Russia is Back on the World Stage
As the dust settles on July’s G8 Summit hosted by Russia in St Petersburg, it is clear that Russia is back on the world stage as a major economic and diplomatic force. There are three reasons why the world is now taking Russia seriously, perhaps more seriously than at any time since the end of the Cold War and the collapse of the Soviet Union: energy, terrorism and nuclear proliferation. The country’s soaring energy-based tax revenues, the growth in value derived from other commodity exports and a boom in industry has created sustainable economic growth and a feeling of stability, which is why more and more international companies and investors are pouring into Russia. It is also the key to Russia’s new foreign and economic policy, which is aimed primarily at advancing Russia’s own interests.
Energy and the Economy:
Oil prices have surged since 2000, when the price for crude oil averaged about $28 a barrel. Today, with oil around $75 a barrel, these revenues are underpinning much of Russia’s geopolitical resurgence. Russia’s annual oil and gas sales amounted to about US $75 billion in 2000 when Vladimir Putin became President. This year revenues from oil and gas sales are expected to exceed US $200 billion.
Russia is a leading global commodities exporter and the world's # 2 oil exporter after Saudi Arabia.
Russia already commands the world’s third largest foreign exchange reserves with $245 billion in the bank, and growing! This enables the country to pay off accumulated foreign debt from the Soviet era, plough money into infrastructure from railways to electrical generation, raise state salaries and pensions and still build a multi-billion dollar Stabilization Fund to protect against an oil-price down-turn.
GDP has been constantly rising for the last six years and is on target at nearly 6% this year. While partially due to the filterdown effect of the oil revenues, it is also helped by growing industrial production, kick-started by the 1998 default and ruble devaluation, and by other commodity exports, from diamonds and gold to timber and titanium.
The tangible year-on-year increase in the average Russian’s spending power, from Moscow to Tomsk and on to Chita and Vladivostok, is reflected in a growing stability in society, with aspiring Russians in their mid-thirties who are now able to make decisions on mortgages and starting a family. Ten years ago they were dubious about their ability to afford these life-affirming decisions.
It is not going to get worse. Experts around the world are predicting a rise in oil prices. “The steady march toward $100 a barrel continues,” says Fadel Gheit, an oil analyst at Oppenheimer & Co.
Stephen Leeb, president of Leeb Capital Management and editor of The Complete Investor newsletter believes that "Energy stocks are undervalued." Leeb believes prices will continue to trend higher on surging demand from emerging economies like India and China. He predicts that the price of oil per barrel will hit the low $80s by the end of this year, and he sees a reasonable chance of $100 next year. Christopher Welch, co-manager of the Diamond Hill Small- Mid Cap Fund says, "There has been a 20-year bear market in energy and little investment in new supply."
Russia is Key to the Anti-Terror Coalition
Opposition to terrorism is fundamental to Russia’s foreign policy resurgence. It was the first country to partner with the U.S. in its War on Terror after 9/11 and is the only Security Council member on speaking terms with not only Iran and North Korea but also Hamas. Russia is now seen as the only broker of diplomatic solutions to crises that continue to erupt around the world. At the same time, it is emerging victorious in its war against the fundamentalist elements in Chechnya.
Chechnya is a subject where Russia comes under much criticism by well intentioned liberals around the world. But as President Putin, who initiated the second Chechen War told foreign interviewers recently, “Russia gave Chechnya what amounted practically to independence in 1995, but what did we end up with as a result? Overnight, this republic was taken over by extremist groups from all around the world. Overnight. Not only did the people who came to power there spare little thought for the interests of their citizens, they gave their interests no thought at all, pursuing instead their goal to create a fundamentalist state reaching from the Caspian to the Black Sea.”
By luck, or design, the Russians have killed the notorious Shamil Basayev, the Chechen warlord who not only masterminded the infamous Nord-Ost theatre hostage-taking in Moscow, but also the 2004 horrific attack on the Beslan School.
As one of the largest nuclear powers, Russia is keen to export its technology for peaceful purposes including power generation, and, as one of the few countries with normal ties to both Iran and North Korea, the country is viewed as offering the best opportunity for defusing a potential nuclear confrontation.
Russia has been helping Iran build its Bushehr reactor, and President Putin said recently, “The matter concerns not only Iran, but also other countries that are on the threshold of developing nuclear technology. The development of nuclear energy is one of the ways of overcoming the energy crises. How can we close off access to present and future nuclear technology to all countries that are not in the nuclear club, especially for peaceful purposes? We cannot do this. Iran will not be the only country wanting to develop this technology, other countries will want to do it too, and we cannot cut them all off from it,” he told Canadian television.
