Russia’s Sweet Revenge

Al Gore wants to fight Big Oil on behalf of the little guy in an enormous SUV. George W. Bush is not exactly happy about all this attention on the oil price issue, either. And French farmers and truckers have re-discovered the barricades, blockading oil terminals to protest high gasoline taxes. In a rare move of European like-mindedness, even the Brits, despite being oil producers in their own right, are following the French tax revolt. On top of that, virtually everybody in the G-7 is worried that high oil prices might cause a global recession.

But in the G-8, not all is so gloomy. One of these leaders is smiling. For Vladimir Putin, high oil prices have been a godsend. In fact, after a dismal August, when Russia suffered a series of disasters and humiliations à la Kursk, it is kind of nice to see crude at around $35.

Suddenly, Mr. Putin’s government has enough money to service its debt and make up politically crucial payment arrears in pensions and military salaries. Russia’s trade surplus now totals roughly a quarter of its GDP. Even the hapless ruble has been pushed up.
Ordinary Russians once more have money to spend: upscale foreign boutiques are returning to Moscow, with Italy’s Benetton just opening its largest store in the world in the Russian capital.

If you look back a bit, all of this seems to be a throwback to the bad old days of Cold War confrontation between the Soviet Union and the West. Back then, too, Western woes were Moscow’s gain.

In fact, oil prices played a crucial role in the ups and downs of Soviet success in the international arena-even when the Soviet economy was much larger than Russia’s is today and when oil exports were only a small percentage of overall GDP.

Consider, for example, the first OPEC crisis, in October 1973. Just months before, in September, the Soviet Union had suffered a severe political setback on the global stage when a leftist regime in Chile was overthrown in a CIA-assisted military coup.

But by early 1975, the Communist Bloc took full revenge. Soviet allies overran South Vietnam, triggering a domino effect throughout Indochina. While oil prices stayed high in the 1970s, the tide in the Cold War seemed to be decisively in Russia’s favor. It gained a foothold in the Horn of Africa and acquired important allies in Angola.

In 1979, oil prices rocketed once more. At mid-year, the fall of the Somoza government in Nicaragua brought another leftist insurgency to power right in America’s backyard. And at year-end, the Soviet Union invaded Afghanistan, for the first time since World War II using its own military force to install a communist regime abroad.

This invasion marked a watershed, both for oil prices and for Russia’s expansion. OPEC overreached itself, providing an incentive for industrial countries to reduce their dependence on oil. In the course, the oil markets began to stagnate – and by mid-1980s they were in full retreat.

On the political plane, this fall in oil price corresponded to a rapid decline and disintegration of the Soviet Empire. Most of its external allies, dependents and puppets were gone by the time Iraq invaded Kuwait in 1990.

As you may remember, the Gulf War caused another spike in the oil market. The fact that Iraq could no longer export its crude raised hopes that a decline in oil prices would come to an end.

In the Soviet Union, firmer oil prices went hand in hand with a hard-liner putsch against President Mikhail Gorbachev in August 1991. It marked the last attempt by the Old Guard to stem the international decline of their country. Just as the oil-price spike proved a flash in a pan, so the did the Russian military putsch. It failed miserably and resulted instead in the break-up of the Soviet Union.

Which brings us right to the present. At the start of last year, the world saw the lowest point for oil prices. And, wouldn’t you know it, that date also marked the time when Russia’s economic, political, social and military fortunes reached a nadir. It had been defeated by a ragtag band of Chechen separatists at home, lost all influence abroad, suffered a humiliating financial crisis and watched its leader, Boris Yeltsin, degenerate into a non-entity.

In sharp contrast, the steady rise of oil prices corresponds to the rise of vigorous, assertive leadership in the Kremlin. President Vladimir Putin has stated unequivocally that his government intends to strengthen Russia’s military, clearly implying that he wants to restore its status as a global superpower.

However, his plans have already run into trouble. Chechen rebels have proved a much more resilient adversary than he hoped for. One of the newest nuclear subs – it had been commissioned in 1995 – went down-apparently, while testing a new torpedo. Other disasters over the past month such as the smoldering fire in Moscow’s TV tower have revealed that Russia lacks resources to deal with incidents on its own soil-much less throw its weight around abroad.

Evidently, there is a close correlation between oil markets and Russia’s political fortunes. The only problem for Russia is that sometimes higher oil prices coincide with a rise in the country’s status and power and sometimes they foreshadow the opposite. The only thing that the Russians – and the world – can rely on is that turning points for oil should make Russian leaders nervous. They either have a good ride in office – or are on the verge of being deposed.