Abstract
Post-Soviet Russia has had the will to dominate its neighbors, but it no longer has the capability. Its Central Eurasian neighbors are much stronger and more confident about their independence, and Russia's influence is being effectively challenged there by China, the West, and the democratic economies of Asia. Unable to modernize its economy and armed forces, Russia has failed to achieve most of the main objectives (excluding NATO, regaining trade exclusivity, ending drug, arms, and terrorist infiltration) it has set for itself in the “near abroad.” In view of Russia's admitted weakness and its excessive reliance on oil and gas exports, some of its leaders favor redirecting its efforts to improving relations with the West. Aside from Central Asia, where Russia is cooperating with NATO in combating extreme Islamists operating in Afghanistan, Russia is trying to establish an Eurasian customs union with Kazakhstan and Belarus. But relations with most of the others have deteriorated to some degree in recent years.
Henry Kissinger taught us that in foreign affairs the crucial variables are capability and will. Without the will to dominate, and the capability, other states have little reason to worry. We will argue here that although Russia under Vladimir Putin has had the will to dominate its neighbors, it no longer has the capability. Besides its own material weakness, Russia's post-Soviet neighbors are much stronger and more confident about their independence. Russia's influence is being challenged effectively by China and the West.
On a number of recent occasions the top Russian leadership has expressed its special interest in the ex-Soviet republics that now independent. Prime Minister Vladimir Putin has called the dissolution of the USSR and its empire one of the greatest geopolitical tragedy of the 20th century, though he denies trying to reconstitute it. 2 On Russian television on August 31, 2008, President Dmitri Medvedev referred to his country's “privileged interests” in the near abroad, where many Russian ethnics still live – many with Russian citizenship, too. More recently Foreign Minister Sergei Lavrov claimed “unique relations” with the countries of the Commonwealth of Independent States (CIS) based on “civilizational unity.” Late in 2011, as Prime Minister Putin announced his plans to return to the Presidency, he called for a stronger “Eurasian Union” to include Belarus and Kazakhstan immediately, and Ukraine, Kyrgyzstan, and Tajikistan later. 3 This broader group would negotiate with the European Union and the small European Free Trade Association for free trade area across the Eurasian continent to Vladivostok. 4
“There is no talk of reforming the USSR in some form…It would be naïve to restore or copy what has been abandoned in the past, but close integration on the basis of new values, politics, and the economy is the order of the day,” said PM Putin. Charles Clover and Isabel Gorst, “Putin urges creation of Eurasian Union,” Financial Times, October 5, 2001, p. 3.
Izvestia, October 4, 2011. Irina Filatova, “Putin Calls for a New ‘Eurasian Union of Former Soviet Countries,” MoscowTimes, October 5, 2011.
The four EFTA has fewer than 14 million inhabitants; the 27-member EU has more than 500 million and borders on the Russian Federation.
Under Putin's leadership since 2000Russian foreign policy became more ambitious and assertive. Beginning in 2003 and up to 2008 rising revenues from oil and gas strengthened the apparent consensus among Kremlin policymakers and the public in favor of restoring Russia's dominant role in the now independent parts of the former Soviet Union. None of those new states has achieved adequate countervailing power to defend itself in any confrontation with Russia. Even for the new members of NATO – the Baltics, as well as Poland and the rest of the former satellite states of East Central Europe – it is far from clear how vigorously the older members of NATO would defend the interests of these newer ones, let alone prospective members, such as Georgia or Ukraine.
Eleven of ex-Soviet republics are members of the Commonwealth of Independent States (CIS), but at its 20th anniversary celebration in Dushanbe, Tajikistan, three of the presidents failed to show up. CIS provisions for a free trade area have lain dormant for years. At an earlier meeting, some of the leaders had the effrontery to express disapproval of Russia's invasion of Georgia, a rare Russian use of force since the end of the Soviet Union in 1991. Kazakhstan's President Nursultan Nazarbaev, one of Russia's best friends, released this statement just after the invasion: “The principle of territorial integrity is recognized by the entire international community. Difficult interethnic issues should be worked out through peaceful negotiations. There can be no military solution for such conflicts.” At a subsequent meeting of the Chinese-initiated Shanghai Cooperation Organization, Russia's fellow members refused to join in recognizing the independence of South Ossetia and Abkhazia, separatist parts of the Republic of Georgia. Instead, Russia's erstwhile colonies called for all parties in the Caucasus to resolve “existing problems” through dialog and negotiation, not the use of force. Russia stood alone diplomatically.
