After a week in Russia I concluded that Russia is very stable – perhaps too stable. President Vladimir Putin appears to want little political or economic reform, lest it lead to instability. Nevertheless, divisions are appearing in his entourage: some favour clamping down hard on the opposition, while others counsel softer tactics. Sometimes Putin backs one group, sometimes the other. On foreign policy, too, Putin seems to have two faces. The pragmatic Putin wants to work with the US in dealing with common problems. But another Putin views the US as a hostile power that is trying to destabilise Russia, and is happy to do things – like sheltering the fugitive Edward Snowden – that infuriate it.

In Moscow, both opposition leaders and the more liberal government officials agree that the need for political and economic change is greater than ever, but that the chances of serious reform are close to zero. After mass demonstrations in the winter of 2011-12, optimists thought the regime would attempt to win back the support of the middle classes by modernising the country’s governance. But these days nobody expects much to change.

Russia’s leaders worry that big economic or political reforms could upset vested interests, create losers and perhaps strengthen the opposition. The government has in fact attempted some reforms of the university, school and healthcare systems, in order to save money, but these have been unpopular. Reform of the pension system – which would mean curbing pension rights – has been mooted for over a decade but frequently put off. There always seems to be an excuse for postponing major reform.

The slowdown of the economy has come as a shock to Russia’s rulers. In 2010, 2011 and 2012, Russia grew at close to 4 per cent. This year growth may be less than 2 per cent. The government initially blamed the slow-down of the world economy: demand for Russia’s natural resources was diminishing. But in April, when Putin gathered key ministers and experts to discuss the economy at the Black Sea resort of Sochi, they concluded that some of the problems were home-grown.

Officials list the structural problems: the absence of spare industrial capacity (in the 2000s the economy could grow quickly by turning on Soviet-era plants); the lack of labour mobility in Russia (old Soviet ‘mono-towns’ are propped up by the state); an ageing population; and, especially, the falling rate of private sector investment. Net capital outflow of $40 billion in the first half of the year did not help, but inadequate rule of law is perhaps the major deterrent to investment. Not much is being done about it. “The leaders put too much emphasis on stability,” said a former senior official. “There is a lack of energy at the federal level”.

More sustainable and less volatile growth requires Russia to wean itself off dependency on natural resources. One official admitted that though diversification remained a political objective, achieving it would be extremely difficult. Russia had to respect its natural strengths, which were raw materials, ‘mathematically-intense services’ (like data processing and computing) and land, said the official – who noted that Australia did quite well despite depending on exports of natural resources.

A high oil price provides cash for the government to satisfy vested interests and undermine potential opponents. But even a lower oil price would not necessarily trigger much reform, officials warn. “Everyone understands we need a crisis before you get institutional reform”, said one. “But they hope you can escape the crisis. Nobody in government or opposition has a really good plan for implementing reforms.” Even opposition leaders doubt that a drop in the oil price would spur reform. “There are no examples in Russian history since the USSR of bad economic performance provoking political unrest,” said one. “And if there are more demonstrations, so what?”

But if reform driven by bottom-up protests seems unlikely, for the time being, could splits in the ruling elite lead to top-down change? There is no longer a division between Putinites and followers of Prime Minister Dmitri Medvedev, because he is no longer a significant player. But the Putinites seem to be dividing between siloviki (those linked to the security establishment) and pragmatists. The battle between them is not yet dangerous to the stability of the regime, because Putin is clearly in charge.

The siloviki, led by, among others, Alexander Bastrykin (the head of the ‘investigative committee’) want to crush dissent. The siloviki ensured that Alexei Navalny, an opposition leader, was sentenced to five years’ hard labour in July. They do not want him to compete in September’s Moscow mayoral election.

But after one night in prison, Navalny was released. This means that he can – while his appeal is pending – run for mayor of Moscow. He can thank the pragmatists, who include Sergei Sobyanin, the current mayor of Moscow, for his release. Sobyanin, it seems, wants to run against Navalny in a free and fair election, as he knows this would enhance his legitimacy and that he would win easily. The Navalny affair is a reminder of the degree to which the courts are controlled by the executive.

Many oligarchs, liberals and moderates see Sobyanin as a possible successor to Putin. A former governor of Tyumen region, deputy prime minister and head of the presidential administration, he is a grey, Chernomyrdin-like figure. Sobyanin is very loyal to Putin and said to be effective. One former official who has worked with him said that if Sobyanin was in charge he would try to make moderate improvements to the system.

