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Executive Summary #2235 on Russia

January 30, 2009

Executive Summary: Russia's Drive for Global Economic Power: A Challenge for the Obama Administration

By and

Until the recent global financial crisis, Russia's economic revival under Vladimir Putin had helped to restore the country's standing as a major player in the world arena. In many respects, Russia's invasion of Georgia was fueled by Russia's economic growth and newfound wealth.

This economic prosperity was largely the result of Russia's oil and natural gas exports, coupled with the high prices of other Russian commodities in world markets. With the seventh-largest oil reserves and the largest gas reserves in the world, and as the leading exporter of oil and gas, the Kremlin is using its energy exports, export revenue from arms and metal sales, and investments abroad, including in the mining and energy sectors, to extend Russian influence worldwide.

Russia shut down the flow of natural gas to Ukraine in January 2006 and again in January 2009. It attempted to prevent Caspian oil and gas supplies from flowing freely to European markets by applying pressure on Kazakhstan, Turkmenistan, and Azerbaijan; threatened to disrupt oil exports through Georgian territory when it invaded Georgia; has acquired, and is in the process of acquiring, European energy companies, as well as pipelines, refineries, and other assets in more than a dozen countries. Moscow is also targeting the strategic Middle Eastern oil and gas sec­tor for joint ventures, and is displacing Western energy companies operating in OPEC founding member Venezuela.

Russia's geo-economic ambitions cover the entire Eurasian landmass from the Atlantic to the Pacific. Severe repercussions for Europe's national security due to dependence on Russian energy are widely recognized by the European Union and individual nations. Furthermore, Russia aims to become a major energy supplier and provider of raw materials to countries of the Asia-Pacific region, including China, Japan, South Korea, and also the United States. Such a goal, if achieved, would greatly enhance Russian economic and political leverage in the Pacific Rim.

Russia's Economic March. The geo-economic and geopolitical implications of Russia's economic power projection abroad cannot be overstated: As the Russian state's main source of revenues and as a foreign policy arm, it enables the Kremlin to extend Russia's influence on a global scale. Moscow exer­cises economic--and political--influence over countries that depend on Moscow's resources. Rus­sian exports and investment projects are an instru­ment for establishing and developing strategic relationships through the export of commodities, arms, and nuclear technology.

Since Vladimir Putin became president in spring 2000, the Kremlin has been backing the formation of "national champions" of the economy--corpo­rate giants, private or state-owned, and subservient to the government. The huge corporations favored by the Kremlin--Gazprom, Rosneft, LUKoil, and Rostekhnologii (Russian Technologies)--have become instruments of the Russian state's policy to dominate the national economy and to project its power abroad through a trade-based foreign economic policy. The Kremlin has been using energy exports as a tool of its foreign policy. The most notorious example is the disruption or the threat to cut off oil and gas exports to an importer country, such as Ukraine, that is perceived as adopting policies that go against Russia's national interests.

A Perfect Storm. The international financial crisis has seemingly put a stop to Russia's dynamic efforts at worldwide economic expansion. The invasion of Georgia made economic problems in Russia worse, triggering a further outflow of capital due to fear of instability. The interruption of gas supply to Ukraine and the rest of Europe in January 2009 once again raised questions about Russia's reliability as a supplier of energy. Other problems have combined to create a perfect financial storm against Russia: International banks called loans of vastly powerful oligarchs who, before the crisis and precipitous drop in company valuations, used their company shares as collateral for foreign loans; and the price of oil and other commodities, including metals, fell, causing grave losses to Russian state financing.

The Obama Administration should, therefore, take quick action to:

  • Ensure that CFIUS (Committee on Foreign Invest­ment in the United States) has the resources and support it needs to conduct its investigations according to the law. The U.S. should urge its allies to develop similar institutions and pro­cesses to perform national security evaluations.
  • Increase cooperation among U.S. and allied intelligence services, law enforcement agencies, and independent experts to track Russian state and oligarch money laundering, corruption, and unfair competition practices.
  • Encourage U.S. and multinational companies to compete in economically viable and geopolitically significant energy ventures, which Russia is targeting, using diplomatic and security support.
  • Promote market-viable alternative energy sources and unconventional sources of fuels worldwide to counter strategic dependency on Russian, Iranian, and Venezuelan oil.
  • Expand security cooperation with Russia's energy-exporting neighbors and other countries that Russia is targeting for energy cooperation. The U.S. should make use of NATO's Partnership for Peace program.

Conclusion. Russia is being run as a corpora­tion by former senior members of the Russian intelligence community who strive to maximize profits and power by expanding global corporations for exports of raw materials and weapons. The Kremlin has made it clear it intends to diminish America's standing as a world leader by promoting a "multi­polar" world, and by using its military, economic, and "soft" power to re-establish Russia as America's closest competitor. The smaller energy profits accruing in Moscow from the current global economic downturn can play a role in mitigating Russia's anti-status quo foreign policy, and slow down the growth and modernization of its armed forces. But the U.S. nevertheless needs to develop comprehensive policies to handle Russia's economic power projection that is aimed at undermining American allies, power, and security interests through a mix of commercial, national security, intelligence, and diplomatic activities.

Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security, and Lajos F. Szaszdi, Ph.D., was a Consultant 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.

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