubled states in the world will decrease in the foreseeable future.

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INTERNATIONAL SECURITY: PARADIGM SHIFT Aleksei G. Arbatov, Vladimir Z. Dvorkin, Andrey V. Zagorsky, Natalya I. Kalinina, Alexander N. Kalyadin, Sergey K. Oznobishchev, Pyotr V. Topychkanov, Tamara U. Farnasova The situation with international security is characterized by a fundamental change of traditional tendencies, models and military and political approaches in many aspects and along many lines. Until the end of the XXth century the international security agenda was dominated by the relations between the Soviet Union (Russia) and the US, their strategic nuclear confrontation, negotiations and agreements, today the  world’s increasingly polycentric order brings to the fore the relations between the US and China, between the new centers of power on the one side and the superpowers on the other, and in-between themselves, as well as a whole number of the new type of security threats. Military force continues to be used as a political instrument, yet its role is relatively on the wane compared to what it was during the Cold War era. The key factors of national power and influence now are economy, the implementation of innovation technologies, and “soft power”. Build-up of military strength no longer compensates for marginalization along the above lines. The military force itself of the leading countries and alliances is changing its character and quality due to implementation of innovative technologies and new warfare techniques. Whereas before the mutual nuclear deterrence of the US and the Soviet Union served as a basis for averting global and local wars between them and their allies in Europe and Asia, today the role of deterrence is undergoing significant changes, it is increasingly inefficient as a universal guarantee of security for the superpowers and their allies. The principal threat to the survival of the humankind today are local conflicts and their social consequences, proliferation of weapons of mass destruction and the danger of terrorists gaining access to such, and not a nuclear war between superpowers.

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At the diplomatic level of averting nuclear war the bilateral nuclear disengagement model (Russia and the US) will have to be expanded on account of the emergence of third nuclear weapon states, agreements on cutting-edge anti-missile systems, conventional strategic arms (including aerospace weapons), as well as inclusion of non-strategic nuclear systems onto the negotiations agenda. In the absence of the above, further reduction of Russia’s and the US nuclear arsenals is hardly possible. There is also the growing need for international peacemaking efforts. The latter are, however, changing their format, taking the form of peace enforcement and military intervention for protection of civilians. This requires new norms and mechanisms of cross-border use of force to be developed to prevent international lawlessness, double standards, and actions beyond the UN legal framework. Russian and international security alike will in the foreseeable future depend on the extent to which the government, the research centers and the civil society in Russia and other countries realize the inevitability of changes and will succeed in jointly finding practical solutions to emerging problems.

The International Security Agenda Until the end of the XXth century the international security agenda was dominated by the relations between the Soviet Union (Russia) and the US, their strategic nuclear confrontation,, negotiations and agreements. Today it is the relations between the US and China, between the newly emerged regional powers and between them and the superpowers, and the new type of threats to security that are coming to the  forefront of the global politics. Contrary to the perception quite popular among Russia’s military political elite, by all objective criteria the threat of a major war is smaller today and henceforth than ever before in the contemporary history. The number of international conflicts and the scale of their devastating effect have shown a strong tendency for decrease over the past couple of decades that have elapsed since the end of the Cold War, compared to just any 20-year span throughout its course (the period between the late 1940s and the 1980s).

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Suffice it to remember the two Korean wars, the two wars in Indochina, the four wars in the Middle East, the war in Afghanistan, the Indo-Pakistani War and the Iran-Iraq War, which all broke out during that period, to say nothing of the multitude of border and civil conflicts in Asia, Africa and Latin America which not infrequently involve foreign intervention. According to various estimates, at least 20 million had perished in a variety of armed conflicts breaking out during the Cold War. The US alone, being most sensitive about casualties among military personnel, had lost some 120,000 lives over that period – about as many as it did in World War I in 1914–1918. The superpowers have lived through a series of crises which, since they occurred within the bipolar system of relations, threatened to result in a global war. That disaster was fortunately altogether avoided. Many believe that this fact manifested the effectiveness of nuclear deterrence, others see this as evidence of ineffectiveness of nuclear deterrence, and as for the happy ending, especially of the Cuban missile crisis of 1962, they attribute that to sheer luck. Since the early 1990s and to date only two wars waged by the US and their allies against Iraq, as well as the civil wars with the external interventions into Yugoslavia, Tajikistan. Afghanistan and Libya, can be compared to those events in terms of damage and casualties. For all that, in the past couple of decades, unlike it was during the Cold War, the great powers not only had no record of entering, even indirectly, into armed conflicts with each other (like it was in Korea, Indochina, the Middle East), but also refrained from providing aid to either state or non-state combat formations fighting against other great powers. There has not been a single crisis since 1991 which would have brought the two superpowers to the brink of an armed confrontation. Today, even in a situation of disagreement with each other’s actions, it never seems to occur to anyone to drive the world to brink of a global war or to threaten to use nuclear weapons as a protest against the US military in Iraq, the NATO military campaign in Libya, Russia’s military involvement in Georgia or even over Israel’s or US strikes against Iran. During the Cold War the world was living under a constant threat of a global nuclear catastrophe which could result from a potential armed confrontation between the East and the West – that had on several occasions been barely averted, with the situation getting too close to the dangerous line in the days of the Cuban missile crisis of October 1962. In that context regional and local conflicts were then perceived as

