Washington Pay Attention: Silver Clouds in Moscow

For the diplomatically stretched United States, there's a possible silver lining in the cloudy financial turmoil in Russia.

Russia's financial regulators today yet again halted trading on the ruble-dominated stock exchange, the MICEX. They acted just after the MICEX opened, and kept traders at bay for two hours before reopening the exchange. At the close of the day, the index had fallen by 6%; it also fell 5.5% yesterday, and is down by about 50% for the year.

Meanwhile, also yesterday Prime Minister Vladimir Putin coughed up $50 billion on top of the previous $130 billion he has injected into Russia's financial system to keep the economy from completely locking up. The subprime collapse is one matter. But the plummet in oil prices is also hurting the country. According to a story today by my friend Charles Clover at the FT, Russia's budget will go into deficit if oil prices fall below $70 a barrel, which isn't the loopy notion it seemed just a month or so ago (they dropped to about $97 yesterday). This latter data point is especially interesting because, when I was researching Putin's Labyrinth in Moscow last year, a Kremlin official told me that the budget would remain in balance at $39-a-barrel oil. What a difference a year makes.

All of this means that Russia's high-flying financial health is wholly different from even a month ago, in addition to that of the western banks and investment banks that have underwritten Russia's foray into global finance.

In a nutshell, there's serious reason to doubt that Russia can raise the money any time soon to carry out its grand energy strategy -- a new natural gas pipeline network stretching from Turkmenistan into Europe.

Washington -- with its myopic focus on Iraq and neglect of its long-cultivated policy on the Caspian Sea -- has been handed a gift of a pause in the seemingly inexorable march of the Nord Stream and especially South Stream pipelines. As O and G readers know, these two pipelines -- championed through the peripatetic work of Putin and President Dmitri Medvedev -- are behind the potent rise of Russian influence in Europe.

A previous posting on this topic provoked reader alarm that Europe will go dark and cold without these new pipelines, an unwarranted reaction considering that Europe uses just half the capacity of the three Russian natural gas pipelines that currently serve it. Nord Stream is arguably a good idea, but South Stream is purely political, a geostrategic ploy to pre-empt the equally political, western-backed Nabucco natural gas pipeline.

How long the pause in Russia lasts depends on who you talk to, but one or even two years are entirely reasonable projections.

That's a window for a Western oil company to get an on-shore natural gas deal in Turkmenistan, which would be key to any resurrection of moribund Nabucco. If the next president, whether John McCain or Barack Obama, rapidly launches a well-considered and -led strategy -- meaning recruiting an American graybeard of the gravitas of Jim Baker or Zbigniew Brzezinski as spearpoint -- he could possibly salvage some of the lost U.S. political and economic influence in the region.

One sure thing is that the window won't remain open. When it closes, Putin will be back as Europe's most dynamic and determined leader.

Russia's Achilles Heel

Over the last couple of days, the post-mortems have begun to roll in from big-thinkers on Russia. The prescriptions advised in order to bring about status-quo ante in Georgia -- ejecting Russia from G-8, distancing Moscow further from global trade treaties -- add up to a consensus of "Oh Dear, Oh My." Non-membership in G-8 and WTO no doubt is provoking snickers in the Kremlin.

Contrary to these views, however, the West and the U.S. in particular do have one very real lever, one that Karl Rove might recognize -- Russia's very strength.

Russia's Achilles Heel is its petro-power. It's a message that both senators Barack Obama (and his running mate Joe Biden) and John McCain should keep in mind as they prepare to deal with Russia.

For more than a year, O and G has been describing progressive U.S. setbacks in what I've called the Pipeline War, the struggle with Russia for energy-driven political influence in Europe. We've also been writing here during that period about the growing tensions between Russia and Georgia.

In a nutshell, Russia understands that power in a large swath of the world -- Europe, the former Soviet Union and parts of the Middle East -- can be exerted from control of oil and natural gas pipelines. That's how the U.S. has inserted its power into Russia's backyard -- through the Baku-Ceyhan oil pipeline that crosses the country of today's conflict, Georgia. Now, Vladimir Putin intends to build on Russia's restored power by erecting two gigantic new natural gas pipelines into Europe, which already relies on Russia for almost a third of its gas.

Here's where the Achilles Heel comes in. One of these pipelines -- South Stream -- would pass through nations like Bulgaria, Hungary, Serbia and Austria. These are countries in which the U.S. has influence.

If the U.S. wants Russia's attention, persuade these countries and others -- for instance Germany, the main European partner on the second pipeline, called Nord Stream -- to freeze their support for the lines until it's satisfied that Georgia's sovereignty is no longer compromised.

Energy, and specifically Nord Stream and South Stream, are a Russian strength, and a genuine vulnerability.