Russia's priority objectives in the “near abroad”
To appraise Russia's success in asserting its will one must analyze Moscow's objectives in the “near abroad,” as evidence by Kremlin statements and actions. (1) First and foremost, Russia has expressed a strategic concern to exclude NATO from areas close to its borders. At a European security conference, President Putin said that NATO expansion into the Baltics and potentially into the Caucasus and Ukraine “represents a serious provocation that reduces the level of mutual trust.” Any and all placement of missiles or troops in those areas would complicate Russian defenses, which traditionally depend on strategic depth. Russian diplomats remember that former U.S. Secretary of State James Baker promised that reunification of Germany would not lead to such NATO expansion. Strobe Talbott, former Ambassador-at-large and special assistant to the secretary of state in the subsequent administration of President Bill Clinton, admitted to us at a reception that, yes, Baker had made this promise, but it was “not an official commitment of the US government.”
Quite obviously, this Russian objective of excluding NATO near its borders has not been achieved. President Clinton pushed NATO membership through for Poland and the Baltic three – all adjacent to recognized Russian territory. In Central Asia, following the Al Qaeda attack on the World Trade Center and Pentagon, American airmen were stationed in Uzbekistan from 2001 to 2005, followed by German airmen on behalf of NATO after that. Now Uzbekistan, the most powerful Central Asian state, has again increased its cooperation with NATO efforts in Afghanistan, and the Obama Administration is talking with President Islam Karimov about using routes through Uzbekistan to supply NATO from the north, instead of mostly through Pakistan, as well as a return to the Termez airport transit point.
NATO also has an airbase in Kyrgyzstan and servicemen in Tajikistan. All these countries, most noticeably Georgia, receive American military training and equipment to replace aging Soviet types. Kazakhstan is also a member of NATO's Partnership for Peace, though it balances its position by buying advanced Russian missile and artillery weapons and intends to set up a single air defense system. 5 Georgia has declared its “goal to joining the Euro-Atlantic institutions, particularly the EU and NATO,” something only the Baltic states among former Soviet republics have actually achieved. 6
Interfax KazakhstanOnline, September 22, 2011.
Giorgi Baramidze [Vice Prime Minister of Georgia and State Minister on European and Euro-Atlantic Integration], “Tbilisi in the Crosshairs,” The Journal of International Security Affairs no. 20 (Spring/Summer, 2011), p. 82. Russia's foreign minister stated in April, 2008, that his government “will do everything” to prevent this eventuality. The new US ambassador to Moscow has declared Washington's interest in it, though.
As a match for NATO, some time ago Russia initiated the Collective Security Treaty Organization (CSTO). Although this organization has some rapid reaction forces on paper, they have never been used. It has been rumored in Tashkent, capital of Uzbekistan, that President Karimov will once again secede from the CSTO, the Russian-sponsored military alliance. Accordingly, the Russian head of the CSTO, General Nikolai Bordyuzha has suggested that the CSTO henceforth work by majority rule, not unanimity. If so, it would seem, Uzbekistan will surely withdraw. But neither Russia nor anyone else wished to intervene in the June, 2010, riots between Kyrgyz and local Uzbeksin and around Osh. Apparently the Russian military doubted the effectiveness of deploying “peacekeepers” in the complicated ethnic fabric of southern Kyrgyzstan. And Uzbekistan objected, along with the Chinese, so Russia backed away. 7 Uzbekistan also strongly protested a plan to build a second Russian military base in the south of the Kyrgyz Republic near the Uzbek border.
Stephen Blank, “A Sino-Uzbek Axis in Central Asia?” Central Asia-Caucasus Analyst 12:16, September 1, 2010.
Similar results have been observed for the Shanghai Cooperation Organization, which has degenerated into a talking forum with no real military or economic effect in itself. 8 Its “Peace Mission 2010” involved only officers from China, Kazakhstan, Kyrgyzstan, and Tajikistan in an exercise. 9 Uzbekistan, Tajikistan, and Kyrgyzstan are quite willing to participate in this latter organization, sponsored by China. They have all agreed to host Confucius Institutes for the study of Mandarin Chinese. Chinese universities have accepted many Central Asian students, so Russia's cultural preeminence as lingua franca of the older generation of officials is slipping. As the Oriental saying has it, “The friendly calf can suck on two mothers.” Or three.
