Since the beginning of the twenty-first century, China and Russia have been constants in the world. They have been autocratic, resistant to the spread of freedom, occasionally belligerent toward their neighbors, and increasingly prosperous. They have consistently joined together in order to block Western initiatives in the UN Security Council and to defend dictatorships like Iran, North Korea, and Syria.
The two countries have created the illusion of durability. Vladimir Putin has just begun a six-year presidential term, with an option for another. Hu Jintao and Wen Jiabao are planning to hand over power in October to a new tandem, Xi Jinping and Li Keqiang, who are expected to serve for ten years. Yet the evidence is growing that the apparent stability in Russia and China is untenable. For similar reasons, the two states have exhausted their current political and economic systems. Their rulers have grown rigid and are mired in corruption. Both their political elites and their average citizens are growing visibly restless. In the next decade, it is likely that one or both of these global powers will undergo an economic crisis and a dramatic political transformation. When and how it will happen is the most important “known unknown” that Barack Obama or Mitt Romney will face during the next US presidential term.
The predictions that systemic change is inevitable, and that it might be tumultuous, are coming not just from lonely dissidents or hostile Western observers but from stalwarts of the establishments in Moscow and Beijing. In February, a report prepared by experts from China’s Finance Ministry and the Development Research Center of the State Council, in cooperation with the World Bank, concluded that “China has reached a turning point in its development” and that a “strategic” and “fundamental shift is called for,” comparable to Deng Xiaoping’s embrace of the market economy three decades ago. “China 2030” warns:
There is a broad consensus that China’s growth is likely to slow, but when and at what pace is uncertain and there is no saying whether this slowdown will be smooth or not. Any sudden slowdown could unmask inefficiencies and contingent liabilities in banks, enterprises and different levels of government—heretofore hidden under the veil of rapid growth—and could precipitate a fiscal and financial crisis. The implications for social stability would be hard to predict in such a scenario.
Similarly, in late May a group of experts convened by Aleksei Kudrin, a mainstay of the Putin government for more than a decade until his resignation last year, issued a report declaring that “research shows that the crisis” in the Russian economy and political system “has become irreversible, regardless of the scenarios of its further development. Maintaining political stability, let alone a return to the pre-crisis status quo, is no longer possible.” In a press conference, Kudrin said there was a fifty-percent chance that Russia was headed for a recession that would produce a political breakdown and a change of government.
Despite such auguries, the Obama administration continues to pursue a policy toward both Russia and China that assumes that the existing power structures will continue indefinitely. Its primary aim is to “engage” the top leaders on a transactional basis—a strategy that, for Obama, has become a quasi-ideology in foreign policy. Thus did he welcome Xi to Washington in February with talks that focused on economic issues and geopolitical cooperation—and ignored the incipient domestic political turmoil in China that had prompted a senior police official from the city of Chongqing to seek asylum in a US consulate days earlier, in a development that would soon become a full-blown leadership crisis.
After Putin’s controversial election as president in March, Obama, overlooking the growing street protests in Moscow, invited him to an early meeting at Camp David (which Putin later cancelled) and dispatched National Security Adviser Thomas Donilon to Putin’s dacha outside Moscow to deliver what a Russian official described as “a multi-page detailed document, whose main message is that Obama is ready to cooperate with Putin.”
While critiquing these advances, Mitt Romney’s presidential campaign also appeared unprepared for the possibility of upheaval in Russia or China. The GOP candidate described both countries not as unstable autocracies but as dangerous powers to be contained. He claimed that Russia “is without question our number one geopolitical foe,” and promised to designate China as a currency manipulator, subject to trade sanctions, on his first day in office.
In short, it appears that neither Obama nor Romney is contemplating the possibility that Russia or China could become destabilized in the next several years, with all of the opportunities and dangers that would pose for the United States. Such shortsightedness is hardly unprecedented: George H. W. Bush denied the possibility of revolutionary change in the Soviet Union and the former Yugoslavia until it occurred, and Obama himself was blindsided by the Arab revolutions of 2011. Yet by now, after witnessing the successive collapses of dictatorships over a quarter century in Latin America, East Asia, Eastern Europe, and the Middle East, US policymakers should know better than to assume that the autocracies of Russia and China are invulnerable. The next administration ought to be prepared for, and encouraging of, changes in both these countries.
