Russia, Ukraine and natural gas, once more…

Once again Russia and the Ukraine are at it over the issue of the latter’s unpaid gas bills. Out of the 390 cubic metres of Russian natural gas that go through Ukrainian territory each day, 300 are bound to be transited to other European countries. While Gazprom, Russia’s natural gas monopoly, has announced it has limited its deliveries to these 300, final destinations, among them Bulgaria and Romania, have been experiencing a drop in deliveries, something which has raised suspicions that Ukraine is siphoning off gas meant for transit rather than its own consumption. Ukraine on the other hand is claiming this is happening for technical reasons. Since siphoning off is what is generally assumed to have happened the last time we saw a similar row, it is difficult to make this claim and still expect people to believe you. Nervousness is about and the European Union’s Czech presidency has demanded the conflict be resolved quickly so as not to jeopardise deliveries and is also attempting to mediate.

This situation has several interesting features to it. First of all, this is not merely a show-off of Russian power (even though there is an element of it in there); there is no doubt that Ukraine has been receiving subsidised gas all this time and there has for several years been a genuine eagerness on the part of Russia to receive prices closer to the correct market value and this has not only affected Ukraine but also Belarus, which has had a far cosier relationship to its neighbour these past years, to no avail. Secondly, it is likely to have an effect on Ukraine’s relationship to the European Union. If, yet again, Ukraine is indeed siphoning off gas that is meant for EU countries, irritation is likely to rise. It might increase support for the new Russian pipeline running across the Baltic Sea, circumventing the most troublesome transit countries, and thus in the long run make Ukraine less able to rely on the EU to exert pressure on its main energy supplier. Russia could easily live with such an outcome. Ukraine on the other hand might have to enjoy a somewhat colder day after tomorrow. There is after all no coincidence that these conflicts have a tendency to erupt during winter time.

The economic crisis and its political consequences for Russia

The rumours about the death of this blog are hugely exaggerated, although updates have admittedly not been done with much frequency lately. Running a blog of this kind takes a great deal of effort and unfortunately this author has not felt it to be within his powers to regularly sit down to produce a written analysis of anything. Encouraging comments and demands from a few regular readers have, though, finally provided him with something of an incentive. Readers shouldn’t expect this blog to be updated with the same frequency as when it was started, but at least shouldn’t feel that there is no reason to stop by now and then. Deal?

What better could one do on New Year’s Eve than take a quick look on what might be expected in the year 2009? The present economic downturn is likely to have large consequences for Russia, despite earlier claims to the contrary made by the political leadership. Already, the central bank has spent more than a quarter of its currency reserve just to prop up the rouble, and still during December it has had to silently make it slip by one percentage point eight times. Talk about a larger devaluation to come is about and a Russia analyst at one of the major investment banks, with whom this author had a chat, confirmed this perspective as very likely. There could be a 30% devaluation soon, which would obviously hurt both the Russian public and the business community, which in some notable cases has taken large loans in foreign currencies. The capital flight is in fact on the scale of the 1998 rouble crisis, according to an analyst at an asset manager specialising in the region. 

Another major issue is of course the crash of the oil price. With Russian oil trading at $32 a barrel it isn’t enough to support the federal budget, which for 2009 is based on an oil price of $95 a barrel.  The result will be a deficit of $52 billion to $86.5 billion, or up to 6% of GDP. In the short run such a deficit can be sustained by milking the stabilisation fund set up by the government to take care of excess oil revenues in the past; this fund, though, only holds $132.6 billion, so if worst comes to worst, it would not last even two years. Even if initially spending won’t be cut, an inflation rate that, even without the currency continuously being devalued, has never entered the area of single digits is likely to be felt. The car industry’s crisis is also likely to affect Russia directly, considering that several foreign manufactures have set up facilities in the country. It seems we have a recipe for both increased unemployment and diminished spending power.

