Sunday, January 18, 2015

The Russian threat runs out of fuel / Daniel Gros

For Europe, the defining event of 2014 was Russia's annexation of and military intervention in eastern Ukraine's region. The Kremlin's actions directly challenged key principles that have guided Europe for more than six decades, particularly the renunciation of the use of force to alter national borders. But is in no position to sustain its aggressive foreign policy.

It has often been argued that Russia was reacting to the perceived encroachment on its "near abroad" by the(EU) and the (Nato). But history suggests a simpler explanation: a decade of steadily rising oil prices had emboldened Russia, leaving it ready to seize any opportunity to deploy its military power.

Indeed the Soviet Union had a similar experience 40 years ago, when a protracted period of rising oil revenues fuelled an increasingly assertive foreign policy, which culminated in the 1979 invasion of Afghanistan. Oil prices quadrupled following the first oil embargo in 1973, and the discovery of large reserves in the 1970s underpinned a massive increase in Soviet output. As a result, from 1965 to 1980, the value of Soviet oil production soared by a factor of almost 20.

Burgeoning oil wealth bolstered the regime's credibility - not least by enabling a significant increase in military spending - and rising economic and military strength gave the Soviet Union's geriatric leadership a rejuvenated sense of invulnerability. The invasion of Afghanistan was not merely an improvised response to a local development (a putsch in Kabul); it was also a direct result of this trend.

Vladimir Putin's reaction to the Euromaidan demonstrations in followed a similar pattern. In both cases, a seemingly low-cost opportunity was viewed as yielding a large strategic gain - at least in the short run. Indeed while the devastating consequences of the Soviet Union's Afghan adventure are now well known, at the time the invasion was viewed as a major defeat for the West.

The Soviet army's retreat in 1988 is usually ascribed to the Afghan insurgency, led by Pakistan-trained mujahideen with support from the United States. But the decline in oil prices during the 1980s, which cut the value of Soviet output to one-third of its peak level, undoubtedly played a role. Indeed it led to a period of extreme economic weakness - a key factor in the Soviet Union's dissolution just three years after its withdrawal from Afghanistan.

During the 1990s, Russia was too preoccupied with its own post-Soviet political turmoil to object to EU or enlargement to the east. Nor did it have the wherewithal, as its own production and oil prices continued to decline, hitting a trough of $10 a barrel in 1999-2000.

Russia's stance changed gradually during the early 2000s, as world oil prices - and Russian output - recovered, reinvigorating the country's economic base at a time when its leadership was becoming increasingly autocratic. Only then did Russia start to claim that the United States and its European allies had offered some implicit pledge not to expand Nato eastward.

With oil prices steadily rising, the value of Russian oil production reached a new peak, roughly 10 times the 1999 level, in 2008; Russia invaded Georgia the same year. Though prices collapsed during the Great Recession of 2009, they quickly recovered, with the value of Russian output reaching another peak in 2012-2013 - precisely when Russia's position on the EU-Ukraine association agreement hardened. Given that the EU and Ukraine had already been negotiating the deal for more than two years, without much reaction from Russia, the EU was blindsided by the Kremlin's sudden sharp objections.

Clearly, Russia's attitude toward its near abroad is not quite as erratic as it may seem. When oil prices rise, Russia expresses its latent resentments more aggressively, often employing its military. Moreover, at higher prices, the oil industry crowds out other export sectors that support open markets and a less aggressive foreign policy.

The Soviet war in Afghanistan was followed by a long-term decline in oil prices. The recent price slide - to $50-60 a barrel, halving the value of Russia's oil production - suggests that history is about to repeat itself.

And oil prices are not Russia's only problem. Western sanctions, which seemed to constitute only a pinprick a few months ago, appear to have inflicted serious damage, with the rouble having lost nearly half its value against the dollar last year. Though financial markets will calm down when the rouble's exchange rate settles into its new equilibrium, Russia's economy will remain weak, forcing the country's leaders to make tough choices.

Against this background, a stalemate in the Donbas seems more likely than an outright offensive aimed at occupying the remainder of the region and establishing a land corridor to Crimea - the outcome that many in the West initially feared. President Putin's new Novorossya project simply cannot progress with oil prices at their current level.

To be sure, Russia will continue to challenge Europe. But no amount of posturing can offset the disintegration of the economy's material base caused by the new equilibrium in the oil market. In this sense, the United States has come to Europe's rescue in a different way: its production of shale oil and gas is likely to play a greater role in keeping Russia at bay than Nato troops on Europe's eastern borders.


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