A new "cold war"?

AuthorDadak, Casimir
PositionRussia's capability to re-emerge as a world superpower

The collapse of the Soviet Union changed Russia's international status dramatically; the country lost its global power status overnight and soon afterward suffered international humiliation when the government defaulted on its debts in 1998. Therefore, it should come as little surprise that a Russian nationalist lamented the USSR's demise as a "major geopolitical catastrophe." (1)

Russia enjoyed a substantial economic rebound following the 1998 debacle, however, and its leaders regained confidence. Moreover, Russia was admitted to the Group of 7 (which was therefore renamed the Group of 8). Although President George W. Bush afforded his Russian counterpart a special relationship, Russian leaders soon began to challenge U.S. supremacy in words and deeds.

President Vladimir Putin blamed a "unipolar world" for "an almost uncontained hyper use of force--military force--in international relations ... that is plunging the world into an abyss of permanent conflicts," and he concluded his tirade by saying, "One state and, of course, first and foremost the United States, has overstepped its national borders in every way" (2007c). His successor, Dimitry Medvedev, did not want to be outdone and off, red the following counsel: "The world cannot be run from one capital. Those who refuse to understand this will only create new problems for themselves and others." In this address, the new president also proposed turning Russia into a leading financial center and boosting "the ruble's role as one of the currencies involved in international payments" (Medvedev 2008a). This statement was a prelude to an overt attack on the U.S. dollar's role in the world economy at the June 2009 meeting of Brazil, Russia, India, and China held in Yekaterinburg, Russia (Halpin 2009). (2)

Russia has also taken specific steps in the military sphere; today, Russia's strategic bombers again patrol both U.S. coasts, and its navy conducts exercises in the Caribbean. Moreover, the Kremlin invests heavily in upgrading its strategic nuclear arsenal, a weapons system useful only in a global confrontation. These actions clearly indicate that the brief war with Georgia in August 2008, the maintenance of a military presence in Transdniestria in contravention of an earlier agreement, and the attempt to incite Kyrgyzstan into shutting down U.S. operations at the air base in Manas are not merely efforts to control the "Near Abroad," but integral parts of a strategy to regain a global power status. Indeed, President Medvedev (2009a) seems to believe that Russia never lost this international standing. (3) Putin and Medvedev now behave in a manner similar to that of the leaders of the Soviet Union, and some observers perceive that the world is sliding into a new "cold war."

In this article, I analyze Russia's potential to regain a global power status. Ray Cline (1975) identifies several key features that determine a nation's weight in the international arena: economic strength and technological advancement; demographic vitality and ethnic cohesion; military expenditures and power; and political factors. Overall, with very few exceptions (nuclear arsenal, size of territory, and production of raw materials), present-day Russia possesses no assets that would equip it to play the role of a global power and enable it to challenge the United States.

Economic Performance

Following the 1998 crisis, Russia enjoyed a significant economic turnaround, including a robust economic growth and a very high surplus in the balance of trade (table 1). Anders Aslund (2004) believes that fiscal reforms and partial economic liberalization introduced by Putin brought about the turnaround. Marshall Goldman (2004) and Philip Hanson (2004) stress, respectively, the effect of the ruble's real depreciation and rapidly increasing energy prices. The World Bank (2009) finds that capital inflows and access to low-cost external financing played an important role, too.

Russia is the world's second-largest exporter of oil, and The Economist ("Russia's Economy" 2008) estimates that oil and gas account for more than 31 percent of the nation's gross domestic product (GDP). In 2005, taxes on exports of oil and gas generated 37.6 percent of the Russian government's total revenue (World Bank 2008). Heavy taxation of the energy sector allowed the government to accumulate $596.8 billion in official reserves by mid-2008 (Central Bank of the Russian Federation n.d.), and the increase in official reserves encouraged the state to engage in another type of market interference--fixing the ruble's exchange rate.

The fallacy of these policies became apparent when the recent global financial crisis hit Russia in the fall of 2008; the nation was among the countries most severely affected by the turmoil. In 2009, Russian GDP sank 7.9 percent, with construction and manufacturing output plunging 16.4 and 13.9 percent, respectively ("2009 GDP Drops" 2010). The World Bank (2009) foresees a slow recovery in 2010 and a return to the precrisis level of real GDP only in late 2012.