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inevitable and somewhat fringe manifestations of the global rivalry between the superpowers. They were deemed to be a kind of “lesser evil” as long as a large-scale armed confrontation between the Soviet Union and the US, for which both camps were actively preparing, was avoided. Once the Cold War was over, the major universal threat has faded into insignificance in the global public perception, yet not to be replaced with universal harmony and peace. Contrary to what was believed and hoped for during the euphoria in the late 1980s-early 1990s, to the front of international security came new complex and multidimensional threats and challenges: ethnic and religious conflicts, proliferation of weapons of mass destruction and of their carriers, international terrorism, etc. The ideological opposition between capitalism and communism in all its possible forms was replaced with the clashes in-between nationalistic forces and religions. The sense of danger is particularly prevalent in Russia because the collapse of the Soviet Union coincided with the transition from the bipolar to the polycentric world in which Russia no longer holds one of the leading positions in terms of the majority of criteria of national might (apart from the nuclear arsenal, the size of the territory and the natural reserves). The probability of armed conflicts or wars between the superpowers and their military political alliances is lower today than ever before, and that ‘ever’ refers not only to the XXth century, but equally to the previous centuries retrospectively. The economic, information and social interdependence of the leading stakeholders in the global politics, which is constantly increasing in step with the globalization progresses is precisely the factor which will make damage in a conflict like this incomparable to any political or other gains which could be hoped to be achieved through the use of military force (let alone, nuclear weapons) against each other. There is also ongoing competition, with wide employment of indirect means and local conflicts, for economic, political and military influence across the post-Soviet territory, in a number of regions (particularly, the ones rich in natural resources) of Asia, Africa and Latin America. There are also attempts to gain military and technical advantages with the purpose of bringing political and psychological pressure on other countries (ABM, conventional precision weapons, this includes suborbital and hypersonic weapons).

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Speaking of conflicts in which superpowers may get entangled, the greatest danger is posed by the probability of confrontation between China and the US because of Taiwan. Quite probable is the escalation of the South China Sea crisis, in which the US will take the side of China’s adversaries. On the whole, the rivalry between the US and China over domination in Asia Pacific is now coming to the front of the global military and political rivalry. Nonetheless, due to the immense financial and economic and trade interdependence between the two powers, the probability of a direct armed conflict between them is quite low compared to what it was during the Cold War, particularly in the 1950s.1 At that, despite the menace of a war between the superpowers being extremely low, a potential disruption of their cooperation in countering common threats to their security (terrorism, proliferation of weapons of mass destruction and of its carriers, local conflicts) is quite possible, the result of this being incapability to cope with new challenges and threats and the growing chaos in the global politics and economy. Slightly more probable are armed conflicts between big regional powers: India and Pakistan, Israel (whether in alliance with the US or not) and Iran, North Korea and South Korea. The danger in all three cases is aggravated by the probability of their escalation to the point of using nuclear weapons. The confrontation in South Asia represents the biggest danger in this respect.2 The major threat to international stability will henceforth emanate from outbreaks of cross-border, or ‘mixed’ violence.3 This means civil conflicts on ethnic, religious or political grounds in sensitive countries, into which other countries or alliances intervene. The purpose of such intervention can be both to provide aid to the rebels fighting against the national government (Libya, Syria) and to provide aid to the national government with suppressing armed opposition (Iraq, Afghanistan, Bahrain). It is not infrequent that behind local conflicting parties 1 For more see: Mikheyev V.V. Kitay: ugrozy bezopasnosti [China: threats to security]. In: A.G. Arbatov, V.Z. Dvorkin, S.K. Oznobischev (ed.) Perspektivy uchastiya Kitaya v ogranichenii yadernykh vooruzheniy [Prospects of China’s participation in nuclear arms limitations ]. Мoscow: IMEMO RAN, 2012. P. 8–14. 2 For more about the destabilization threat in South Asia, see: A.G. Arbatov, V.Z.  Dvorkin, S.K. Oznobischev (Eds.) Perspektivy prisoyedineniya Indii I Pakistana k ogranicheniyu yadernykh vooruzheniy [Prospects of India’s and Pakistan’s accession to agreements on nuclear arms limitation]. Мoscow: IMEMO RAN, 2012. 3 See: Zagorsky A. “Peacekeeping Doctrines and Practice”. In: A.A. Dynkin and N.I. Ivanova (Eds.).Russia in a Polycentric World. Moscow: Ves Mir Publishers, 2012. P. 75–83.

