Russia: The Saudi Offer That Cannot Be Refused

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January 7, 2016: The post-Cold War Russian renaissance is definitely over. The hope for a more prosperous and powerful Russia is being crushed by the return of totalitarian rule and aggressive (and familiar) attitudes towards the outside world. Since 2014 Russia has been making a lot of headlines but not much else. The economy is a mess, it has fewer allies and the future looks dim. After the Soviet (Russian) empire dissolved in 1991 the rest of the decade was spent trying to reorganize and rebuild. Russia entered the 21 st century with a new elected government dominated by former secret police (KGB) officers who promised to restore economic and civil order. They did so but in the process are turning Russia into a police state with less political and economic freedom. A growing number of Russians opposed this and the government responded by appealing to nationalism. Russia has returned to police state ways and the traditional threatening attitude towards neighbors. Rather than being run by corrupt communist bureaucrats, the country is now dominated by corrupt businessmen, gangsters and self-serving government officials. The semi-free economy is more productive than the centrally controlled communist one but that just provides more money to steal. A rebellion against the new dictatorship has been derailed by astute propaganda depicting Russia as under siege by the West. Yet opinion polls that show wide popular support for this paranoid fantasy has left enough Russians with democratic impulses to continue leading the struggle for better government and needed reforms. But for now most Russians want economic and personal security and are willing to tolerate a police state to get it. That atmosphere, plus the anxiety generated by the Ukraine aggression has scared away a lot of foreign investors and many Russian ones as well. Russia can downplay this in the state controlled media but without all that foreign and Russian capital the economy cannot grow.

For the average Russian the inflation rate seems to have stopped growing and has been stuck at about 15 percent for over a year. The ruble, however, is again getting weaker (against foreign currencies). In October it was 65 rubles per dollar but is currently at 74 rubles to buy per dollar. Two years ago it only cost 39 rubles to buy a dollar. Russian, and foreign, investors were alarmed at the impact of the sanctions and the lower oil price on the Russian economy and the ruble/dollar exchange rate is a major indicator. The economy, and GDP, is still shrinking just more slowly. Unemployment continues to increase and managers concentrate on survival not expansion plans. GDP is expected to decline nearly one percent in 2016, a year in which the world GDP is expected to grow nearly three percent. China, despite an unprecedented (by recent Chinese standards) recession is expected to see GDP growth of over six percent in 2016. China is still investing heavily in countries adjacent to Russia, as well as Russia itself and that reminds Russians (and Chinese) who has the economic upper hand these days.

The decline of the Russian economy is mainly about the shift in global economic power after the Cold War ended in 1991. At that point the U.S. and EU (European Union) had over half the world GDP. The Soviet Union had about ten percent and China two percent. The Soviet Union and its economy was falling apart (hence the dissolution of the Soviet Union). By the end of the 1990s Russia (now with half the population of the Soviet Union) had three percent of world GDP, China seven percent, the EU 24 percent and the U.S. 21 percent. China began growing at ten percent a year in the 1980s and kept going. The compounded growth really adds up if you can sustain it over several decades. By 2015 China was 17 percent of world GDP, Russia three percent, the EU 17 percent and the U.S. 16 percent. Projections for 2020, even taking into account showed down Chinese growth, have China with 19 percent of world GDP, Russia three percent, the EU 15 percent and the U.S. 15 percent. One special aspect in all this is the fact that China has more people than the EU, the U.S. and Russia combined. China also has the worse pollution, labor force, corruption and stability problems than the West, or even Russia. Failure to cope with these problems may do more to hobble Chinese growth than anything the rest of the world does about growing Chinese economic and military power. Both of these items terrifies Russia because Chinese economic power is a growing presence in and around Russia and China has ancient territorial claims on the Russian Far East.

An example of how Chinese foreign investment scares Russians can be seen in how a Chinese firm is negotiating a deal to manufacture their JL-15 jet trainer/light attack aircraft in Ukraine. This makes sense as Ukraine has several underused Cold War era aircraft manufacturing facilities and currently supplies the engines for the JL-15. These jet trainers are designed for ground attack and reconnaissance as well as for training pilots. Because of all the Cold War era arms factories Ukraine inherited in 1991 when the Soviet Union, not to mention huge stockpiles of Soviet weapons, ammo and equipment, Ukraine became one of the biggest exporters of military gear on the planet in the 1990s. China has been a regular customer and is familiar with what the Ukrainians can do. Because China is one of the few major allies Russia has, Russia in unlikely to pressure China to back away from deals with Ukraine. China and Ukraine have been doing business since the 1990s and China sees more opportunity there, despite the threat of Russian invasion (which would probably avoid damaging Chinese properties).

Meanwhile without much fanfare in 2015 Russia replaced China as the largest food donor to North Korea. China has been cutting aid in an increasingly desperate effort to halt the North Korean nuclear weapons program. Russia does not care much about that and has been making more economic deals with North Korea than ever before. The latest agreements allow Russia to set up chains of stores, fast-food outlets and local taxi services. This is an obvious effort to appease the Russians and please the new entrepreneur (donju) class at the same time.

