Can Russia fix itself by 2012?

In 2010, Russia is picking up the pieces after the train wrecks that derailed its express return to great power status—the near-collapse of its stock market, the aftereffects of the Georgia war, and the global financial crisis. The good news—for the Kremlin—is that despite major falls in the prices for energy and raw materials from their 2008 highs, the system set up by Vladimir Putin survived. It did not come crashing down as some had predicted. Unrest was contained and companies teetering on the verge of bankruptcy got bailouts that prevented their Russian owners (or the state) from losing control to Western banks.

The bad news: the rainy-day stabilization fund is set to run out of money by the end of the year, and the fund supporting an ambitious array of national projects will see the till run dry by 2012. So Russia is running against the clock. It needs to rebuild its budget reserves to pay salaries and pensions so that much of the middle class which depends on the state for its employment stays supportive of the regime. It must get its new ambitious energy projects into place—especially the Nordstream and South Stream pipelines that promise a direct avenue to Russia’s most important European customers—before alternatives that would erode Russia’s advantages can be solidified (e.g. a Nabucco pipeline that takes in energy from Central Asia and Iraqi Kurdistan). It must work to solidify its growing sphere of influence in the Eurasian space before Europe recovers from its expansion fatigue and resumes the eastward march of the Euro-Atlantic world. Most importantly, it must keep maintain the “Putin bargain” in place: giving the Kremlin effective control over the political process in return for prosperity and opportunity. With a weak banking sector and major infrastructure challenges posing two key threats to that bargain, and without record-high energy prices bringing in “excess” income—this will be a hard challenge to meet.

What’s also interesting to observe is how the crisis affected the relationship of Prime Minister Putin to President Dimitry Medvedev. In my own reading of the duumvirate, I interpreted Putin’s role as the protecting chrysalis, allowing Medvedev to build up the team and economic institutions that would carry Russia forward into the next decade. Eventually, Putin would pass sole power to Medvedev, who would be responsible for the “second stage” (a more liberalizing one) of the regime Putin constructed on the rubble bequeathed to him by Mikhail Gorbachev and Boris Yeltsin. But the crises besetting the country seem to have convinced Putin that “stage one” is still needed, with him at the helm, for a while longer. Whether Medvedev would accept the need for significant delay (relinquishing the presidency in 2012 to return to it in 2016, for instance) remains to be seen.

Russia has made it through the initial storms of 2008-09, but the Kremlin ship of state still has significant bad weather up ahead to navigate through.

Nikolas Gvosdev is a professor of national security studies at the U.S. Naval War College. These views are his own private opinions. Find Nick at http://washingtonrealist.blogspot.com.

One Comment

  1. rkka
    Posted January 13, 2010 at 3:40 pm | Permalink

    “In 2010, Russia is picking up the pieces after the train wrecks that derailed its express return to great power status—the near-collapse of its stock market, the aftereffects of the Georgia war, and the global financial crisis. The good news—for the Kremlin—is that despite major falls in the prices for energy and raw materials from their 2008 highs, the system set up by Vladimir Putin survived. It did not come crashing down as some had predicted.”

    Yes, I recall many commentators, pundits, and analysts at RFE/RL/VoA/Washington Post/etc. discussing that prospect with glee a year or so ago. I was stunned that so many were hoping for millions of Russians to once again be rendered destitute, in the hopes that they could then watch the Russian people turn on Putin and all his works, and open Russia once again to being looted by the Western financial system. Our Punditocracy really are a vicious lot, and they richly deserve the frustration and disappointment they must now feel.

    “Unrest was contained and companies teetering on the verge of bankruptcy got bailouts that prevented their Russian owners (or the state) from losing control to Western banks. ”

    And it was done very well, IMO.

    “The bad news: the rainy-day stabilization fund is set to run out of money by the end of the year, and the fund supporting an ambitious array of national projects will see the till run dry
    by 2012.”

    True, at Kudrin’s very conservative estimate of world oil prices of less than $60/bbl for 2010. It is significantly higher than that, and has been for several months. Unless the global economy tanks again, which I certainly don’t rule out, Russia’s 2010 budget deficit will be far smaller than Kudrin projected, so Russia’s reserve funds will very likely hold up nicely.

    “So Russia is running against the clock. It needs to rebuild its budget reserves to pay salaries and pensions so that much of the middle class which depends on the state for its employment stays supportive of the regime. It must get its new ambitious energy projects into place—especially the Nordstream and South Stream pipelines that promise a direct avenue to Russia’s most important European customers—before alternatives that would erode Russia’s advantages can be solidified (e.g. a Nabucco pipeline that takes in energy from Central Asia and Iraqi Kurdistan).”

    Is that all the Kremlin has to worry about?? No sweat then. Nabucco has neither gas nor financing, and no real prospect of getting either.

    “It must work to solidify its growing sphere of influence in the Eurasian space before Europe recovers from its expansion fatigue and resumes the eastward march of the Euro-Atlantic world. Most importantly, it must keep maintain the “Putin bargain” in place: giving the Kremlin effective control over the political process in return for prosperity and opportunity. With a weak banking sector and major infrastructure challenges posing two key threats to that bargain, and without record-high energy prices bringing in “excess” income—this will be a hard challenge to meet.”

    Record high energy prices not really required. Oil north of $60/bbl. will do nicely.

    The risk is that the global economy tanks again, and even then, Russia maintained a current account surplus through the very worst of 2008-2009 and Russia still has 450 gigabucks stashed away in Euro and Dollar securities.

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