Russia's Drive for Global Economic Power: a Challenge for the Obama

No. 2235 January 30, 2009 Russia’s Drive for Global Economic Power: A Challenge for the Obama Administration Ariel Cohen, Ph.D., and Lajos F. Szaszdi, Ph.D. Until the recent global financial crisis, Russia’s Russia’s geo-economic ambitions cover the entire economic revival under Vladimir Putin had helped Eurasian landmass from the Atlantic to the Pacific. to restore the country’s standing as a major player in Severe repercussions for Europe’s national security the world arena. In many respects, Russia’s invasion due to dependence on Russian energy are widely of Georgia was fueled by Russia’s economic growth recognized by the European Union and individual and newfound wealth. nations. Furthermore, Russia aims to become a This economic prosperity was largely the result major energy supplier and provider of raw materials of Russia’s oil and natural gas exports, coupled with to countries of the Asia–Pacific region, including the high prices of other Russian commodities in China, Japan, South Korea, and also the United world markets. With the seventh-largest oil reserves States. Such a goal, if achieved, would greatly and the largest gas reserves in the world, and as the enhance Russian economic and political leverage in leading exporter of oil and gas, the Kremlin is using the Pacific Rim. its energy exports, export revenue from arms and Russia’s Economic March. The geo-economic metal sales, and investments abroad, including in and geopolitical implications of Russia’s economic the mining and energy sectors, to extend Russian power projection abroad cannot be overstated: As influence worldwide. the Russian state’s main source of revenues and as a Russia shut down the flow of natural gas to foreign policy arm, it enables the Kremlin to extend Ukraine in January 2006 and again in January Russia’s influence on a global scale. Moscow exer- 2009. It attempted to prevent Caspian oil and gas cises economic—and political—influence over supplies from flowing freely to European markets countries that depend on Moscow’s resources. Rus- by applying pressure on Kazakhstan, Turkmeni- sian exports and investment projects are an instru- stan, and Azerbaijan; threatened to disrupt oil ment for establishing and developing strategic exports through Georgian territory when it invaded Georgia; has acquired, and is in the pro- cess of acquiring, European energy companies, as This paper, in its entirety, can be found at: well as pipelines, refineries, and other assets in www.heritage.org/Research/RussiaandEurasia/bg2235.cfm Produced by the Douglas and Sarah Allison more than a dozen countries. Moscow is also tar- Center for Foreign Policy Studies geting the strategic Middle Eastern oil and gas sec- of the Kathryn and Shelby Cullom Davis tor for joint ventures, and is displacing Western Institute for International Studies energy companies operating in OPEC founding Published by The Heritage Foundation 214 Massachusetts Avenue, NE member Venezuela. Washington, DC 20002–4999 (202) 546-4400 • heritage.org Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation or as an attempt to aid or hinder the passage of any bill before Congress. No. 2235 January 30, 2009 relationships through the export of commodities, and independent experts to track Russian state arms, and nuclear technology. and oligarch money laundering, corruption, and Since Vladimir Putin became president in spring unfair competition practices. 2000, the Kremlin has been backing the formation • Encourage U.S. and multinational companies to of “national champions” of the economy—corpo- compete in economically viable and geopoliti- rate giants, private or state-owned, and subservient cally significant energy ventures, which Russia is to the government. The huge corporations favored targeting, using diplomatic and security support. by the Kremlin—Gazprom, Rosneft, LUKoil, •Promote market-viable alternative energy sources and Rostekhnologii (Russian Technologies)—have and unconventional sources of fuels worldwide become instruments of the Russian state’s policy to to counter strategic dependency on Russian, dominate the national economy and to project its Iranian, and Venezuelan oil. power abroad through a trade-based foreign economic policy. The Kremlin has been using energy •Expand security cooperation with Russia’s exports as a tool of its foreign policy. The most noto- energy-exporting neighbors and other countries rious example is the disruption or the threat to cut that Russia is targeting for energy cooperation. off oil and gas exports to an importer country, such The U.S. should make use of NATO’s Partnership as Ukraine, that is perceived as adopting policies for Peace program. that go against Russia’s national interests. Conclusion. Russia is