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stand large nations and corporations vying for economic and political influence and gaining profit from supplying mercenaties, armaments and military equipment.

Military Force Military force continues to be used as a political instrument, yet its role is diminishing (at least, in comparison with the Cold War era). The military potential of the world’s leading powers and alliances is undergoing a fundamental change of its quality. Military force continues to be used as a political instrument, yet in the context of globalization and the countries’ growing economic, humanitarian and information interdependence its role has begun to wane in the early XXIst century in comparison to the significance of other (“soft”) factors of power and national security. The latter include the financial and economic potential and diversification of foreign economic ties, the innovation-oriented dynamics within the industry and the advancement of information technologies, investment activity abroad, authority in international, economic and political organizations and institutions. That said, it has to be granted that in the recent years hard military power again began to play a relatively noticeable role as an instrument of both direct and indirect (via political leverage) influence on other countries. Nonetheless, hard military force, while still kept in the arsenal of political instruments, is incapable of making up for the lack of ‘soft’ power as a factor of international prestige and influence. As far as the military sphere proper is concerned, the probability of a large-scale war, as well as the role of traditional large armed forces and their uses, will be of diminishing importance. The key role is now with the new type of selective military operations, which depend not on the total size of the armies, total strength of armor and fire, the size of the arsenals of military equipment, but on the perfection of weapons, strategic communications, the quality of both the command and personnel for handling new challenges. The strength of the armed forces, their munition and equipment, the total firepower traditionally determined the efficiency of a country’s or an alliance’s military potential and their chances to win the war. Today, however, and apparently in the foreseeable future, effec-

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tive military power will be not in the form of large armies and fleets, but of a different quality, primarily of the information-network-centric type. This envisages consistent integration of intelligence and other information systems, remote means of destruction with the help of precision conventional weapons and automatic management systems which allow rapid (i.e. without passing information up the command line or an order to attack down to the executives) attack on the enemy before the latter discovers it has been detected. It was precisely these means and methods of warfare that had secured for the US and their allies the speedy victory in the wars in Afghanistan (2001) and Iraq (2003). The development of a new generation of armed force largely depends on the countries’ financial and economic potential, the innovation dynamics of their industry, the progress of information technologies, the quality of military personnel, the efficiency of internaional alliances. With regard to use of armed force, the role of short-term local military campaigns and long-range non-nuclear surgical strikes (“non-contact warfare”) will continue to grow, as will the role of highly-trained mobile military units and formations, well-equipped for the special operations. It comprises the use of political leverage to bring pressure on a specific state, deprivation of such of crucial economic or military assets (including nuclear industry or nuclear weapons), introduction of sanctions, interruption of communications and blockade. Peace enforcement operations and efforts in humanitarian crises prevention will be pursued. With the forecast spread of international terrorism and transnational crime, the armed forces and operations aimed at combating these threats will continue to expand. A special line of peacebuilding activity will be application of force to prevent the proliferation of nuclear weapons and access to it for terrorists.