Navalny, who began as an anti-corruption campaigner, is emerging as the most credible opponent of Putin, though he lacks large-scale support (opinion polls suggest that he would be lucky to win 10 per cent of the votes in Moscow) and his own party has not been registered. The most liberal opposition leaders do not trust him to be a real democrat.

The Republican Party seeks to bring together all the liberals but has very little money and too many leaders. One of the party’s four co-leaders, Vladimir Milov, recently walked out to found his own party. Of the others, Vladimir Ryzhkov voted against the Republicans backing Navalny for mayor of Moscow, but Mikhail Kasianov and Boris Nemtsov voted in favour and so the party will support him. The opposition looks like remaining weak – and Russian politics are on course to remain stable.

Russia’s relations with the US, however, are in flux. The ‘reset’ – the warm tone that prevailed between Presidents Barack Obama and Dmitri Medvedev – had disappeared before Putin returned to the presidency in May 2012. This year the atmosphere has gradually soured.

Fathoming Putin’s intentions towards the Americans is difficult. Ask senior Russians how Putin sees the US and you get two different answers. One is that Putin would like a business-like relationship in which the two sides can deal with common challenges, like terrorism, Afghanistan, Iran, Syria and so on – even though they will often criticise each other. Putin understands that the US is the pre-eminent superpower and that he must work with it on some of these issues. Thus Putin personally backed last year’s Exxon-Rosneft deal – perhaps worth up to $500 billion – to develop hydrocarbon resources in the Black and Arctic Seas.

The other answer is that Putin really is paranoid about the US. He takes at face value the often insincere rhetoric of American politicians about the importance of spreading democracy and human rights. He thinks that the US will inevitably try to intervene to overturn regimes it dislikes, as it did in Afghanistan, Iraq, Libya and Serbia. Putin does not distinguish between Republicans and Democrats, believing them all to be interventionist (this upsets some of Obama’s people, since Obama and Secretary of State John Kerry opposed the Iraq war). This hostility to the US explains the clampdown on Russian NGOs that get foreign (and notably American) funding.

Both these views of Putin are probably true. He switches from one face to the other, which makes him a difficult partner for the Americans.

Obama has two priorities with Russia but is making little progress with either. One is arms control. Speaking in Berlin in June, Obama proposed new cuts to nuclear arsenals. For several years Russia has complained that American plans for missile defence could affect its strategic nuclear capability and therefore limit its enthusiasm for cutting warheads. In March the US said it was scrapping the fourth and final phase of its planned missile defence system in Europe. But Russia has not responded to that move or to the Berlin speech. One reason may be its desire to maintain a significant nuclear superiority vis-à-vis China.

Obama’s other priority is Syria. Putin has gone along with the idea of a ‘Geneva II’ peace conference, but this has been stymied by the West’s inability to deliver the opposition (though this is because the opposition is losing, which – in the view of US officials – is partly because of Russia’s support for President Assad). Most Russians believe that events in Syria are proving them right: they always warned that much of the opposition would turn out to be nastier than Assad’s regime. Syria will remain a source of discord for the foreseeable future.

There are other irritants in the US-Russia relationship. Russia has banned American exports of pigs and cattle, because the meat contains the chemical ractopamine. Meanwhile the ‘Magnitsky list’ annoys the Russian government: Congress has passed an act that enables the administration to impose visa bans and asset freezes on officials linked to the death in custody of Sergei Magnitsky, a lawyer and whistle-blower.

And now Russia has granted temporary asylum to another whistle-blower, Snowden. American officials think that Putin under-estimates how much Snowden matters to the Obama administration, which sees him as a serious criminal, and therefore how much the affair can damage the Moscow-Washington relationship. Obama may now be unwilling to meet Putin in Moscow in September, after the G20 summit in St Petersburg, as had been envisaged.

Those who know Obama well say that he is unwilling to spend time on subjects that do not deliver results. So the lack of progress on arms control and Syria, plus the Snowden affair, may lead to Obama minimising the time that he spends on Russia. Not that that is likely to upset Russia’s leaders a great deal. What they care most about is stability within Russia, an objective that they are – for now – achieving.

Charles Grant is director of the Centre for European Reform

As soon as US Secretary of State John Kerry announced the resumption of peace talks between Israel and the Palestinians, the EU promised to do everything it could to support the new American initiative. The Middle East peace process has been a top EU priority for years. But Europeans are conscious that they lack the diplomatic clout to be a major player. Palestinians and Israelis think that EU member-states are too frequently divided among themselves. Many Israelis also argue that even though the EU and Israel have close ties, the Union does not give sufficient importance to their security concerns. Nevertheless, Europeans played a modest role in helping the US convince Israelis and Palestinians to sign up to new talks. And the EU can make further contributions to the peace process.

