WHAT HAPPENS TO RUSSIA WHEN – NOT IF – OIL AND GAS PRICES BEGIN TO RETREAT?

Source: Newsweek International, MSNBC.com, September 25, 2006
Agency WPS
The Russian Business Monitor (Russia)
September 22, 2006 Friday

News stories about Russia these days follow a predictable theme. The
country is resurgent and strong, and the West must adjust to this
new reality. But that story line is wrong. Russia is weak and getting
weaker.

Take the conventional index of power-military might. Yes, Moscow is
testing advanced missiles systems and talks buoyantly about countering
a US antiballistic-missile system with a new generation of warheads
that can evade interceptors. Yet note the failure earlier in September
of the highly touted Bulava submarine-launched missile. The United
States experiences such mishaps, too, of course. But in Russia they
are signs of something deeper. It is no secret that, for all Russia’s
new oil wealth, its Army remains poorly trained, malnourished and
demoralized. Alcoholism, suicide and corruption are rife. Weaponry
is aging and newer models arrive at a trickle: India has bought more
Russian tanks since 2001 than the Russian Army.

Russia gets credit for economic growth-nearly 7% in 2006, according
to the IMF. But the boom has been propelled mainly by rising energy
prices. What happens when-not if-oil and gas prices begin to retreat?

New investment in production capacity is insufficient to sustain
current levels of exports. Meanwhile, economic reform has stalled,
state control over strategic economic industries has increased and
foreign investment remains low. Of the $648.1 billion in foreign
investment worldwide in 2004, only $11.6 billion went to Russia. Not
surprisingly, Russia rates poorly in globalization rankings. The
2005 Foreign Policy/A.T. Kearney survey placed it 52nd in a list of
62 countries-a drop of five places from 2004.

Russia’s human capital is being ravaged. The population is declining
by some 750,000 annually because of low birthrates and unusually high
death rates among males; it is also aging rapidly and will therefore
become increasingly less productive. Alcoholism remains pervasive, as
does drug use. Russia has the highest rate of tuberculosis in Europe.

AIDS has yet to crest. Suicide is one the rise. According to WHO
data on 46 countries between 1998 and 2003, Russia, with 71 cases
per 100,000 of the male population, topped the list.

A nation’s power also rests on the strength of its institutions.

Here, too, Russia is growing weaker. Putin’s authoritarianism has
brought order to a once chaotic political scene. But Parliament has
been neutered. So have independent civic organizations, political
parties and media. The secret police, military and security
services-no friends of the rule of law-occupy prominent political
positions. Official corruption flourishes.

Abroad, Russia’s influence continues to ebb. Its closest
allies-Kyrgyzstan, Tajikistan and Uzbekistan-are poor and
politically unstable. Energy-rich Kazakhstan and Turkmenistan
resent Russia’s grip on their exports. Armenia, loyal but penurious,
remains embroiled in the Nagorno-Karabakh conflict with increasingly
prosperous Azerbaijan. The Kremlin’s meddling in Georgia has deepened
Tbilisi’s determination to join NATO and strengthened anti-Russian
sentiment. Belarus’s dictatorial president envisions union with Russia,
but his Soviet-style political order repels many ordinary Russians.

On the wider global stage, Putin displays seeming strength and new
confidence. Russian support is key to the negotiations over Iran’s
nuclear program. Its Security Council veto gives it an important say
on various international issues, from Kosovo’s independence to the
United Nations peacekeeping force in Lebanon. Yet Putin’s rhetoric
increasingly strikes themes of Great Russia-imperial, nostalgic,
nationalistic. However much it resonates with a particular Russian
political class, that rhetoric can itself breed weakness.

You see this in the sharp rise of race-related hate crimes in Russia.

Right-wing racism and Russia-for-Russians chauvinism augur ill for
a multiethnic, multiconfessional Russia, which has near 25 million
Muslims.

So, the received wisdom is wrong. What the West must live with
is a weak Russia. And history shows that states that talk loudly
while carrying a small stick often overreach, creating problems for
themselves and others.