Odd man out

Energy wealth aside, Russia's membership in the G8 raises some hackles.

Russia could hardly have chosen a more fitting venue to showcase its economic and political resurgence. In the 1990s, the Constantine Palace, outside St. Petersburg, was a neglected relic of the czarist era, its 200 hectares of land a virtual swamp and its ornate buildings on the verge of collapse. At that time, Russia itself wasn't in much better shape: its economy was in shambles and its global influence was on the wane. But when Group of Eight leaders, including Canadian Prime Minister Stephen Harper, gathered for July's summit at Constantine, its fortunes had changed dramatically. A US$280-million renovation, completed in 2003, restored the imperial grandeur of the Italian baroque palace and its opulent gardens overlooking the windy Gulf of Finland.

Russia's own transformation since the chaos of the 1990s has been equally impressive. The six years since President Vladimir Putin came to power have marked the longest period of political stability since the collapse of the Soviet Union in 1991. Soaring energy prices, meanwhile, have fuelled rapid economic growth and increased Russia's global influence as Europe's main source of gas and the world's second-largest oil exporter, after Saudi Arabia.

For Putin and his supporters, the St. Petersburg summit was more than another gathering of powerful leaders. It was a chance to highlight Russia's renewed claim to a place among the world's major players. “For Russia, this was one of those watershed moments,” said a senior western diplomat who attended the summit. “Putin was sitting at the table with other G8 leaders not as a junior partner but as an equal.” Dmitry Peskov, a senior Kremlin spokesman, argued the summit had laid to rest any doubts about Russia's place in the G8. “We've proven that we belong,” he said.

Kremlin assurances aside, Russia's membership in the G8, and its presidency of the group for the first time, this year, remains contentious. Putin's critics say the state of Russian democracy and underlying economic problems make a mockery of the values the G8 is supposed to stand for and are straining the group's credibility. “Russia's presidency of this club could have become a sort of triumph for our country…a sign of recognition by the world that Russia has become a natural, normal and healthy member of the world community. Unfortunately, this has not come to pass,” says Andrei Illarionov, a former Kremlin economic adviser who resigned in protest over stalled reforms.

Intended as a forum for the leaders of the world's wealthiest democracies to meet outside the formality of international organizations, the G7 was founded by Britain, France, Germany, Italy, Japan and the United States, in 1975, and joined by Canada a year later. Russia became a member, in 1998, although it continues to be excluded from some important talks on finance and economics. The invitation to join reflected Russia's continued clout thanks to its Soviet-era nuclear arsenal and global influence, and was seen as encouragement to continue on the path of political and economic reform. The same year, the ruble collapsed and Russia defaulted on more than US$40 billion in domestic loans.

The eight years since have seen a remarkable turnaround in the Russian economy. With oil prices rocketing to more than US$75 per barrel, Russian oil revenues–which stood at nearly US$90 billion in 2004–have soared. The booming economy is luring foreign investors at a growing pace. Last year Russia took in US$14.6 billion in foreign direct investment–more than 10 times as much as 2003. State coffers are bulging with cash; foreign reserves now stand at a record US$262.9 billion, and Russia has announced that it will pay off its US$22-billion debt to the Paris Club of creditor nations, by Aug. 21. Even the much-maligned ruble is staging a comeback: on July 1, Russia lifted the last remaining restrictions on the currency, clearing the way for it to become fully convertible.

Russian companies are also on a roll, with oil and gas firms leading the charge. On July 17, state-run oil firm Rosneft pulled off the largest initial public offering in Russian history, raising US$10.4 billion with a share price of US$7.55. Meanwhile, state-owned Gazprom is cementing its place among the world's biggest companies, with profits last year of US$11.8 billion and promises from executives that the gas giant's market capitalization will exceed US$1 trillion in the next 10 to 15 years. Already the provider of more than a quarter of Europe's gas, Gazprom is now looking to gain a foothold in North America with, among other projects, a prospective deal with Petro-Canada to ship liquefied natural gas (LNG) to a processing station in Quebec. Harper and Putin praised the LNG deal during a bilateral meeting at the G8 summit, with the Russian president saying the two companies were “on the threshold of implementing quite important projects.”

And yet, despite the economic growth, the energy wealth and the powerhouse companies, Russia's place at the table with other G8 economies is easily disputable, says Peter Westin, chief economist with the MDM investment bank in Moscow. “There has been a lot of progress, but Russia is still so far behind on all economic variables that it just doesn't fit the profile for a G8 country,” he says. While growing, the Russian economy was still only the 14th largest in the world last year, with a smaller gross domestic product than many non-G8 members, including China, India and Brazil. In GDP per capita, Russia ranked 62nd, just below Malaysia and Botswana.

Russia's economy is concentrated in a few large sectors and a handful of enormous firms. Small- and medium-sized businesses account for only 13% of Russia's GDP, compared with 30-50% in more developed countries. Russia also remains the largest economy outside the 149-member World Trade Organization. A flurry of talks ahead of the G8 summit with officials from the United States, the final country whose support Russia needs to join the WTO, failed to secure a deal. Perhaps more importantly, says economist Westin, Russian business remains unpredictable, rife with corruption and beholden to political interests. “It's still a jungle out there,” he says.

Many of those concerns were played out when Russia kicked off its G8 presidency by cutting off gas supplies to Ukraine–and indirectly to western Europe–on Jan. 1. While Russia claimed the incident was nothing more than a dispute over gas prices, Ukraine accused the Kremlin of using its hold over energy resources to punish the country for its pro-western course after the Orange Revolution that brought President Viktor Yushchenko to power, in 2005. A long-term gas-supply agreement was eventually reached. But the murkiness of the deal–involving a secretive firm called RosUkrEnergo that will act as a middleman in gas sales–raised serious concerns about transparency.

July's successful Rosneft IPO was also not without controversy. It only went ahead after a court in London dismissed an attempt by Russian oil firm Yukos–whose former boss Mikhail Khodorkovsky is serving time in a Siberian prison camp on fraud and tax-evasion convictions–to block the offering. Rosneft acquired Yukos's main production unit, in 2004, after it was seized by the government. Interest in the IPO was also dominated by strategic investors who may have been looking to curry favour with the Kremlin, with half the shares going to only four buyers: BP, Chinese state oil firm CNPC, Petronas of Malaysia and a mystery fourth investor rumoured to be Gazprombank, the banking arm of the Russian gas giant.

Even if an argument can be made for Russia's place in the G8 as an energy superpower, it's sorely lacking in terms of democratic credentials, say critics like chess champion-turned-opposition politician Garry Kasparov. At a conference before the G8 summit, Kasparov and other opposition figures decried what they say has been a steady rollback of democratic reforms under Putin. Russia's much-vaunted stability, they said, has come at the price of freedom of speech, legal and legislative independence and free-market principles. By treating Russia as an equal, said Kasparov, other G8 members “put a seal of approval on the policy of destroying political and civil rights pursued by the authorities today.”

Still, cutting loose Russia from the G8 would do more harm than good, says John Kirton, the director of the University of Toronto's G8 research group. The G8 is a key conduit for countries like Canada to push for their interests in Russia, he argues. Kirton also says that being part of the group has helped Russian democracy by exposing its leaders to western values. “It's a learning process,” he says. “We can't expect Russia to change overnight.”