The new Russia and how to deal with it

Dmitri Medvedev compares '8/8', the date of Georgia's attack on South Ossetia, with 9/11. The Russian president is right that the war in Georgia, and the way the West reacted, have fundamentally changed the worldview of many Russians. It irks them that, for most westerners, democratic Georgia was the victim of imperialist aggression by its giant neighbour. The real story, as far as many Russians are concerned, is that little South Ossetia faced a brutal onslaught from an army commanded by a crazy nationalist, Mikheil Saakashvili. They believe that a close US ally such as Georgia would not have sent troops into South Ossetia without American encouragement. The war has greatly reinforced both Russian paranoia towards the West and the sense of victimhood among many Russians.

In September, as part of the 'Valdai club' of academics and journalists, I met Medvedev, Prime Minister Vladimir Putin and senior ministers. The message we received was contradictory. Russian leaders displayed plenty of swagger and self-confidence, yet at the same time seemed strangely insecure.

We heard angry denunciations of the West, and particularly the US. "The lesson of the Caucasus war is the abandonment our last illusions about the worth of the existing security system - we had thought it could be just and mature, and maintain a balance between the main players," said Medvedev. "But in fact the current security structure malfunctions, leading to conflict, border change and bloodshed - so we need a new one." He called for a security conference to bring together Europe's states and regional organisations (and implicitly diminish the role of NATO).

Putin sometimes spoke softly. For example, though some Russian politicians talk of taking Crimea from Ukraine, he stressed that Russia recognised Ukraine's borders. But Medvedev - who unlike Putin needs to establish his tough-guy credentials - emphasised that Russia's sphere of influence extended far beyond its boundaries. "All over the world there are friendly countries that want economic and military co-operation. Now we'll say yes, though we could not afford to in the 1990s". Thus Russia has sent warships and bombers to exercise with the Venezuelans. And it asserts its "privileged relations" with the Balkans: one minister talked of the Russian mission to stop a 'greater Albania' emerging.

Kremlin spin doctors claimed that Russia would turn its back on the West and forge a new 'multi-vector' foreign policy, based on closer partnerships with China, Iran, the Arab world and Turkey. They even said that if Ukraine tried to join NATO it would provoke a war between Russia and the US.

But despite the bluster, Russia's leaders seemed nervous about the economic impact of poor relations with the West. Medvedev admitted the war had contributed to the stockmarket slump (from May to mid-September it fell by 50 per cent). Putin accepted that inflation - approaching 15 per cent - was a serious problem. But the real concern of Medvedev, and the liberal technocrats in his entourage, is the long-term challenge of modernising the economy. Russia needs to diversify from hydrocarbons, develop service industries and improve its poor record on innovation. Russian leaders are obsessed with the importance of advanced technologies and aware that - beyond a few areas like aerospace - they have rather few.

Putin claimed that the US had de facto revived the cold war 'COCOM' regime of blocking high-technology exports to Russia. One of his ministers said that Rosteknologia - a new state holding company designed to foster innovative technologies - could not succeed without partnerships with western firms. Medvedev, who has worked in the corporate world and has close links to many business leaders, seems to understand the economy's vulnerability. He talks with passion about the need to establish the rule of law in Russia, so that it is an attractive place for domestic and foreign investors. In the Russian system the prime minister is supposed to be in charge of the economy, while the president takes care of security, but that now seems to have been reversed.

Both leaders kept saying: "Don't treat us as if we are the Soviet Union". Medvedev, whom Putin described - with perhaps a little condescension - as "liberal, modern, educated and democratic" even said that he did not "want a militarised country sheltering behind an iron curtain, I lived in such a country and it was uninteresting and tedious…Russia has quite different values from the Soviet Union." Yet the Russian state keeps behaving in a Soviet way: using television to spew out propaganda, stifling opposition politicians, harassing foreign investors, sending tanks into neighbours and supporting some of the world's most autocratic leaders (in places like Uzbekistan, Zimbabwe and Burma). The recent murder of Magoled Yevloyev, an Ingush journalist, was particularly chilling: after a row with the president of Ingushetia during a flight he was bundled into a police car and later found shot.

That said, the West must take some responsibility for the dire state of relations with Russia. The decision to put missile defence systems into the Czech Republic and Poland - though aimed at Iran, not Russia - was unnecessarily provocative, feeding Russian fears of encirclement. The biggest American mistake has been to push for NATO enlargement into Ukraine (and Georgia, though the latter is less sensitive for Russians). Russia should not have a veto over countries joining NATO, but the move was unwise for three reasons. Most Ukrainians oppose membership. Putting Ukraine into NATO could damage the alliance's credibility, since the article five mutual defence commitment would probably be unenforceable in a place like Crimea. And it would strengthen hard-line nationalists within Russia, a country whose history and religion started in Ukraine and whose defence industry and navy are partly based there.

Now the West needs to approach Russia with a mixture of carrots and sticks. It should encourage economic ties. The US is unwisely blocking Russian membership of the World Trade Organisation, apparently as a punishment for the war. But if Russia was in the WTO it would be bound by multilateral rules, and the business leaders who are lobbying for a softer foreign policy would have more clout. Civil society contacts should be encouraged; the proposal by Conservative leader David Cameron to deny visas to ordinary Russians is bizarre.

The West should maintain a high-level political dialogue with Russia, because it needs Moscow's help on issues like Afghanistan, Iran, terrorism and climate change (since the war no senior American has visited Moscow). The US should put on hold the installation of interceptors in Poland: Iran currently has no missiles that threaten the West. In private, western leaders should tell the Russians that they are prepared to scrap plans to enlarge NATO - but only if Russia gives something important in return, such as support for the EU mission in Kosovo and an agreement to limit the forces that it deploys in South Ossetia and Abhazia. My guess is that the Russians would give a lot to see the threat of NATO expansion lifted.

At the same time NATO should start to take seriously the defence of the territory of its existing members. The Baltic states, two of which host large Russian minorities, need to be reassured. In many ways NATO has been the big winner of the Caucasus war: after two decades without a clear mission it has now rediscovered its old one, which is to protect members from potential aggressors.

The EU needs to do two things. First, it should integrate Georgia and Ukraine with as many of its policies as possible, including foreign policy, while offering the long-term prospect of membership for Ukraine, if and when they it makes the grade (such an offer would encourage the Georgians to think that one day they too could aspire to membership). Second, it should speed up plans for a single market in energy - including the so-called unbundling of suppliers from distribution networks - so that the interests of the memberstates vis-à-vis Russia converge. On some energy questions, the EU's governments must allow its institutions to speak to Russia on their behalf.

Although the West finds many internal developments in Russia distasteful, it can do very little about them. Any attempt to push Russia towards liberal democracy would be counterproductive. What the West can and should do is influence Russia's external behaviour.

The West's biggest stick is economic. In private, western leaders should tell Putin and Medvedev that there are red lines which should not be crossed. In particular, Russia must respect the independence and territorial integrity of countries such as Belarus, Georgia (minus Abkhazia and South Ossetia, which Tblisi has lost for good), Moldova and Ukraine. If Russia crossed those lines, the West could not stop trading with it; the EU needs Russian gas almost as much as Gazprom needs European consumers. But the US and the EU should impose restrictions on Russian companies trying to invest in or raise money in their markets. And they should limit technology transfers to Russia.

Despite their sometimes emotional rhetoric, Russian leaders take a very realist view of international relations. If the West is capable of being tough, fair and consistent, the Russians will respect it. In their calmer moments, Russia's leaders probably know they need the West more than it needs Russia.