Military and political confrontation and economic relations Whereas before military and political confrontation suggested the prevalent significance of economic confrontation, today military and political rivalry is paradoxically combined with strong economic interdependence (US-China, China-Japan, Russia–ЕU/NATO). Russia-NATO. The EU countries continue to be Russia’s chief trading partners. They are subject to strong energy dependency on supplies of

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Russian hydrocarbons (40% of imported gas, 30% of oil and coal), while 40% of Russia’s revenue into the federal budget proceed from these supplies. The EU accounts for an exceptionally high share in Russia’s foreign trade turnout (50%) and in the investments into Russia’s economy (80%), whereas the EU countries receive 60% of Russia’s foreign investments. No pivot towards the Eurasian Union and further toward Asia Pacific will be able to reduce this interdependence in the foreseeable future. Nevertheless, Russia’s foreign policy continues to be, and in the recent years increasingly so, oriented towards confrontation with NATO of which 22 of the 28 EU countries are members.1 Russia’s military priorities largely contradict its foreign economic priorities. At that, today’s military reform and its novelties not only fail to eliminate such contradiction, but in many aspects exacerbate it further still. Russia’s New Military Doctrine adopted in February 2010 proclaims that the key sources of external threats for Russia are the US and its allies, whereas “proliferation of weapons of mass destruction, missiles and missile technologies” and the “spread of international terrorism”, which all require to some extent or other cooperation with the West, are ranked way below on the list, on the sixth and the tenth position respectively).2 With regard to the nature of possible future wars the Doctrine states the following: “Military actions will be typified by the increasing significance of precision, electromagnetic, laser, and infrasound weaponry, computer-controlled systems, drones and autonomous maritime craft, and guided robotized models of arms and military equipment.”3 It is quite clear that the reference here is not to the global fight with terrorism or with the fundamentalist regimes, but to rivalry with the US and their allies. The ambitious plans regarding preparations for aerospace warfare are put forth in a situation when the Russian armed forces have proved 1 Dvorkin V.Z. Rossiya I NATO posle “kholodnoy voyny” [Russia and NATO in the aftermath of the Cold War]. In: A.G. Arbatov, V.Z. Dvorkin, S.K. Oznobischev (Eds.) Rossiya I dilemmy yadernogo razoruzheniya [Russia and the nuclear disarmament dilemmas]. Мoscow: IMEMO RAN, 2012. P. 111. 2 Ukaz Prezidenta Rossiyskoy Federatsii ot 5 fevralya 2010 g. No 146 “O voyennoy doktrinye Rossiyskoy Federatsii [Decree No 146 of the President of the Russian Federation dated February 5, 2010 “On the MIlitary Doctrine of the Russian Federation”]. Rossiyskaya Gazeta. February 10, 2010. English translation: http://carnegieendowment.org/ files/2010russia_military_doctrine.pdf/. 3 Ibidem.

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to be appallingly ill-prepared and ill-equipped to tackle such relatively minor conflicts on their own territory and in its immediate neighborhood as the two Chechen wars of the 1990s and the 2008 war in Georgia. There is a lack of means and resources for participation in basic peacekeeping operations (which was manifested during the 2010 crisis in Kyrgyzstan) and for fighting piracy (in the Gulf of Aden). There are no real political grounds to believe that the nature of military threats will see any drastic change in the next 20 years, nor do military theorists offer any arguments to support such assumption. Such local campaigns will in all probability become increasingly frequent and numerous. In accordance with the new Doctrine and the current practical reform, the foreign policy and the military organization priorities include, first of all, nuclear deterrence with a relatively high level of forces, providing for application of all forms of strategic nuclear forces and targeting primarily the US and NATO. The second is aerospace defense from massive precision non-nuclear strikes by the US and their allies. This Russian defense system deployed in 2011 is quite understandably hardly compatible with either a joint Russian–US–NATO ABC system discussed earlier for protection against missile attacks by irresponsible regimes, or with the demand for guarantees that NATO’s ABM system will not be aimed at undermining Russia’s potential of nuclear deterrence in respect of this organization. The third is preparation for large-scale regional conflicts with NATO’s involvement near Russia’s and the CIS northern, western and south-western borders: the Western and Southern Joint Strategic Commands have already deployed 30 land force brigades and three military equipment storage and repair base, which makes almost 50% of the total number of deployed brigades and three of the four fleets (see Fig. 19.1). Meanwhile, just like in Russia, in the US the strategic nuclear forces have undergone a 5- or 6-fold reduction over the past 20 years, while the short-range nuclear forces have been reduced by a factor of 15–20 (the Russian forces were reduced by a factor of 10). Russia’s General Purpose Forces (GPF) are significantly behind NATO’s total forces with regard to all categories of military personnel and the main types of armaments and military equipment. This is, however, not a result of NATO’s military power build-up, but rather a result of a considerable weakening of the Russia’s GPF. In the 1990s the reason behind this was the general economic crisis, while in the last

