Reply With QuoteThis is a satire piece right?
The Financial Crisis and the Six Pillars of Russian Strength
By Lauren Goodrich and Peter Zeihan
Related Link
- The Russian Resurgence
- Putin’s Consolidation of Power
- Russian Energy and Foreign Policy
- Russia’s Military
Under the leadership of Vladimir Putin, Russia has been re-establishing much of its lost Soviet-era strength. This has given rise to the possibility — and even the probability — that Russia again will become a potent adversary of the Western world. But now, Russia is yet again on the cusp of a set of massive currency devaluations that could destroy much of the country’s financial system. With a crashing currency, the disappearance of foreign capital, greatly decreased energy revenues and currency reserves flying out of the bank, the Western perception is that Russia is on the verge of collapsing once again. Consequently, many Western countries have started to grow complacent about Russia’s ability to further project power abroad.
But this is Russia. And Russia rarely follows anyone else’s rulebook.
The State of the Russian State
Russia has faced a slew of economic problems in the past six months. Incoming foreign direct investment, which reached a record high of $28 billion in 2007, has reportedly dried up to just a few billion. Russia’s two stock markets, the Russian Trading System (RTS) and the Moscow Interbank Currency Exchange (MICEX), have fallen 78 and 67 percent respectively since their highs in May 2008. And Russians have withdrawn $290 billion from the country’s banks in fear of a financial collapse .
One of Moscow’s sharpest financial pains came in the form of a slumping Russian ruble, which has dropped by about one-third against the dollar since August 2008. Thus far, the Kremlin has spent $200 billion defending its currency, a startling number given that the currency still dropped by 35 percent. The Russian government has allowed dozens of mini-devaluations to occur since August; the ruble’s fall has pushed the currency past its lowest point in the 1998 ruble crash.
The Kremlin now faces three options. First, it can continue defending the ruble by pouring more money into what looks like a black hole. Realistically, this can last only another six months or so, as Russia’s combined reserves of $750 billion in August 2008 have dropped to just less than $400 billion due to various recession-battling measures (of which currency defense is only one). This option would also limit Russia’s future anti-recession measures to currency defense alone. In essence, this option relies on merely hoping the global recession ends before the till runs dry.
The second option would be to abandon any defense of the ruble and just let the currency crash. This option will not hurt Moscow or its prized industries (like those in the energy and metals sectors) too much, as the Kremlin, its institutions and most large Russian companies hold their reserves in dollars and euros. Smaller businesses and the Russian people would lose everything, however, just as in the August 1998 ruble crash. This may sound harsh, but the Kremlin has proved repeatedly — during the Imperial, Soviet and present eras — that it is willing to put the survival of the Russian state before the welfare and survival of the people.
The third option is much like the second. It involves sealing the currency system off completely from international trade, relegating it only to use in purely domestic exchanges. But turning to a closed system would make the ruble absolutely worthless abroad, and probably within Russia as well — the black market and small businesses would be forced to follow the government’s example and switch to the euro, or more likely, the U.S. dollar. (Russians tend to trust the dollar more than the euro.)
According to the predominant rumor in Moscow, the Kremlin will opt for combining the first and second options, allowing a series of small devaluations, but continuing a partial defense of the currency to avoid a single 1998-style collapse. Such a hybrid approach would reflect internal politicking.
The lack of angst within the government over the disappearance of the ruble as a symbol of Russian strength is most intriguing. Instead of discussing how to preserve Russian financial power, the debate is now over how to let the currency crash. The destruction of this particular symbol of Russian strength over the past ten years has now become a given in the Kremlin’s thinking, as has the end of the growth and economic strength seen in recent years.
Washington is interpreting the Russian acceptance of economic failure as a sort of surrender. It is not difficult to see why. For most states — powerful or not — a deep recession coupled with a currency collapse would indicate an evisceration of the ability to project power, or even the end of the road. After all, similar economic collapses in 1992 and 1998 heralded periods in which Russian power simply evaporated, allowing the Americans free rein across the Russian sphere of influence. Russia has been using its economic strength to revive its influence as of late, so — as the American thinking goes — the destruction of that strength should lead to a new period of Russian weakness.
