If Vladimir Putin ever writes his autobiography, he will have to call it “The Art of the Bluff.” No Russian leader since Catherine the Great’s Prime Minister, Grigory Potemkin, has done a more masterful job of blending guile, audacity and bluff to project an undeserved illusion of power and success. Whether that strategy ultimately bears fruit will depend on the Kremlin’s ability to negotiate a wide-ranging agreement with the Trump administration that addresses Russia’s principal strategic concerns; in short, the White House’s willingness to engage in a geopolitical monopoly game in which the Kremlin can cash in chips that it has acquired, principally in the Middle East, in return for valuable concessions elsewhere.
What Moscow wants from Washington is first and foremost an end to economic sanctions, secondly an agreement on Ukraine that ensures that Kiev joins neither the European Union or NATO and that results in a reduction in the levels of financial and military aid to a point that, eventually, Ukraine will have no choice but to seek an accommodation with Russia. Moscow is unlikely to get either outcome.
First, it’s hard to imagine under what conditions Russia would willingly withdraw from the Crimea and cease its support for secessionists in the Donbas basin short of the complete collapse of Russian power; that’s possible, but highly unlikely in the short-term. That means the end of economic sanctions would also be a de facto acceptance of the Russian intervention in Ukraine. Such a concession would be very problematic. There would be strong bipartisan opposition in the U.S. Senate against such an acceptance.
Both Congress and the president have the authority to impose sanctions, the former by legislative action and the latter by executive order. Both branches of government imposed sanctions on Russia as a result of its invasion of Ukraine. Those sanctions imposed by executive order could presumably be cancelled by another executive order. Those sanctions imposed by legislation would, most likely, require new legislation to be repealed. Any attempt by the Trump administration to accept Russian actions in the Ukraine would bring a quick, bipartisan, rebuke from Congress and, more importantly, create a split within Republican ranks.
On February 8, a bipartisan group of senators led by Lindsey Graham (R-South Carolina) introduced the Russian Sanctions Review Act of 2017. The Act would require specific congressional approval of any easing of economic sanction against Russia by the United States. In the event the President proposed to “waive, suspend, reduce, provide relief from, or otherwise limit the application of sanctions”, the Senate and the House would have 120 days in which to decide whether to pass a Resolution of Disapproval. If Congress failed to do so, the sanctions would be lifted at the end of the 120-day period.
In recent weeks, the Trump White House has indicated that it intends to maintain the sanctions for now. VP Mike Pence, said that the Trump Administration was “very troubled” by the resumption of fighting in eastern Ukraine. The resignation of National Security Adviser Michael Flynn has also diminished the likelihood of a wide ranging agreement with Moscow. Flynn favored a closer relationship with Russia in order to have both countries cooperate to jointly meet the threat posed by radical jihadists. That price of that cooperation would have presumably required Washington to accept at least some of Moscow’s actions in Ukraine.
Any move to “legitimize” Russian actions in Ukraine would also be highly destabilizing to NATO and especially to its newest members in Eastern Europe. Those members, many of which are already dealing with a constant stream of Russian provocations, would see such an agreement as a threat that their own security was little more than a bargaining chip that might be traded away in return for Russian concessions elsewhere. The European Union has insisted on the full implementation of the Minsk Accords and an end to fighting in Ukraine by Russian backed separatists. EU officials have indicated that the organization will extend the economic sanctions against Russia, when they expire on March 15, for another 6 months.
Finally, any kind of accommodation with Moscow over Ukraine will rekindle, not that they are going to go away anytime soon, the issue of Russian manipulation of the recent presidential election and the extent to which Donald Trump is in any way beholden to Vladimir Putin for his election. It’s clear that the Kremlin intervened in the 2016 presidential election and that there were numerous contacts between campaign officials and prominent supporters of the Trump candidacy. Whether their actions affected the outcome and whether these actions were somehow coordinated with the Trump campaign, both highly unlikely, will probably never be settled.
