Russia's Drive for Global Economic Power
By Ariel Cohen, Ph.D. and Lajos F. Szaszdi Ph.D., Heritage Foundation 30/1/09
Jan 31, 2009 - 9:22:03 AM
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
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.
Russia's war with Georgia was as much about Moscow's plans to annex
South Ossetia and Abkhazia as it was to reassert economic domination
of the Caucasus by force and prevent additional oil and gas pipelines
from being built outside Russian control. Russia sent the signal by
temporarily controlling the cargo port of Poti and Georgia's main
highway and railway line and by threatening the safety--and thus the
viability--of current and future oil and gas pipelines that bypass
The Russian invasion and partial occupation had the intended effect of
persuading Kazakhstan to drop its investment plans for Georgia. The
Kazakh state oil and gas company KazMunaiGas announced in September
that it would abandon its plan to build an oil refinery in the Georgian
port of Batumi, and not long before that, the Kazakh government also
announced it would not build a grain-export terminal in the port of
Poti. This terminal would have enabled Kazakhstan to export part of
its grain production through an alternative route, bypassing Russia.
For years, Russian energy policy was a crafty tool of power projection
in Eurasia. Russian state-controlled entities like Gazprom used
mysterious, economically useless affiliates to ensnare local political
leaders in corruption, thus co-opting them. Examples include
Rosukrenergo (with Ukraine) as well as Gazprom-Zeromax in Uzbekistan.
Energy deals are used to entangle the local regimes, ensuring their
political dependence on Moscow.
Moscow has not only used its resources and economic prowess to exert
its influence in the former Soviet states of Eurasia. Russia's
neo-corporatist state is also pursuing an anti-American agenda and
challenging the existing global economic system. It seeks control or
influence of sectors that are of paramount importance to American and
European security, such as special materials like platinum, titanium,
and other rare metals; defense technologies, such as the European
aircraft manufacturer EADS; and energy resources and infrastructure,
such as U.S. Getty, Spain's Repsol, Germany's Ruhrgas, refineries, and
a slew of companies in Germany, Hungary, Bulgaria, Poland, Serbia,
Slovakia, and elsewhere. Russia seeks to establish platforms from which
it can more easily conduct industrial and classic espionage, money
laundering, and other covert activities, and increase political
dependency through corruption. Moscow is also seeking influence in the
developing world, as well as challenging the independence and security
of Europe, including major powers like Germany and Italy, as well as
Ukraine and Georgia, in which the United States has national security
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
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
Russia's Economic March
The geo-economic and geopolitical implications of Russia's economic
power projection abroad cannot be overstated: As the Russian state's
main source of revenues, and as a foreign policy arm, it enables the
Kremlin to extend Russia's influence on a global scale. Moscow
exercises economic--and political-- influence over countries that
depend on its resources. Russian exports and investment projects are an
instrument for establishing and developing strategic relationships
through the export of commodities, arms, and nuclear technology.
Since Vladimir Putin became president in spring of 2000, the Kremlin
has backed the formation of "national champions" of the economy, state-
or publicly owned corporate giants that are subservient to the
government. Initially, the amalgamation of companies into big
conglomerates was intended to help Russian companies compete
successfully at home and abroad. But the massive corporations favored
by the Kremlin soon became instruments of the Russian state's policy to
dominate the national economy and to project its power abroad through
a trade-based foreign economic policy.
These state and private corporate players are subject to the
instructions of the government in both business and geopolitical
priorities. So important are such strategic sectors like oil and gas
or the military-industrial complex that, together with the big
corporations that dominate these sectors-- Gazprom, Rosneft, LUKoil,
and Rostekhnologii (Russian Technologies)--they constitute one of the
pillars of the Russian state, along with the other pillars of power:
the military, the intelligence services, the police and law-enforcement
agencies, and the government bureaucracy.
Indeed, the Kremlin has been using energy exports as a tool of its
foreign policy. The most notorious example of this practice is cutting
off or threatening to cut off oil and gas exports to any country that
adopts policies that go against Russia's national interests. A recent
example was the September 1, 2008, announcement to reduce the flow of
gas to the European Union, reportedly announced by the Russian gas
monopoly Gazprom soon after the 27 EU member countries agreed to halt
negotiations with Russia for a new partnership agreement. The EU
measure came in response to Russia's war against Georgia in August.
In another example of the use of energy exports as a tool of foreign
policy, Prime Minister Vladimir Putin, in a veiled threat to Europe,
urged on the eve of the same EU meeting that the construction work on
the East Siberia-Pacific Ocean (ESPO) oil pipeline, destined to export
crude to the Asia-Pacific region markets, be accelerated. The
message was clear: If Europe does not want to buy Russian oil, Moscow
can sell it to China, South Korea, and Japan. Currently, Europe imports
from Russia a third of the oil and 40 percent of the natural gas it
This is no coincidence, since Russia's global posture is directed by
now-Prime Minister Putin and his associates--KGB veterans. As Putin's
former economic adviser Andrey Illarionov described it, the Russian
Federation is being run as a corporation. Today, this "Russia
Inc." operates essentially with a hierarchical structure in which Prime
Minister Putin is the equivalent of the CEO and chairman of the board,
with President Dmitry Medvedev as a member and chief operating officer.