Revolutions are, of course, unpredictable. Some regimes fall sooner than seemed possible until the event occurs; some linger long after their demise has become inevitable. But the recent history of unfree countries has shown that while breaking points are hard to anticipate, there is a common set of conditions that sets the stage for change. Perhaps most important is the emergence of a middle class with growing non-material expectations, along with the exhaustion of the economic model that produced that class. There is the deterioration of the old elite, which is weighed down by corruption and paralyzed by power struggles. There are factors that can accelerate change, ranging from failure in war and environmental degradation to demographic implosion and the proliferation of technologies that allow citizens to communicate and to organize in spite of official repression.
From a distance, Russia and China may seem immune to these conditions. For now, both economies appear to be relatively prosperous compared to sickly neighbors like the European Union and Japan. Both have large foreign reserves: $500 billion in Russia and $3 trillion in China. Though there have been regular street protests in Russia since late last year, and a visible power struggle has been under way within the Chinese leadership, neither regime appears to be in imminent danger of collapse. In foreign affairs, the two governments exude confidence, even arrogance: at mid-year, China was bullying neighbors like the Philippines in the South China Sea, while Russia was propping up the Syrian dictatorship of Bashar al-Assad in defiance of the United States, Europe, and the Arab League.
Upon closer examination, however, both governments are saddled with economies that have lost their most dynamic means of growth. They are facing the imperative of far-reaching restructuring in order to avoid stagnation or recession in the coming years; but it’s questionable whether either regime has the strength to push through the changes necessary to hold off crisis. Meanwhile, by the summer of 2012 each faced the possibility that a recession in Europe would spread eastward, inducing a “hard landing” for their economies at a sensitive political moment.
For Russia, the dilemma is summed up in the prices of oil and gas, and the role those two commodities have come to play during the Putin era. When Putin first took office in 1999, oil and gas earned less than half of Russia’s export revenue. Now that share is more than two-thirds. In part this increase is due to rising prices and production, but Russia has also deindustrialized under Putin. According to a report in Business New Europe, this year the country gave up the effort to maintain its own auto industry, and stopped producing the Lada sedan. The company that manufactures the iconic AK-47 rifle went bankrupt, largely because of its failure to develop a more modern version of the Kalashnikov. And a new civilian passenger jet promoted by Putin as an answer to Boeing and Airbus flew into a mountainside during one of its first demonstration flights, killing the deputy transport minister of Indonesia and forty-four others and throwing its future into question.
Now the energy industry itself is declining. From 2000 to 2004, Russian oil and gas production grew by an average of 7.5 percent per year as private companies flourished and foreign investors bought in. But following Putin’s political crusade against magnates like Mikhail Khodorkovsky and mistreatment of Western oil firms, the average increase dropped to 1.4 percent between 2005 and 2011. Foreign capital needed to increase production will be difficult to attract, given Putin’s record, and the development of large new oil and gas reserves in Europe and the United States has further dimmed the prospect for export revenues in the next few years.
At the same time, the Russian government budget has become more dependent than ever on oil and gas. Energy revenue pays for more than half of government spending—and that spending has mushroomed from fifteen percent of GDP four years ago to nearly a quarter this year. Putin has compounded the problem by promising vast new outlays: a doubling of the wages of doctors, police, and teachers; higher payments to families; and $790 billion in new defense spending.
Russians now commonly measure the state of the economy by calculating the price of oil needed to balance the state budget. In 2008 it was $55 a barrel; in 2011 it was $100. Now experts guess that it would take an average price of $117 to cover this year’s planned spending, and somewhere between $130 and $150 a barrel to meet Putin’s promises for the next several years.
Within weeks of beginning his new mandate, with oil prices well under $100, Putin was already hinting that the budget would be scaled back. The question was whether he could avoid the swelling of public unrest that austerity might provoke. Two major polls, by the Pew Global Attitudes Project and the Associated Press, released in May and July, showed that while Putin remained relatively popular among the general population, support for him in Moscow and other big cities had plummeted—and the demand for political freedom, and support for ongoing popular protests, had expanded.
Backed by eighty percent of the population as recently as 2008, Putin now attracts overall support of fifty-eight percent, reported the AP—and only thirty-eight percent in Moscow. Since 2002, according to Pew, “five of the six measures of democratic freedom tested by the Global Attitudes Project have witnessed double-digit increases in terms of the percentage of Russians describing them as ‘very important.’” Only thirty-one percent say they are satisfied with the state of democracy in the country—and sixty-four percent describe the economic situation as bad. A solid majority of fifty-eight percent said they supported the post-election opposition street demonstrations.