Geography and Development
But before one can truly understand the roots of Russian power, the reality and role of the Russian economy must be examined. From this perspective, the past several years are most certainly an aberration — and we are not simply speaking of the post-Soviet collapse.
All states economies’ to a great degree reflect their geographies. In the United States, the presence of large, interconnected river systems in the central third of the country, the intracoastal waterway along the Gulf and Atlantic coasts, the vastness of San Francisco Bay, the numerous rivers flowing to the sea from the eastern slopes of the Appalachian Mountains and the abundance of ideal port locations made the country easy to develop. The cost of transporting goods was nil, and scarce capital could be dedicated to other pursuits. The result was a massive economy with an equally massive leg up on any competition.
Russia’s geography is the polar opposite. Hardly any of Russia’s rivers are interconnected. The country has several massive ones — the Pechora, the Ob, the Yenisei, the Lena and the Kolyma — but they drain the nearly unpopulated Siberia to the Arctic Ocean, making them useless for commerce. The only river that cuts through Russia’s core, the Volga, drains not to the ocean but to the landlocked and sparsely populated Caspian Sea, the center of a sparsely populated region. Also unlike the United States, Russia has few useful ports. Kaliningrad is not connected to the main body of Russia. The Gulf of Finland freezes in winter, isolating St. Petersburg. The only true deepwater and warm-water ocean ports, Vladivostok and Murmansk, are simply too far from Russia’s core to be useful. So while geography handed the United States the perfect transport network free of charge, Russia has had to use every available kopek to link its country together with an expensive road, rail and canal network.
One of the many side effects of this geography situation is that the United States had extra capital that it could dedicate to finance in a relatively democratic manner, while Russia’s chronic capital deficit prompted it to concentrate what little capital resources it had into a single set of hands — Moscow’s hands. So while the United States became the poster child for the free market, Russia (whether the Russian Empire, Soviet Union or Russian Federation) has always tended toward central planning.
Russian industrialization and militarization began in earnest under Josef Stalin in the 1930s. Under centralized planning, all industry and services were nationalized, while industrial leaders were given predetermined output quotas.
Perhaps the most noteworthy difference between the Western and Russian development paths was the different use of finance. At the start of Stalin’s massive economic undertaking, international loans to build the economy were unavailable, both because the new government had repudiated the czarist regime’s international debts and because industrialized countries — the potential lenders — were coping with the onset of their own economic crisis (e.g., the Great Depression).
With loans and bonds unavailable, Stalin turned to another centrally controlled resource to “fund” Russian development: labor. Trade unions were converted into mechanisms for capturing all available labor as well as for increasing worker productivity. Russia essentially substitutes labor for capital, so it is no surprise that Stalin — like all Russian leaders before him — ran his population into the ground. Stalin called this his “revolution from above.”
Over the long term, the centralized system is highly inefficient, as it does not take the basic economic drivers of supply and demand into account — to say nothing of how it crushes the common worker. But for a country as geographically massive as Russia, it was (and remains) questionable whether Western finance-driven development is even feasible, due to the lack of cheap transit options and the massive distances involved. Development driven by the crushing of the labor pool was probably the best Russia could hope for, and the same holds true today.
In stark contrast to ages past, for the past five years foreign money has underwritten Russian development. Russian banks did not depend upon government funding — which was accumulated into vast reserves — but instead tapped foreign lenders and bondholders. Russian banks took this money and used it to lend to Russian firms. Meanwhile, as the Russian government asserted control over the country’s energy industries during the last several years, it created a completely separate economy that only rarely intersected with other aspects of Russian economic life. So when the current global recession helped lead to the evaporation of foreign credit, the core of the government/energy economy was broadly unaffected, even as the rest of the Russian economy ingloriously crashed to earth.
Since Putin’s rise, the Kremlin has sought to project an image of a strong, stable and financially powerful Russia. This vision of strength has been the cornerstone of Russian confidence for years. Note that STRATFOR is saying “vision,” not “reality.” For in reality, Russian financial confidence is solely the result of cash brought in from strong oil and natural gas prices — something largely beyond the Russians’ ability to manipulate — not the result of any restructuring of the Russian system. As such, the revelation that the emperor has no clothes — that Russia is still a complete financial mess — is more a blow to Moscow’s ego than a signal of a fundamental change in the reality of Russian power.
