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Liquid Courage

Friday, February 22, 2008

When oil prices rise, so does Russia’s foreign policy aggression.

PutinDespite George Bush’s best efforts to forge a close personal relationship with Russian President Vladimir Putin, the past seven years have seen disturbing trends in Moscow’s foreign policy. Many analysts note that Putin has benefited enormously from high commodity prices and argue that bountiful oil wealth has fueled Russian aggressiveness. However, very little actual data has been gathered to support this common interpretation.

We decided to crunch the numbers and find out if there was, indeed, an empirical correlation between oil prices and Putin-era aggression. We built an “aggression index” based on 86 events in Russian foreign policy from January 2000 to September 2007. We then assigned each event a value between one and five, with a higher number indicating a more aggressive event—aggressiveness being defined as actions harming Western interests. Import bans, diplomatic expulsions, and similar activities earned low-level values: a 1 or a 2. More clearly threatening acts, such as arms sales to terror-sponsoring states, military exercises, attempts to support separatist regions, and interruptions of energy supplies to neighbors, earned mid-range values such as 3 or 4. We assigned ratings prior to looking up oil price data. To the best of our knowledge, this is the most comprehensive dataset available to analyze the effect of oil prices on Russian foreign policy; a few events missed here or there will not alter the bigger picture.

Oil price-aggression relationship

We found that as the price of oil rose, the aggressiveness index increased: that is, the more valuable oil became, the more hostile Russian foreign policy became. The reverse was also true: when oil prices dropped in 2001 and 2002, so did Russia’s aggression. The relationship proved strongest at the annual level: a $1.48 increase in oil prices yearly correlated with an additional “point” increase in Russian aggression. Oil prices rose from $17.37 a barrel in December 2001 to $73.88 a barrel in September 2007; over that same period, the aggression index rose from 17 to 55.

Some believe other theories better explain the rise in Russian aggression. Some say that Putin initially focused on ousting old Yeltsin administrators, increasing central controls over Russia’s various regions, and breaking the back of domestic “oligarchs.” In this view—call it the Yeltsin explanation—Moscow had to consolidate its grip before it could act decisively abroad. Others see Russian aggression as a response to Western infringement on Russia’s “near abroad.” According to this “color revolutions” explanation, the Kremlin interpreted American and European attempts to ensure free and fair elections in Georgia and Ukraine as interferences in Russia’s sphere of influence and therefore responded aggressively, leading to more belligerence after 2003 and again after 2005.

Still others argue that U.S. attention and resources spent on Iraq left more breathing room for Russian power projection. Russia expert Jeffrey Mankoff has written that “diminished U.S. power as a result of the war in Iraq [has] given the Kremlin greater autonomy to pursue policy choices that Russia’s elite has long favored.” Call it the Iraq explanation.

The data dispute all of these theories. Putin came into office acting aggressively but then acted more passively over the next two years. In 2000, he signed a treaty pledging joint non-interference in domestic affairs with North Korea, hosted an indicted Serbian war criminal, charged an American businessman as a spy, and revoked a 1995 agreement with the US that had placed strict limits on Russian military and nuclear cooperation with Iran. There was more than twice the number of aggressive events in 2000 alone than there was in 2001 and 2002 combined.

Indeed, the period between July and September 2001 saw only a single aggressive event. This pause corresponded with a fluctuation in global oil prices: they dropped from a high of $30.35 a barrel in November 2000 to $17.37 a barrel in December 2001. Oil prices did not hit $30 a barrel again until February 2003. Now consider the other explanations for recent Russian foreign policy behavior. One would expect a consistent rise in aggression under the Yeltsin explanation, a bump after 2003 under the Iraq explanation, and a post-2005 spike under the “color revolutions” explanation. But the data contradict all of these, making the rise in oil prices the most plausible explanation. 

Of course, oil prices are not the sole determinant of Russian foreign policy: Moscow might have acted less aggressively if a more Western-friendly leader had been in charge. But an increase in oil prices has freed Putin from various international constraints and enhanced his leverage abroad in several ways.