Moreover, exactly what chips is Russia bringing to this geopolitical monopoly game? Of late, the Kremlin has certainly created the impression that its power and influence in the Middle East has been rising. It intervened successfully in Syria to stabilize the government of its client Bashar al-Assad. It is trying to actively promote Libyan Field Marshall Khalifa Hiftar as the next “ruler” of Libya. It seems to have a good working relationship with Iran, and has been steadily expanding its influence throughout the rest of the Middle East. Notwithstanding the above, however, what exactly does Moscow have to offer Washington?
What the U.S. wants in the Middle East is the elimination of Islamic State (IS) and a strategy to contain and eliminate al Qaeda and other jihadist groups; it wants to contain the expansion of Iranian influence and power and prevent the emergence of Sunni-Shia proxy conflicts, like those in Syria and Yemen; political stability, especially in Saudi Arabia and its Gulf allies; and ensure that neither Iran, nor anyone else, interferes with the free flow of oil out of the Persian Gulf to world markets. There is little that Moscow can do to advance any of these objectives.
While Washington is hardly a supporter of the Assad regime, neither does it have a credible alternative to the Assad government. The idea that there were “moderate” groups within the Syrian opposition was always a questionable assumption. Syria, without Assad, is more likely to resemble Libya than it is to be a paragon of secular, democratic stability. Indeed, more than one “realist” has suggested that however repugnant and barbaric the Assad regime may be, Moscow did the West a favor by ensuring that it stayed in power since the alternative would have been even worse.
Russian air power can certainly assist in the fight against Islamic State. What the U.S. needs to defeat Islamic State, however, isn’t more air power, it has plenty of that and can easily get more if its needed. The U.S. needs boots on the ground to root out IS militants and roll back the territory controlled by Islamic State. Russia, outside, at best, of a token Special Forces contingent, isn’t going to send ground troops to the Middle East. Moscow can certainly help on the intelligence side and, more importantly, push the Assad government to commit more resources to battling Islamic State. Damascus will do that once the rest of its Syrian opponents have been crushed, but until then has little reason to focus on IS.
Moscow has better relations with Tehran than does Washington, or any of its allies, but that relationship stops well short of any meaningful influence or leverage. Russia does not have the ability to reign in Tehran or curb the expansion of its power and influence, much less cut short the emergence of Sunni-Shia proxy conflicts. The two countries share a common interest in shoring up the Assad regime in Syria, in undermining American influence on the Middle East and in increasing the price of oil on world markets. Beyond that, the expansion of Iranian influence in the Middle East is not necessarily in Russia’s self-interest.
Moreover, during the “sanctions period,” Moscow played an important role in running interference for Tehran in organizations like the UN Security Council and in reducing its diplomatic isolation. That role is still important, but far less so now that many countries have dismantled the economic sanctions. Iran has played an equally important role in mobilizing its proxies to provide boots on the ground for the Russian intervention in Syria. It’s an open question whether Moscow needs Tehran more than Tehran needs Moscow.
There is a sense of déjà vu in comparing the appearance of rising Russian power and influence around the world today with a similar period in Soviet history. In the 1970s and 1980s Soviet power around the world seemed ascendant. The Soviet navy, for the first time in its history, was rapidly developing a blue water fleet capable of challenging U.S. naval power around the world. Their proxies were visible throughout Africa, Latin America and Asia, and they had a stable of client states across the Middle East and South Asia that ran from Algeria to India.
When Soviet troops intervened in Afghanistan in 1979, many saw it as a first step in a campaign that would see Soviet troops roll across Baluchistan, giving the USSR warm water ports on the Indian Ocean just kitty-corner from the Persian Gulf. Instead, even as Moscow appeared to be flexing its power, its economic foundations were crumbling. By 1991, the Soviet Union had been dissolved. The Soviet empire in Eastern Europe had collapsed and the legacy of five centuries of Russian/Soviet imperialism stretching from Ivan IV to Joseph Stalin simply evaporated.