The Reality of Russian Power
So while Russia might be losing its financial security and capabilities, which in the West tend to boil down to economic wealth, the global recession has not affected the reality of Russian power much at all. Russia has not, currently or historically, worked off of anyone else’s cash or used economic stability as a foundation for political might or social stability. Instead, Russia relies on many other tools in its kit. Some of the following six pillars of Russian power are more powerful and appropriate than ever:
- Geography: Unlike its main geopolitical rival, the United States, Russia borders most of the regions it wishes to project power into, and few geographic barriers separate it from its targets. Ukraine, Belarus and the Baltic states have zero geographic insulation from Russia. Central Asia is sheltered by distance, but not by mountains or rivers. The Caucasus provide a bit of a speed bump to Russia, but pro-Russian enclaves in Georgia give the Kremlin a secure foothold south of the mountain range (putting the August Russian-Georgian war in perspective). Even if U.S. forces were not tied down in Iraq and Afghanistan, the United States would face potentially insurmoun table difficulties in countering Russian actions in Moscow’s so-called “Near Abroad.” Russia can project all manner of influence and intimidation there on the cheap, while even symbolic counters are quite costly for the United States. In contrast, places such as Latin America, Southeast Asia or Africa do not capture much more than the Russian imagination; the Kremlin realizes it can do little more there than stir the occasional pot, and resources are allotted (centrally, of course) accordingly.
- Politics: It is no secret that the Kremlin uses an iron fist to maintain domestic control. There are few domestic forces the government cannot control or balance. The Kremlin understands the revolutions (1917 in particular) and collapses (1991 in particular) of the past, and it has control mechanisms in place to prevent a repeat. This control is seen in every aspect of Russian life, from one main political party ruling the country to the lack of diversified media, limits on public demonstrations and the infiltration of the security services into nearly every aspect of the Russian system. This domination was fortified under Stalin and has been re-established under the reign of former President and now-Prime Minister Vladimir Putin. This political strength is based on neither financial nor economic foundations. Instead, it is based within the political institutions and parties, on the lack of a meaningful opposition, and with the backing of the military and security services. Russia’s neighbors, especially in Europe, cannot count on the same political strength because their systems are simply not set up the same way. The stability of the Russian government and lack of stability in the former Soviet states and much of Central Europe have also allowed the Kremlin to reach beyond Russia and influence its neighbors to the east. Now as before, when some of its former Soviet subjects — such as Ukraine — become destabilized, Russia sweeps in as a source of stability and authority, regardless of whether this benefits the recipient of Moscow’s attention.
- Social System: As a consequence of Moscow’s political control and the economic situation, the Russian system is socially crushing, and has had long-term effects on the Russian psyche. As mentioned above, during the Soviet-era process of industrialization and militarization, workers operated under the direst of conditions for the good of the state. The Russian state has made it very clear that the productivity and survival of the state is far more important than the welfare of the people. This made Russia politically and economically strong, not in the sense that the people have had a voice, but in that they have not challenged the state since the beginning of the Soviet period. The Russian people, regardless of whether they admit it, continue to work to keep the state intact even when it does not benefit them. When the Soviet Uni on collapsed in 1991, Russia kept operating — though a bit haphazardly. Russians still went to work, even if they were not being paid. The same was seen in 1998, when the country collapsed financially. This is a very different mentality than that found in the West. Most Russians would not even consider the mass protests seen in Europe in response to the economic crisis. The Russian government, by contrast, can count on its people to continue to support the state and keep the country going with little protest over the conditions. Though there have been a few sporadic and meager protests in Russia, these protests mainly have been in opposition to the financial situation, not to the government’s hand in it. In some of these demonstrations, protesters have carried signs reading, “In government we trust, in the economic system we don’t.” This means Moscow can count on a stable population.