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Figure 19.1. Russia’s Joint Strategic Commands JSC “Zapad” (“West”) 17 brigades 2 WMESRBs 750 tanks 440 aircraft 61 ships and submarines JSC “Yug” (“South”) 13 brigades 1 WMESRB 400 tanks 40 aircraft 17 ships and submarines

JSC “Tsentr” (“Center”) 20 brigades 5 WMESRBs 400 tanks 110 aircraft JSC “Vostok” (“East”) 14 brigades 7 WMESRBs 600 tanks 330 aircraft 31 ships and submarines

Sources: A.G Arbatov, V.Z. Dvorkin. “Novaya voyennaya reforma Rossii.” [Russia’s New Defense Reform]. Rabochiye materialy. 2011, No 2, Мoscow: Moskovskiy tsentr Karnegi [Moscow Carnegie Center], p. 9; “Voyennaya reforma 2008–2020: tsifry i fakty.” [Military Reform of 2008–2020: Facts and Figures]. Indeks bezopasnosti, 2011. No 1(96). p. 33–49; M.S. Barabanov (ed.) Novaya armiya Rossii [Russia’s New Army]. Мoscow: Tsentr analiza styrategiy I tekhnologiy, [Center for Analysis of Strategies and Technologies], 2010. Note: JSC – Joint Strategic Command; WMESRB – Weapons and Military Equipment Storage and Repair Base.

decade the reason was the mistakes in the military policies and reforms in Russia, despite the 9-fold increase in defense spending in 2000– 2012 (from 190 billion up to 1,860 billion roubles).1 As for NATO, its armed forces have undergone moderate modernization over this period. Nevertheless, the current 28 NATO member states have 40% less manpower, 35% smaller ground forces, 30% smaller naval forces and a 40% smaller combat air force than the 16 member states in the early 1990s. The US troops deployed on the continent have over this period have been subjected to a three-fold reduction of numbers, and some specific units (like ground forces) by a factor of 10. 1 Pozharov A. “Ekonomika Rossii v nachale veka” [Russia’s Economy at the Turn of the Century]. Voyenno-promyshlennyi kurier. 9–15 January 2013, No 1, p. 2–6.

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If only NATO really planned to attack Russia – which is widely claimed to be the case by the massive propaganda campaign launched in the Russian media in the recent years, – such reduction would have hardly been possible, let alone the fact that the US and its NATO allies are planning further reduction of their respective defense spending and reduction in the armed forces in the coming years, due to the economic crisis. That is why the increasing emphasis of Russia’s defense policy on military standoff with the US and NATO appears unfounded, even though there is no doubt as to the need for Russia to maintain its nuclear deterrence, aerospace defense and general-purpose forces potential, this includes the Western strategic direction, at the level of reasonable sufficiency. US–China. The situation between the US (together with its main ally in the Far East – Japan) and China relations is no less controversial. The bilateral trade turnover, the financial interdependence and the rate of mutual investments in the case of these two countries are higher than anywhere else in the world (totaling more than USD 760 billion a year). China’s foreign currency reserves have reached a total of USD 3.2  trillion, chiefly on account of the surplus in its trade balance with the US, meaning that the resilience of the US and the global fiscal systems to a great extent depends on China. At the same time, there is a growing tension and military confrontation between these two countries. The recent years have shown a clear tendency on the part of the US to shift the focus of nuclear deterrence to the Pacific, with China being the primary target (8 of the 14 Ohio/ Trident-class ballistic missile submarines (SSBN) are deployed in the Pacific Ocean). Washington makes an infinitely greater emphasis on the deployment of ABM in this zone than in the Euroatlantic (90% of information means and attack anti-missile munition are deployed in Asia Pacific)1 and on the development and deployment of strategic precision-guided systems, including programs in the framework of the  Prompt Global Strike concept. Moreover, radars and anti-missile interceptors are deployed on the territories and by the naval forces of the US allies and partners, with whom joint work in technological 1 Two of the three existing large stationary radars of the missile warning system (MWS), two of the four mobile radar stations, all 30 (in the future – 44) strategic groundbased interceptors (GBI0 cover the azimuths of possible attacks from Asia-Pacific; 16 from the 23 US Navy ships equipped with IGIS are deployed there.

