Medvedev positions Russia as an alternative to the US which is currently plagued by economic woes. He termed United States actions "economic egoism" and blamed US markets for trying to "substitute" for the commodity markets. More interestingly, Medvedev argued that Russia should be the new economic focus of the world and offered numerous suggestions for how it could do so.
There is some truth to his argument, as Russia's economy has benefited substantially from the rise in oil prices. Former IMF representative Martin Gilman explains that:
For Russia, the stakes are different. As the world's second-largest oil producer, it is almost the mirror image of many Western countries. Higher oil prices are fueling a boom in domestic aggregate demand, with real gross domestic product expanding by more than 8 percent for the year through May. Government revenues are rising so much that, even with the supplementary budget, the fiscal surplus is expected to decline only slightly to 5 percent in 2008. Foreign-exchange reserves have hit almost $550 billion as the country attracts foreign investment on a net basis on top of the current account surplus.
Medvedev has a point here as Russia's economy is growing much more quickly than that of the United States which is barely growing if at all. Moreover, it maintains a fiscal surplus in comparison to the train wreck of a budget that George Bush has created. The astute economists have probably already guessed that this is resulting in inflation. However, Gilman believes that Russia will be able to head off the inflation, an argument I'm inclined to agree with - especially as there isn't any indication of wage inflation.
This oil boom comes at a price, however. The continuing rise in private spending, along with the acceleration in government spending since the second half of last year and a loose monetary policy, have fueled a doubling in the rate of inflation in just a little over a year. Hopefully, recent steps to tighten monetary conditions and the deceleration of fiscal expansion should help to prevent Russia from following Ukraine's path toward inflation rates exceeding 30 percent.
Another problem looms large, as Russia's production actually dropped in May by 0.8 percent as total exports fell by 4.6%. This spells trouble for Russia's economy and the government is acting accordingly, offering numerous incentives and tax breaks to increase production.
For Russia, the stakes are especially high as critical decisions about future oil output are overdue. The country already produced 0.8 percent less oil in May than in the same month last year, bringing the country closer to the first annual decline in oil output in a decade. Total exports also fell by 4.6 percent less than in May last year.
The government plans to offer a 100 billion ruble ($4.2 billion) package of tax breaks and incentives to stimulate production growth, including a cut in the mineral extraction tax, incentives for production of high-quality and environmentally cleaner fuels, tax holidays for offshore exploration and changes to the excise duties on high-quality oil products. But with higher costs of development, it is unclear if the proposals, which will go into force in 2009, will go far enough to boost production.
Earlier this week, Russia saw concerns about the US economic crisis harm its stock market, amid rising inflation, despite corrective measures taken by the Central Bank. I expect to see the Central Bank continue to increase interest rates, but it will likely rely on the ruble to combat inflation.
Russia won't be saved by Arctic oil, at least not yet, as Denmark, Canada, US, Russia, and Norway have agreed to halt exploration into the Arctic.
In the short term, the Moscow Times reports that Gazprom, Russia's largest energy company, is seeking to establish a pipeline to Alaska among other things.
Central Times Asia (Subscription) explains that Russia faces an increasingly strong challenge from the United States in the Caspian region, as a recent visit by US assistant secretary of state for South and Central Asia, Richard Boucher made headway on energy policy in both Turkmenistan and Uzbekistan. Medvedev will be visiting the Turkmenistan in early July, most likely to try and sway the Turkmen government away from the US proposed Trans-Caspian Pipeline. Diplomat of the Future has an excellent post assessing the visit by Boucher as well.
However, just a few days prior to that, it appeared that Russia was in danger of losing its stranglehold over Caspian Basin exports, as aggressive lobbying by the United States seemed on the verge of bearing fruit, specifically in getting Turkmenistan to join a long-planned trans-Caspian pipeline (TCP) project.
The source of great expectations for the United States was a regional tour made by Richard Boucher, US assistant secretary of state for South and Central Asia. Boucher made no secret of the fact that the goal of his Caspian Basin visit, which lasted from May 28 to June 3, and included stops in Azerbaijan, Turkmenistan and Uzbekistan, was to undermine Russia's influence in the region. In all regional capitals, Boucher repeated his message: "The more choices any nation has, the more independence it has".