In July, as Secretary Kerry negotiated assiduously with Israeli Prime Minister Benjamin Netanyahu and Palestinian President Mahmoud Abbas to give peace talks another chance, the EU high representative for foreign affairs Catherine Ashton announced that the EU would no longer give grants and scholarships to companies and educational institutions based in Israeli settlements. In addition, a leaked letter from Ashton detailed EU plans to require products from settlements to be labelled as such when sold in the EU. The Union, which has long argued that Israeli settlements are illegal under international law, had been working on both initiatives for a while. But the timing of the announcement and the leaked letter helped in a small way to convince both President Abbas and Prime Minister Netanyahu to agree to peace talks.

Of course, the Obama administration was the key driver behind Abbas and Netanyahu’s endorsements of new negotiations. But according to European officials, the Palestinian president felt emboldened by the fact that the EU was willing to put international pressure on Israel. Israel, for its part, is always worried about being isolated. Netanyahu asked Kerry to convince the EU to revisit the decisions on the settlements. But Kerry told Netanyahu that he would not ask the EU to back down, and that unless Israel took part in peace talks, Tel Aviv risked similar action by other countries in the future. According to officials, the exchange between Kerry and Netanyahu weighed on the Israeli prime minister’s decision to support negotiations.

The EU helped the Americans coax the parties to the negotiating table because it has some economic leverage over them. Israel has an association agreement with the EU, and so many of its exports to Europe benefit from preferential trade terms. The Union disburses research funds and scholarships to Israeli industry and universities. And the EU is the largest donor to the Palestinians. In recent years, the European Commission and member-states have together provided €500 million a year. Amongst other things, this money has helped Palestinians develop the institutions required to function as an independent state – though more Palestinian nation-building will be needed before a two-state solution can be viable. The EU’s economic weight could be of significant help to both Israelis and Palestinians if they reached a peace deal. European states could help stabilise the region through further aid and trade concessions. The EU is already reflecting on how it could deepen bilateral ties with Israel in response to the progress in the peace process, a move the Israeli authorities greatly welcome.

Europe could also help the negotiations by making clear that if a deal was reached it would offer peacekeepers to prevent violence. Over the years, a number of European politicians have raised this possibility. Europeans already provide peacekeepers to UN monitoring missions along the Lebanese and Israeli border, and the Golan Heights. But if Europeans want their offer to be credible, they need to reassure Israelis and Palestinians that their peacekeepers would not be passive observers. Instead European troops would be given a mandate to use force if necessary to stop outbreaks of violence. EU states have sometimes imposed limitations on what troops or police forces can do when deployed, for a variety of reasons including minimising the risks to personnel. This was the case for example during an EU police monitoring mission along the border between Gaza and Egypt between 2005 and 2007. As a result, Israel never felt the mission was credible.

Finally, and controversially, the EU can support the peace effort by helping to bring Hamas into the process. The militant group, regarded by the EU, US, Israel and many other countries as a terrorist organisation, has been in sole control of Gaza for six years. Hamas, which frequently clashes militarily with Israel, is popular among Palestinians in the West Bank as well as in Gaza. Without its endorsement President Abbas will be incapable of reaching a durable peace settlement with Israel. In recent years, Egypt, Qatar and several EU governments have grudgingly reached this conclusion. Qatar and Egypt – even under former President Hosni Mubarak – have tried unsuccessfully to reconcile the warring Palestinian factions. The EU has made clear that it would be willing to work with a Palestinian unity government which included Hamas, if President Abbas were comfortable with the deal and Hamas renounced violence.

The need to include Hamas in a peace deal is also recognised by some Israeli officials, including former heads of Mossad – the Israeli national intelligence agency – and by some in the US government. During her last year in office, former Secretary of State Hillary Clinton asked her department to work out how to engage with the militant group. But the US government is unlikely to stop boycotting Hamas, given strong Congressional opposition to the organisation.

If the talks between Netanyahu and Abbas develop into something meaningful, Secretary Kerry should make use of Europe’s willingness to engage with Hamas. With the consent of President Abbas and the Israeli government, the US should discreetly encourage the EU to make the public case for including Hamas in the peace negotiations.