While President Medvedev is a civilian, Putin and many of his close
allies are alumni of the Russian intelligence community. In a study
conducted in 2006 by the Center for the Study of Elites at the Russian
Academy of Sciences,of 1,016 senior government officials and elected
members of Parliament, 26 percent belonged to the KGB or the
post-Soviet intelligence agencies. That proportion grew to 78 percent
when individuals with "unexplained gaps in résumés, unlikely career
paths or service in organizations affiliated with the KGB" were
More than five years ago it was suggested that up to 6,000 active duty
and reserve members of the Russian intelligence community occupied
positions of influence in the state. It can be concluded that the
alumni of the Russian intelligence apparatus control the state by
controlling the government's civilian bureaucracy, the military, and
the country's main economic sectors. As Daniel Treisman, professor of
political science at the University of California, Los Angeles,
pointed out, in Russia "the security forces' takeover of corporate
boardrooms is coming to define Putin's regime," during his
presidency and premierships.
Moscow business insider Oleg Shvartsman suggested that the goal of the
members of the Russian intelligence services who occupy senior
positions in the corporate world is to gain wealth for themselves in
addition to global power for Russia through business expansion abroad.
There have been revelations by a businessman managing the assets of
members of the Presidential Administration from the so-called
"siloviki" (men of power). These are officials with links to the FSB
(the Federal Security Service and the main successor to the KGB) and
SVR (the Foreign Intelligence Service, formerly the KGB's First Main
Directorate) through the obscure Finansgroup company which claims
assets worth around $3.2 billion. Thus, huge amounts of money in
the hands of the former members of the Russian intelligence apparatus
could be employed for personal use, while vast state revenues can be
directed to fund clandestine operations and other state activities.
Massive money laundering operations through the Bank of New York
and Republic Bank of New York are well documented and were the subject
of congressional hearings. According to publications in the Russian
media, the Austrian Raiffeisen bank is reportedly involved in
suspicious activities in the Russian gas sector and other questionable
business transactions with ties to intelligence services. Back in
2004, Czech counterintelligence sources revealed that the SVR invested
"huge sums in local real estate, hotels, casinos, and entertainment
complexes" in the Czech Republic, probably in order to obtain front
companies for intelligence operations, to strengthen the SVR's (and the
Russian state's) influence in the country, and possibly as alternative
sources of funding outside of the regular control of the Russian
It is little wonder that earlier last year U.S. Attorney General
Michael Mukasey cited Russia and other Eurasian nations as places where
"organized criminals control significant positions in the global
energy and strategic-materials markets. They are expanding their
holdings in those sectors, which corrupts the normal functioning of
these markets and may have a destabilizing effect on U.S. geopolitical
interests."He revealed that the U.S. government has re-assembled
its Organized Crime Council to combat a new "hybrid criminal problem"
involving alliances between foreign intelligence agencies and criminal
groups. Mr. Mukasey said law-enforcement officials have "grave concern"
about "so-called "iron triangles' of corrupt business leaders, corrupt
government officials and organized criminals."
Beyond Personal Wealth
The Russian leadership's ambition surpassed the drive for
self-enrichment a long time ago. Putin and then-Defense Minister Sergey
Ivanov meant every word when they set the goal for Russia to become a
world energy superpower. In 2006, Vladislav Surkov, Deputy Head of the
Presidential Administration, aide to President Putin and ideological
chief of Putin's regime, declared that "the idea of Russia as an energy
superpower is…fully consistent" with the country becoming competitive
economically. Yet, ever cautious, at that year's Valdai Club
meeting, President Putin rejected the idea that Russia wanted to become
an "energy superpower," assuring the audience that his government
wanted instead to provide stable energy supplies to world markets.
A key instrument in the dream of Russia as an energy superpower is
Gazprom, the world's largest gas company and Russia's state-owned gas
monopoly. Gazprom was the Kremlin's principal tool in the two gas
supply interruptions to Europe, which were triggered by the gas prices
disputes between Moscow and Kyiv. Gazprom is rated as the company
with the highest capitalization in Russia. It is intended to become
the core of a gas counterpart to OPEC, and its close energy ties with
Iran, which has the second-largest gas reserves on earth, threaten
market access and competitiveness, especially in the liquefied natural
gas (LNG) sector, and as a result, stability of the world economy.
The recent agreement between Russia, Iran, and Qatar to form a "Gas
Troika" (in the works for at least a year and a half) that would meet
several times a year, could lead to unfair business practices, such as
"the exchange of information about prices, development schedules and
investment plans." Russia, Iran, and Qatar hold 56 percent of
global gas reserves, and the Iranian oil minister declared in October
of last year that the three countries have reached an agreement on the
formation of a "gas OPEC." Less than a week later, Alexei Miller,
Gazprom's deputy chairman of the board of directors and chairman of
the management committee, said that the Gas Troika could become a
formal organization in November of 2008. Later, Anatoly Yanovsky,
deputy energy minister, disclosed that at a December 23 summit in
Moscow, 16 gas-producing countries, including the host nation, plan to
sign a charter establishing an "organization of gas exporting
A Perfect Storm. The international financial crisis has seemingly put
a stop to Russia's dynamic efforts to expand its economic interests
worldwide. Prime Minister Putin wrongly blamed the U.S. exclusively for
the meltdown, which since May has affected Russia's stock exchanges,
the RTS and the MICEX, with Russia's indexes losing thus far as much as
70 percent of their value.