Oil revenue has let Russia erase its debt to international lending organizations. By 2006, it had entirely paid off its International Monetary Fund obligations, which totaled $16.8 billion in 1999. Russia no longer needs Western cash—and therefore Western friendship—to keep its economy afloat.

With vast oil wealth, Russia can purchase the military tools needed to buttress an aggressive foreign policy. Between 2001 and 2007, defense spending increased by more than 400 percent.

New oil funds have also made Russia less dependent on neighboring trading partners, which has allowed Moscow to use trade cutoffs as a political tool. In November 2005, Russia banned imports of Polish meat; in January 2006, it cut off purchases of Ukrainian meat and dairy products; and later that year it blockaded Georgia’s economy almost entirely. All three of these countries—through their pro-Western foreign policy orientations—had offended Moscow.

With its vast oil wealth, Russia can now purchase the military tools needed to buttress an aggressive foreign policy. Between 2001 and 2007, its defense spending grew from $7.3 billion to $31 billion, an increase of more than 400 percent. Russian pilots barely flew 20 hours a month in 1999; that number increased to as many as 70 hours a month by 2003. In October 2003, Russia opened its first new base in Central Asia since the end of the Cold War. In 2005-2006, Russia received over a dozen ICBMs, two strategic bombers, 15 fighters, 15 satellites, 48 T-90 tanks, over 250 APCs, and 7,500 vehicles.

Russia is planning for an ambitious military buildup through 2015: 60 Iskander missiles, over 1,000 new and modernized aircraft, five nuclear-powered submarines, 69 SS-27 strategic nuclear missiles—the list goes on. Three new satellites launched in January give Russia’s Glonass system, an alternative to the U.S. Global Positioning System, coverage of 83 percent of the globe.

Putin described the scope of these plans in October 2007: “Our plans aren’t just big, they are grandiose, and they are perfectly doable.” Oil wealth has simply given Russia’s elites a more confident outlook, emboldening them to act more assertively abroad. Russian foreign minister Sergei Lavrov has stated that “it would be right to say that we view our role in global energy supply as a means for ensuring our foreign policy independence.”

A 2003 Russian energy strategy document turned this “petroconfidence” into official policy: “ensuring national security—that is the fundamental task of the energy policy.” Close ties between the Kremlin and the energy industry have brought these policy goals within reach. Taxes on oil and gas provide 37 percent of the Russian national budget. According to the World Bank and the IMF, each dollar increase in the price of oil augments the budget by about .35 percent of Russian GDP.

The state-owned firm Gazprom, which produces nearly 90 percent of Russia’s gas supplies, has served as the main vehicle for state control over the energy industry. Upon becoming Gazprom’s chairman in 2000, Dmitry Medvedev, Putin’s likely successor as Russian president, said that the company’s board “must not only tackle the industry’s pressing problems and map out plans for the future but also protect the interests of the state as its main shareholder.”

Medvedev was serving as Russia’s deputy prime minister at the time; half of the other ten Gazprom board members hold or have held Kremlin positions since 2000. Meanwhile, Viktor Khristenko, Russia’s minister of industry and energy, chairs the board of Transneft, which operates all of the country’s oil pipelines. Rosneft, the largest state-owned oil company, is chaired by Igor Sechin, Russia’s equivalent of a deputy chief of staff.

Higher oil revenues have thus fueled Putin’s drive for greater domestic power. By controlling the distribution of petroleum revenues, the Kremlin is better able to purchase loyalty and reduce potential openings for an independent economy. Many political scientists have shown the connection between increased autocracy at home and increased aggressiveness abroad: the regime has less need to respond to domestic constituencies, and it encourages foreign adventures to distract attention from its consolidation of power at home.

Thanks to exploding energy demand from China and India, oil prices probably will not drop significantly anytime soon—which means that, at least in the short term, Russia will continue to display hostility toward Western interests.

Charlie Szrom is a research assistant at the American Enterprise Institute. Thomas Brugato is a former intern in AEI’s foreign and defense policy studies department.

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