- Natural Resources: Modern Russia enjoys a wealth of natural resources in everything from food and metals to gold and timber. The markets may take a roller-coaster ride and the currency may collapse, but the Russian economy has access to the core necessities of life. Many of these resources serve a double purpose, for in addition to making Russia independent of the outside world, they also give Moscow the ability to project power effectively. Russian energy — especially natural gas — is particularly key: Europe is dependent on Russian natural gas for a quarter of its demand. This relationship guarantees Russia a steady supply of now-scarce capital even as it forces the Europeans to take any Russian concerns seriously. The energy tie is something Russia has very publicly used as a political weapon, either by raising prices or by cutting off supplies. In a recession, this lever’s effectiveness has only grown.
- Military: The Russian military is in the midst of a broad modernization and restructuring, and is reconstituting its basic warfighting capability. While many challenges remain, Moscow already has imposed a new reality through military force in Georgia. While Tbilisi was certainly an easy target, the Russian military looks very different to Kiev &# 8212; or even Warsaw and Prague — than it does to the Pentagon. And even in this case, Russia has come to rely increasingly heavily on its nuclear arsenal to rebalance the military equation and ensure its territorial integrity, and is looking to establish long-term nuclear parity with the Americans. Like the energy tool, Russia’s military has become more useful in times of economic duress, as potential targets have suffered far more than the Russians.
- Intelligence: Russia has one of the world’s most sophisticated and powerful intelligence services. Historically, its only rival has been the United States (though today the Chinese arguably could be seen as rivaling the Americans and Russians). The KGB (now the FSB) instills fear into hearts around the world, let alone inside Russia. Infiltration and intimidation kept the Soviet Union and its sphere under control. No matter the condition of the Russian state, Moscow’s intelligence foundation has been its strongest pillar. The FSB and other Russian intelligence agencies have infiltrated most former Soviet republics and satellite states, and they also have infiltrated as far as Latin America and the United States. Russian intelligence has infiltrated political, security, military and business realms worldwide, and has boasted of infiltrating many former Soviet satellite governments, militaries and companies up to the highest level. All facets of the Russian government have backed this infiltration since Putin (a former KGB man) came to power and filled the Kremlin with his cohorts. This domestic and international infiltration has been built up for half a century. It is not something that requires much cash to maintain, but rather know-how — and the Russians wrote the book on the subject. One of the reasons Moscow can run this system inexpensively relative to what it gets in return is because Russia’s intelligence services have long been human-based, though they do have some highly advanced technology to wield. Russia also has incorporated other social networks in its intelligence services, such as o rganized crime or the Russian Orthodox Church, creating an intricate system at a low price. Russia’s intelligence services are much larger than most other countries’ services and cover most of the world. But the intelligence apparatus’ most intense focus is on the Russian periphery, rather than on the more expensive “far abroad.”
Thus, while Russia’s financial sector may be getting torn apart, the state does not really count on that sector for domestic cohesion or stability, or for projecting power abroad. Russia knows it lacks a good track record financially, so it depends on — and has shored up where it can — six other pillars to maintain its (self-proclaimed) place as a major international player. The current financial crisis would crush the last five pillars for any other state, but in Russia, it has only served to strengthen these bases. Over the past few years, there was a certain window of opportunity for Russia to resurge while Washington was preoccupied with wars in Iraq and Afghanistan. This window has been kept open longer by the West’s lack of worry over the Russian resurgence given the financial crisis. But others closer to the Russian border understand that Moscow has many tools more potent than finance with which to continue reasserting itself.
Source: stratfor.com
This is a satire piece right?
If George Friedman's book "The Next 100 Years" is any guide (as it should be) STRATFOR is an extremely doubtful source. After having read this œuvre (unfortunately after having spent money for it), I downright feel duped.
The suspicion arises that Friedman is mainly attempting to make money by coming up with half-baked theories which are provocative and very appealing to nationalist Americans. Essentially he forecasts no less than that the USA are just at the beginning of their age of absolute supremacy over the world, a position which they in his opinion will keep for atleast the next 500 years.
He arrives at this conclusion by letting China and Russia conveniently collapse in the early 21st century (never to recover again as it seems), and by simply ignoring India or the possibility of the forming of an even half-way influential European Alliance of any sort, which then clears the stage for a cast of second to third rate powers to become the forces challenging America: Japan, Turkey and Poland.
