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Putin’s Dangerous Games

Monday, January 12, 2009

How will a domestic economic crisis affect Russian foreign policy?

It is discouraging, though not at all surprising, that Moscow has once again resorted to energy blackmail—having Gazprom, a state-run Russian monopoly, cut off natural gas shipments to neighboring Ukraine—in hopes of bullying a pro-Western democracy and frightening the European Union, which gets roughly one-quarter of its gas supplies from Russia. Vladimir Putin may now be the Russian “prime minister” and not its formal president, but he is still the head honcho. For several years now, Putin has pursued a multipronged strategy aimed at reestablishing his country as a global power. He has sought to bring Russia’s former Soviet-era possessions back within its sphere of influence, intimidate the West, and bolster anti-American regimes around the world, including the governments of Iran and Venezuela. 

While implementing these policies abroad, Putin has gradually but dramatically rolled back the institutions of democracy at home. Through it all, he has boasted sky-high approval ratings, thanks mainly to Russia’s oil-fueled economic boom, his control of the domestic media, and his skillful manipulation of Russian nationalism. Putin’s game seemed to be working well when commodity prices were shooting through the roof and the Kremlin’s coffers were bulging with cash. But now that energy prices have fallen substantially and the financial crisis has spread, Moscow may soon face a full-blown economic meltdown, which would inevitably have an impact on its foreign policy behavior. 

Now that energy prices have fallen substantially and the financial crisis has spread, Moscow may soon face a full-blown economic meltdown.

Just over a year ago, economist and British House of Lords member Robert Skidelsky wrote that, “A resurgent Russia is the world’s foremost revisionist power, rejecting a status quo predicated on the notion that the West won the Cold War.” Putin, who once called the Soviet Union’s demise “the greatest geopolitical catastrophe of the century,” has made clear Moscow’s intent to dominate former Soviet republics such as Ukraine and Georgia and draw them into a pro-Russian, anti-Western orbit. Both of those countries wish to join the NATO alliance and the European Union. The Kremlin has responded with various forms of bullying, including bellicose rhetoric, energy blackmail (witness its current gas war with Ukraine), and, this past August, a full-scale military invasion of Georgia following a lengthy dispute over two separatist provinces backed by Moscow.

The week that Russia invaded Georgia, crude oil prices opened at over $125 a barrel and closed at over $115 a barrel. A month earlier, they had hit a record high of over $147 a barrel. Oil revenues have been the indispensable underpinning of Putinomics. They have also been a prime catalyst of Russia’s recent foreign policy assertiveness, which goes well beyond Ukraine and Georgia.

In 2005, Moscow agreed to sell Iran more than $700 million worth of military air-defense systems. In September 2008, as The Times of London reported, “The head of the [Russian] state arms exporter said that he was negotiating to sell anti-aircraft systems to Iran despite American objections.” Russia has also been building Iran’s $1 billion Bushehr nuclear power plant, which is apparently near completion. 

Meanwhile, this past August, when Bashar Assad visited Moscow, there were reports that the Syrian leader wanted to purchase “advanced weaponry” from the Russians. “Although Russian officials remained noncommittal about specific weapons sales, analysts said closer Russian-Syrian military cooperation going forward was a very real possibility for a variety of reasons,” The Los Angeles Times noted. In 2005, the Kremlin forgave a large majority (nearly three-quarters) of Syria’s outstanding debt to the former Soviet Union. 

In Latin America, Moscow has embraced Venezuelan strongman Hugo Chávez, who has purchased more than $4 billion worth of Russian weapons over the past few years, including submarines and fighter jets. In late September, as The New York Times reported, the two countries “agreed to form a Russian-Venezuelan energy consortium that would share resources to produce and sell oil and gas. Russian companies are already at work exploring oil fields in Venezuela, but the agreement will allow them to expand their reach into more areas, including fields in Ecuador and Bolivia.” In late November, Russia agreed to help Venezuela build a nuclear reactor. 

A Chávez regime with nuclear technology would be dangerous enough; compounding this danger is the fact that Venezuela—like Russia—enjoys warm relations with the Iranian theocracy. Shortly after Russian and Venezuela signed the nuclear pact, their respective naval forces commenced military exercises in the Caribbean (exercises that included a Russian nuclear warship). 

Speaking of the Caribbean, Moscow has also moved closer to Communist Cuba, rekindling ties with its old Soviet-era client and seeking to boost both economic and military relations. Last month, as Reuters reported, “A Russian warship sailed into Havana Bay…for the first time since the 1991 collapse of the Soviet Union.” Russian president Dmitry Medvedev visited the island nation in late November and met with both Castro brothers. 

Over the past half decade, Russia’s aggressive foreign policy has been propelled by its unprecedented oil wealth. But after the recent plunge in energy prices, the fundamental weakness of the Russian economy is becoming ever more obvious. “With current commodity prices,” writes economist Anders Aslund, “the country’s exports [in 2009] could plummet by some 40 percent in current dollars, or by $200 billion. Budget and current account surpluses will quickly turn into deficits.”

As Aslund notes, tumbling commodity prices and the global credit crunch are not the only causes of Russia’s current economic woes. Putin has also made a hash of things by promoting corrupt and inefficient state-owned corporations, embracing a policy of resource nationalism that has hindered the Russian energy sector, and “systematically” reducing economic transparency. Corruption has become pervasive.

The Kremlin’s volatile and belligerent foreign policy hasn’t helped, either. Even when oil prices were well over $100 a barrel, investors were fleeing from Russia, spooked by the brief war with Georgia and concerns over political instability. Russian troops invaded Georgia on August 7. According to central bank data, Russia lost around $16.4 billion in foreign exchange reserves during the week of August 8-15.

When you combine Putin’s mismanagement with the major drop in commodity prices and the global economic downturn, Russia could be in for severe turmoil. The recent protests in Vladivostok, which were brutally suppressed by Russian police, could be a harbinger of things to come. The Kremlin is hoping that energy prices will spike again before the unrest spreads. But what if they don’t? 

A weakened Russia will have less money to shower on rogue governments. On the other hand, if Russia’s economy collapses and the stability of the regime is seriously threatened, it may provoke a new foreign policy crisis to distract attention. Indeed, Moscow may orchestrate a crisis (say, in Venezuela) and then use that crisis to demand something from the United States (perhaps a pledge to stop the deployment of missile defense systems in Poland and the Czech Republic). One thing seems clear: In 2009, Vladimir Putin will be causing plenty of headaches for the incoming Obama administration. 

Jaime Daremblum, Costa Rica’s former ambassador to the United States, is director of the Center for Latin American Studies at the Hudson Institute.

Image by Darren Wamboldt/The Bergman Group.

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