One reason for the Russian decline is the inability to keep up in developing new technology. Russian tech is increasingly seen as backward and unreliable. Thus India is threatening to cancel its order for 154 of the new Russian T-50 “stealth fighter” because of growing delays in the program. It’s not just the high-tech T-50 but several other new Russian aircraft, both military and commercial. Same with Russian efforts in space. Growing quality control problems and delays in developing new technology has damaged Russian efforts to remain a major power in space or in any high-tech field. Russia still launches about a third of the space satellites worldwide. But this dominance is threatened by growing insurance costs (because of failed launches) and more money being spent on the problem without much effect. The collapse of the Soviet Union in 1991 led to a lot of the best talent leaving state run enterprises and there is no easy way to get them back. The growth of the police state in Russia has led to a more (over a million) of these skilled and talented people migrating. This has hurt the Russian economy across the board. The fundamental problem is an ineffective government that tolerates widespread and crippling corruption. Instead of addressing that problem the government blames all the problems on NATO plots to destroy Russia.

But the reality is that Russia failed to manage economic assets it had when the Soviet Union collapsed. An example of this Polish plans to buy another 40 radar guided R-27R1 missiles. These are used by Poland’s MiG-29 fighters. Poland wants to stock up in these missiles, especially since a growing number of older ones can no longer be refurbished and are becoming so unreliable they are useless. Normally the primary supplier of this missile is Russia, because the MiG-29 and the missiles it uses were designed by and largely built in Russia. But many Russian weapons and aircraft components were built outside what is now Russia when (before 1991) the Soviet Union still existed. Ukraine, for example had a lot of weapons factories and inherited these when the Soviet Union dissolved. Ukraine has, since the 1990s, been a second source for the R-27R1 and many other Russian weapons. The Ukrainian versions are not only a bit cheaper, but also considered more reliable.

In Ukraine Russia has been quietly eliminating (murdering) trouble rebel leaders in eastern Ukraine. In late December Russia appointed a more powerful (in the Russian government) official to handle the Russian efforts to take eastern Ukraine (Donbas) away from Ukraine. That effort has been stalled for over a year, in part because the pro-Russian Ukrainian rebels in Donbas had become too independent minded and often refused to follow orders from their Russian patrons. Officially there is no Russian involvement in Donbas. In reality no one really believes that fiction anymore. Since September 2015 Russia has shifted its military efforts to Syria and apparently wants to end the Donbas situation quickly and as much as possible, in Russia’s favor. This will be difficult. When the Russian instigated fighting began in early 2014 Russia tried to take possession of all Donbas, an area consisting of two Ukrainian provinces (Donetsk and Luhansk). Donbas comprises about nine percent of Ukrainian territory, 13 percent of the population and 15 percent of the GDP. Donbas was about 38 percent ethnic Russian. The two provinces comprise the Donets Basin (or “Donbas”) which was for a long time an economic powerhouse for Russia. But that began to decline in the 1980s and accelerated when the Soviet Union fell (and Ukraine became independent) in 1991. Since 2014 over two million people have fled rebel controlled parts of the Donbas (most to Ukraine) and only about two million remain in rebel controlled areas. The Russian sponsored violence in Donbas has reduced economic activity to less than a third of what it was in 2013. Rebel occupied Donbas is sustained by supplies trucked in from Russia. Where rebels control the border, the border has ceased to exist. The rebels control only about half of Donbas and that area has already become part of Russia. It is the Russian currency that is used and any foreign trade is with Russia. Some rebuilding is being financed by Russia. If the new Russian “ruler” of rebel Donbas can get the Ukrainians to agree on some kind of compromise Ukraine will manage to keep about half of Donbas while the rest will be part of Russia. That will be the price of peace, a peace that may not last long because many Russians believe all of Ukraine should be part of Russia. Meanwhile Ukrainians are feeling the economic and military pain more than the average Russian. In late 2015 opinion polls revealed that 79 percent of Ukrainians consider themselves poor compared to 62 percent a year earlier. Polls also indicated that Ukrainians are glummer than they have ever been since achieving independence in 1991. It’s not just the Russian aggression but the persistence of corruption, even in the face of the Russian threat.