Erica Marat, The Military and the State in Central Asia. London: Routledge, 2010, p. 85.
Interfax KazakhstanOnline, September 2, 2010.
(2) A second vital interest of Russia in the near abroad is interdiction of drugs, contagious disease, arms, and Islamist terrorists. Islamists from Chechnya are active in and around the Caucasus. Chechnya itself is pacified but hardly peaceful. Seventy Russian policemen and others have been killed in “increasingly ungovernable” Dagestan and Ingushetia. 10 More recently explosions of two car bombs killed a Russian policeman and wounded some dozens of others in the capital of Dagestan, the largely Muslim and ethnically diverse Russian Federation republic in the north Caucasus region. 11 Resurgence of the Taliban in Afghanistan might encourage Islamists within Russia's southern border. 12 Were the Taliban to prevail in northern Afghanistan, they might well make common cause with hither-to suppressed opponents of the Central Asian regimes and thus threaten Russian interests there. The flow of narcotics to Russia's millions of addicts, many of whom are victims of HIV, has not abated. This is one consequence of Russian involvement in Tajikistan, where the drug-related illness is rising fast. According to our sources, Russian airmen engage in transporting opium from the wild Afghanistan border with Tajikistan to markets within Russia and further west. With a polio epidemic in nearby Tajikistan, the disease has spread because of neglect, and in the summer of 2010 Russia registered the first cases of polio in Uzbek migrant laborers. 13
The Economist, September 6, 2008, p. 30. The situation in 2009 is tantamount to “civil war.” Ibid., January 30, 2010, p. 63. “Chechnya…is now a brutal dictatorship toying with sharia governance. The Muslim fundamentalist insurgence has spread to previously quiet Dagestan, Ingushetia, and Kabardino-Balkaria, while the Moscow Metro, planes, and an airport have been targets of devastating terrorist attacks.” Leon Aron, “Russia's Deep Despair,” The New Republic, March 24, 2011, p. 13.
Financial Times, September 23,2011, p. 4.
According to Sergei Prikhodko, chief foreign policy advisor to the Russian President. RFE/RL, Feb. 4, 2009.
Interview with “senior international official” in Bishkek by the International Crisis Group in September, 2010. Central Asia: Decay and Decline, Crisis Group Asia Report no. 2010, February 3, 2011, p. 20.
(3) Russia's top elite, the so-called siloviki, make their fabulous incomes by taking their cut of the country's wealth of raw materials and its transit fees, earned by the oil and gas pipelines from Central Asia and Ukraine over Russian territory. Keeping the money flowing is thus a third objective. In Soviet times Russia was able to obtain an unlimited share of the oil and natural gas from Central Asian at prices permitting profitable resale in Europe. But now the situation in the oil and gas sector is gradually slipping away from Gazprom, Russia's energy monopolist throughout most of Central Asia and the Caucasus. Turkmenistan, Kazakhstan, and Uzbekistan have allowed gas pipelines to be built by Chinese workers to supply the People's Republic's considerable energy needs. Azerbaijan and Georgia agreed to construction of the BTC oil pipeline from the Caspian to the Turkish port of Ceyhan on the Mediterranean Sea, with the encouragement of American officials. The EU intends to build the Nabucco gas pipeline from Caspian sources to European markets. All this competition has meant that Russia's Gazprom must pay up and lose profits, as final prices to consumers are likely to decline, as shale gas supplies increase worldwide.
Gazprom has tried to block new outside construction by buying up some of its possible gas supply. Several existing pipelines from Central Asia traverse Ukraine and gives that country (more precisely, its small elite) access to natural gas, legally or illegally, and transit fees. Consequently, Russia has had to construct new and expensive undersea lines under the Black and Baltic seas to its customers and now plans the rival South Stream pipeline in the Balkans. 14
Boris Nemtsov and Vladimir Milov assert that Gazprom's costs of construction have been $3 million per km, two to three times higher than the world average. Andei Shleifer and Daniel Treisman, “Why Moscow Says No,” Foreign Affairs, January/February 2011, p. 127.
In other industries Russian companies are still active. Kazakhstan's coal and electricity sector has been attractive for some Russian investors. 15 Despite Uzbekistan's objections, Russia is helping build the Sangtuda hydroelectric station on the Vakhsh River of Tajikistan – crucial for aluminum development – and has promised to build three low-capacity hydropower stations (CASA-100) to transmit electricity to Afghanistan. President Rakhmon personally asked President Medvedev to approve a new railroad line from Tajikistan north to Russia so as to bypass Uzbekistan. This request was not received positively.