This is a troublesome situation for those in power. The popularity of the sitting political leadership is based upon living standards having improved considerably since the chaos and misery of the Yeltsin era. That official propaganda has moved on from Soviet-style “telling people what to think” to “telling people what they want to hear” isn’t the same as saying Russians are fools, conveniently in the hands of their masters. On the contrary, they can be very eager to express their opinion, when they find current developments to be unpleasing. It has been seen lately in Vladivostok with its inhabitants protesting against meddling in their much beloved second-hand car imports from Japan. In 2006, pensioners took to the streets of Moscow to object to a decision aimed at replacing privileges such as free medication and public transport with monetary cheques. Despite the government’s effort to curb these hot feelings through the use of news coverage of how well the new system worked throughout the country, the ground was indeed trembling under then Prime Minister Fradkov. In the end they had to walk away from the reform. There is therefore absolutely no reason to suspect the Russian public to react differently this time, when their economic well-being is under threat. The difference is in the sheer amount of people affected, because this time we are not talking about a community of pensioners and war veterans. This time we are looking at an enraged population and a government that has so far failed spectacularly at reforming an ailing business environment and burdensome economic system when it had the opportunity to do so.

Now, the most interesting question seems to be how this will affect the issue of when (rather than if) Prime Minister Putin aims to retake the presidency from his protégé. It is the prime minister who is in charge of economic policy, thus a likely failure in this area would fall upon Putin’s shoulders. This could seriously hurt his reputation and credibility as national leader. With President Medvedev resigning from his office, citing the need for a more experienced hand at the wheel in this time of crisis, such a development could easily be avoided. As prime minister, Putin would in that case automatically assume the responsibilities of acting president in the same way he did when Boris Yeltsin stepped down on New Year’s Eve 1999. Russia was then facing a different crisis, one of terrorism and national humiliation. Putin was then able to restore the confidence of the Russian public and self-esteem of the country, earning him a truly remarkable level of popularity. If history were to repeat itself, now would be a good time, some might think.

Why did Russia stop fighting Georgia?

As it turns out there was no need to physically enter Georgia’s capital Tbilisi. Panic was already everywhere yesterday evening and President Saakashvili had to make an appeal so that its inhabitants would remain in the city. Militarily there was also nothing more for Russia to prove having demonstrated what little a tiny country (because it is awfully small) such as Georgia can put up against its armed forces. The conflict was in fact over as soon as Russian forces crossed into their rebellious neighbour. The question remains, though, why Russia suddenly decided to end the operation, after having publicly refused to even contemplate it when Saakashvili suggested it less than 24 hours earlier. 

That the conflict escalated to the point where it got totally out of hand in such a short time came as nothing but a shock to the Western powers. The nervousness among leading politicians has become more obvious with every foreign minister or president visiting either Moscow or Tbilisi in the midst of the conflict. Not very surprising considering that this was the first time in ages that Russian forces physically entered another country with hostile intentions. Russia’s political position was, however, never going to be very easy, so a prolonged conflict was not going to be in their interest. Refusing to acknowledge Saakashvili’s proposal to cease the hostilities yesterday seems like nothing but slightly prolonging the inevitable, creating more fear in Georgia (apparently successful considering the panicking in Tbilisi) and letting President Medvedev be the one deciding when to end the conflict.

What this conflict has surely accomplished is pushing Georgia even further towards the West. Today it was announced by President Saakashvili that Georgia is to leave the Commonwealth of Independent States, the rather loose organisation of former Soviet republics of which it, despite its controversies with Russia, has remained a member. Still the feelings towards the West, which failed to offer any military support during the conflict, though mobilised an impressive diplomatic task force, are not unambiguously warm. Georgia’s ambassador to NATO Revaz Beshidze today accused the alliance’s member states of having made the escalation possible by not extending an invitation to join the organisation during a NATO summit in April. Looking at it from a different perspective one could of course also argue that NATO members at the time fearing a candidate for membership with not one but two frozen conflicts on its soil have been proved nothing but right. Even though these past events have inevitably made Georgia even more eager to join not only NATO but also the European Union (the EU flag has been flying over government buildings for years and was clearly visible behind President Saakashvili during his televised address yesterday), the question remains: How eager are the members of these organisations to let the Georgians in? The U.S. is sure to continue offering its support and this blog would not be surprised to see President Bush pay a visit shortly, especially after his harsh remarks with regards to the conflict on Monday.* A fair assumption is that Georgia will be offered closer ties with these organisations but without the prospect of full membership anytime soon.