Even with a co-ordinated transatlantic effort, the prospects for the nascent peace initiative are not good. Not only must Hamas and President Abbas’ Fatah party be reconciled for any Palestinian state to work, but Netanyahu will also have to ensure his coalition supports a deal (and he would then probably have to win a referendum on withdrawal from many of the West Bank settlements); meanwhile many of the Arab countries whose support will be essential, above all Egypt, are in turmoil. Hezbollah could seek to re-establish its credibility in the Middle East – damaged by its support for Syrian President Bashar Assad – through a new military confrontation with Israel. More generally, spill-over from the Syrian conflict could destabilise both Lebanon and an increasingly fragile Jordan. But the talks are worth pursuing, with strong EU backing: if they fail, it is unclear how long Mahmoud Abbas can remain Palestinian president, and few other Palestinian politicians are as supportive of a negotiated peace. Secretary Kerry would probably have preferred a better hand of cards on taking office. But the next hand could be even worse.

Clara Marina O'Donnell is a senior research fellow at the Centre for European Reform.

Myanmar has a long and difficult road ahead to achieve political stability, democracy and economic development. Hope rests on Aung San Suu Kyi to pull the nation together and lead the reforms after the 2015 election. Are Myanmar’s, and the world’s, expectations too high?

I went to Myanmar recently as part of the ‘young global leaders’ club organised by the World Economic Forum. I saw a country changing fast, full of anticipation but with an uncertain destiny. Yangon, the country’s old capital and commercial hub, illustrates Myanmar’s economic challenges, while Naypyidaw, the eerie new administrative capital, shows its political challenges.

Ramshackle Yangon (formerly Rangoon) almost comes as a shock, so used are we to ultra-modern and gleaming Asian cities. There are no multi-storey department stores, branded coffee shops or air-conditioned office towers. It feels weird to walk through crowded alleys where not a single person is on a mobile phone. Even though the price of a SIM card has come down from $1,000 a couple of years ago to around $60 today, mobile phone penetration in Myanmar is still only 4 per cent (in Thailand: 117 per cent). Internet penetration is even lower.

Myanmar is one of the world’s poorest countries. A quarter of the people live on less than $1.25 a day (though all statistics in Myanmar should be treated with great caution). The McKinsey Global Institute has calculated that even under a best-case scenario in which annual GDP growth doubles, GDP per head (on a PPP basis) would reach only $5,000 in 2030 – roughly where Morocco and Mongolia are today. While other ASEAN economies are thriving on the production of cars, electronics and consumer goods, almost half of Myanmar’s output comes from agriculture. The biggest export items are jade, logs and natural gas.

Training a skilled workforce will take decades: children stay in school for only four years on average, while the higher education system – 164 universities overseen by 13 ministries – is designed to prevent student revolts rather than produce good doctors and engineers. Frequent power-cuts make manufacturing difficult. Logistics are a struggle in the absence of modern road and rail networks. And only North Korea has a less developed banking sector.

But Myanmar offers plenty of opportunities, too. Labour is cheaper than in other Asian countries so Myanmar will attract the garment trade and other low value-added industries. McKinsey thinks that Myanmar could ‘leapfrog’ several stages of development by using digital technology to upgrade education, health-care and finance. Its strategic location between China, India and South East Asia could be attractive to investors. And the country has plenty of natural resources, including vast swathes of fertile land.

The West has lifted almost all economic sanctions. So far, however, potential foreign investors remain cautious: foreign direct investment was a paltry $1.4 billion in the year to April 2013 – though this was a fivefold increase on the previous year, when sanctions were still in force. If economic reforms reached a critical mass, that sum could quickly multiply.

That is a big ‘if’. A visit to Naypyidaw, in the centre of the country, suggests that the political system may not yet be able to sustain ambitious economic reforms. Naypyidaw is military dictatorship set in concrete: a vast expanse of emptiness (the city is seven times the size of Singapore), dotted with enormous official buildings (the parliament is bigger than the Pentagon) and connected by eight-lane highways (24 lanes in front of the presidential palace). These are completely empty – devoid of cars, mopeds or people. Although the government has forced civil servants to relocate and claims (implausibly) a population of 1 million, this place resembles a ghost town.

Other than official palaces and pastel-coloured condominiums for civil servants, Naypyidaw offers little else: a big new airport with few staff and even fewer passengers, a conference centre donated by China, a couple of American-style hypermarkets surrounded by deserted parking lots, a replica of Yangon’s golden Shwedagon pagoda and a zoo with penguins. The city also has a surprisingly large number of hotels, with lots more being built – presumably in preparation for the South East Asian games that Myanmar is hosting later this year and its forthcoming ASEAN chairmanship. But who will stay in them once these events are over?