In spite of the huge amount of official reserves in the Russian treasury, the global financial crisis spawned a debilitating capital outflow--in the fourth quarter of 2008 alone, Russia lost more than $130 billion (World Bank 2009). As a consequence, the value of official reserves declined to $383.9 billion by the end of April 2009 (CBRF n.d.). The capital flight led to a huge drop in stock prices that severely weakened the Russian financial system, so much that in the fall of 2008 the government had to pledge massive aid to banks. Nevertheless, in June 2009 Standard & Poor's estimated the amount of "troubled assets" held by Russian banks at $213 billion (Maternovsky and Khrennikov 2009). Moreover, heavy taxation left even the energy sector with depleted resources, and the government had to help oil and gas producers with servicing of foreign debt when bank financing dried up.

The spectacular deterioration in economic fortunes took its toll on government finances. A substantial federal budget surplus equal to 5.4 percent of GDP in 2007 gave way to a shortfall of 6.8 percent of GDP in 2009 alone. Deficits are expected to continue into the future, and Moscow plans to plug the hole with a drawdown from two nest eggs, the Reserve Fund and the National Welfare Fund. A draft law on the federal budget for 2010-12 anticipates that the former, which at the end of 2008 stood at more than 10 percent of GDP, will completely disappear by the end of 2010, and the value of the latter will sink from 6.6 percent of GDP at the end of 2008 to 2.0 percent by the end of 2012 (World Bank 2009, 11).

A closer look at economic data points to other significant weaknesses (table 1). In 2007, Russian GDP was equal to only a small fraction of the U.S. or European Union GDP and less than one-third as large as China's. The prospects for a quick catch-up are not good, however, because the level of investment has been relatively low. The robust rate of economic growth between 1999 and 2007 was to a large extent a consequence of increasing oil and natural gas prices rather than a rapid growth in investment and production.

The Organization for Economic Cooperation and Development (OECD 2009) reports that Russian exports of goods grew rapidly from 1998 to 2005, from $72.3 billion to $241.5 billion (and further to $352.3 billion in 2007). This rise, however, was largely a result of quickly increasing exports of commodities, especially of oil and natural gas, and their rapid price increases. In 1998, fuel exports accounted for 39.2 percent of all export revenue, and by 2005 their share had increased to 49.0 percent (World Bank 2008). Russia also exported significant quantities of other commodities, and unprocessed goods accounted for approximately 80 percent of the nation's exports.

In contrast, in 2005 manufactured goods constituted only 18.9 percent of exports, a decrease from 28.7 percent in 1998 (World Bank 2008). This decline in the share of manufactured goods in total exports indicates that the tremendous increase in commodity prices and the associated strengthening of the ruble made other industries less competitive on world markets, an occurrence known as the "Dutch disease." (4) In the second half of 2008, prices of raw materials dropped significantly, and the negative effects of the disease are setting in, as Russia's plummeting GDP illustrates.

Russia is a major exporter of military hardware; however, the data are significantly skewed because the key buyers of Russian weapons are countries that face restrictions on arms trade imposed by the West (for example, China and Iran). Apart from weapons, Russia produces few high-tech products that can be sold on world markets. Table 2 shows that the 2005 total value of Russian exports in this category was a miniscule fraction of the amount the major economic powers produce.

The small amount of high-tech exports reflects the extremely poor outcome of the nation's research and development (R&D) effort (table 3). In 2005, Russians recorded an insignificant number of "Triad family" patents. (5) This outcome is less than impressive given the manpower and resources invested in R&D. The low yield of patentable discoveries reflects the low quality of equipment in Russian laboratories, a high degree of bureaucratization, the focus on theoretical research, and the backwardness of local firms.

In addition, an authoritarian political system, widespread corruption, and limited protection of property rights do not offer incentives to invest time and energy in R&D. Without greater innovation, fast economic progress is impossible. Therefore, Medvedev's (2009a) dream of building a new Russia based on human capital, knowledge, and cutting-edge technologies in medicine, information, energy, space, and telecommunications industries will be very difficult to realize. (6)

Table 4 illustrates the chasm that separates Russia from the...

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