At midyear, Putin still looked relatively strong, because the largely middle-class freedom protesters gathering in Moscow had not been joined by blue-collar workers, and rural areas were not as restless as the cities. But with the Internet’s stream of uncensored information rapidly growing, that seemed unlikely to last. According to the AP, the percentage of Russians using the Internet daily has grown from twenty-two to thirty-eight percent in just two years.
Kudrin’s report outlined several scenarios for the future, chief among them “modernization through dialogue between the government and opposition,” stagnation, and a “chaotic radical transformation of power.” The director of the study, Mikhail Dmitriev, of the Center for Strategic Research, was quoted by the news agency RIA Novosti as saying that “the most likely scenario is mounting pressure on protests” by the regime, “eventually resulting in public backlash and sudden
transformation of power.”
Few in Beijing are predicting such a political explosion, and the economy there is far stronger. But China suffers from the same fundamental problem of declining economic returns and rising demands for personal and political freedom. The country’s vaunted export-oriented growth model, which brought five hundred million people out of poverty in just thirty years, seems to have run its course. Having peaked in 2007 at ten percent of GDP, the current-account surplus, the broadest measure of trade, was just 2.8 percent of GDP in 2011, or $201 billion, according to a recent report in the Economist magazine—less than that of Germany. This year, exports are not contributing to GDP growth.
In the last five years, the Hu regime has managed to sustain that growth only by launching one of the largest government stimulus programs in world history. According to the Economist, investment as a share of GDP increased by six points between 2007 and 2010; lending rose from one hundred and twenty-two percent of GDP to one hundred and seventy-one percent between 2008 and 2010. State-run enterprises controlled most of the money flow, pouring borrowed cash into housing construction and other speculative investments. In 2011, spending on plant, machinery, buildings, and infrastructure made up an amazing forty-eight percent of China’s GDP.
Beijing launched another stimulus in the spring of 2012, when the economy showed signs of a sharp slowdown. But few economists in or outside the government believe the policy is sustainable. Some think the forests of apartment towers rising around dozens of Chinese cities reflect a real estate bubble that will eventually pop, bringing with it the “hard landing” and social destabilization that the authors of “China 2030” warned of. Even if that does not happen, the lending and investment binge will have to slow—and some new formula for growth will replace it.
There is little disagreement among economists about what is needed. China will have to shift its growth engine from exports and domestic investment to consumer spending. There is plenty of room for this; household consumption currently makes up only a third of GDP, compared to seventy percent in the United States. Vast sums could be spent on upgrading Chinese health care, especially for skyrocketing numbers of seniors; on a social safety net for the poor and unemployed; and on education. Financial markets must be liberalized and average Chinese allowed to purchase shares and bonds, including in foreign markets. Both wages and interest rates on savings need to rise.
As “China 2030” puts it:
It is imperative that China adjusts its development strategy as it embarks on its next phase of economic growth. At its core, this adjustment requires changing the role of government and its relations with the market, the private sector, and society at large . . . . The government will need to transform itself into a lean, clean, transparent and highly efficient modern government that operates under the rule of law.
The problem with implementing such an agenda is that it will require a dramatic change in the orientation of government, which is now heavily bound up with state-owned enterprises, big manufacturing exporters dependent on cheap labor, a huge bureaucracy, and other status quo interests.
Even the party’s planners don’t believe it will be possible for the Chinese Communist Party to push through such a transformation without political reform that, as the report puts it, makes the emerging middle class “a major force in promotion of harmonious development.” As the authors of “China 2030” explain:
If the experiences of other countries is any guide [sic], the rising ranks of the middle class and higher education levels will inevitably increase the demand for better social governance and greater opportunity for participation in public policy debate and implementation. Unmet, these demands could raise social tensions; but if the government finds ways to improve consultation and tap the knowledge and social capital of individuals and nongovernment agencies, these demands can be transformed into a positive force.
So far, China’s middle class has not followed Russia’s into the streets. But its Internet burns with restlessness; more than two hundred and fifty million Chinese now have accounts on microblogging sites such as Sina Weibo, the Chinese version of Twitter. Even a vast state censorship operation has been unable to prevent outpourings of critical commentary on events like a high-speed train crash, a food safety scandal, or the treatment of blind dissident Chen Guangcheng after he sought refuge in the US Embassy in May. The purge of Chongqing governor Bo Xilai in March prompted months of feverish online commentary and speculation—including outbursts from angry supporters of the disgraced populist.