Vladimir Paramonov, “Russia's Energy Challenges,” The Journal of International Security Affair s, no. 20 (Spring/Summer 2011), p. 133.
Russia has backed off from doing a similar hydro project in the Kyrgyz Republic because of political instability there. Long suspicious of Russian initiatives in the political and military arenas, Uzbekistan has nevertheless welcomed Moscow's interest in developing its petroleum reserves, and gas sales continue, too.
(4) Yet another Russian objective is to reconstitute near exclusivity in trade with the near abroad, on terms favorable to Moscow. Because of their failure so far to be admitted to the World Trade Organization (WTO), owing to Georgia's veto, Russia is again trying to fortify its commercial position elsewhere in the near abroad. The Eurasian Economic Community (EurAsEC), a project long championed by Kazakhstan's President Nursultan Nazarbaev, has diverse and ambitious objectives on paper, including a customs union with a common external tariff and single set of regulations for movement of labor and capital. If Moscow has it way, this will be a monetary union as well, with the ruble a single regional currency, instead of dollars or euros. From the beginning of 2010 the Russia-Kazakhstan-Belarus customs union began to operate, 16 albeit with some exceptions. 17 This arrangement is supposed to expand in January, 2012, to a “common economic space” with free passage of all goods and services, as well as capital, with a common (ruble) currency to follow, on the model of the European Union.
Kazakhstan and Belarus add about 25 million population to Russia's 141 million, although the former two have somewhat lower buying power.
A few types of goods are still exempt. Some border checkpoints between Russia and Kazakhstan have been closed, while some new ones with Uzbekistan have been opened. There are still some barriers to imports into Belarus as of October, 2011.
Adopting the Russian external tariffs has meant that the duty on automobiles rose from 10% to 30–35%, or more on used vehicles. Because the Russian tariff imposed on Kazakhstan makes automobiles from Japan, Uzbekistan, and elsewhere far more expensive, well-off Kazakhstanis have been unhappy with the customs union. This is a clear attempt to make Russian-made automobiles like the Lada competitive, despite their poor quality. For Kazakhstanis a Toyota Camry went from $22,000 to $40,000, and the prices of leather and medicines also rose very noticeably, “provoking indignation among consumers in Kazakhstan.” 18 According to Bolat Abilov, co-chairman of the oppositionist social democratic party Azat, the tariffs have also made food and fuel much more expensive this year. “We think there is a very dangerous risk of another political union between Russia and Kazakhstan” by the anniversary of the Bolshevik Revolution five years from now. 19
Kenjail Tinbai, “A semi-Soviet Union is born,” TOL, March 2, 2010. The negative effects on Kazakhstan were recognized by Russian observers at a conference in Ekaterinburg in February. Aleksei Starostin, “Politologi schitaet, chto Rossiia dolzhna usilit svoe prisutstvie v Tsental'noi Azii.” It was further stated that the customs union could hardly succeed without Uzbekistan.
Clover and Gorst, Financial Times, October 5, 2011, p. 3.
What auto-exporter Uzbekistan will do is not yet clear, but Russian ambitions to establish a “common economic space” by 2012 would seem to require more members, and more fiscal and monetary coordination than has been possible in the past. Given the much wider usefulness of dollars or euros, as well as Russia's inflation and unstable ruble values, that proposal seems unlikely to appeal to Moscow's partners.
Despite the proximity and commercial contacts with Russian-speakers in the near abroad, all of the ex-Soviet republics have tried to diversify their trade. They send their natural resources and agricultural products – such as cotton, gold, uranium, aluminum, and animal products – to the best world markets, rather than Russia, though Russia remains a significant customer for ores, fruit, and natural gas. The southern tier countries buy an increasing share of cheap consumer goods from China, Turkey, and the Persian Gulf. Capital goods come in from Germany, making that country unusually interested in close relations with the authoritarian regimes of Central Asia. Except for atomic reactors and some arms, Russia is simply not competitive. 20
In 2007 Kazakhstan took 35% of its imports from Russia, but this includes transit trade originating in other countries. The other Central Asians imported 8-26% of their purchases from or through Russia, with China's share roughly equal to the Russian's in Tajikistan and Kyrgyzstan. The OECD countries are important competitors in Uzbekistan (19%) and Turkmenistan (22%). IMF Directions of Trade Statistics, June, 2008.