Several observers pointed out that the Russian invasion of Georgia made
the financial problem worse, triggering a further outflow of capital
out of fear of instability. Other problems have combined to create a
perfect financial storm against Russia: International banks called
loans of powerful oligarchs who before the crisis and their loss in
value used their company shares as collateral for foreign loans; and
oil prices and those of other commodities fell, including metals,
causing grave financial damage to Russian state financing.
Russia's financial benefits accruing from foreign trade are altering
its international behavior. In early August 2008, the Russian
government's Reserve Fund and National Welfare Fund held the
equivalent of $162 billion, while its hard currency and gold reserves
summed their highest point on August 8--the day Russian forces invaded
Georgia--with more than $597 billion, the third-largestreserves in the
world after China and Japan. By December 5, Russia's hard currency
and gold reserves were down to $437 billion, yet they lost $31 billion
in one week from October 17 to 24, and $17.9 billion in the week of
December 5. These reserves are expected to continue to decline as
the Russian government uses them to rescue the national economy from
the effects of the international financial crisis, and if oil prices
remain below $70 a barrel.
The effects of the financial crisis in Russia have left many Russian
companies and banks unable to repay their foreign loans without state
intervention. Thus, the Russian Central Bank has provided liquidity to
Russia's state development bank, Vnesheconombank (VEB): $50 billion to
help enterprises in financial trouble pay their foreign creditors. This
situation is allowing the Russian government to take over failing
banks and acquire stakes in struggling companies, strengthening the
power and influence of the state.
The crisis has also caused Russia's most powerful billionaire
businessmen, with close links to the Kremlin, to incur combined losses
of up to $230 billion. The one with the highest losses according to
Forbes is Oleg Deripaska, who, until the crisis, was the wealthiest man
in Russia and who had lost more than $16 billion by early October of an
estimated $28 billion fortune before the crisis. Deripaska is the
owner of RUSAL, the largest aluminum and alumina producer in the
world. Other examples include Roman Abramovich, who by the third
week of October lost over $20 billion after his shares in steelmaker
Evraz plummeted. The owner of steel producer Novolipetsk Steel (NLMK),
Vladimir Lisin, lost $22 billion by early October, and the fortune of
Severstal's Alexei Mordashov went down from $21.2 billion by March 2008
to $5.3 billion by early October. LUKoil's owner Vagit Alekperov's
value of his 20 percent stake in the oil company fell from $19.5
billion to $7.2 billion by early October.
All these private-sector companies with close Kremlin ties are involved
in international trade and investment activities, serving as sources of
tax revenues and hard currency for the Russian state, and as tools of
the Kremlin to expand Russia's influence worldwide. The Kremlin might
use this opportunity as well to try to gain controlling stakes of
private companies that are in financial trouble, thus expanding the
state's commanding role in the national economy and in the long term
give it further resources and power, enabling foreign adventurism.
Despite the fact that it will be cancelling plans for more drilling and
oil refining, private oil company LUKoil still intends to buy a 30
percent stake in Repsol, the Spanish national oil company, as well as a
refinery in Sicily, and is putting together a $1 billion loan for that
purpose. It seems that the national corporate champions, such as
LUKoil or Gazprom might see their expanding investment plans at home or
abroad shelved due to lower oil prices, yet this is likely to be a
temporary setback, depending on how quickly the international
financial markets in general and foreign investor confidence in
Russia in particular recover.
Yet, Russian businesses are feeling the brunt of the crisis. The
abysmal loss of value of Russian banks and companies' shares has led
Bloomberg to declare the stocks of Russian companies as the cheapest in
the world. Indeed, there seem to be fears in Russian nationalist
circles that the low value of Russian companies' stakes could lead to
free-for-all acquisitions of Russian stocks by Western financial
interests. To avoid this outcome, the Russian state, through its banks
like VEB and institutions like the Deposit Insurance Agency, is
providing the loans and guarantees needed by Russian banks and
companies in distress. It is also using them to take control of failed
banks. But even the Russian state itself could go broke if the
price of oil continues to fall.
This petroleum windfall is also being used to win the loyalty of some
European politicians. Such arrangements benefit Russian energy
interests, as in Germany with regard to the Nord Stream gas pipeline
consortium chaired by former chancellor Gerhard Schroeder for an
annual compensation of 1,000,000 euros (about $1,270,000 in U.S.
dollars). Nord Stream also hired the Finnish prime minister as a
consultant, triggering concerns in Europe about spreading
corruption. An extremely expensive project, the Nord Stream
pipeline would reach from Russia along the Baltic Sea bottom to
Germany, bypassing the Baltic states and Poland and denying them
transit revenue, with spurs to the Netherlands and France. In Bulgaria,
Hungary, Serbia, and Austria, the planned--and even more
expensive--South Stream gas pipeline would stop the EU- and U.S.-backed
Nabucco gas pipeline, which bypasses Russia. The cooperation of
Schroeder and Hungarian Prime Minister Ferenc Gyurcsany is key in
implementing Russian projects that undermine Europe's security of
The anti-competitive practices of Russian companies are spreading in
the West and are undermining the rule of law as well as sound economic
practices and business ethics. Gazprom, Rosneft, and their subsidiaries
negotiate and make energy deals with foreign energy companies. Such
opaque business partnerships are shrouded in secrecy, politicize the
energy business, and are devoid of free and fair competition. Worse,
the opaque nature of such agreements between state energy companies
leaves an ample margin for corrupt practices that violate both the law
and business ethics. One notorious example are the allegations made
against the Austrian Raiffeisen bank, which has been accused by the
Russian press of participating in a money laundering scheme that sent
capital out of Russia and that involved senior Russian government
officials with links to oil companies and ties to the FSB.