Listening to Iowa, India and China

The West has made it so difficult for Russia to join the 153-member global trade group called the WTO that, under Vladimir Putin, Moscow adopted the Groucho Marx dictum, "I refuse to belong to any club that will have me." After the performance of the leading trading nations in Geneva this week, one might be tempted to have sympathy for that sentiment. Freer trade is important -- if done right, poorer nations can spread the wealth beyond the corrupt elite. But the emphasis is on the execution.

The prevailing wisdom after this week's unprecedented collapse of talks for a freshened, global trade deal is that the world may have become too complex for such grand deals now. Better to turn to smaller, piecemeal pacts among nations and regions, and curb one's ambitions.

From such smaller agreements, according to this line of thinking, those antagonistic toward freer trade will be more comfortable with it. Or, say some people, such limited accords may be the wave of the future – it may no longer be possible to strike a global trade agreement, not with so many competing interests.

It seems to me that that's at best a limited reading of what happened to the so-called Doha trade agreement. My BusinessWeek colleagues Bruce Einhorn and Mehul Srivastava go a ways in explaining why India and China, for instance, dug in their heels at the last moment:

The field has changed around the world. Just as politics has led the U.S. Congress in June to renew subsidies of its cotton and sugar farmers, China and especially India are responding to domestic unease with more open trade borders.

Look at the trouble getting the Columbia trade deal through the U.S. Congress. Are the Democrats going to be more amenable if they see Canada, for instance, do bilateral deals? It seems absurd on its face. Extend that out to the rest of the world, and you get the picture.

Instead, free-traders need to start over with roll-up-the-sleeve politicking. Quite apart from increasingly hostile domestic opinion, a President Obama or McCain will - far more than previous U.S. leaders -- have to satisfy emerging economic states.

India's trade minister, Kamal Nath, used humor to make just this point. At the last moment, it seemed that U.S. Trade Representative Susan Schwab understood that the West could no longer ram through its agenda, and tried to finesse India. But it was to no avail. "Susan Schwab said that she loved me," Nath said in Geneva. "I said that I loved her too. But probably she didn't love me enough."

One of the most striking aspects of the final hours of the talks was the decidedly undiplomatic language used by China's trade representative, Chen Deming, in complaining that the West simply didn't take the rest of the world seriously. "There were no serious efforts to convince the Third World to accept the developed world's package." Deming said. He said, "Once their interests were guaranteed, the Americans demanded a sky-high price" of developing nations.

After the way he has talked down Nafta, Sen. Barack Obama not surprisingly may not be in an enormous hurry to find a way to resurrect Doha. In statements after the collapse, the campaign issued soft support for Doha, but said that the Bush administration was "right to walk away" from China's and India's last-minute demands. Asked what precisely would be needed to move Doha forward, Dan Tarullo, a Georgetown law professor who advises the Obama campaign, told me that it's too early to know. It is also too early to know whether one should use the building-block approach suggested by the McCain campaign. Talking to the Obama camp, the feeling is of a campaign punting what it probably regards as a back-burner issue.

I also spoke with Colin Bradford, a scholar at the Brookings Institution in Washington. He said that the collapse isn't necessarily a bad thing. All the major economies involved – the U.S., China, India, Japan, Brazil and so on – are listening more closely to their domestic constituencies than they ever have, he says. Agriculture subsidies are a sensitive issue in all the major economies. "Are we ourselves going to say we are not going to listen to our Iowa farmers?" Bradford said.

Photo: Eurritimia

Rights: Creative Commons

Nice Try, Sen. McCain

John McCain today credited President Bush with the plunge in oil prices over the last couple of weeks. He says the market is breathing easier because Bush has come down on the side of easing offshore drilling restrictions. I'm not impressed with the energy positions taken by either McCain or Barack Obama. But just to get this on the record before it takes off in the spiral of political commentary -- Bush's reversal of a presidential ban on coastal drilling has had no impact on the markets, nor is it likely to.

The price of oil is dropping for other reasons. The main one is that, contrary to popular opinion, there is no shortage of oil, and traders are starting to notice. The reason that prices have gone through the roof until now is that traders see that, if any emergency happens, such as a Katrina-type hurricane, there might be a shortage.

It's like a healthy person panicking over a lack of catastrophic illness insurance -- if she or he does contract a really serious condition, or is hit by a truck, there won't be enough money to pay the rent.

Traders are worried that, if there's a hurricane or war with Iran, there won't be enough oil. And they've pushed prices through $100 a barrel and on almost to $150 a barrel because of that trepidation.

Ed Morse, the oil contrarian over at Lehman Brothers whom I profiled this week in BusinessWeek, predicts that we are heading below $100 a barrel.

As for offshore drilling -- traders are looking to the medium term, a few years at most. None is looking as many as a decade ahead, the likely time horizon before any new oil from U.S. coastal waters would come to market.