Some say that the astrologer of Than Shwe, the former military dictator, told him to build the new capital in the middle of nowhere; others that the junta simply wanted an inland capital to avoid an American invasion or bombing (in Naypyidaw the ministerial buildings are several miles apart). Construction began in 2001, in secret. Five years later, the Burmese learnt about the new capital when it appeared on daily weather reports. Naypyidaw makes sure that Myanmar’s people are far removed from their rulers.

The big hope now is that the reform ambitions of President Thein Sein have more substance than the city in which he reigns. Over the last three years, the speed of Myanmar’s democratic opening has been breath-taking: Aung San Suu Kyi has been released from house arrest and her National League for Democracy (NLD) allowed to run in last year’s by-elections; most political prisoners have been set free; press censorship has been lifted; and the blacklist of foreigners and dissidents barred from entering the country has been cut drastically.

However, Myanmar still lacks many of the necessary ingredients for a successful reform programme: policy is made in a haphazard fashion and there is no medium-term roadmap; state administration is weak since civil servants have traditionally been appointed for their loyalty rather than their skills; and levels of corruption are on par with Afghanistan and Sudan.

Investors will stay wary as long as the outcome of the reform process remains uncertain. The army and its cronies, who used to benefit handsomely from Myanmar’s monopolistic and over-regulated economic system, appear resigned to the reforms, but may start pushing back. Perhaps the biggest risks stem from the country’s long-standing ethnic and religious conflicts. Around 60 per cent of the population are Buddhist Burman (or Bamar) people, while the rest are from various ethnic and religious minorities fighting for equality and economic opportunity. The government has now concluded ceasefires with all the armed groups, most recently in May with the Kachin Independence Army in the far north of the country. These conflicts were the cause of and justification for military rule over 60 years. Myanmar will not achieve liberal democracy unless it deals with them in a sustainable way.

The International Crisis Group warns that the ceasefires will fail without first, a political settlement in the shape of a constitution that gives significant autonomy and rights to the minorities; second, a workable plan for integrating the often war-ravaged minority areas (home to 70 per cent of the country’s natural resources) into Myanmar’s economy; and third, an effort to root out the cronyism and crime on which many of the country’s military have flourished.

Then there is the separate issue of the Rohingyas – an oppressed Muslim minority whose origins and right to be in Burma are disputed, unlike those of other ethnic groups. The growing tensions surrounding the Rohingyas have fostered some nasty Buddhist nationalism and violence against Muslims in Myanmar. 

Although some journalists and NGOs are speaking out about the need for a comprehensive settlement of the minorities problem, most people react with palpable unease when asked about it. Aung San Suu Kyi hesitated before condemning the violence against the Rohingyas, and when she did, she remained vague and cautious. Her reticence has upset some of her supporters in the West. One person who knows her well says that she is the only person who can unify her nation but that she needs to pick her fights carefully: if she pushes too hard on the minority issue now, her chances of becoming president in 2015 might diminish. Another of Aung San Suu Kyi’s contacts welcomes her transition from “icon to politician”, predicting that as president she would be more courageous on the ethnic minority conflicts than the present government.

At the World Economic Forum in Naypyidaw in early June, Aung San Suu Kyi declared that she would like to run for president in 2015. But this cannot happen unless the government changes the constitution, which prohibits people with foreign spouses and children from running for the office. Aung San Suu Kyi is the widow of the British academic Michael Aris, and her two children have British citizenship. If she is allowed to run and wins, she is almost bound to disappoint, given how enormous Myanmar’s challenges are. “There is perhaps too much hope”, she said in a briefing recently.

Given Aung San Suu Kyi’s iconic image and the sincerity with which Thein Sein seems to be pursuing reform, the West stands ready to help Myanmar with money, advice and trade. The EU has responded sensibly to Myanmar’s opening. It has lifted sanctions in a two-stage process, reinstating the so-called GSP preferences (free market access to goods from poor countries) and widening its aid effort beyond humanitarian programmes. The EU’s priorities – peace, democracy and development – seem right, and probably in that order too. The challenge now is to find ways of turning ambition into reality, including through co-ordination with the US on the one hand and China on the other.

Myanmar is so backward that even ‘capacity building’ – strengthening local administrations and the infrastructure needed to absorb aid programmes – will be difficult. At the same time, there is so much international goodwill that a surge of aid seems inevitable.  Among several things that can be done, the EU should help to channel aid towards capacity building. Despite all the difficulties and inevitable disappointments, this is a time and a place where anything is possible.

Katinka Barysch was until recently deputy director of the Centre for European Reform