What Russia Wants: "New World System"
Russia needs its oil price to be at least $70 a barrel in 2009 to
avoid falling into budget deficits. Its recent talks with OPEC may
be directed at coordinating efforts to reduce oil production and thus
raising the price of oil, a goal also pursued in earnest by OPEC
members Iran and Venezuela, whose national budgets depend on $70 a
barrel to balance their budgets. The budget deficit may also
constrain some foreign policy tools Russia uses.
Attending an OPEC meeting in Vienna in September 2008, Russian Deputy
Prime Minister Igor Sechin, a friend of Putin's, said that "OPEC is one
of Russia's key partners on the global oil market" and that "it is very
important for us to create mechanisms of regular dialogue" with the oil
With Russia and OPEC responsible for a combined total of 51 percent of
the world's oil, Moscow's cooperation with OPEC to coordinate oil
prices and production quotas would be a requisite for the further
expansion of Russia's influence in the world. Even though the idea of
Russia joining OPEC has been rejected by Russian officials, one of
LUKoil's vice presidents declared recently that Russian membership of
OPEC "will be only good for Russia" for "the future of the Russian
industry and [oil] price stability." Cooperation with OPEC and the
formation of a gas cartel are consistent with one of the objectives
enunciated in the recent Foreign Policy Concept of the Russian
Federation, which announced that Russia "strengthens strategic
partnership with the leading producers of energy resources."
Russia aims to challenge the current international financial system
dominated by the U.S. and Western industrialized countries. At the St.
Petersburg Economic Summit in 2007, President Putin called for a new
world economic framework based on regional alliances, relegating
Bretton Woods-era global institutions like the International Monetary
Fund and the World Bank to the sidelines. He demanded that the new
system reflect the rising power of emerging market economies like
Russia, China, India, and Brazil, as well as the decline of the
established powers: the United States, Japan, and Western European
Moscow is establishing "favorable political conditions for
diversifying Russia's presence in the world markets through expanding
the export range and geography of foreign economic and investment links
of Russia." At the same time, the Kremlin is promoting a
multilateral, state-driven approach to the international economic and
financial system to regulate the free markets globally, and using the
ruble as the dominant currency in the Commonwealth of Independent
Speaking at the recent conference on the international financial
crisis in Evian, France, Russian President Medvedev said that "the
formation of new financial centers and strong regional currencies will
act as new stability factors" in the face of the crisis. While
suggesting that the current international U.S.-based "unipolar economic
model" is inefficient, Medvedev alluded to the "multi-polar nature of
the world and the complexity of globalization." Medvedev is proposing
that "the global financial architecture be changed, the role of the
current international institutions be reviewed, and new ones created
to guarantee stability." "It will take years to shape a new world
system," Medvedev said.
Another goal seems to be replacing the dollar in Russia's international
trade transactions. Putin has proposed this goal to his Chinese
counterpart Wen Jiabao for bilateral trade between Russia and China,
which was estimated to reach $50 billion in 2008.
Russia is following a multilateral approach to challenge the current
international financial and trading system, as part of its overall
strategy of pursuing a multilateral world system, through the Shanghai
Cooperation Organization, OPEC, a new gas OPEC, or new
international financial bodies that would include China, India, EU
member states, and challengers of the established international order
such as Iran and Venezuela.
Influencing the international prices of oil and gas would be key for
the economic recovery of the country as well as for funding military
and industrial modernization and economic development programs at home.
Before the international financial crisis hit Russia, an increasing
share of its resources had been directed at the rearming of the
military with modern weapon systems, and at increases in funding of the
Ministry of the Interior, and of the security and intelligence
services, such as the FSB domestic security service, the SVR foreign
intelligence service, the GRU military intelligence, and the Border
Guards under FSB supervision. Before the crisis, the Kremlin planned
to raise defense spending by 50 percent over three years, deploy an
army rapid reaction force at a high level of operational readiness, and
construct new nuclear-powered ballistic missile submarines. It
remains to be seen if the government's financial stabilization efforts
at home will reduce spending in defense as well as activities of the
Ministry of Foreign Affairs and of Russian government propaganda and
Arms Exports Boost Russia's Power
Russia is also a major world weapons exporter. The Kremlin aims to
forge long-lasting military relations and strategic partnerships with
foreign countries through the export of arms. Russia's military
exports extend to Europe, the Middle East, Central Asia, South Asia
(primarily India), the Far East (mainly China), Southeast Asia, Africa,
and Latin America. To further centralize government control over the
production of the military-industrial complex, the Kremlin has created
an industrial behemoth, Rostekhnologii (Russian Technologies), which
agglomerates 426 state enterprises. These include the defense export
enterprise Rosoboronexport, the aircraft manufacturing, non-ferrous
metals, and shipbuilding conglomerates to name just a few. Russia's
titanium exports corporation, VSMPO- Avisma, vital for Airbus and
Boeing, is now controlled by Rostekhnologii, which is planning to
develop it into one of the largest non-ferrous-metals companies in the
world. Rostekhnologii will centralize the planning and production
of the various enterprises under its umbrella. It could also attempt to
marshal together its various resources and coordinate its efforts to
become a formidable competitor in the international market for arms,
metals, and aerospace technology.