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The Real War: Autocrats Versus Democrats

Seventeen years after the Soviet breakup, why has Kazakhstan's Nursultan Nazarbayev never run a fair election? Why is Russia's leadership the subject of a selection as opposed to an election? Why, for that matter, is China so successful as a Communist state?

According to Robert Kagan, this is the natural order of things. The last two decades have been an anomaly, and we are now seeing a revival of real ideological balance, he says in, "The Return of History and the End of Dreams."

For O and G readers, here is the best paragraph in the short, 105-page, pocket-size book: "It is a mistake to believe that autocracy has no international appeal. Thanks to decades of remarkable growth, the Chinese today can argue that their model of economic development, which combines an increasingly open economy with a closed political system, can be a successful option for development in many nations. It certainly offers a model for successful autocracy, a blueprint for how to create wealth and stability without having to give way to political liberalization. Russia's model of 'sovereign democracy' is attractive among the autocrats of Central Asia. Some Europeans worry that Russia is 'emerging as an ideological alternative to the EU that offers a different approach to sovereignty, power and world order.' In the 1980s and 1990s, the autocratic model seemed like a losing proposition as dictatorships of both right and left fell before the liberal tide. Today, thanks to the success of China and Russia, it looks like a better bet."

A cottage industry is under way of books dissecting how we started out with a peace dividend from the fall of the Soviet bloc, and ended up with a hyper-charged war atmosphere. Today's New York Times, for instance, reviews America Between the Wars, by Derek Chollet and James Goldgeier.

The books are part of the current electoral atmosphere -- while McCain and Obama battle for the White House, wonks are girding for a place in one or the other's foreign policy superstructure, including senior spots in the National Security Council and the State Department.

This is perhaps Kagan's current aim. With that in mind, he takes aim at Francis Fukuyama, who in 1992 argued in The End of History and the Last Man that liberal democracy was the final stage of governance.

For those unacquainted with him, Kagan is a long-time provider of intellectual heft for neoconservatives. In this book, he puts on a show of shedding his ideological past. Indeed the first two thirds of the book -- through page 82 -- is a bracing and sweeping display of knowledge and analysis of his argument that the world has returned to a competition between democratic and autocratic states. And that that -- and not a struggle between the West and Islam -- is the main geopolitical contest to which the world will be treated in the years ahead. Militant Islam, he says, will fall by the wayside to this more robust rivalry.

But then Kagan reverts to his past as a factory of neo-con ideological thought. For instance, other reviewers have asserted that, with this work, Kagan loses his embrace of Iraq and the transformational global change he promised in the lead up to the current war. But they apparently missed his assertion, on page 90, that Iraq remains a place that, if handled correctly, could still become a strategic boon for the U.S. "A stable, pro-American Iraq would shift the strategic balance [in the Middle East] in a decidedly pro-American direction," Kagan writes.

Indeed, he argues, unlike the criticism rendered by some major scholars, the Bush administration's foreign policy record stacks up well against its predecessors'. The Cold War resulted in "major strategic setbacks"; during the 1950s and 1960s, Egypt and Syria allied with Moscow.; and, under Jimmy Carter, the U.S. lost its crucial ally, Iran, to the uprising of Ayatollah Khomeini. "Nothing similar has yet occurred as a result of the Iraq war," Kagan writes.

One might also quibble with Kagan's characterization of one of the impulses behind Bush's foreign policy -- the same "noble generosity of spirit" that has long driven U.S. actions. In Kagan's telling, Bush's policies have dove-tailed with how Americans have been all along.

Though it might have upset his publisher, the book easily could lose 10 or 20 pages, where Kagan veers off his theme of democracy versus autocracy and into his drum-beating on behalf of the neo-con cause.

Yet I found the clear-eyed crunching of the genuine current battle worth the cover price.

Presidential Candidates on Russia

With Iraq sucking much of the air out of the room, the former Soviet Union and Russia in particular have gotten little attention from the U.S. presidential candidates. The notable exception has been GOP nominee John McCain, who threatened with Bush-like chest-thumping to expel Russia from the G-8, and sophomorically described Vladimir Putin's eyes as containing a "K a G and a B."

Matt Siegel at The Moscow Times weighs in today with a piece in which he interviews McCain's Russia expert, Stephen Biegun, a vice president at Ford Motor and a veteran of the current President Bush's foreign policy team; and Michael McFaul, who is Barack Obama's Russia specialist and acting director of the Institute for International Studies at Stanford University. It's worth reading, in addition to this discussion by a panel of specialists gathered together by Johnson's List a couple of weeks ago.