During a reporting trip to Beijing, Shanghai, and the interior city of Changsha in May, I was struck by the openness with which Chinese intellectuals, journalists, and even government officials spoke about the need for political as well as economic change. Their hope was that a destabilization of the regime could be headed off by a top-down reform process that would begin with greater press freedom and acceptance of a grassroots civil society independent of the Communist Party. “This is the time to do something, and to do it incrementally,” said Shen Dingli, the dean of the Institute for International Studies at Fudan University, whom I met in Shanghai. “If you reform, you have immediate challenges. But if you don’t reform, you will have even bigger challenges. The top leaders all know this.”
In fact, the top leaders of both Russia and China have repeatedly and publicly acknowledged the trouble they are facing. In one of his last major speeches in March, outgoing premier Wen Jiabao told the National People’s Congress that China “has come to a critical stage” in which “without successful political structural reform . . . new problems that have cropped up in China’s society will not be fundamentally resolved.”
For his part, Vladimir Putin published an op-ed in the Washington Post last February in which he declared: “Our society is completely different from what it was at the turn of the 20th century. People are becoming more affluent, educated and demanding. The results of our efforts are new demands on the government and the advance of the middle class above the narrow objective of guaranteeing their own prosperity.”
Putin and his deputy, Dmitri Medvedev, and Wen as well, have been making such speeches for years—and still have taken no significant action to liberalize the political order. On the contrary, Putin launched an offensive against his opposition after his election, pushing through new laws to punish protesters with heavy fines and to curtail the activity of nongovernmental groups. Though it allowed Chen to leave the US Embassy for the United States in May, China has been stepping up prosecutions of dissidents and trying to tighten control over the Internet ever since the Arab Spring revolutions began in early 2011.
Putin conceded a primary reason for these reactionary approaches during a June speech on the economy. After calling the dependence of the budget on oil prices “the Achilles’ heel of our economy,” and conceding the desperate need to attract foreign investment into the energy industry, he added: “Unfortunately corruption is without exaggeration the biggest threat to our development. The risks are even worse than the fluctuation of oil prices.”
In fact, corruption paralyzes the Kremlin. The political system cannot be opened up without exposing the criminal networks that have infected every part of the bureaucracy, siphoning off billions of dollars in what should be public revenues. By many accounts Putin and his inner circle have participated robustly in the looting; but even midlevel officials have stolen hundreds of millions with impunity. More than a dozen prominent journalists and human rights activists have been murdered in the last decade—including one on Putin’s birthday in 2006. A more open system would inevitably lead to demands for accountability that would imperil Putin and most of those around him.
China’s leadership has similar vulnerabilities. After the purge of Bo—one of the rising party “princelings,” or heirs of past Communist leaders—Western news accounts chronicled how his wife and other relations had built up a vast business empire, and allegedly murdered a British businessman in order to protect it. An investigation by Bloomberg News in April found that Bo’s family had accumulated $136 million in assets. In June, Bloomberg reported finding an even larger fortune controlled by the extended family of incoming leader Xi Jinping—prompting a paroxysm of censorship of such reporting on the Chinese Internet. If China liberalizes its media, Xi surely will be asked to explain how his family came to own, for example, seven properties in Hong Kong, reported by Bloomberg to be worth $55 million.
A forward-looking US policy would aim at putting pressure on these obstacles to change. A good model is the bipartisan Magnitsky Bill, which has been moving through the US Congress this year. It mandates visa revocations and an asset freeze for Russian officials who are guilty of killing or persecuting people fighting corruption or abuses of human rights. It is named for Sergei Magnitsky, a lawyer who uncovered a $230 million embezzlement scheme by tax and Interior Ministry officials and then was imprisoned by those same officials and subjected to mistreatment that caused his death in 2009.
Tellingly, the prospect of such sanctions has shaken Moscow to its core. Putin issued a directive in May that listed stopping the bill as a top priority in relations with the United States. Equally remarkable, the Obama administration chose to take Putin’s side, and lobbied heavily on Capitol Hill to block the legislation.
Obama clearly still hopes that in a second term he will be able to strike deals with Putin, starting with a new treaty to reduce nuclear arms. He will seek to forge an early partnership with Xi as well, focused on reducing trade frictions and stopping the nuclear programs of North Korea and Iran. Rhetorically, Romney promises a harder line. But neither is prepared for the hard landing many Russians and Chinese see in their near future.
Jackson Diehl is the deputy editorial page editor of the Washington Post, where the column from which this article was expanded originally appeared.
Photo Credit: www.kremlin.ru