being run as a corpora- A Perfect Storm. The international financial cri- tion by former senior members of the Russian intel- sis has seemingly put a stop to Russia’s dynamic ligence community who strive to maximize profits efforts at worldwide economic expansion. The inva- and power by expanding global corporations for sion of Georgia made economic problems in Russia exports of raw materials and weapons. The Kremlin worse, triggering a further outflow of capital due to has made it clear it intends to diminish America’s fear of instability. The interruption of gas supply to standing as a world leader by promoting a “multi- Ukraine and the rest of Europe in January 2009 once polar” world, and by using its military, economic, again raised questions about Russia’s reliability as a and “soft” power to re-establish Russia as America’s supplier of energy. Other problems have combined closest competitor. The smaller energy profits to create a perfect financial storm against Russia: accruing in Moscow from the current global eco- International banks called loans of vastly powerful nomic downturn can play a role in mitigating Rus- oligarchs who, before the crisis and precipitous drop sia’s anti–status quo foreign policy, and slow down in company valuations, used their company shares the growth and modernization of its armed forces. as collateral for foreign loans; and the price of oil and But the U.S. nevertheless needs to develop compre- other commodities, including metals, fell, causing hensive policies to handle Russia’s economic power grave losses to Russian state financing. projection that is aimed at undermining American allies, power, and security interests through a mix The Obama Administration should, therefore, of commercial, national security, intelligence, and take quick action to: diplomatic activities. • Ensure that CFIUS (Committee on Foreign Invest- —Ariel Cohen, Ph.D., is Senior Research Fellow in ment in the United States) has the resources and Russian and Eurasian Studies and International Energy support it needs to conduct its investigations Security, and Lajos F. Szaszdi, Ph.D., was a Consultant according to the law. The U.S. should urge its in the Douglas and Sarah Allison Center for Foreign allies to develop similar institutions and pro- Policy Studies, a division of the Kathryn and Shelby cesses to perform national security evaluations. Cullom Davis Institute for International Studies, at The •Increase cooperation among U.S. and allied Heritage Foundation. intelligence services, law enforcement agencies, No. 2235 January 30, 2009 Russia’s Drive for Global Economic Power: A Challenge for the Obama Administration Ariel Cohen, Ph.D., and Lajos F. Szaszdi, Ph.D. Until the recent global financial crisis, Russia’s economic revival during the presidency of Vladimir Putin had helped to restore the country’s standing as a major Talking Points player in the world arena. Yet, prosperity has come • Until the recent global financial crisis, Russia’s with some unintended consequences. Russia’s inva- economic prosperity under Vladimir Putin sion of Georgia was fueled by Russia’s economic had helped restore the country as a major growth and newfound wealth. world player and as a challenger to Western influence. This economic comeback is largely the result of Russia’s oil and natural gas exports, coupled with the • Russia’s economic comeback is largely the result of its high-priced oil, natural gas, and high prices that other Russian commodities have metals, and its arms exports, construction, enjoyed in world markets. With the seventh-largest oil and consumer boom. reserves and the largest gas reserves in the world, and • The Kremlin has used energy exports to as the leading exporter of oil and gas, the Kremlin is Europe as a foreign policy tool, most notori- using its energy exports, revenue from arms and met- ously through threats to disrupt oil and gas als sales, and investments abroad in the mining and exports to countries that oppose Russia’s energy sectors to extend Russia’s influence worldwide. national interests. The interruption of gas supply to Ukraine and the • The U.S. should increase cooperation with rest of Europe in January 2009 resulted in the worst allied intelligence services, law enforcement energy crisis in Europe since the Arab Oil Embargo of agencies, and independent experts to track 1973, and once again raised questions about Russia’s Russian money laundering, corruption, and 1 unfair competition practices. The Obama reliability as an energy supplier. In the recent past, Administration should make gathering Russia has already prevented Caspian oil and gas sup- actionable intelligence on questionable plies from flowing freely to the European markets; has Russian activities

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