An interesting example of the challenges Russia encounters doing business in Central Asia is the case of Talco, the Tajik aluminum company that accounts for about 60 per cent of that country's exports. Up to 2004, the high point of Russian-Tajik relationships, the Russian conglomerate Rusal handled Talco trading operations, but in 2006 Rusal was displaced by the Norwegian firm Hydro. The Norwegians agreed to some shady financial arrangement that diverted the fabulous profits from Talco to President Rakhmon and his associates, rather than the Tajik treasury. 21
John Heatherstraw, “Tajikistan amidst globalization: state failure or state transformation?” Central Asian Survey, vol. 30, no. 1 (March, 2011), 147-68. Apparently some IMF payments went in the same way.
Relations with the neighbors mostly worse
Active diplomacy on the part of Russia has tried to establish “cooperative” relationships with its neighbors. The most important is Ukraine is at work. Elections there in 2010 in Ukraine has brought Viktor Yanukovych to power, mostly owing to the failures of his predecessor, Victor Yushchenko the previous pro-Western Ukrainian president closely associated with the Orange Revolution. Supposed to be pro-Russian, Yanukovych is known to favor the Russian language over Ukrainian and has rejected the charge of deliberate genocide in the Holodomor famine of 1932–1933. The anti-Russian genocide interpretation had been emphasized by Yushchenko. It is reported that Yanukovych has also tolerated Russian penetration of the Ukrainian SBU secret service. 22 The new president soon agreed to extend Russia's basing rights at the naval base at Sevastopol beyond 2017. Russia soon announced a modernization and expansion of its military capability there. In return, Kyiv was supposed to obtain a discount from the world price on its vital natural gas supply from Russia, rather than the price negotiated in 2009 by Prime Minister Yulia Tymoshenko. But this concession has not been forthcoming. Ukraine is actively negotiating free trade and association agreements with the EU – a popular orientation for most Ukrainians but unwelcome to Moscow. 23 So now Russia seems to be insisting that Ukraine join its EurAsEc gambit instead before it receives the discount. 24 The Kremlin has also initiated a “low-grade trade war” with Ukraine and is trying to collect a $400 million debt Kyiv is supposed to owe from Tymoshenko's time in office. 25
Taras Kuzio, “Ukraine's Foreign and Security Policy Controlled by Russia,” Eurasia Daily Monitor, October 18, 2010, published by Jamestown Foundation.
Ukraine's export potential into the EU is questionable. Its manufactured products are low quality and its food and grain would face the EU's protected Common Agricultural Policy.
Roman Olearchyk, “Moscow offers Kiev cheap gas,” Financial Times, April 13, 2011. Ukraine could gain a market for its grain and steel in Europe but would have to accept the EU's quality consumer goods. The EU delegation is also pressing Yanukovych to drop the charges against former Prime Minister Yulia Timoshenko for supposedly exceeding her authority in negotiating a 2009 gas deal with Moscow. Financial Times, Septmeber 30, 2011, p. 6. On Russia's demand, see Reuters, September 25, 2011.
The Economist, September 24, 2011, p. 65.
Despite even stronger Russian pressures Georgia has been amenable than Ukraine. For years Georgia's pro-American president Mikheil Saakashvili had threatened the use of force to retake control of Abkhazia and South Ossetia, territories assigned to the Georgian SSR as part of the Soviet Union but occupied by Russian “peacekeepers.” 26 Saakashvili proclaimed his desire to join NATO, a possibility unacceptable to Moscow. Georgia had increased its military budget by some ten times since 2004, and by 2008 it constituted a full 5 per cent of its GDP, according to the authoritative Stockholm Institute for Peace Research. 27 Russia had evidently also been preparing for war, but when Georgians came under fire from Russia's local allies, the impetuous Saakashvili attacked first. 28 Russian forces moved into still more Georgian territory in a previously rehearsed five-day campaign supported by a cyber-attack on Georgian communications. Russian troops still occupy land in Georgia proper and have continued to build up bases and armed forces in both Abkhazia and South Ossetia, break-off territories Russia (but hardly anyone else) recognizes as independent. Besides South Ossetia and Abkhazia, where ethnic Georgians have been pushed out, Russian troops are in violation of the Cease-fire Agreement negotiated by the EU. OSCE and UN monitoring missions have been prevented from entering Russian-occupied territories claimed by Georgia. Russia has tried to intimidate other arms suppliers, such as Israel, to stop deliveries to Georgia. Russia also still boycotts Georgia's exports.
