| Russia's Drive for Global Economic Power:
A Challenge for the Obama Administration
By Ariel Cohen and Lajos Szaszdi.
January 30, 2009
Until the recent global financial crisis, Russia's economic revival during the presidency of Vladimir Putin had helped to restore the country's standing as a major player in the world arena. Yet, prosperity has come with some unintended consequences. Russia's invasion of Georgia was fueled by Russia's economic growth and newfound wealth.
This economic comeback is largely the result of Russia's oil and natural gas exports, coupled with the high prices that other Russian commodities have enjoyed in world markets. With the seventh-largest oil reserves and the largest gas reserves in the world, and as the leading exporter of oil and gas, the Kremlin is using its energy exports, revenue from arms and metals sales, and investments abroad in the mining and energy sectors to extend Russia's influence worldwide.
The interruption of gas supply to Ukraine and the rest of Europe in January 2009 resulted in the worst energy crisis in Europe since the Arab Oil Embargo of 1973, and once again raised questions about Russia's reliability as an energy supplier. In the recent past, Russia has already prevented Caspian oil and gas supplies from flowing freely to the European markets; has threatened to disrupt oil exports that pass through Georgian territory when it invaded Georgia last August; has acquired, and is in the process of acquiring, major European energy companies, as well as pipelines, refineries, and other assets in more than a dozen countries. Moscow is also targeting the strategic Middle Eastern oil sector and is displacing Western energy companies operating in OPEC founding member Venezuela.
Beyond that, Russia has dominant global positions in the strategic and precious metals sectors including titanium, platinum, and other precious metals used in aerospace industries, electronics, and military and automotive production. A major Kremlin-connected oligarch owns the world's largest aluminum company and has been accused of corrupt practices in the U.S., Germany, Nigeria, and Guinea, while the Russian banking sector is tied in with organized crime.
Moscow's expanding business interests have made Europe highly – and dangerously – dependent on Russian oil, gas, and raw materials. Russia currently supplies two-thirds of Europe's imported natural gas – 42 percent of total European consumption; Central and Eastern European countries depend on Russian gas for more than 90 percent of their needs. By 2030, Europe will import 84 percent of its gas needs. Europe has not developed alternative sources of gas, and has rejected nuclear power and coal. Since natural gas is supplied by pipelines controlled by Gazprom, the Russian state gas monopoly, these countries cannot easily turn to other suppliers. Thus, Europe has tied itself to dependence on a commodity supplier with a track record of geopolitical intimidation as opposed to a free-market relationship.
Severe repercussions for Europe's national security dependence on Russian energy are widely recognized by the European Union and individual countries. Europe has now "stepped up its attempts to reduce its exposure to potential Russian blackmail over energy supplies," reports Ian Traynor in The Guardian. The European Commission unveiled "an ambitious strategy aimed at weakening Russian giant Gazprom's domination of Europe's gas imports." "We must not sleepwalk into Europe's energy dependence crisis," said Jose Manuel Barroso, EU Commission President. Russia is trying to replicate this model in other areas as well, such as electricity and raw-materials exports by state-owned corporations, as demonstrated below.
Russia also aims to become a major energy supplier and provider of raw materials to countries of the Asia-Pacific region, including China, Japan, South Korea, and the United States. Such a goal, if accomplished, will greatly enhance Russian leverage in the Pacific Rim.
The Tools for Global Cooperation
The U.S. should cooperate with its friends and allies on combating excessive dependency (beyond 25-30 percent) on Russian strategic raw materials and energy exports, such as oil, gas, coal, and electricity. What is needed is a global security system for tracking investment activities by Russia and other anti-Western governments in industries and sectors with defense and security implications.
One of those tools is the Committee on Foreign Investment in the United States (CFIUS). CFIUS is an inter-agency committee of the United States government that reviews the national security implications of foreign investments in U.S. companies or operations. Chaired by the Secretary of the Treasury, CFIUS coordinates representatives from nine U.S. agencies including the Departments of Defense, State, Commerce, and Homeland Security.
The U.S. Treasury recently published final rules to strengthen security reviews of foreign investments in U.S. businesses. As the former Treasury Secretary Henry Paulson put it, the final regulations are intended to "strengthen the CFIUS process in a manner that reaffirms America's longstanding policy of openness to investment, consistent with the protection of our national security." The regulations clarify that transactions in which a foreign entity acquires less than a 10 percent stake in a U.S. business are not automatically exempt from a CFIUS review. Under the new procedures, a foreign investor in a U.S. business considered "critical infrastructure" is encouraged to consult with the CFIUS panel before filing a formal notice. This is a wise step in improving oversight of investments in critical infrastructure, resources, and financial systems on which our nation and our alliances depend.
The U.S. should also increase cooperative effortsamong the international intelligence and law enforcement agencies and independent experts to keep track of how the Russian state and oligarchs may be laundering money and engaging in corruption and unfair competition. The Obama Administration should encourage, without dictating investment decisions,U.S. and other multinational companies to compete with Russian companies like Gazprom for pipeline and energy projects, as well as promote alternative market-based sources of energy and unconventional sources of fuels worldwide to counter any over-dependency on energy from countries such as Russia, Iran and Venezuela, which overtly seek to counter the West's economic and military strength.