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How Russia is Winning Economics of U.S.-Russian Great Power Competition

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14 April 2020 How Russia is Winning the Economic Side of U.S.-Russian Great Power Competition Dr. Leif Rosenberger Chief Economist ACERTAS Introduction The Pentagon is determined to win the Great Power Competition with Russia. During the Cold War the two superpowers competed in a nuclear arms race and in Third World trouble spots. More recently, that competition has also taken place in Europe. Back in 2013 Ukraine was a critical test of how the U.S. and its NATO allies would respond to Russian aggression in Europe. Pro-Russian Ukrainian President Viktor Yanukovych decided to reject closer ties with the European Union (EU) and agreed to financial assistance from Moscow by the end of 2013. That decision was a catalyst for a popular uprising in November 2016 in Kyiv’s Maiden Square. The

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14 April 2020

How Russia is Winning the Economic Side of U.S.-Russian Great Power Competition

Dr. Leif Rosenberger

Chief Economist

ACERTAS

Introduction

The Pentagon is determined to win the Great Power Competition with Russia. During the Cold War the two superpowers competed in a nuclear arms race and in Third World trouble spots. More recently, that competition has also taken place in Europe.

Back in 2013 Ukraine was a critical test of how the U.S. and its NATO allies would respond to Russian aggression in Europe. Pro-Russian Ukrainian President Viktor Yanukovych decided to reject closer ties with the European Union (EU) and agreed to financial assistance from Moscow by the end of 2013.

That decision was a catalyst for a popular uprising in November 2016 in Kyiv’s Maiden Square. The government responded with a crackdown on the demonstrators and violent clashes between protesters and government forces. In February 2014 the Yanukovych regime collapsed and Yanukovych fled to Russia. A pro-Western government emerged that wanted to distance itself from Moscow and move closer to the EU and the U.S.

Moscow responded to the change of government in Kyiv by seizing Ukraine’s Crimea region and annexing it in March of 2014. In April 2014, pro-Russian separatists supported by Moscow seized parts of the Donbas region of eastern Ukraine. In late August 2014, Russia stepped up support to the separatists in reaction to a new Ukrainian offensive.

The U.S. and the EU had several options. The U.S. and the EU could have intervened militarily in an attempt to put a government back in power that wanted to distance itself from Moscow and move closer to the EU and the U.S. The U.S. and the EU could have criticized Russian aggression and pursued a diplomatic solution to the conflict. Instead, the U.S. and the EU opted for a third option which was to impose economic sanctions on Russia.

U.S. and EU Economic Sanctions

These economic sanctions ultimately included travel bans for prominent individuals, prohibiting long-term financing for some major corporates and banning assistance to Russian oil and gas companies for Arctic, shale and offshore projects.

Economic sanctions are a favorite foreign policy tool of both U.S. political parties. But there is a major problem with this punitive approach. Sanctions allow lawmakers (regardless of party) to claim moral high ground without actually accomplishing anything. Despite the promises of fervent U.S. economic warriors, Logan Albright says “the inconvenient truth is that sanctions don’t work – have never worked – to punish bad actors abroad” (Albright, L. 2020).

For instance, after World War I the allies assumed the punitive Treaty of Versailles would keep the German economy down. They figured that a weak German economy would also keep the German military weak. Instead, this economic warfare triggered German resentment, the rise of Adolph Hitler and World War II (Wilde, R. 2019),

The U.S. also applied economic sanctions against Cuba after Fidel Castro came to power in Cuba. Albright notes that “half-a-century of sanctions on Cuba did nothing to destabilize the Castro regime, while denying the economic opportunity that might have prevented a few of them from starving” (Albright, L. 2020).

Another problem with sanctions is they often hurt Americans more than the targeted country. For instance, President Jimmy Carter decided to use a grain embargo to punish the Soviets after the Red Army invaded Afghanistan. The Soviets had no problem finding virtually every other grain producer in the world to replace U.S. grain exporters. Not only was the grain embargo a colossal failure, but many American farmers permanently lost their market shares for years to come.

Despite a history of failure, the U.S tried once again to apply economic warfare against Russia in 2014. US economic warriors promised the sanctions would “isolate Russia” and bring the Russian economy to its knees. The economic collapse of Russia would coerce the Kremlin to change its aggressive behavior in Ukraine. Unfortunately, Russia has not reversed its occupation and annexation of Crimea, nor has it dropped support for Donbas separatists.

But what about bringing the Russian economy to its knees? Given these economic sanctions on Russia, how did the U.S. do in the economic component of its Great Power Competition against Russia? And since the U.S.- Russian Great Power Competition has a lot to do with U.S. national security, let’s remember what Admiral Michael Mullen said back in 2010. Admiral Mullen said the U.S. national debt was the greatest threat to U.S. national security (CNN, 2010). Back in 2010 the U.S. national debt was a little bit over 90% of GDP. The EU says that anything over 60% of GDP is financially unstable.