Somehow he knows that the former two will start an surprise attack against the US (he apparently has even a very good idea when and how exactly this will happen, all through the miracle of his geopolitical forecasting technique) to be conveniently defeated in a sort of replay of WWII (complete with a Pearl Harbor in space). After emerging victorious, the US will rule supreme and force every other nation (absolutely no exceptions) to accept America's exclusive right to possess space based weapons systems, ensuring total American dominance once and for all. Only Mexico will be able to challenge the United States at the end of the century and...ah well, never mind.
To make a long story short, George Friedman has apparently decided to make his living as a waffle seller - and "The Next 100 Years" is quite a load full. However, any mediocre science fiction novel is more entertaining than his book - and about as truthful, or possibly even more so since it claims not to be anything but fiction.
Last edited by Kitsune; 03-03-2009 at 06:52 PM.
Haven't read his book(s) but that's exactly the impression I got aswell from reading his analyses that get posted regularly on mp.net.Originally Posted by Kitsune
His credentials are also rather questionable but ok let's not go there...
Meh......
I think of Russian ideology/culture as a bit junkyard dog-ish.
Starve 'em
Beat 'em
Leave 'em out in the snow to freeze
They will remain loyal to an overly strict master.
Personally, I don't think the Russian people would be weighing on Putin and his mob's mind.
I think the "near abroad" description parallels my thoughts on Russia primarily focused on growing it's hybrid "regional superpower" status.
Russia is the dominant regional military superpower while maintaining a strategic nuclear trump card.
I expect far more overt and decisive military action from Russia when Russian government feels it's warranted and feels it can get away with it.
There is an effective argument that can be made for it, along the lines of future US issues from the failing state of Mexico......Russia's got a number of Mexicos to deal with rather close to home.
I fail to understand Russia's perceived need to display such overt presence in Venezuela...but I suspect beyond just the energy monopoly trading bloc aspect and the export sales it's a bit of an embarrassment.
The biggest threat Russia poses over the next decade in my opinion is it's strengthening energy weapon which it has already brandished in regards to Eastern and Western Europe.
$40 oil is not going to be around for ever...or even for long.
Once we see energy prices spike again......which is simply a matter of time....Russian leverage and non conventional military influence will continue to rise.
I believe Russia has given up with any attempt to counter US global conventional military power as it would lose. Nuclear warfare is simply not an option.
BUT economic warfare seems like an option.
It's quite possible we are in the midst of the opening salvoes of economic warfare as we speak.
The west has deeper financial resources and more flexible financial markets, but is extremely vulnerable to energy price shocks.
Russia and it's growing shadow over supraregional energy resources has deeper energy resources but is far more vulnerable to financial market shocks.
Could the west be trying to knock over Russia/Venezuela/Iran, hammer for regime change while they suffer from low energy prices, before we see the next price spikes?
If current governments continue in Russia/Venezuela/Iran over the next 5-10 years we could see a substantial increase in their collective leverage over the west.
Just some low probability speculation........but there's enough for a potential Tom Clancy novel
Another blogger did a good overview of Friedman's book here:
http://www.sublimeoblivion.com/2009/...ext-100-years/
I think Friedman's claims about China are particularly odd. He says the deserts of China are a hindrance to development. Has he ever been to southern California?
Sublime Oblivion is a good source for Russia watchers. While you might not agree with what the author is saying he always makes a good argument.
That is your problem. You see Russia developing a relationship with Venezuala as some sort of chess move. A political move. A strategic move. I guess you think Russia is just building nuclear reactors in Iran to "get" at the US in particular and the west in general.I fail to understand Russia's perceived need to display such overt presence in Venezuela...but I suspect beyond just the energy monopoly trading bloc aspect and the export sales it's a bit of an embarrassment.
The reality is that after they took off the communist blinkers and embraced the concept of democracy and capitalism they realise that the west is not interested in most of their products so they really can't be picky who they sell stuff to. Gradually western countries have picked out technologies where Russia has things of interest and created joint ventures, but on the whole the west still really isn't interested in Russian products. This means if they want to make money through exports when Venezuala asks to buy stuff they will say how much do you want. Russia didn't kick out the legitimate leader of Venezuala and try to take the place over. The CIA tried to kick out the legitimate leader of Venezuala and because of that relations between Russia and Venezuala improved greatly. It is rather a lot like the Soviet Union, China and US relationship... the Chinese and Soviets fell out and the US stepped in and improved relations with China. Iran is also just business. Russia doesn't want Iran to have nukes any more than the US does. They do however see Iran as a trading partner and don't see why poor relations between Iran and the US mean Russia and Iran can't trade.