A third such area, Ajaria, was recovered, partly through Russian mediation. André Liebich, review of Svante E. Cornell and S. Frederick Starr, The Guns of August 2008: Russia's War in Georgia. N.Y.: M.E. Sharpe, 2009. Like the Russian Federation itself, Georgia has always had significant non-Georgian ethnic populations, some of whom have closer ties to Moscow than to Tbilisi.
Noted in Nezavisimaya gazeta, March 18, 2009.
According to the Tagliavini Report of the EU. Council of the European Union, “Independent international fact-fining mission on the conflict in Georgia report,” vol. III, 2009. www.ceiig.ch/Report.html.
President Saakashvili, whose term expires in 2013, has recently run into increased criticism from domestic opponents for his authoritarian ways, despite significant economic reforms. But his hopes for American support have apparently fallen victim to the Obama administration hopes for a “reset” with Putin's Russia with regard to more important issues, such as Iran. Saakashvili has been warned that, although the USA will help with some material assistance, Georgia should not expect military support for any adventure to recapture the two break-away provinces. Indeed, in 2010 the Georgian leader renounced the use of force to recover the lost territories. Nonetheless, the new American ambassador to Moscow, the noted academic Michael McFaul, has reiterated Washington's rejection of Russian occupation of Georgian territory. The US will not force Georgia to go along with Russia's application to the World Trade Organization. Rather, Washington favors Swiss mediation of the WTO matter. The fact that Georgia supplies soldiers for the NATO mission in Afghanistan undoubtedly plays a part in assuring this continued, if moderated, support.
Russia has been backing Armenia in its mounting tension with neighboring Azerbaijan over Armenia's occupation of the Karabakh region and other areas once part of the Azerbaijani SSR. A new bilateral defense treaty commits Russia to defend Armenia from an Azerbaijani attack, provided more arms against that eventuality, extended the lease on the Gyumri base for another three decades. 29 Publicly, however, Moscow continues to work for a solution on acceptable terms. This has not prevented Azerbaijan from developing new energy routes and contacts with Western customers, to Russia's disadvantage, and the arms it is buying may create problems for Russia in the future.
F. Ismailzade, “Russian Arms to Armenia Could Change Azebaijan's Foreign Policy Orientation,” Central Asia-Caucasus Analyst 11:2 (January 28, 2009).
In nearby Moldova, Russia has stubbornly maintained its military support of the outlaw Transdniester regime in the eastern part of Moldova. In response to that and Germany's insistence on withdrawal of Russian troops – with support of fellow NATO members Poland and Romania – the new Moldovan government has taken a pro-EU position and is hoping for military assistance from Romania as well.
Even so, the “near abroad” institutions supposed to bind the region together have largely failed. At a recent meeting of the CIS, supposedly a coordinating body through which Russia tries to exercise leadership, only six of the eleven presidents from the “near abroad” bothered to show up. The meeting adjourned after 30 min. According to Alexei Malashenko of Moscow's liberal Carnegie Center, the countries of the former Soviet Union see such organizations as the CIS and EurAsEC “as ruled by Russia, and they would like to deal with Russia in private.” 30
Johnson's Russian List, October 5, 2011.
In short, while Russia has the will to control the near abroad, it may not have to do much actively to do so. And anyway it doesn't have the capability, given the resistance from China and the states of Central Asia and the Caucasus.
Russia's economic weakness
Russia's basic economic condition has deteriorated since 2007, when it achieved a very good growth rate of 8%. 31 Two-thirds of Russia's hard-currency exports still come from oil and gas. When oil prices, which are notoriously volatile, dropped in early 2009, GDP was down almost 10%, and has recovered little since. Taxes on those export provide half of its budget revenues, so budget deficits of 8–9% appeared early in 2009 when oil prices fell to $50 or so. During 2011 and into 2012, GDP will grow about 4%, so at present Russia is muddling through. But the consumer price inflation rate has accelerated to nearly 9% during 2011. 32 Oil prices have been around $80 per barrel at this writing, not high enough to allow the Russian Federation to balance its budget, though enough to fuel imported consumption goods and allow rich Russians to travel and send money abroad to buy luxuries and real estate. 33 Even with average oil prices now, the trade surplus and ruble have declined, according to the Economist Intelligence Unit and IMF, but the Russian elite still can send money abroad.