Saudi Arabia is openly calling on Russia to act as a peacemaker in the ongoing (and escalating) conflict between the Saudi led Sunni Moslems and the Iran led Shia. The Saudis make it clear that successful peacemaking efforts will be rewarded with large investments in the Russian economy and Saudi efforts to boost the price of oil. The falling (now under $40 a barrel) price of oil and its devastating impact on the Russian economy is largely the work of Saudi Arabia and meant to weaken Iran. Russia and Saudi Arabia both agree that while the Saudis can end the current low oil prices long range the main threat to high oil prices is the development of effective fracking technology in the United States. This created a sharp increase in oil and natural gas production in North America. But fracking is expensive and as the oil price declines a growing number of oil and natural gas operations dependent on fracking have to be shut down until the price increases again. The Saudis and Russia hoped the lower oil prices would kill off fracking, but that won’t happen. Rising oil prices have always made it feasible to go after expensive to extract (like very deep or off-shore) oil and natural gas. As prices decline, these high cost operations have to be temporarily shut down, not eliminated entirely and forever. When some firms go bankrupt other firms buy up the assets and resume production when prices rise again. Nevertheless if the Saudis eased their current overproduction of oil the price would soon rise to over $60 a barrel. This is still half the previous (pre-fracking, pre-Saudi overproduction) high price of $132 (mid-2008). After that fracking and the Saudis drove down the price of oil and have kept it down. This has hurt Iran, but also Russia and several other nations that have become too dependent on oil export income. For the Russians this Saudi offer may be one they cannot refuse.

NATO is again actively working on how to deal with a hostile Russian military. This sort of work went out of style after the Soviet Union dissolved in 1991. Because of Russian military activity since 2008 in Georgia, Ukraine and Syria and threats against East European states that are NATO members, old Cold War plans (and memories) are being brought back to face the current Russian threat. This made more urgent after November because NATO member Turkey shot down a Russian warplane and NATO fears that this may escalate. NATO planners are working on dealing with Russian air defense systems installed in Syria and possible air and ground attacks in East Europe.

January 6, 2016: Turkey accuses Russia of violating international agreements by blocking Turkish airliners from Russia via a refusal to issue visas for the flight crews. Russia is still feuding with Turkey because Turkish F-16s shot down a Russian Su-24 on November 24th. Turkey is finding that Russia is hitting back any way it can and is exploiting a lot of Turkish vulnerabilities. While the economic retaliation will cost the Turkish economy over $10 billion, Russia is also fomenting anti-Turkish sentiment in Turkic nations (especially former parts of the Soviet Union) where Turkey has been trying, with some success, to establish a diplomatic and economic presence it was unable to achieve during the Cold War. Turkey is finding that Russia still has a lot of clout in Turkic nations like Azerbaijan and the five “stans” of Central Asia. Even in Syria, where Turkey does not want Russian troops to be, Russia has made its presence even more annoying for Turkey by targeting leaders of rebel groups that Turkey has been backing (in part to help keep Islamic terrorists out of Turkey). For Russia, payback is something that must be delivered in massive quantities and from unexpected directions.

The North Korean announcement that they had conducted a successful test of a fusion (H-Bomb) nuclear weapon was condemned by the Russian government but on Russian Internet sites Russian nationalists celebrated this North Korean “triumph” over their common enemy (the United States). At the government level China and Russia both agree that North Korea having nukes is a bad thing. China is morte concerned about this than Russia. Western technical experts doubt that the nuclear weapons test (that apparently did take place) was a fusion bomb. Soon (by the end of January) intel agencies, who are equipped for this sort of thing, will have collected and analyzed air samples from the test site. Winds blow this contaminated air out to wear intel aircraft or ground stations can capture air samples. Analysis of those samples will clearly show if it was a fission (A bomb) or fusion (H bomb) test.

January 1, 2016: In Syria it is estimated that Russian air strikes since the end of September have killed nearly 2,400 people, a third of them civilians.

December 28, 2015: Russia abolished its government space agency (Roscosmos) and transferred all the assets and responsibilities to a new state-owned corporation (called Roscosmos). This is another effort to halt the deterioration of Russian space efforts.

December 27, 2015: In eastern Ukraine (Donbas) Russian supported rebels violated the holiday true by firing mortar shells at a village held by Ukrainian troops. Two Ukrainian soldiers died as did one civilians. There were more attacks the next day. Ukraine also revealed that it had confirmed a recent incident where six Russian soldiers in Donbas were killed in a friendly-fire incident. It is estimated that over 9,000 have died in Donbas since the fighting began in early 2014. The current ceasefire, agreed to last September, has largely held.

December 23, 2015: A large part of western Ukraine suffered an electricity blackout. Some 1.4 million homes and businesses went dark for several hours because of a computer virus (BlackEnergy) believed to be Russian and deliberately deployed against Ukraine.

December 21, 2015: In the south (Dagestan) Islamic terrorists fired assault rifles from nearby woods, killing one Russian soldier and wounding ten civilians (mainly tourists visiting a historic site). ISIL (Islamic State in Iraq and the Levant) took credit for the attack. Non-ISIL Islamic terrorists in the Caucasus avoid hurting local civilians.

December 18, 2015: NATO agreed to send some of its American made AWACS air control aircraft to Turkey to monitor the Syrian border and help avoid any more incidents like the late November one in which a Turk F-16 shot down a Russian Su-24 because the Turks believed the Russian aircraft had flown into Turkish air space. AWACS keeps a record of what it can monitor (up to 400 kilometers away) and Russia would be less likely to dispute that kind of evidence. NATO is also sending more Patriot anti-aircraft batteries to Turkey.

 

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