Not all of Georgia will benefit of course. Abkhazia and South Ossetia are most likely to be lost for the foreseeable future. The latter should be expected to receive economic support from Russia for rebuilding and there is even the possibility that Russia might acknowledge it as a sovereign state, a move made far more credible thanks to the Kosovo precedent. In that case, the same courtesy would be extended to Abkhazia very quickly. This would of course finally bring to an end some of the uncertainties concerning the status of these regions, but the solution would have come at a very heavy price. There might be celebrations on the streets of Tbilisi and people smirking in the Kremlin tonight. That does not change the fact that Tskhinvali lies in ruins, so if its inhabitants fail to see the greater picture, they should be forgiven.

*The full statement can be found at http://www.whitehouse.gov/news/releases/2008/08/20080811-1.html.

Why is Russia fighting Georgia?

The latest crisis in the South Cacasus has proven to be a genuine strike of luck for Russia and its leadership. After having for several years had to live with the humiliation of witnessing Georgia, with highly provoking Mikheil Saakashvili at the helm, falling further and further into the hands of the West and the United States in particular, it has now identified an opportunity to strike back forcefully.

Having done absolutely nothing to help in reaching a solution when it comes to Georgia’s frozen conflicts, other than maintaining status quo, it has been handing out Russian passports to the people residing in both South Ossetia and Abkhazia for years. Apparently, the fact that a large number of people have rather recently become Russian citizens has very conveniently proven to be reason enough to invade its southern neighbour. Not that Georgia and its government does not have itself to blame just a little for what is taking place at the moment. Russia is likely to have been waiting for something of this kind to happen for years and, quite frankly, President Saakashvili should have seen it coming. And perhaps he did. Provoking Russia into invading his country has certainly showed that Russia’s self-esteem is not confined to drafting angry press releases and making use of its veto in the UN Security Council. The message to the West is extremely clear; ironically, presidents Medvedev and Saakashvili might as a matter of fact have a common interest in presenting this picture, although their motives for doing so are sure to differ.

With the Russian armed forces crushing their Georgian opponents the message its leaders are sending to the West reads: NATO has no place in the South Caucasus. Having, due to its then utter lack of military muscle, had to accept Estonia, Latvia and Lithuania gaining entrance to the alliance, they are determined not to let history repeat itself. With most NATO members, bar the United States under President Bush, rather reluctant to let negotiations with Georgia get anywhere near offering a membership, this latest escalation certainly is not helping Saakashvili’s sake. The objections over Georgia’s instability have been proven right. But is such a goal really enough to engage in a full-scale invasion?

Rather, Russia’s objective is to humiliate not only Georgia but also the United States. Having invested loads of money and tonnes of prestige, it is now unable to help its comrade-in-arms in Iraq. The Emperor is naked, having tied its own hands fighting wars in both Afghanistan and Iraq. So much for being America’s friend. Russia is proving it can do whatever it wants in its own backyard and that the West should bloody well keep out. Leaders in “the near abroad” should also take this latest development into careful consideration when making their own foreign policy choices. Ukraine obviously springs to mind, but also Belarus, if we would chose to take a longer perspective on things. It is, though, perfectly clear at the moment that the ongoing events are likely to put massive strains on the already uneasy relationship between Russia and the West and that they will help to define their intercourse for the foreseeable future. But Russia does not care. To them, the West has brought this upon themselves. Kosovo was just one of many issues that, from their perspective, have already defined all there is to define. By crossing the border not only into South Ossetia but into Georgian controlled territory, while bombing pieces of Georgian infrastructure into pieces, Russia has made it known to the world that the foot has come down, even more so by publicly refuting an opening for negotiations. They are staging a parade for the world to witness and this blog would not be surprised at all were it in the end to go through Tbilisi, the capital.