If America was winning this economic competition, we would expect U.S. national debt would be falling as a percentage of GDP and the Russian national debt would be rising as a percentage of GDP. Despite Donald Trump’s baseball cap that says, “America is Great Again,” the facts tell a different story.

Turning the Economic Tables

Meanwhile, Russia has turned the economic tables on the U.S. since 2014. In 2020 the U.S. national debt is an alarming 105% of GDP and rising (Foy, H. FT, 2020). In contrast, Russia’s government debt is only 20% of GDP. In fact, total Russian government debt and corporate debt fell from $713 billion in 2014 to just $455 billion at the start of 2020. And while the big Russian companies have been de-leveraging and are now almost free of corporate debt, US companies have been loading up on commercial debt.

The point is Putin was undaunted by U.S. and EU sanctions. He turned the tables on the U.S. and the EU by applying Russian sanctions against the U.S. and EU. Russia’s countersanctions on food imports drove down Russian food imports by 1/3 to just $ 24 billion. That signal inspired Russian farmers to increase agricultural production and has made Russia more self-reliant in food production. Not surprisingly, the Russian farming sector is booming. Wheat production is the highest ever on record – and Russia earned a record $24 billion in agricultural exports in 2019, over twice what it made from arms exports. (Foy, H. FT, 2020) and Doff, N. and Andrianova, A. Bloomberg, 2020).

Far from being an economic basket case and collapsing, the Russian economy has been resilient and resurgent. Putin learned a bitter lesson from simultaneous. external shocks of low oil prices and economic sanctions against Russia. Russia would anticipate the next financial crisis and be better prepared for it.

That meant Russia would build an economic fortress and be less vulnerable in the future. Russia would have financial buffers that would cushion the economy during the next global financial crisis. That would enable Russia to ride out the panic and bounce right back.

This economic strategy worker. All three levels of the Russian government ran a budget surplus in 2018 and 2019. (Foy, H. 2020) Russia boosted its foreign reserves by 50% between the end of 2015 and the end of November 2019 (Weir, F. CSM 2020) Russia’s foreign reserves are now $570 billion – the 4th largest in the world (Economist, 2020) and (Picardo, E. 2020). Russia now has enough foreign reserves to enable it to survive without borrowing for at least one year and Russia also took advantage of higher oil prices after 2014. (Doff, N and Andrianova, A. Bloomberg, 2020). Russia’s finance ministry funneled excess revenues from taxes on oil exports into a giant Sovereign Wealth Fund (SWF). Russia’s SWF has risen to $125 Billion or 7.3% of GDP. (Economist, 2020)

Russia’s Foreign Economic Strategy

In addition, the U.S. mistakenly assumed that economic sanctions would keep Russia isolated in the world. An undaunted Russia is now winning the foreign economic side of the Great Power Competition between the U.S. and Russia. The Kremlin has cultivated new friends in Asia and Africa to partially offset the decline in trade and investment with the U.S. and EU. Put recently hosted a summit with 43 heads of African states and governments (Foy, H. FT, 2020) In the 2017-2019 three-year time period, Russia’s trade with China rose 53% to $107 billion in 2019.

Sino-Russian Energy Partnership

The U.S. and the EU hoped the sanctions would isolate Russia diplomatically and economically. Since the days of Peter, the Great in the 17th century, Russia had tried to be a European power. In fact, Europe had been a catalyst for the Russian economy before 2008. But after 2008 Europe became a drag on the Russian economy. (EIU, 2014).

Russia’s transition from Europe to Asia became apparent in 2009 when Russia built a crude oil pipeline to China. The East Siberia-Pacific Ocean (ESPO) spanning from Taishet in East Siberia to Kozmino on Russia’s Pacific coast was completed in 2009 and began pumping oil to China via a branch line to Daqing in 2011. Russian crude oil exports to China rose 6-fold between 2008 and 2018, reaching 1.4 million barrels a day, surpassing Saudi Arabia in the process. A second parallel branch line from Russia to China began operating on 1 January 2018, enabling crude oil deliveries via pipeline to double from 15 million tons to 30 million tons per year. (Wishnick, E. 2019, 55). Since 2016 Russia surpassed Saudi Arabia as the largest exporter of oil to China.

In addition, Russia is poised to become a major supplier of natural gas to China. The Yamal LNG project began shipping gas to China in 2018. The Power of Siberia started to deliver gas to China on 2 December 2019 (Euronews, 2019). Together the Yamal LNG project and the Power of Siberia pipeline will deliver 31 million tons of gas to China over the next few decades. (Downs, E, 2019)

Conclusion

What does the robust Sino-Russian energy partnership mean for the U.S.? The energy partnership is a major breakthrough for Russia. The partnership rebalances Russian energy exports in favor of Asia and at the expense of Europe. The partnership is also a strong signal to U.S. economic warriors that Russia cannot be isolated, and Russia has alternatives when the U.S. refuses to engage with it on equal terms.