What the Obama Administration Should Do
If Russia were a friendly Euro-Atlantic power, the United States would
be no more concerned about its economic activity than about that of
France. Russia's use of state-dominated businesses to enhance its
geopolitical posture and gain dominance over U.S. allies' energy
supply, however, should raise deep concerns in the Obama Administration
and in European capitals. Free-market competition is and should remain
a fundamental principle of U.S. trade policy; but America and its
allies have a duty to their citizens to monitor, and, where necessary,
prevent, any country's anti-market, political, covert, or illicit
efforts to undermine our markets or our security, which Russia
increasingly is aiming to do.
For example, Russian's growing control of Eurasian energy resources
and exports to Europe through non-market means is both strategically
and economically burdensome, as well as dangerous. To better ensure
that the U.S. and its allies have access to the energy that fuels their
economies and their militaries, to prevent Russian domination in
strategic sectors, and to counter corrupt and criminal activities of
Russian corporations and tycoons, the Obama Administration should take
early action to:
* Ensure that CFIUS has the resources and support it needs to
conduct its investigations according to the law. The U.S. should urge
its allies to develop similar institutions and processes to perform
their own national security evaluations and screenings.
* Increase cooperation among U.S. and allied intelligence services,
law enforcement agencies, and independent experts to track Russian
state and oligarch money laundering activities, corruption, and unfair
competition practices. The Obama Administration should make the
collection of actionable intelligence on questionable Russian
activities by U.S. and allied law enforcement agencies a priority.
Such intelligence is critical in gathering evidence necessary for
achieving convictions in courts of law. Such intelligence includes, for
instance, Russian banks providing credit card support for child
pornography Web sites. The U.S. should exercise leadership in
expanding international cooperation among law enforcement agencies to
prevent and stop complex trans-border crimes, such as money laundering,
and those that involve current or former Russian government officials;
oligarchs with close ties to Russia's political leaders; intelligence
operatives; and persons with ties to organized crime. When U.S.
laws--such as the Patriot Act (especially Section 312, proceeds of
foreign corruption), the Foreign Investment and National Security Act
of 2007 (FINSA), the Defense Production Act of 1950 (DPA), money
laundering laws, the Foreign Corrupt Practices Act, G-8 anticorruption
initiatives, and similar laws in allied jurisdictions--are violated by
Russian entities, the U.S. and its allies should not hesitate to
vigorously prosecute the offenders and confiscate, through appropriate
court proceedings, illegally laundered funds and properties acquired
with illegally procured funds, and aggressively deny visas to those
government and business figures involved in the illicit activities.
* Encourage U.S. and other multinational companies to compete in
economically viable energy and infrastructure projects overseas through
free-trade, diplomatic and security support, and regulatory and tax
policies that will enhance free competition without government-directed
investment decisions. U.S. companies should be encouraged to compete
for the Libyan and Trans-Saharan gas pipelines, Turkmenistan's gas
fields, and other geopolitically significant ventures, which Russia is
targeting in India, Southeast Asia, Africa, and Latin America.
* Promote market-viable alternative energy sources and
unconventional sources of fuels worldwide to counter strategic
dependency on Russian, Iranian, and Venezuelan oil. This should be
accomplished through deregulation and trade and tax policies that
encourage innovation and investment to develop, and through
commercializing new sources of energy that best meet the needs of
individual regions and nations. Western economies will be better off by
expanding the supply of transportation fuels and reducing their Russian
energy imports, thus reducing the influx of revenue into Kremlin
* Expand security cooperation with Russia's energy-exporting
neighbors and other countries that Russia is targeting for energy
cooperation, including train-and-equip programs for military and
security forces protecting pipelines, and officer corps education in
U.S. military colleges. The U.S. should make use of NATO's Partnership
for Peace program.
Conclusion: The Way Forward
Russia is being run as a corporation by the former senior members of
the Russian intelligence community who strive to maximize profits and
power, expanding global corporations for exports of raw materials and
weapons. America's European allies and the newly independent states of
Eurasia have already been subjected to Russia's heavy-handed policies
and corrupt practices aimed at increasing their energy dependency, as
well as a flurry of efforts to acquire critical infrastructure such as
ports, pipelines, refineries, and energy distribution networks.
The Kremlin has made clear that it intends to diminish America's
standing as a world leader by promoting a "multipolar" world, and using
its military, economic, and "soft" power to re-establish Russia as
America's near-peer competitor. The lower energy profits accruing to
Moscow from the current global economic downturn can play a role in
mitigating Russia's anti-status quo foreign policy, and slow down the
growth and modernization of its armed forces. But the U.S. should not
rely on these developments. The U.S. should develop comprehensive
policies to handle Russia's economic power projection that is aimed at
undermining American allies, power, and security interests, employing a
mix of commercial, national security, intelligence, and diplomatic
Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and
Eurasian Studies and International Energy Security and Lajos F.
Szaszdi, Ph.D., was a Consultant in the Douglas and Sarah Allison
Center for Foreign Policy Studies, a division of the Kathryn and Shelby
Cullom Davis Institute for International Studies, at The Heritage
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January 8, 2009, at
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Russia," The Guardian, November, 13, 2008, at
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l=en&art=13307&geo=3&theme=1&size=A#(December 30, 2008).
