Heritage Foundation Leadership for America

As the Obama Administration embarks on a major readjustment of U.S. policy toward Russia, U.S. policymakers need to understand how the economic crisis is influencing Russia's foreign and domestic policies, and thereby affects U.S. interests. Much of Russia's assertiveness and adventurism in recent years floated on a bubble of expensive oil and natural gas exports.

As Russian leaders realize their country's economic weakness, the Administration should deny Russia economic benefits if Russia pursues anti-American policies or refuses to enact the needed policy changes, especially on Iran. At the same time, the U.S. should devise incentives that facilitate Russia's integration into global markets and promote policies in sync with U.S. goals. Unilateral concessions by the Obama Administration will not work, whereas pursuit of mutual strategic and economic interests is possible. Specifically, the U.S. should work with its European allies to diversify their energy supplies, to defeat Russian hopes of blackmailing Europe into further strategic concessions, to block Russian weapons and sales to Iran and Venezuela, and to oppose Russia's attempt to reestablish its hegemony in the "near abroad."

Russia's falling economic performance has dampened some aspects of the revisionist rhetoric, but has not drastically changed Russia's foreign policy narrative, which remains decidedly anti-status quo and implicitly anti-American. Recent increases in oil prices ensure the continuity of this policy thrust. Unless the Kremlin significantly reorients its foreign and security policy priorities, the Obama Administration's attempt to "reset" U.S.-Russian relations may fail.

The Russian Economic Crisis and Foreign Policy. Since summer 2008, the Russian economy has undergone a major meltdown, largely due to the global financial crisis. The crisis caused a significant decline in oil and gas revenues, the principal source of income for the Russian economy and government. Beginning in the fall of 2008, the financial resources for Russia's assertive foreign and defense policy dwindled, with Russia's massive hard currency reserves declining from about $600 billion to about $400 billion. However, economic growth resumed in the second quarter of 2009 before the reserves were exhausted.

Yet during the current crisis, Russia has continued to voice strong grievances against the West and demanded changes in key international economic and European security institutions.

The U.S. Policy Conundrum. The United States has used economic levers to deal with Russia for more than 70 years with mixed results until Ronald Reagan won a decisive geo-economic victory over the decrepit Soviet system. Today, U.S. interests in Russia include:

• Stopping or at least slowing Russia's slide toward a state capitalist model, which makes externally aggressive authoritarianism more viable;
• Encouraging Russia to develop more transparent business practices, which will attract American business and help Russia's candidacy for membership in the World Trade Organization (WTO); and
• Increasing Russia's integration into the global economy.

The U.S. is interested in demonstrating to the Russian leaders that their current policies could lead toward imperial overstretch and isolation. Offensive Russian priorities--including support of Iran and Venezuela; building military bases in Central Asia, the Caucasus, and the Middle East; and ambitious pipeline projects--could prove economically unviable. In the long term, they could become unsustainable liabilities that impoverish the Russian people.

What the U.S. Should Do. It is in long-term U.S. and Russian interests for Russia to abandon its revisionist rhetoric and policies and to join the community of market economies. Moscow could become a more viable U.S. partner if it demilitarized its foreign policy and refocused on economic modernization and international integration. However, such a shift will require profound changes within Russia. To this end, the U.S. should offer incentives for changes that facilitate Russia's integration into global markets and disincentives for anti-American or destabilizing policies. Specifically, the U.S. should:

• Work with key European governmentsto address their overreliance on Russian gas;
• Supportdiversification of energy transportation routes in Eurasia;
• Cooperatewith Western governments to track and prosecute Russian state and oligarch money laundering activities, corruption, and unfair competition practices;
• Place conditions on Russian borrowing from international financial institutions;
• Encourage Russia to deepen its economic reforms and diversify its economy;
• Makethe rule of law and good governance litmus tests in developing U.S.-Russian economic relations;
• Support Russian membership in the WTO and OECD if it opens its economy and implements transparency, rule-of-law, and anti-corruption measures; and
• Repeal the Jackson-Vanick Amendment.

Conclusion. The economic crisis has selectively toned down Russia's rhetoric, but has not sufficiently changed the basic priorities of the top Russian national leadership.

When dealing with Russia, the U.S. should staunchly protect its national security and foreign policy interests. This is not the time for counterproductive, unilateral concessions, which may cause further Russian recalcitrance. Yet by increasing Russia's stake in the global economic pie it is likely that its rulers may emphasize the economic agenda over the 19th century-style expansionism. This is an option that Congress and the Obama Administration should pursue while driving a hard bargain on vital national security priorities.

Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security in the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation. Richard E. Ericson, Ph.D., is Chair of the Department of Economics at the East Carolina University and former Director of the Harriman Institute at Columbia University. The authors thank Daniella Markheim and Ted R. Bromund, colleagues at The Heritage Foundation, for their review of and contributions to this paper.