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development is underway. These allies and partners are Japan, South Korea, Taiwan, Australia and the Philippines (in the case of the latter two such cooperation is contemplated so far).1 Washington’s new decision to modify its ABM program in Europe has cancelled the fourth stage of the latter, which was Moscow’s biggest concern (deployment of the Standard Missile 3 IIB interceptor in Poland), yet made the US add to the number of its strategic GBI and radars in the Pacific.2 The existing and the future US systems of precision-guided conventional munition, primarily the long ranged submarine-launched cruise missiles (SLCM) Tomahawk in a conventional variant, will be playing an ever growing role.3 Almost 70% of these munitions will be deployed in the Pacific. Many experts believe that it is for this theater that systems capable of carrying precision-guided conventional military load to any remote part of the globe within an hour are being developed in the framework of the Prompt Global Strike programme; currently only Intercontinental Ballistic Missile (ICBM) and submarines, and only in its nuclear variant (SLBM), have the same capability. These are expected to enter into service after 2020.4 Increasing tensions between the two nations can be forecast not only with regard to Taiwan, but also with regard to the dominant role in Western Pacific. The fast growing China considers it as a natural zone of its vital interests, both economic and military political. And the US is resolved not to yield its present military dominance in this region, what with its vast material and political investments and obligation to ensure the security of its allies and partners in the region. 1 Romashkina N.I., Topychkanov P.V. “Regionalnyie protivoraketnyie programmy (India, Izrail, Yaponiya, Yuzhnaya Koreya” [Regional Missile Defense Programs (India, Israel, Japan, South Korea)]. In: A.G. Arbatov, V.Z. Dvorkin (eds.). Protivoraketnaya oborona: protivostoyaniye ili sotrudnichestvo? [Missile Defense: confrontation or cooperation?]. / Moskovskiy tsentr Karnegi [Moscow Carnegie Center. Мoscow: ROSSPEN, 2012, p. 284–293. 2 Missile Defense Announcement As Delivered by Secretary of Defense Chuck Hagel, The Pentagon, Friday, 2013, March 15 // US Department of Defense (www. defense.gov/speeches/speech.aspx?speechid=1759). 3 The US Navy has 59 destroyers and 22 cruisers. By 2020 the total maximum number of SLCM on the US Navy submarines may reach 1,600, and 4,700 missiles on surface ships (see: V.Ye. Myasnikov. “Vozdushno-kosmicheskaya ugroza Rossii” [Aerospace Threat to Russia]. In: A. G. Arbatov, V.Z. Dvorkin (Eds.) Protivoraketnaya oborona: protivostoyaniye ili sotrudnichestvo? P. 130). 4 Grossman E.M. Pentagon Readies Competition for «Global-Strike» Weapon // Global Security Newswire. 2011. June 24.

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Contesting the US military domination in this part of the world, China invests vast resources into development of the naval component of the strategic triad and into the general development of naval forces (including aircraft carriers) and of the coastal combat systems designed to keep US Navy far away from China’s shores.1 The plan is to gradually achieve naval superiority first in the coastal seas, and then in the Sea of Okhotsk and the Sea of Japan, and later across the ocean spaces of the Mariana Islands, the Caroline Islands, New Guinea, etc. – all the way to the Hawaii. It is therefore proposed to divide the Pacific Ocean between China and the US. China’s ambitious naval plans also envisage the deployment of naval bases and forces in the Indian Ocean to control the communications and energy supplies from the Persian Gulf and Africa. The political and military situation in the Western Pacific is further complicated due to the intertwining of strategic defensive and offensive non-nuclear systems and combat operations scenarios. China makes a great emphasis on intermediate-range ballistic missiles ((IRBM) and short-range attack missiles (SRBM) with conventional precision-guided heads suitable for striking the US Navy and the US military bases on the territory of its allies.2 According to different sources, 300–500 of such devices have already been deployed. China has achieved notable progress on the path of military technical development, its IRBMs are equipped with supersonic gliding manageable heads. To provide their pointing China implements wide-scale programs in development of orbital, stratosphere and aerial intelligence and pointing systems.3 The United States and their allies in their turn deploy their land and sea-based ABMs, including those able to counter China’s attacks on ships and grount units using precision-guided conventional munitions, in Taiwan, Japan, South Korea and the Philippines. This tangle of military technical and strategic factors and contradictions greatly hinders all efforts related to arms limitation and agreements on confidence-building measures in the region and, in certain areas, at the global level. 1 Shpyndov A.V., Tebin N.P. Podnebesnaya vystavliayet rubezhi v okeanye [The Celestial Empire Delimits the Ocean]. Nezavisimoye Voyennoye Obozreniye. November 4–10, 2011, No 42, p. 8–9. 2 Wu Riqiang. “Survivability of China’s sea-Based Nuclear Forces.” Science & Global Security. 2011. May-August, Vol. 19, No. 2, p. 91–120. 3 Ibid.