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2008, at http://www.econlib.org/library/Enc/Fascism.html(January 13,
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Russia in Global Affairs, No. 2 (April-June 2008), at
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Damien McElroy, "Vladimir Putin Demands Asia Pipeline as Warning to
Europe," Telegraph.co.uk, August 31, 2008, at
Jon Swaine, "Georgia: EU Leaders Set to Condemn Russia,"
Telegraph.co.uk, September 1, 2008, at
gia/2659810/Georgia-EU-leaders-set-to-condemn-Russia.html (December 1,
Andrey Illarionov, "Russia Inc." The New York Times, February 4,
2006, at http://www.nytimes.com/
2006/02/04/opinion/04illarionov.html (December 31, 2008).
Peter Finn, "In Russia, A Secretive Force Widens," The Washington
Post, December 12, 2006, at http://www.washingtonpost.com/wp-
"Chekists in the Corridors of Power," Novaya Gazeta, in Johnson's
Russia List, No. 50 (July 18, 2003), at
http://www.cdi.org/russia/johnson/7255-4.cfm(December 31, 2008). See
also Gary K. Busch, "A Spectre is Haunting Europe," Ocnus.Net, November
14, 2008, at http://www.ocnus.net/artman2/publish/
Editorial_10/A_Spectre_is_Haunting_Europe.shtml(December 31, 2008).
Daniel Treisman, "Putin's Silovarchs," Orbis, 51, No. 1 (2007), p.
142, quoted in Brian D. Taylor, "Russia's Power Ministries: Coercion
and Commerce," Institute for National Security and Counterterrorism,
Syracuse University, October 2007, at
20Events/Taylor_Russia%20Power%20Ministries.pdf(December 31, 2008).
See interview of Oleg Shvartsman, "For Us, the Party Is Represented
by the Power Bloc Headed by Igor Ivanovich Sechin," Kommersant,
December 3, 2007, at http://www.kommersant.com/p831089/r_530/Oleg
31, 2008); Luke Harding, "Putin, the Kremlin Power Struggle and the
$40bn Fortune," The Guardian, December 21, 2007, at
.uk/world/2007/dec/21/russia.topstories3(December 31, 2008).
M. Corey Goldman, "Watching Overseas Funds: Alleged Russian Mob
Money Laundering Raises Questions about Bank Safeguards," CNNMoney,
September 1, 1999, at
2008); Timothy L. O'Brien with Raymond Bonner, "Bank in Laundering
Inquiry Courted Russians Zealously," The New York Times, August 20,
1999, at http://query.nytimes.com/gst/fullpage.html?
res=9D06E1DA1538F933A1575BC0A96F958260(December 31, 2008).
Thomas A. Renyi, Chairman of the Board of the Bank of New York,
testimony before the Banking and Financial Services Committee, U.S.
House of Representatives, September 22, 1999, at
http://www.russianlaw.org/renyi_congress.htm (December 3, 2008). See
also Ariel Cohen, "Russian Money Laundering: Questions Congress Should
Ask," Heritage Foundation Backgrounder No. 1323, September 22, 1999,
Natalia Morar, "Officials Are Taking Money Away to the West," New
Times, No. 15, May 21, 2007, p. 6, in Russian, at
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States," Radio Free Europe/Radio Liberty, May 14, 2004, at
http://www.rferl.org/content/Article/1143159.html(December 31, 2008).
Susan Schmidt and Glenn R. Simpson, "Arms-Control Group Tied to
Kremlin Paid Wife of Weldon Aide," The Wall Street Journal, June 10,
2008, p. 4, at http://www.military-quotes.com/forum/
house-ex-staffer-caught-probe-t63542.html (December 31, 2008), and
"House Ex-Staffer Caught in Probe," Citizens for Ethics, quoting The
Wall Street Journal report of June 10, 2008, at
http://citizensforethics.org/node/31931(December 31, 2008).
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Sovereignty," Radio Free Europe/Radio Liberty, March 6, 2006, at
http://www.rferl.org/content/Article/1143587.html(December 31, 2008),
and Victor Yasmann, "Russia: Ideological Doctrine Paves Kremlin's
Course," Radio Free Europe/Radio Liberty, August 4, 2006, at
http://www.rferl.org/content/article/1070339.html(December 31, 2008).
Mary Dejevsky, "Putin Promises Russia Will Not Act Like an "Energy
Superpower,'" The Independent, September 11, 2006, at
Cohen and Graham, "European Security and Russia's Natural Gas
"Gazprom, LUKOIL Biggest in Russia," Kommersant, October 6, 2008,
com/p-13340/r_529/Russias_largest_companies/ (December 31, 2008). See
also Expert RA Rating Agency, "Index of Companies Listed in the
Ranking," "Expert-400," at
2008) and Expert RA Rating Agency, "Capitalization-200," "Expert-400,"
at http://www.raexpert.org/ratings/expert400/2007/table2/(December 31,
Carl Mortished, "Gas Cartel Could Have a Significant Impact on
Europe," The Times, October 22, 2008, at
nists/article4988242.ece(December 31, 2008); Russian News Information
Agency Novosti, "Russia, Iran, Qatar to Hold Regular Natural Gas
Dialogue," October 21, 2008, at
http://en.rian.ru/russia/20081021/117866397.html(December 31, 2008);
"Russia, Iran, Qatar Agree on Gas OPEC," Kommersant, October 21, 2008,
at http://www.kommersant.com/page.asp?id=-13421(December 31, 2008).