Medvedev, then what?

Now, when it seems pretty obvious that Dmitri Medvedev is on his way of becoming the next president of the Russian Federation, it would be interesting to think a little about what this will mean for Russia and, perhaps most importantly, its relationship with the West. An analysis of this would be important because this, if anything, seems to be what might change quite fast. Foreign policy is rather naturally an obvious part of the domain of the president and also where the present establishment is most likely to give him any opportunities to have a real impact. Going after domestic issues at first would undoubtedly make things feel a bit uncomfortable for many people within this group, something which of course could have repercussions for the new president. To make certain he would remain supported by the establishment, Medvedev expressed his desire for Putin to become prime minister after the election, this way reassuring these people he would not constitute a threat to them. Putin, to my knowledge, still has not accepted this offer in public and my hunch is that he will not for some time. He might even wait till after the election itself, just to keep people a little on their toes. All the same, this is a clear sign of Medvedev’s weak position. Will it ever grow stronger so that he will be able to govern on his own? I see no reason to doubt that; Putin did not pick someone simply because in this way he would be able to control him. Putin has been working with Medvedev for years and given him important portfolios to look after. He is obviously trusted. If Putin wanted to remain in power indefinitely he would have picked someone with a weaker position, such as present PM Zubkov. The office of the president is so powerful in itself that there is a good chance things will work out for Medvedev, so long as he does not try anything stupid before he has had the time to build for himself a proper power base, which is not solely dependent on his predecessor. Given Putin’s strong position at the moment, he will though have to remain as the guarantor of a smooth succession, as prime minister or something else.

With Putin in the background (or perhaps even in the foreground), it is very likely that the only part where Medvedev in the beginning will be able to exercise much influence will be on foreign policy. The sad truth is we do not know what this will mean. Medvedev has been exceptionally quiet on the issue, perhaps not too perplexing given the fact that he has always held positions of more domestic substance, such as head of the presidential administration and then first deputy prime minister. This, however, never stopped the person always thought to be his main contender for the presidential blessing, Sergei Ivanov, too first deputy prime minister. That Sergei Ivanov has been fairly active within foreign policy might perhaps not be too surprising, since he used to be minister for defence and as such far more involved in bilateral and multilateral issues than Medvedev, at least in public (Ivanov even once met with the King of Spain, somewhat obscure since he was then merely a member of the cabinet). There are analysts suggesting that Medvedev’s silence on the matter might have been because of disagreement with the path chosen. Even though he for a long time has been a member of Putin’s inner circle of co-workers and friends, there could be something to it. Let’s explore why. 

The most obvious reason is that Medvedev never served in any branch of the security services, in contrast to Ivanov who spent his career within first the KGB and then the heir of most of its part, the FSB. Medvedev, being the son of academics and himself briefly a law professor, does not perhaps have the instinctive mistrust of the West that has so poisoned many of the people in the Kremlin. This in combination with the election of an American president more keen on multilateralism and international co-operation might result in a much-needed improvement of Russian-American relations. If you compare him to Ivanov, the latter is by far more likely to make references to Nazi-Germany while talking on American hegemony.

Medvedev is also a liberal when it comes to economics, so he will probably put more emphasis on things such as trade. As president of Gazprom he is also likely to understand that Russian gas is not only a tool for exercising pressure on one’s customers, but that there is also a business perspective on all this. This will be important especially in dealings with the European Union. 

 All this is not to suggest that Russia’s stand on the main geopolitical issues of our time is likely to change. But with a new president in the Kremlin there might at least be some room to maneouvre.