Up to 2007 Russia was able to increase its oil production, now standing at 501 metric tons per year, reduce its gross debt, raise foreign direct investment considerably and cut unemployment from 10.6% in 2000 to 6.2% in 2005-08. Life expectancy, which reflect declining morbidity from alcoholism, for 2005-10 is estimated by the Russian State Statistical Service 67.7 years, but Russia population has shrunk from 146.9 million to 141.9, reflecting a crude birth rate of 12 per thousand as of 2008 and a relatively high death rate of 15/1000. World Development Indicators 2010, p.64. High oil prices lately have allowed GDP growth of about 4%, though it also funded approximately $50 billion in capital exports from the Russian Federation.
The Economist, September 10, 2011, p. 105.
More than $21 billion left the country in 2010, not to mention more than 1.25 million citizens in the last few years, according to official figures.
Finance Minister Alexei Kudrin used high oil prices in the last two years to build up a reserve of about $500 billion and to reduce Russia's foreign debt to about 10% of its GDP. Nevertheless, in the eyes of Russia's young and technical population, the prospects are not encouraging and many have left for the West, despite the current recession. About $50 billion in assets left with them this year, and the ruble declined some 15% from August, 2011. Private net outflows have been considerable since 2008, according to the Central Bank of Russia. 34
The Economist, September 10, 2011, p. 28.
Oil and gas production volumes are stable or decreasing, and world competition from LNG, Qatar, and new oil fields is cutting into Russian demand. Finance Minister Kudrin recently stated “Economic growth based on oil has been exhausted.” 35 Prime Minister Putin, though prone to brag about his country as an “energy superpower,” has called for more diversification. It won't be easy. For instance, Walmart's persistent attempt to enter the Russian market by purchasing one of its backward retail chains failed. Said a source familiar with the reason: bureaucrats “did not want another whiner like Ikea, which had exposed corruption.” 36
Leon Aron, “Russia's Deep Despair,” The New Republic, March 24, 2011, p. 13.
Ibid.
Overall government spending in the Russian Federation has risen to 40%, and once-and-future President Putin has announced a $630 billion program for military modernization, a plan which together with social spending forced Kudrin to resign in protest. 37 Some $200 billion had to be spent of state reserves to bail out banks and failing factories. Industrial and R&D investments have been paltry. 38 Instead of investing in schools, hospitals, and its deteriorated infrastructure, Putin's regime has given out subsidies to obsolete factories in one-company towns. A leading example is the Avtovaz plant, which employs 70,000 workers to make the out-of-date Lada, a holdover from Soviet time. Since the fall of the Soviet Union only one cement factory has been built and no new oil refinery. A World Bank study from 2007 found that only 5% of firms were renewed in the previous decade – a quarter of the rate in healthy Western economies.
The Financial Times, September 28, 2011, p. 15.
Investments in science are but 1.5% of GDP. Paul Starobin, “Silicon Implant,” The New Republic, February 17, 2011, p. 18.
Popular opinion is pessimistic. Judging by actions of its own citizens and investors, Russia's longer-term prospects are unsatisfactory. According to the well-known Levada Centre poll, 22% of Russia's adult population would like to leave the country for good – three times the proportion just three years ago. That includes even higher fractions of younger, high-income adults. Among entrepreneurs and students, more than half would leave permanently, and about a third of professionals. 39 The leading causes mentioned were “an unreasonably high cost of living, low quality of medical services, and widespread corruption among public servants.” Half a million Russian-speaking immigrants in California include many mathematicians, programmers, and engineers. 40 Some are key entrepreneurs. One of them, Google co-founder Sergey Brin, has described his native land as “Nigeria with snow.” A World Bank study of Russian science and engineering students studying in America found that 77% will not go back to their native land. 41
The Economist, September 10, 2011, p. 27. To leave permanently means obtaining entry visas, a contract, or student fellowships—not easy matters. As of now, Russians do not have visa-free travel to western Europe, quite an annoyance for those with property or vacation plans in southern France.
Ibid.
The Economist, September 10, 2011, p. 30.
Campden Media and UBS, asked 19 Russian businessmen with more than $50 million in personal assets about their plans. Of these 17 said they had moved their wealth abroad and might sell their companies, whose turnover exceeded $100 million, rather than passing them on to their children, now typically studying in the West for future business careers there. 42 Commented Nadia Wells of the global fund Capital Group, “if your elite is not reinvesting in Russia, why should we invest here?” She noted that compared with other emerging markets Russian assets, such as energy fields, trade at a discount of as much as 40%. 43
The Economist, September 10, 2011, p. 30.