Mortished, "Gas Cartel Could Have a Significant Impact on Europe";
"Russia, Iran, Qatar Agree on Gas OPEC"; Novosti, "Russia, Iran, Qatar
to Hold Regular Natural Gas Dialogue."
"Big 3 May Become Gas Market Fixture," Kommersant, October 27,
31, 2008); Gazprom, "About/Board of Directors," at
http://www.gazprom.com/eng/articles/article8823.shtml (October 27,
"Russia Says Gas Troika Won't Set Up Output Quotas," SILObreaker,
November 27, 2008, at
(December 31, 2008).
Russian News Information Agency Novosti, "Russian Government to
Take New Measures to Fight Credit Crunch," October 26, 2008, at
http://en.rian.ru/russia/20081026/117954502.html(December 31, 2008);
Suzy Jagger, "Vladimir Putin Blames America for World Economic Crisis,"
The Times, October 2, 2008, at
article4863967.ece (December 31, 2008); "RTS, MICEX Resumed Trading
After 3hr Break," Kommersant, October 7, 2008, at
2008); Tony Halpin, "Russia Is Well Prepared to Survive Financial
Crisis Says Putin," The Times, October 20, 2008, at
/business/markets/russia/article4981200.ece(December 31, 2008).
Russian News Information Agency Novosti, "Russian Government to
Take New Measures to Fight Credit Crunch"; Jagger, "Vladimir Putin
Blames America for World Economic Crisis"; Halpin, "Russia Is Well
Prepared to Survive Financial Crisis Says Putin."
"Business in Brief: Oil Funds at $162Bln," The Moscow Times, August
4, 2008, at
(December 31, 2008); "Ruble Stuck in the Trenches," Kommersant, October
24, 2008, at http://www.kommersant.co
m/p1046260/Central_Bank_of_Russia_ruble_policy/(December 31, 2008).
Ibid., and Russian News Information Agency Novosti, "Russian
International Reserves Down $31 Bln in Week," October 30, 2008, at
http://en.rian.ru/business/20081030/118027896.html(December, 31, 2008);
Emma O'Brien, "Russia Devaluation Gathers Pace as Central Bank Loosens
Control," Bloomberg.com, December 11, 2008, at
pid=20601087&sid=aRhI2KitimCs&refer=home(December 31, 2008).
Halpin, "Russia Is Well Prepared to Survive Financial Crisis Says
Russian News Information Agency Novosti, "Russian Government to
Take New Measures to Fight Credit Crunch"; Halpin, "Russia Is Well
Prepared to Survive Financial Crisis Says Putin"; Russian News
Information Agency Novosti, "Russia's Vnesheconombank Approves Takeover
of Globex," October 27, 2008, at
http://en.rian.ru/business/20081027/117972964.html (December 31, 2008);
David Robertson, "Russian Fears Grow of State Control," The Times,
October 31, 2008, at http://business.timesonline.co.uk/tol/bu
siness/markets/russia/article5050898.ece(December 31, 2008).
David Robertson, "Russia's Rich Forced to Sell Assets to Repay
Loans," The Times, October 22, 2008, at
ia/article4988116.ece(December 31, 2008); Yuriy Humber, Greg Walters,
and Maria Kolesnikova, "Abramovich, Deripaska, Oligarchs Lose $230
Billion (Update1)," Bloomberg.com, October 10, 2008, at
(December 31, 2008); "The World's Billionaires: #9 Oleg Deripaska,"
Forbes.com, March 5, 2008, at
a_UCP9_print.html (December 31, 2008);"Magazine Counts Billionaires'
Losses," Kommersant, October 20, 2008, at http://www.kommersant.com/p-
13417/financial_crisis_billionaires(December 31, 2008); Halpin, "Russia
Is Well Prepared to Survive Financial Crisis Says Putin"; United
Company RUSAL, "Key facts and Figures," at
http://www.rusal.ru/en(October 27, 2008).
Robertson, "Russia's Rich Forced to Sell Assets to Repay Loans";
Humber, Walters, and Kolesnikova, "Abramovich, Deripaska, Oligarchs
Lose $230 Billion (Update1)"; "Magazine Counts Billionaires' Losses,"
Kommersant; Halpin, "Russia Is Well Prepared to Survive Financial
Crisis Says Putin"; "The World's Billionaires: #18 Alexei Mordashov,"
Forbes.com, March 5, 2008, at
Mordashov_QW68_print.html(December 31, 2008); Evraz, "Assets Map," at
http://www.evraz.com/business/(December 31, 2008); NLMK, "Acquisition
of International Steel Trading Facilities," January 2008, at
http://www.nlmksteel.com/StandardPage____766.aspx(December 31, 2008);
Severstal North America, "Parent Company: Severstal--a Global Leader in
the Steel Industry," at
http://www.severstalna.com/about-us/parent-company.html (December 31,
 Humber, Walters, and Kolesnikova, "Abramovich, Deripaska,
Oligarchs Lose $230 Billion (Update1)."
"Gazprom Neft to Slash Investment Program, LUKOIL to Shelve
Refining Projects," Kommersant, October 29, 2008, at
13471/LUKOIL_Gazprom_Neft_shelve/(December 31, 2008).