Russia’s solution is to create a network of international centers to enrich uranium and process spent nuclear fuel; a plan which has won the acceptance of the United States and others in the nuclear club.
Against this background, Russia’s financial markets have become truly integrated into global finance. “We all sit on one long trading desk from Rio de Janeiro, through New York, London, Moscow, Vladivostok and Tokyo – and indeed we all watch each other’s screens,” writes Eric Kraus, the portfolio manager for the Nikitsky Russia/CIS Opportunities Fund in his Truth and Beauty (… and Russian Finance) newsletter.
“The main Russian macroeconomic numbers are eye-glazingly excellent,” Kraus writes in a recent issue. “GDP growth is on target, industrial production is increasing, FDI is pouring in,” he continues. “Inflation is slowing, budget surpluses are huge, and the need for massive renovation of infrastructure is finally being met. Corporate governance, while still uneven, has nevertheless been revolutionized over recent years. The best Russian companies are becoming major players on the global stage.”
Yury Rubinsky, head of the Department of French Studies at the Institute of Europe at the Russian Academy of Sciences, writing in Russia Profile, says that this year Russia has swapped its folding chair at the meeting of the world’s economic and industrial leaders for a real chair, as the G8 host in St Petersburg.
He notes that, “The irony of the situation, however, is that while Russia’s credentials have improved, the ideological differences between Russia and the group’s other members have become more apparent.”
In fact, as President Putin put it, major Western countries have lost their leverage over Russia (see For the Record, Page 56).
Financial strategist Kraus writes, “We are delighted with the new domestic focus, (Putin’s) increasing assertiveness in the international sphere, and the satisfied, self-confident tone that he has assumed.”
U.S. Ambassador William J. Burns said earlier this summer, “This is a moment of considerable frustration and doubt about the relationship between Russia and the United States. You can hear it and feel it every day in both our capitals. From the American side, there are concerns about over-centralization of power here and about Russian behavior toward some of its neighbors. From the Russian side, there are concerns that Americans do not understand how difficult the last 15 years have been for Russia; that Americans are too quick to criticize and lecture; and that Americans are fundamentally uncomfortable with the re-emergence of a strong Russia and determined to constrain it.”
In fact, Russia is uncomfortable with the uni-polar world that has emerged since the collapse of the Soviet Union and is increasingly building ties with India and China, two other fast developing economies of the 21st Century. But also, perhaps irritated by US support for the ill-fated Orange Revolution in Ukraine, Russia has been developing close ties and arms sales to Venezuela, whose President Hugo Chavez, is an outspoken critic of the US. The military deal was initially only for AK-47 automatic rifles, but it has been upgraded to include some $3 billion worth of Sukhoi SU-30 fighter jets, 30 helicopters and a Kalashnikov rifle and ammunition plant.
Russian relations with India have remained unassailably strong for over five decades and the Indian Ambassador, Kanwal Sibal says that, “There is no other example of two such large countries on the world stage having such a lasting and durable relationship. Our basic political interests are the same,” he told an Indian community gathering. He noted that Russia was “rediscovering its strength and capacity.”
On the other hand, relations between Russia and China have been more turbulent over the years but are now as strong as they have ever been.
Presidents Putin and Hu Jintao have met three times this year. The two states have conducted joint military exercises. Chinese investment is flowing into Russian real estate, oil, and infrastructure projects while plans are advancing for exporting Russian oil via a pipeline to China and in the future, natural gas.
Mr. Putin frankly acknowledges that, “Our general impressions of each other are still based to a large degree on our past experience. This is why it is so important for the public in both our countries to become closer acquainted with life in today’s Russia and today’s China.”
Putin said in an interview with the Chinese News Agency, Xinhua, that, “This fits in perfectly with the objectives underlying the joint decision to hold the Year of Russia in China (2006) and the Year of China in Russia (2007). Genuinely memorable big events will be held as part of these National Years. Their principle goal is to bring our citizens even closer together.”
China and Russia are the bulwarks of the Shanghai Cooperation Organization (SCO), the five-year old regional organization that welds together the central Asian republics of the former Soviet Union. In fact, it is more effective than the Commonwealth of Independent States,which link such disparate countries as Russia, Ukraine, Belarus and Georgia with the other eight former Soviet Republics.
The SCO is the major force in the region, not only because of geographic proximity but also because Russia and China are prepared to invest real money, “not just send lessons in democracy,” as Eric Kraus puts it.