Turkmenistan has become increasingly favorable towards the United States and European Union and is seen as a prime opportunity for breaking up Russia's control over energy transit in the region.
US and European Union leaders have aggressively courted Turkmenistan's Berdymukhammedov since his rise to power in late 2006, hoping to secure a Turkmen commitment to ship a large share of its energy reserves westward via TCP. Russia, meanwhile, has aggressively lobbied against both TCP and Nabucco, which, if constructed, would break Russia's near-monopoly on energy export routes linking Central Asia and Western European markets. Russia is touting its own project, dubbed South Stream, as a more viable transit system.
The US also made progress in Uzbekistan, and is using military cooperation to further energy cooperation.
During a four-day stay in Tashkent, Boucher reportedly raised the possibility of Uzbekistan's exporting its hydrocarbons to Europe via TCP and Nabucco. He emphasized Uzbekistan's intensifying security cooperation with the United States and European Union, and even strongly inferred that the transit of non-lethal cargos for the coalition's forces in Afghanistan through Uzbekistan had already started. In all three capitals, Boucher downplayed human rights-related issues. In Ashgabat, he praised the Turkmen government for "opening up".
Gazprom attempted to combat the growing influence of the EU and the United States, but was rebuffed in Tashkent and Ashgabat.
In Tashkent, President Karimov reportedly declined to meet with the top-level Gazprom delegation, comprising board chairman, Alexei Miller, deputy board chairman, Valery Golubev, and Valery Gulev, general director of Gazprom's subsidiary, Zarubezhneftegaz, which is in charge of all Gazprom's overseas operations. Company representatives succeeded in meeting only two deputy premiers and the finance minister. Moreover, such a high-profile visit was completely ignored by the Uzbek press. "Karimov probably didn't want to meet with Gazprom's officials until he talked to Boucher and other Western officials, and heard what they had to say, or offer, to be specific," a Tashkent-based analyst suggested on conditions of anonymity, according to Eurasianet.
On June 3, the Gazprom delegation tried its luck in Ashgabat, but soon discovered it was in for yet another fiasco. For the first time in many years, company executives were not granted a meeting with President Berdymukhammedov.
An unnamed Tashkent analyst argued that the shift in power from Putin to Medvedev was seized upon by Western countries as a good time to renegotiate.
It appears to me that the incentive is largely symbolic in trying to wrest control of a region that Russia has had exclusive influence over for several decades. There is some, albeit distant, economic incentive, but I see it mainly as an attempt by the West to improve its standing with this relatively unexploited area in the hopes that these nations could become allies in the future. The EU has a much greater interest in swaying Turkmenistan than does the US and I suspect they are beyond this recent push.
As the world economy eventually turns away from oil and towards alternative forms of energy, Russia will be likely left out in the cold. Despite their large manufacturing base, the vast majority - 80% of their exports come from oil and as that slowly decreases (especially if production falters) then Russia may be facing a more serious economic crisis of its own. In addition to the weapons industry, Russia is focusing on developing a stronger nanotechnology sector, which could boost their economy in the long run.
Speaking of alternative sources of energy, the US is working on a deal to expand Russia's civilian nuclear power sector. This comes at an unusual time, as the Pentagon publicly criticised Russia's military nuclear program earlier this week, arguing Russia was unnecessarily expanding its nuclear arsenal Once again, US decisionmakers are applying a double standard, not to ourselves this time, but instead to a rival. It is likely that the US has secured or is hoping to secure Russian cooperation on the Iran issue, although I am inclined to think that Putin and Medvedev may just be putting on a facade, knowing that Bush has little time left in office. At this point, there is no credible evidence that Russia will radically change its stance on Iran but it certainly has interests in expanding its nuclear fuel storage capabilities, something the deal offers. But I doubt the Democratic Congress will allow this to pass especially considering Bush's lame duck status.
No comments:
Post a Comment