"Stocks of Russia's Companies Called the Cheapest Worldwide,"
Kommersant, October 27, 2008, at http://www.kommersant.com/p-
13445/Cheapest_stock_/(December 31, 2008); Halpin, "Russia Is Well
Prepared to Survive Financial Crisis Says Putin"; Russian News
Information Agency Novosti, "Russian Government to Take New Measures to
Fight Credit Crunch." On VEB's ties to Russian intelligence, see Julian
Evans, "Russia Eager to Appoint Foreign Fund Manager for Petrodollars,"
The Times, December 15, 2006, at
_football/article755008.ece (December 31, 2008), "Instead of Eltsin's
"Family' the Country Is Being Plundered by Putin's "Team' and the
Matter Is Being Done Much More Profoundly," Forum.msk.ru, at
msk.ru/english/print.html?id=18238(January 13, 2009). Petr Mikhailovich
Fradkov, the elder son of former Prime Minister Mikhail Fradkov, now
director of the SVR, is deputy chairman of VEB. See Vnesheconombank,
"Fradkov Petr Mikhailovich," at
http://www.veb.ru/en/about/governance/board/chairman_7 (December 21,
"EU Says Gas Supply Must Be Restarted as Arguments About Observers
Continue," Radio France International, January 9, 2009, at
"Nord Stream Consortium Hires Former Finnish Premier," Deutsche
Presse-Agentur, August 15, 2008, at
tream_Consortium_Hires_Former_Finn_12384.aspx(January 13, 2009).
Examples include Gazprom's deals with Austria's OMV, France's Total
and Suez-Gaz de France, Germany's BASF/ Wintershall and E.ON, Italy's
Eni and Enel, to name a few.
Natalia Morar, "Sensational Details Have Appeared in the Case About
the Laundering of Large Sums by Russian Officials through the Bank
"DISKONT' and the Austrian "Raiffeisen,'" New Times, No. 16, May 28,
2007, p. 12, in Russian, at
2009); Robert Amsterdam, "Raiffeisen's Russia Scandal-Part II," from
the Robert Amsterdam: Perspectives on Global Politics and Business Web
site, June 5, 2007, at
ussia_scandal_par_1.htm(December 31, 2008).
Halpin, "Russia Is Well Prepared to Survive Financial Crisis Says
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2008, at http://www.kommersant.co
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Robin Pagnamenta and Angela Jameson, "Opec Plans Closer Links with
Russia to Control Half of the World's Oil Supplies," The Times,
September 11, 2008, at
s/natural_resources/article4727088.ece(December 31, 2008); "Russia to
Share Prices with OPEC," Kommersant, September 11, 2008, at
http://commersant.com/p1023903/r_528/OPEC_price/(December 31, 2008);
ITAR-TASS, "Russia Should Develop Strategic Partnership with
OPEC-Sechin," September 10, 2008, at
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Bearhug Is Something to Worry About," The Observer, September 14, 2008,
ergersandacquisitions/print (December 31, 2008); "OPEC Welcomes
Russia," Kommersant, September 25, 2008, at http://www.kommersant.com/p-
13286/r_528/OPEC_Russia(December 31, 2008); Russian News Information
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print.html(December 31, 2008).
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Russia Web site, July 12, 2008, at
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to Freeze Out US," The Telegraph, October 8, 2008, at
"Medvedev Suggests Steps in Reform of World Financial System,"
ITAR-TASS, October 31, 2008, at
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Russia, China Ditch Dollar in Trade Deals," October 28, 2008, at
http://en.rian.ru/russia/20081028/117991229.html(December 31, 2008).
Russian News and Information Agency Novosti, "PMs from Shanghai
Group to Discuss Global Financial Crisis," October 29, 2008, at
http://en.rian.ru/world/20081029/118010134.html (December 31, 2008).
Russian News and Information Agency Novosti, "Russian Military
Spending to Hit $50 Bln in 2009," October 16, 2008, at
http://en.rian.ru/russia/20081016/117784473.html(December 31, 2008);
Russian News and Information Agency Novosti, "Russian Air Force to
Start Receiving Ka-52 Helicopters in 2009," October 9, 2008, at
http://en.rian.ru/russia/20081009/117616797.html (December 31, 2008);
Russian News and Information Agency Novosti, "Russian Navy to Get 8
New-Generation Submarines by 2015," October 2, 2008, at
http://en.rian.ru/russia/20081002/117393965.html(December 31, 2008);
"Russian Navy Promises New Nuclear Subs with New Strategic Missiles,"
Bellona, October 6, 2008, at
http://www.bellona.org/news/news_2008/new_nuke_subs(December 31, 2008);
"Only 1 Million in Russian Army by 2012," Kommersant, October 8, 2008,
13, 2009). See also "Rapid Reaction Force to be Formed in Russian
Army," October 1, 2008; Russian News and Information Agency Novosti,
"Russia Plans to Raise Defense Expenditures by 50% in 3 Years,"
September 30, 2008, at http://en.rian.ru/russia/20080930/117331145.html
(December 31, 2008).
Reuben F. Johnson, "Russia Merges Enterprises into Industry Giant,"
Jane's Defence Weekly, August 6, 2008, p. 20; Elena Kiseleva and Maria
Cherkasova, "Rostekhnologia Head Seeks Mining Might," Kommersant, April
28, 2008, at http://www.kommersant.com/p887518/r_1/metallurgy_mergers_
and_acquisitions (December 31, 2008).
Source: Ocnus.net 2009