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Russia: And The Danger of an Irrelevant Gas Station

The Huffington Post The Huffington Post 19/10/2015 Edward Goldberg
PUTIN © shutterstock PUTIN

One of the key principles taught in International Relations is that a rising power threatens the world order. The example always given is pre World War I Germany and its rapid economic rise challenging England's dominance.
Globalization has totally changed this. Today's rising power (China) is the poster child for globalization: It is much too invested in the system, too economically intertwined with the world to radically shake up the existing order. It is the declining power, Russia, that is both threatened by the global order and threatening to the global order, that has nothing to lose in trying to reshuffle the deck. Russia is the only major economy that, beyond a collapsing energy market, has no skin in the globalized game.
Just look at this in terms of the United States. Of all the major economic players in the world, the U.S. has by far the smallest and almost non-existent trade relationship with Russia. Unlike China, there are no major economic constituencies or lobbies on either side pushing for accommodation.
The U.S. exported approximately $110,483 billion worth of products to China and imported approximately $425,578 billion. Although the import numbers from China greatly outweigh the export numbers, the import numbers also influence American jobs and investments. Whether it is Wal-Mart, Apple, Nike or warehousing and transporting Chinese steel in Long Beach, California, the import numbers, like the export numbers, represent large constituencies and lobbying efforts, both in Washington and Beijing, that smooth over the relationship.
U.S. exports to Russia on the other hand were only $10,752 billion worth of merchandize; under 1% of our total exports, and the imports from Russia were approximately $23 billion. In terms of customers for U.S. products, Russia is about the same size as Thailand or Indonesia.
Although not as extreme, discounting energy, Russia's trade figures with the EU are somewhat similar. Russia is the third largest exporter to the EU, but most of that was oil and gas. China on the other hand, exporting manufactured and value added goods, is the largest exporter to the EU, making up 18% of EU imports. In terms of EU exports , Russia represent approximately 6% of the whole while China is almost 10% and the US about 18%. In fact the EU exports more to Switzerland than it does to Russia.
According to The U.S. Energy Information Administration, "Oil and natural gas revenues account for more than 50% of the Russian federal budget." But with oil trading in the $50 a barrel range, and Russia's estimated break even for oil at $70 a barrel, Russia is being forced to liquidate parts of its oil revenue-generated sovereign wealth.
Exacerbating this problem is that the age of fossil fuels is slowly coming to an end. On June 9, 2015 the Financial Times ran a banner headline, "G7 in historic accord to phase out fossil fuel emission this century." And as Martin Kaiser, head of International Climate Politics at Greenpeace, stated in the article following, "the G7 leaders' decision signals the end of the age of fossil fuels, the vision of a 100 percent renewable energy future is starting to take shape."
For Russia, with significant fossil reserves, the value of these reserves becomes similar to pre 2008 mortgage bonds held by banks: it totally rests on the perception that things will continue as is. However, if Martin Kaiser's projection holds true, the one thing that is certain is that the monetary value of these reserves will fall. And the Putin regime, cronies et al, will become more nationalistic and more aggressive in order to justify their existence in an ever-weakening economy.
Russia suffers from what the British economist Richard Auty termed the "resource curse." Although a country could be considered lucky to have an over abundance of energy resources, often times it is a curse that perverts the country's political system. Countries that derive substantial revenues from control over natural resource extraction are often less democratic and much more corrupt, with their leadership maintaining authority by allocating resources to favored constituents, by empowering cronyism. There is also often greater patronage spending by the leadership, which tends to reduce the drive for greater democracy. Compounding this problem for Russia is a historic tradition of almost 600 years of autocracy that re-enforces the concept of government through patronage.
Countries that suffer from the curse like Russia have little incentive to diversify their industrial base and when they try the plan is often smothered in corruption and lack of political freedom. Russia tried to create a Silicon Valley in Skolkovo, a suburb of Moscow, but it failed miserably. Cronyism is definitely not the best roadmap for tech creativity. In addition, why should a Russian version of Google work 24/7 to come up with the idea of Android to compete against a Russian version of Apple if wealth easily comes from drilling a hole in the ground? And why should existing vested interests - in Russia's case the favored constituents who have been given opportunities in energy - have any reason to either invest in new concepts or let others with new or different ideas enter into the power game.

Putin has been rightfully accused of following 19th century foreign policy but that is clearly a symptom and not a problem. His biggest problem is that Russia has a 19th century economy based on the principles of kleptocracy, control and a dramatic lack of creative destruction. By preventing the economy from being truly globalized, from moving beyond a reliance on just one product category, Russia's worldview is stuck outside the globalized world.
Although by nominal GDP in 2014 Russia's economy only ranked as the 10th largest in the world behind India, Brazil, France and India, a disgruntled Russia is a major problem. Russia, unlike other countries with the resource curse, has the ability to be not only an irritant but to challenge the dynamic in the world.
Russia has the second largest nuclear arsenal in the world. It is also the largest nuclear-armed landmass in the world. In addition, it has a veto on the UN Security Council and it geographically borders most of the major economic and political areas of the world. And of course it is a major energy supplier to Europe and a leading trading partner with Europe.
Russia's Yalta like need of spheres of influence and buffer states is also in direct conflict with globalization. If a country is economically interlinked around the globe why then does it need spheres of influence? Isn't it interesting that China doesn't demand a military seat at the Mid East table? China has its pocketbook and knows that whoever is in power needs to sell to them.
Last year, Senator McCain famously said, "Russia is a gas station masquerading as a country." What Senator McCain could add now with the collapse of the oil markets, is that 'Russia is like a gas station on the old route 1, and all its customers are driving on the the new freeway.

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