Russia Is Worried About the Wrong Neighbor - A case of Continuously Poor Leadership

Vladimir Putin is spending his country's fortune and reputation on Ukraine, fixated on the concept of Russian civilization as a power. But Putin's view of power as well as his view of the neighborhood he lives in skirts the reality of the 21st century. Whether on account of poor leadership, or the curse of being blessed with extraordinary energy resources, modern Russia has for now lost the only power game that really counts today: the game of globalization.

Ukraine in reality is at best a possible threat not to Russia but to Putin's concept of state-centered leadership. China, Russia's large neighbor to the east, should be Russia's true concern. For China's tremendous post Mao successes in a manner very similar to Japan's historic defeat of the czar's army 109 years ago, demonstrates how far behind economically Russia truly is.

China, Russia's former student in autocracy, is not only a winner in the game of globalization, it is now trying to master the difficult steps of re-ordering its economy to succeed in a new generation of globalization. Strikingly, Putin doesn't even seem to care. He doesn't seem to understand that a westernized Ukraine is the least of Russia's problems.

To contrast China's and Russia's different the approaches to globalization, to capitalism, and even to claims on territories that would "fall under their civilizations," is a study in successful leadership and failed leadership.

From the beginning of their experiments with capitalism, these two former ignoble giants of communist tyranny, acted differently, with China acting more wisely. When the Soviet Union collapsed, Russia followed the "shock theory" in switching immediately from a communist economy to a mostly capitalist economy, a top down approach that lead to economic anarchy. China under Deng Xiaoping, followed a more judicious bottom up approach, experimenting with capitalist reforms in various zones before integrating a Chinese form of Capitalism throughout the country.

But more was going on than just a top-down or bottom-up approach. When Deng began his reforms, the world was just moving into its current form of globalization. Deng's reforms, whether by coincidence or understanding, added a key component: Chinese capital in the form of millions of cheap factory workers. Deng's investment, caffeinated globalization beyond any reality known up until that time.

Post-communist Russia did not add anything new or meaningful to the newly globalized world economy. Russia's exports basically continued to be what they were under the Soviets: raw materials and energy; commodity products that can be sold without an understanding of marketing or customer satisfaction. While energy generates huge cash flows, it also can be controlled by a few, and most importantly is generally free from a competitive need to change and improve.

Chinese leadership then demonstrated extraordinary global economic awareness when they agreed to the reforms necessary for China to join the WTO in 2001. These reforms enabled China to become a globalization super star, with an economy deeply integrated into the world's economy. Leadership took a huge risk. China had to relax over 7,000 tariffs, quotas and various other trade barriers. Within China's ruling circles at the time some feared that by reducing these tariffs, foreign competition would decimate out-dated state-owned enterprises (SOEs), which partly did happen, but the risk was worth it. In the decade that followed, China enjoyed one of the best decades in global economic history. Its GDP quadrupled, and its exports almost quintupled.

Russia on the other hand, after 18 years of on and off talks, finally joined the WTO in 2012 while Medvedev not Putin was President. The hesitancy represented the myopic Russian nationalist view that globalization threatens to replace existing Russian industries with new Western controlled enterprises. Globalization was seen not as a way to lift the Russian economy as it did in China, but as a means for the US and the West to invade Russia using economic weapons.

Of course from the position of the Russian oligarchy, why rush to force drastic reforms on your industry when the main export is energy. But the corollary to this argument was of course that Russia might not otherwise diversify its exports and be anything more then a commodity supplier unless its industry was allowed to compete in the world and learn from that competition.

China was also if not smarter then more fortuitous than Russia in one other major area dealing with globalization: it has capital controls, the Yuan does not float. As Martin Wolf wrote in the Financial Times of April 2, 2014, "China not only is a net creditor but also has exchange controls. Domestic creditors cannot take their money out of China. If they pull out of one part of the financial system, they will have to put it back into other domestic assets."

Whether out of hubris, or quite frankly the needs of the Russian oligarchy to legitimize their funds while fearing the future of the kleptocracy, the Ruble for all practicality is allowed to float within a dual currency basket of dollars and euros . Obviously the fact that the Yuan is not easily convertible has nothing to do with today's concepts of financial sanctions, but imagine how more secure Putin would now feel if he could repatriate all the funds that have left Russia in the last two months.

And finally there is the issue of "territories that fall under their civilization," an issue that has little to do with globalization but has a lot to with how secure leadership is, as well as the nature of the culture they lead. China in most cases since the mid 1970's, and especially in dealing with Taiwan and Hong Kong, understands that it has time on its hands. China's leadership realizes that even Taiwan, which for decades directly challenged the legitimacy of the Beijing government, is not its number one or even number two problem. Contrast this with today's events in Ukraine and Crimea.

Putin has been rightfully accused of following a 19th century foreign policy but that is for sure a symptom not a problem. His biggest problem is that Russia has a 19th century economy. And all his fears about the west are truly illusionary compared to the reality of the economic achievements of his eastern neighbor.

This essay first appeared in Real Clear World