Gregory L. White, “Putin Touts Russian Economic Power,” Wall Street Journal, October 7, 2011, p. A12.
Consequences of material weakness for policy in Eurasia
Not surprisingly in consequence of this weakness, Russia has reneged on promises to lend money to some of its neighbors. 44 Even an important $150 billion development project in the north Caucasus (a chaotic part of the Russian Federation) had to be canceled. 45 Russian analysts are groaning about their country's lost positions in its erstwhile colonies. The well-known commentator Victoria Panfilova writes, “Russia is becoming alienated from Central Asia.” 46
Russia had pledged some $7.5 billion to Kyrgyzstan and Tajikistan. The Baltic Times, no. 705, May 26, 2010. Estimated total investment in the region as of early 2010 was about $4.7 billion. Paramonov, p. 134.
Olof Staaf in Central Asian and Caucasus Analyst, August 17, 2011.
Nezavisimaya gazeta, January 18, 2010, p. 11, translated in Current Digest of the Russian Press, vol. 62, no. 4 (January 25, 2010).
Russia's more liquid competitors are moving in on the Eurasian economies. Most notably, the Chinese have generously bought up some of Kazakhstan's oil fields at a cool $5 billion and lent that financially troubled country a further $5 billion. 47 Already China's state-owned National Petroleum Company produces a fifth of all Kazakhstan's oil output. 48 Turkmenistan is to receive a $4 billion loan to develop one of its promising gas fields. Turkmenistan's new president Gurbanguly Berdymukhammedov signed contracts with firms from China, South Korea, and the UAE worth almost $10 billion to develop the very promising South Yolotan fields. 49 European officials have renewed their interest in Turkmen gas to be piped in across the Caspian and Black seas. Turkmenistan's pipeline with China through Uzbekistan and Kazakhstan opened in late 2009. Russia has found itself outbid and excluded from business prospects in this authoritarian state.
China holds majority stakes in fifteen companies operating in Kazakhstan's energy sector; more than 30% of the crude oil produced in 2010 was expected to go to China through joint pipelines.
Simon Pirani, review of T.N. Marketos, China's Energy Politics in Central Asian Quarterly, no. 2, 2011.
Richard Pomfret, “Exploiting Energy and Mineral Resources in Central Asia, Azerbaijan and Mongolia,” Comparative Economic Studies, vol. 53 (March, 2011), p. 20.
Kyrgyzstan has obtained military equipment from the Chinese, too, while Moscow's planned assistance to Kyrgyzstan's troubled energy sector has been aborted. A Russian loan of $100 million for the Kambarata-1 power station in southern Kyrgyzstan was apparently wasted, as was previous financial aid of $450 million, so Moscow suspending a $1.7 billion loan early last year. 50 Nor do they wish to press for reform of any kind. Tajikistan has several Chinese factories working with Chinese labor. China's Import-Export Bank is the largest investor in Tajikistan's road network. 51
Crisis Group Asia Report, p. 13. Viktoria Panfilova, “Kyrgyzskie kacheli,” Nezavisimaya gazeta, February 26, 2010.
Crisis Group Asia Report, p. 17.
South Korean firms have made significant investments in Central Asia for some time. Not long ago the Republic of Korea announced it will lend Uzbekistan $30 million for an information technology and education project. Korea Resources Corporation will mine uranium, iron, and gold in the country, according to The Korea Herald. South Korea will also develop the Surgil gas field jointly with Uzbekistan and build a chemical plant nearby, at an estimated cost of $3 billion. Korea's well-known consumer goods companies are also quite active in the region, and both India and Japan are trying to do more business there.
Conclusion
Russia's economic and military decline is far from the biggest problem world statesmen have these days in foreign affairs. Russia is no longer a threat to most of its neighbors, nor an ideological threat. Most of the Eurasian countries of the “near abroad” prefer to deal independently with all the major powers. Russia remains a rival in some situations, such as Iranian nuclear ambitions, but Kremlin leaders also have some interests similar to those of North Atlantic and the Pacific rim: preventing war, opposing Islamist extremism, reducing the flow of drugs and arms to criminals, and stabilizing the world's atmosphere.