That’s a strange piece of writing considering I generally don’t let a day go by without reading Stratfor.
The authors mixed undeniable but stale facts with rather shallow understanding of Russia’s economic changes. It almost begs the question: did George Friedman, whose economic acumen I respect highly, let that crap slip through his fingers?
Unlike the authors, most analysis I saw indicate that the Russians handled the ruble rather confidently and for the most part avoided the stampede of the late 90s. Not a word about the fast and massive bailout package that stabilized main Russian banks. Not a word about the slow but real restructuring taking place due to market forces and tax incentives. The authors also failed to comment on another significant development - the Russians are gradually succeeding in transforming their trade with many regional partners (FSU, Turkey, China…) from $ to RUR. I suspect the authors also failed (or unqualified) to analyze shifts in Europe’s sentiments regarding causes of the 2009 “gas war” if compared to 2006.
Overall, for a solid outfit like Stratfor, the article is short on fresh substance and weak on economic analysis.
Regarding other aspects (analysis of intel, military, social..) I am not qualified to say much but found little new in the article.
Last edited by 1curious; 03-04-2009 at 02:30 AM.
a bit of aggro
followed by a dash of inaccurate and baseless supposition and conjecture
topped with a bit of unwanted and unnecessary education is a recipe for failure
you clearly don't work in sales....cause if you did you would F'n starve.
Life is all about people skills.........
No need to go all Chernobyl comrade...lighten the fcuk up
That is what I was thinking of you when I read your reply.No need to go all Chernobyl comrade...lighten the fcuk up
Firstly, please consider taking a deep breath and calm down.......if I have somehow insulted you or your beloved and perfect Russian government, foreign policy, military, and weapon systems then I humbly appologize.
I was not upset and still am not. I was giving an opinion.
Secondly, I don't have a problem....but I do have opinions
So share your opinion and keep your personal attacks to yourself
Your opinion of my people skills really don't interest me, if you are upset about what I said then by all means tell me so. Suggesting my posts are hard to translate or have been mistranslated, I don't understand what you mean... which is ironic considering what you seem to be trying to say.thirdly, as a forum member, not as a mod, please consider having a think about your eerily robotic internet people skills....your personality comes across like a triple translated bad joke from babelfish.
Here we go. I am not a tin foil hat brigade wearer that believes Russia is still communist and wants to invade the US. Selling things to Venezuala after the US refused to support the weapons it supplied and blocked all of Venezualas attempt to keep its US origin equipment operational is clearly a conspiracy masterminded in the Kremlin to create a launch point for the invasion of the US.Matbe start with a "Hello Comrade! I disagree" you know......something less confrontational?
WHERE exactly have I claimed this?
You saidYou make it sound like Russia "went" to Venezuala. Russia is selling weapons to Venezuala because the US refuses to do so. There is little that Russia has in common with Venezuala, they have completely different cultures and geographys etc etc. Currently they have commercial links and Chavez seems to want to create other ties as well. Chavez invited the Russians to send some ships to Venezuala and they sent them.I fail to understand Russia's perceived need to display such overt presence in Venezuela...but I suspect beyond just the energy monopoly trading bloc aspect and the export sales it's a bit of an embarrassment.
Why would the Russians be embarrased about trading with Venezuala? Should New Zealand be embarrased about trading with Communist China?
Moron is your opinion of the guy. He leads a country and has been voted back in twice. He can't be that dumb.I'm pretty sure I wrote that outside of the developing energy cartel and export earnings, Russia's probably embarrassed to deal with such morons as Chavez.
You talk about people skills like you know something about it.Life is all about people skills.........
No need to go all Chernobyl comrade...lighten the fcuk up
Perhaps in your reply to this you might show it and talk to me with a bit of respect. You'll notice I haven't called you a fascist or nazi, despite your insinuations that I am a communist.
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