Sino-Russian energy cooperation is also a major setback for U.S. Great Power Competition. Ten years ago, energy seemed like the weak link in Sino-Russian relations. Today, the Sino-Russian energy partnership is more robust than ever, the pillar of the ties that bind a China on the rise and a resurgent Russia. Russia has turned the economic tables on an embattled U.S. economy. Chinese President Xi Jinping says Putin is his “best friend and colleague.” Trump is the odd man out and “out in the cold” with his ill-advised and self-defeating “America First” brand of economic nationalism.

President Harry S. Truman once said, “The only thing new in the world is the history you do not know.” If we think back to the Treaty of Versailles, it’s clear that victors of World War I came up with a punitive peace. French Prime Minister George Clemenceau wanted revenge, to make Germany pay for the wartime damage it (and the Central Powers) had done against Allied Powers, like France, during the war. Clemenceau got his economic coercion. Heavy reparations were used to keep the German economy down and punish Germany for its bad behavior. Clemenceau assumed that a weak economy would also keep the German military weak. How did Clemenceau’s economic coercion work? A collective German resentment of these economic sanctions arguably aided the increase in the socio-economic demand for violence and, in turn, contributed to the rise of Hitler and World War II.

Professor Ulrich Krotz at the European University Institute in Italy points out that relations between France and Germany have gone through three grand periods since 1871: “hereditary enmity” (up to 1945), “reconciliation” (1945–63) and the “special relationship” embodied in a cooperation called Franco-German Friendship (since 1963). Given the fact that the French and Germans had fought each other for centuries and had developed this hereditary enmity towards each other, was Clemenceau’s economic coercion against Germany inevitable? After World War II, the statesman Jean Monnet argued that it was not. Jon Meacham, author of The Soul of America, would argue that people can and do change if you give them a chance to find their better angels.

In this regard, former Chairman of the Joint Chiefs of Staff General Marten Dempsey likes to talk about radical inclusion. Similarly, Jean Monnet looked for common ground and social inclusion between the French and German people. In his strategic vision, French and German businessmen would work together and build a European Coal and Steel Community. Common bonds among businessmen would spread to the rest of the French and German populations and help turn longstanding enemies into friends. Did Monnet appear naïve and hopelessly idealistic? Possibly. But appearances can be deceiving. Monnet showed that a web of economic interdependence and social inclusion could lead to shared prosperity and a more durable peace than more short-sighted economic coercion. (Keohane, R. and Nye, J. 1989) In other words, shared prosperity would reduce the demand for violence and thus lower mutual threat perceptions – not a bad way to keep the peace in Europe for 70 years. If so, the time has come to abandon U.S. economic warfare and apply Jean Monnet’s strategy of shared prosperity to U.S.-Russian economic relations.

List of References

Albright, L. 2020 Senate’s proposed sanctions on Russia will only hurt American economy, Washington Times, 11 March 2020

CNN, Mullen: Debt is top national security threat, 27 August 2010.

Doff, N. and Andrianova, A. Putin’s Isolation Suddenly Doesn’t Look So Bad, Bloomberg, 31 March 2020

Downs, E. China-Russia Energy Relations, Ties that Bind: Current Areas of Sino-Russian Cooperation, Testimony before the U.S.-China Economic and Security Review Commission, Hearing on An Emerging China-Russia Axis: Implications for the United States in an Era of Strategic Competition, 21 March 2019

Economist, Fortress Russia, 26 March 2020

EIU, Russia signs record energy deal with China, 22 May 2014

Euronews, Russia opens Power of Siberia gas pipeline to Chia, 3 December 2019

Foy, H. Russia: adapting to sanctions leaves economy in robust health, Financial Times (FT), 29 January 2020

Keohane, R and Nye, J. Power and Interdependence: World Politics in Transition, Boston, Little Brown, 1989, pp 3-32.

Kramer, A. Thanks to Sanctions, Russia Is Cushioned from Virus’s Economic Shocks, New York Times, 24 March 2020

Meacham, J. (2018) The Soul of America: The Battle for Our Better Angels, Random House, New York, NY

Picardo, E. 10 Countries with the Biggest Forex Reserves, 7 March 2020

Weir, F. Can long-austere Russia spend its way to a more dynamic economy? Christian Science Monitor (CSM), 24 March 2020

Wilde, R. “How the Treaty of Versailles Contributed to Hitler’s Rise”, Thought Company 10 July 2019

Wishnick, E. Russia and the Arctic in China’s Quest for Great Power Status, Strategic Asia, 2019, 55)

Zoellick, R. (2012) “The Currency of Power,” Foreign Policy 8 October 2012

Leif Rosenberger
Dr. Leif Rosenberger retired from the US government in March of 2016 following a 35 year career in the civil service. He was a Full Professor of Economics at the US Army War College as well as the Chief Economist at both the US Pacific Command in Hawaii and the US Central Command in Tampa, Florida.

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