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It is at the same time beyond all doubt that the economic interdependence which is a reality for the superpowers and the alliances which they lead, serves as a major stabilizing factor in the international relations of the XXIst century, even though as such it generates quite a few economic contradictions (such as the problem of the Energy Package in the EU-Russia relations or of the yen exchange rate in the US-China relations). At the age of globalization, the existing economic interdependence between Russia and the EU, as well as between China, the US, Japan, South Korea and Taiwan, reduces the probability of an armed conflict between them to the minimum, since the mutual damage resulting from such confrontation would have been infinitely greater than any possible military benefit, while the risk of conflict escalation is absolutely unacceptable for just any country. This new reality, unlike it was at the time of the Cold War, relegates military balances away from the spotlight back to the sidelines of the current relations. Build-up of armaments and development of new types and modifications of such in a number of aspects are often expected to strengthen the political positions of the parties (including them becoming a background for their economic relations), and to compensate for the lag of specific countries in non-military parameters of national might or, else, are driven by the motives pertaining to domestic policy.

Nuclear Weapons In the past, mutual nuclear deterrence of the USSR and the USA was the basis for prevention of global and local wars between the USSR, the USA and their allies in Europe and Asia;as well as for nuclear weapon limitation treaties. At present, the significance and the role of deterrence are fundamentally changing. The nuclear stockpile has been numerically reduced by an order of magnitude over the two decades following the end of the Cold War pursuant to agreements between Russia and the USA and due to unilateral steps taken by those powers, as well as the UK and France. However, the number of countries in possession of nuclear weapons has grown from seven to nine (apart from the “nuclear five” and Israel, nuclear weapons were created by India, Pakistan, North Korea and abandoned by the South Africa, cf. fig. 19.2.)

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Figure 19.2. USSR/Russia and the US: reduction of nuclear weapons (warheads) 60,000 40,000 20,000 0 1991 1993 1995 1997 1999 2001 2003 US

USSR/Russia

2005

2007

2009

2011

Total

Sources: Norris R.S., Kristensen H.M. Global Nuclear Weapons Inventories, 1945–2010 // Bulletin of the Atomic Scientists. 2010. No 66. P. 81–82; Norris R.S., Kristensen H.M. Russian Nuclear Forces, 2011 // Bulletin of the Atomic Scientists. 2011. No 67. P. 67; Norris R.S., Kristensen H.M. Russian Nuclear Forces, 2012 // Bulletin of the Atomic Scientists. 2012. No 68. P. 88; Norris R.S., Kristensen H.M. US Nuclear Forces, 2011 // Bulletin of the Atomic Scientists. 2011. No 67. P. 66; Norris R.S., Kristensen H.M. US Nuclear Forces, 2012 // Bulletin of the Atomic Scientists. 2012. No 68. P. 85.

The role of nuclear deterrence in ensuring security for the great powers in particular and the international community generally in the contemporary context is increasingly controversial. Firstly, deterrence remains efficient in addressing the least likely and the most far-fetched threats, such as an intentional conventional-weapon attack by great powers or their alliances. However flagrant it may appear to goodnatured intellectuals in Russia or elsewhere, scenarios of this kind are routinely entertained in the military school of thought of Russia’s strategic community and indeed targeted by nuclear deterrence. Yet, nuclear deterrence is utterly useless in addressing new, real threats to security, such as nuclear proliferation, international terrorism, ethnic or religious conflicts and their consequences, spread of drugs, crossborder crime, illegal immigration, and others. Secondly, the persistence of nuclear deterrence principles generally and, in particular, the principle of mutual nuclear deterrence, in the relations between Russia and the USA significantly precludes cooperation of the great powers in responding to new challenges and threats, as graphicall