The current appearance of Russian power notwithstanding, the Russian economy has deep and profound problems that will sharply limit the ability of Moscow to project its power and influence aboard. The Western media has already raised the prospect that “Russia would run out of money soon,” perhaps as soon as 2017. Such claims are not entirely correct, although Moscow’s hard currency reserves have fallen significantly since 2008. Russian reserves peaked in 2008, at $596 billion. As of the end of 2016, they have fallen to around $323 billion–consisting of $314 billion in foreign exchange reserves, $6.5 billion in Special Drawing Rights and $3 billion in reserves at the International Monetary Fund. In addition, Russia has gold reserves currently valued at $61 billion.
Russia also has a Reserve Fund, euphemistically referred to as “a rainy-day fund” by Western journalists, intended to cover shortfalls in the national budget as well as a Welfare Fund intended to finance future pension obligations and large-scale investment projects. The Welfare Fund currently has a balance of around $70 billion. Roughly 43 percent of the Central Banks reserves are denominated in Euros, 11 percent are in sterling and six percent are in a mix of currencies, including the Japanese yen and the Canadian and Australian dollars. The balance of 40 percent is denominated in U.S. dollars.
Most of Russia’s exports, 80 percent plus of which are commodities, are denominated in dollars. A strong dollar benefits those exporters as their income is in dollars and their expenses are in rubles. A strong dollar, however, reduces the value of Russia’s non-dollar denominated reserves when they are expressed in U.S. currency. The balances in the Reserve Fund have fallen from roughly $92 billion in September 2014, to around $30 billion at the end of 2016. It is expected to be depleted sometime in 2017. The Kremlin has indicated that it may tap the Welfare Fund to finance any future budget deficits.
The most significant declines in Russia’s reserves occurred during 2014 and 2015, when Russia’s Central Bank was attempting to defend the exchange rate of the ruble. The ruble was allowed to float in 2016, dropping to a low of 82 against the dollar in January. It ended 2016, at 61 rubles to the dollar. Since 2014, the Russian ruble has dropped about 40 percent against the dollar. The precipitous decline in reserves notwithstanding, Russia is not going to run out of hard currency reserves anytime soon. Russia’s government debt is relatively low and, notwithstanding the sanctions, it can find buyers for new debt should it need to do so.
In addition, much of the country’s mineral wealth, especially the critical petroleum sector, is directly controlled by the government. In December, for example, the Russian government received 10.5 billion euros ($11.3 billion) for selling a 19.5 percent stake in the giant state oil company Rosneft to the Qatar Investment Authority and the Swiss commodities production and trading conglomerate Glencore. While the sanctions restricted the potential buyers for the Rosneft stake and the price paid, it did not preclude the sale.
Russia’s larger economic problem is that its economy is highly dependent on the export of hydrocarbons. The actual economic impact of the oil and gas sector varies depending on the prevailing price of oil, but, on average, this sector provides 52 percent of the federal budget and 70 percent of the value of Russian exports. Simply put, the Russian economy rises and falls based on the prevailing price of petroleum. From 2000 through 2007, when oil prices were high, the Russian economy grew at an average of seven percent per year, the Russian stock market was among the best performers in the world and average incomes in Russia more than tripled.
Since 2008 average annual growth has been virtually zero. Capital flight has accelerated, foreign investment has fallen precipitously and inflation ha accelerated–topping out at over 13 percent. Adjusted for inflation, average incomes in Russia have declined by about 20% since 2010. Since the imposition of sanctions following Russia’s invasion of Ukraine, the economy contracted by around 3.9 percent in 2015, and by an additional .5 percent in 2016. During this period, there were wide spread reports of government workers going unpaid in some of the poorer regions and even sporadic, anti-government protests.
The economy is expected to show between .5 percent and one percent growth next year. Given the acute regionalization of the Russian economy, however, growth rates of under one percent mean that the Moscow region, which accounts for about one-quarter of Russian economic output, and those regions that are major hydrocarbon producers, will see some economic growth, while the rest of Russia will remain mired in recession. Even with the return to growth in 2017, Moscow has still been forced to cut all government expenditures by 10 percent and to further reduce military expenditures by an additional five percent.