Against this groundswell of a new world order being established in the East, Ambassador Burns of the U.S. may feel he is fighting an uphill battle, especially when so ably aided by Vice President Dick Cheney who, speaking in May at a conference in Lithuania, accused Russia of restricting the rights of its citizens, and said "no legitimate interest is served" by turning energy resources into implements of blackmail. Cheney then went on to visit Kazakhstan and Azerbaijan, two notoriously restrictive states, prompting the normally staid New York Times to say that "spearing Russia while flirting with its even more undemocratic neighbors confuses the message, especially when done by a vice president identified with oil interests."
Cheney’s attack was later disdainfully characterized by Mr. Putin as “an unsuccessful hunting shot,” referring to an incident earlier this year when Cheney shot one of his hunting partners.
The Russian response to these jabs was mild compared to the Chinese who, subjected to far less strident criticism by the U.S. State Department, fired back with an attack on the U.S.’ own human rights record, citing illegal secret prison camps, torture and abuse of prisoners of war, systematic racial discrimination and so on, according to Kraus’ T&B newsletter.
In his address to the Gorbachev Foundation, Ambassador Burns said, “First, let me stress at the outset that -- contrary to the impression we like to convey – Americans do not have all the answers. We are often impatient, occasionally preachy, and – yes – we sometimes make mistakes. I am often reminded of Winston Churchill's famous comment, that "the thing I like most about Americans is that they always do the right thing in the end — they just like to exhaust all the alternatives first."
He went on to acknowledge that “Russia has come a long way in the last decade, especially in rebuilding its economy. Russians themselves have done the hard work, but there is no doubt in my mind that interaction with the West, cooperation between our NGO's and integration into global economic institutions has been an important ingredient.”
He stressed that “There are broad areas of common ground between us, which matter not only to the United States and Russia, but to the interests of the whole world. Nuclear energy is an obvious example. Working together, we can make rapid advances in civilian nuclear technology — and, just as importantly, help limit the dangers of the proliferation of nuclear weapons. No two countries in the world have a greater historical responsibility, or greater capacity to lead in this area, than the United States and Russia. Whether on North Korea or Iran, we have far more to gain by collaboration than competition.
“Russia and the United States, Russia and the West, need each other. That doesn't mean that we won't have differences. Sometimes, we will. We must deal with them honestly, and plainly. But it would truly be foolish — for both of us — to lose sight of what we have to gain by working together,” he stated.
There is plenty of room for America in what financial strategist Kraus calls “a non-ideological and profoundly Russian model” which he proclaims to be a “robust success.”
He affirms that “Russia has already rejoined the ranks of the middle-income countries and for the foreseeable future will continue to enjoy far and away the fastest growth in both the G8 and the EMEA (Europe Middle East Africa) region. He points out that “Russians as a people are now wealthier, more self assured, and live better than at any time in their history.
That self assurance led to the arms deal with U.S. critic Chavez of Venezuela this August. Immediately afterwards the US administration slapped an embargo on two Russian companies, accusing them of aiding Iran’s development of weapons of mass destruction. The charge was vehemently denied by both companies – Sukhoi and Rosoborenexport.
Mr. Putin has endorsed an $18 billion, 30-year deal between Boeing and VSMPO-Avisima, which is being acquired by Rosoboronexport. Under the deal, Boeing will buy titanium products from the Russian company, which is the world’s largest producer of the lightweight durable metal, much in demand by the aviation construction industry.
So trade goes on and Russian companies are head over heels in love with public share offerings and the Russian gas monopoly, Gazprom, is now the world’s third largest company. Gazprom has taken the lead in enforcing market prices for its gas on former heavily subsidized neighbors such as Ukraine and Belarussia. Russia is shifting its energy relations with the CIS to a market base, setting oil and gas supply prices close to world levels. In some cases, these prices have been negotiated in tandem with ownership rights to Soviet-era pipelines. For example, Gazprom threatened to raise gas prices for Belarus, but then clarified that prices could be lowered if President Alexander Lukashenko agreed to privatize Beltransgaz (the gas pipeline crossing Belarus to Western Europe) on advantageous terms for Russia. The “gas war” between Russia and Ukraine in December and January was not only a price dispute, but also a conflict over the pipelines crossing Ukraine.
Energy aside, all the world’s top automakers seem to be piling into Russia as they open or negotiate new plants. They are joined by international retailers and consumer goods companies. With the exception of a few ring-fenced strategic sectors, Russia is now open for business and with the sustainable continuing economic boom few multi-national executives can take the risk of being questioned by their boards of directors on why they are NOT in Russia.
The Russians want them, far less for their capital investment than for their know-how and experience.