Both of the Democratic candidates make the point that it's unnecessary to rile Russia at the moment by insisting on a missile-defense shield in Poland and the Czech Republic, when there is no evidence that the technology works. McCain supports installation of the shield regardless.

Much also is made of Putin's crackdown on rival voices.

None of the candidates has said a word as far as I can tell about a serious, omnibus approach to Eurasian energy security stretching from Central Asia into western Europe. As readers of this blog know, Putin -- and by extension Dmitri Medvedev -- have treated this as a paramount issue, while Washington has been looking the other way to Iraq.

One amusing aspect of the foreign policy debate that has taken place is hoopla among some in the expert community over Obama's reliance on Zbigniew Brzezinski, the Carter-era national security adviser, as a chief foreign policy expert. These experts see Brzezinski as a relic of the Cold War. Perhaps such younger specialists see themselves as more authoritative. But a reading of his writing over the last decade and a half shows Brzezinski proving himself again and again as one of the most realistic and wise hands on the former Soviet Union. He does so again here in the current issue of The Washington Quarterly.

At core is a subjective issue that will not be settled to anyone's satisfaction -- is Russia a normal country, meaning should it be treated the way one would approach, say, France? Brzezinski would be on the reasonable side of those who reply 'no,' at least at the moment. Those for whom the answer seems to be yes seem to include Stephen Kotkin of Princeton and Anatol Lieven of King's College in London.

Hillary, McCain and Jingoism

I was in Baku on an oil story when Hillary Clinton visited Central Asia during the 1990s, but when I got back to Almaty I asked around for local impressions of her. The visit went over well, I was told by her Kazakh and Uzbek hosts -- she stopped by a pre-natal care clinic in Almaty, and met with Kazakhstan's Nursultan Nazarbayev and, in Tashkent, with Uzbekistan's Islam Karimov. But I also heard a singular personal observation from the amused locals -- Clinton, it turns out, doesn't have an athlete's slim legs.

How to respond to an immature remark? Probably with silence, which is what I did. And in fact, I didn't hear Nazarbayev, Karimov or any other official or reporter say publicly: F-A-T T-H-I-G-H-S.

Nor for that matter did I hear then or since any public official abroad say of John McCain: "I looked into his eyes and saw three letters: O-L-D."

Which brings me to recent remarks by Clinton and McCain, both of whom maintain that above all else what sets them apart from their respective rivals in both main parties is gravitas on the foreign policy stage.

So how is it that we find Clinton saying of Vladimir Putin, as she did yesterday: "he's a KGB agent. By definition he doesn't have a soul." And McCain in a newspaper interview: "I looked into his eyes and saw three letters: a K, a G and a B."

Both of these knee-slappers were intended as swipes at President Bush for his oft-quoted 2001 remark about Putin, as kindly provided by the L.A. Times' Andrew Malcolm: "I looked the man in the eye. I found him to be very straightforward and trustworthy. We had a very good dialogue. I was able to get a sense of his soul; a man deeply committed to his country and the best interests of his country. And I appreciated so very much the frank dialogue."

Did Bush's remark reflect wisdom or good judgment? No. But neither does it require any to remark on someone's well-known former employment.

Putin's KGB background does affect Kremlin policy. The thrust of it is -- anything goes. In other words, set the goal, and use whatever means necessary to achieve it, which is a worrying approach to domestic and foreign policy.

But Putin is going to be around a long time, and the U.S. is going to have to find a common language with him. Rather than offering a serious approach, Clinton and McCain dived quite happily into the muck in a craven effort to capture the base.

Photo: DBKing
Rights: Creative Commons

Presidential Candidates Clueless on Russia; Report: Putin to be NYT columnist

The presidential candidates as a whole don't look very sure-footed on former Soviet policy. That is except for John McCain, who says Russia should be shoved out of the G-8, and that the U.S. should proceed with the non-working missile shield in Poland and the Czech Republic. The Council on Foreign Relations collected the candidates' various positions, and The Washington Post ran them out on Friday.

How about returning to part of the Soviet-era approach -- averting McCain's petulant muscle-flexing, but accepting that there's little overlap in belief systems, that the U.S. and Russia are each out for their own self-interest around the world, and that it's each country for itself in terms of competition?

One challenge of 2008 -- winning the battle to control the new flow of energy into Europe. Russia has the edge in winning over the key country in this battle -- Turkmenistan and its huge natural gas supplies. But Turkmenistan President Kurbanguly Berdymukhamedov is still leaving the door open for Europe and Washington's idea to direct his country's natural gas West.

Putin in the New York Times? The Media Bloodhound reports that NYT editorial page editor Andrew Rosenthal, who just announced a deal to publish his sworn enemy Bill Kristol once a week, has struck a second masterstroke: a weekly column by Vladimir Putin. Satire at its best.

Photo: OxDE
Rights: Creative Commons