Moscow needs oil prices to average around $70 per barrel in order to balance its budget, and ideally prices between $70 and $100 per barrel for it to fund the modernization of its military and to rebuild its foreign exchange reserves. Oil prices will not recover to these levels anytime soon. In fact, rising production in Libya and Iran, both of which were exempted from the recently-announced OPEC brokered agreement for a 1.2 million BOPD production cutback, expansion of Canadian oil exports to the U.S. via the Keystone Pipeline, and the expected increase in U.S. production as a result of an easing of federal regulations and an opening up of Federal lands to oil production from fracked wells, will largely offset the production cutbacks. In the short-term, oil prices are unlikely to improve much. That isn’t good news for the Kremlin.
The World Bank has estimated that Russia’s mineral resources are worth an estimated $75 trillion. For the most part, however, Russia lacks the technology and the capital to bring these reserves into production. The overall size of the Russian economy was $1.2 trillion in 2015. Adjusted for purchasing power parity (PPP), this is equivalent, in US dollars, to a $3.5 trillion economy. This puts the Russian economy at one-fifth the size of the U.S. economy and less than one-tenth the size of the combined American-EU economic turnover, even after adjusting for PPP. Simply put, over the long-term, and especially during periods of low oil prices, Moscow simply does not have the economic base to mount a serious military challenge to the United States and its allies.
Students of Russian history have often pointed out that Russia’s geopolitical reality, an absence of a defensible frontier, has meant that for Moscow security could only be obtained by controlling ever larger swatches of its periphery. This “geopolitical imperative” has created a recurring dynamic in Russian history. During periods of strength, Russia’s power and territorial control expands outward only to contract and shrink back during periods of weakness. This dynamic has been particularly true in Eastern Europe, across which Russian hegemony has waxed and waned for the last 500 years. From that perspective, Moscow’s ascendancy in recent years is simply the predictable swing in the pendulum of Russian power. A comeback that many analysts had predicted as being inevitable.
This is where Vladimir Putin’s bluff has been so brazen. Russia’s aggressive posture in recent years, primarily since 2008, is not the result of growing Russian strength but a gambit to hide growing Russian weakness. It’s as if, starting in 2008, the Kremlin decided that reasserting Russia’s status as a great power was more important than maximizing economic growth, investment and development. Indeed, as the economic well being of the average Russian family has declined, the Kremlin’s answer has been to emphasize its success in restoring Russia’s international status regardless of the fact that in doing so it has further aggravated the economic downturn precipitated by low oil prices.
The Kremlin’s policy in the Ukraine, rather than being an example of the reassertion of Russian power in the world, and especially in the Russian periphery, is instead a glaring example of overreach. In Ukraine, Vladimir Putin bit off more than he could chew. Russia never had the ability to invade, much less subdue, Ukraine. The Kremlin gambled that the West would stand aside and give Russia a free hand. The gamble failed and in doing so its consequences, economic sanctions, aggravated what was already a steep economic contraction. The result is a “frozen conflict.” Russia is unwilling, and politically it is incapable, of withdrawing but lacks the means, either politically or militarily, to force Kiev to accede to its will.
It is doing everything it can, from accumulating strategic chips in the Middle East to supporting, and even financing, some of the anti-EU rightwing parties in Europe calling for an end to Russian sanctions, to improve its bargaining position with the West. Ultimately, Moscow is banking that a new administration in Washington will give it a way out of the hole it has dug itself into. We have no reason to do this. Putin’s hand is growing weaker, not stronger. Time favors the West.
That doesn’t mean that there aren’t areas where United States-Russian cooperation makes sense. Nuclear arms control is an obvious choice. Both countries are about to embark on a multi-billion dollar, “upgrade cycle.” An accord to reduce each side’s stock of nuclear weapons before the money is spent to upgrade them makes a lot of sense–especially for Moscow who doesn’t have the money to finance such an upgrade cycle. Soviet expansionism a generation ago turned out to be little more than a cover for an economy that was rotting from corruption, cronyism and mismanagement. The Soviet Union’s fate will ultimately prove to be the same outcome for Putin’s Russia.
An earlier version of this column appeared in military.com.