Sanctioning Russia into multi-polar world?

Published on Russia Today RT, April 2, 2014.

US and European sanctions against Russia are designed to “punish” its actions in Crimea. However, instead of forcing Russia into economic and political submission, the sanctions will spur the country to greater political and economic independence.

Since the end of the Soviet Union, Russia’s economic progress and development has been directly dependent on political and economic institutions dominated by the West. From Russia’s integration into the World Trade Organization, to Russian dependence on Western banking and finance, Moscow has come to rely on precisely those institutions now being used against it.   

Naturally, any Russian countermeasures against the sanctions will aim to disentangle it from this US-, Anglo- and Euro-centric architecture, forcing Moscow to look elsewhere for its economic future. This need to find alternative modes of development and prosperity will contribute greatly toward the continuing shift to a multi-polar world.

Considering the vast sums of money and future investment at stake, it seems unlikely that there will be a monumental shift in the financial arrangement between Russia and the West, the current crisis notwithstanding.

However, the recent actions taken by the US and its European partners underscore the need for Russia to consider viable alternatives to dependence on the West. This dependence takes many forms, from access to financing to revenue from energy exports – Russia heavily relies on Western capital to finance its budget and economic development.

The sanctions imposed by the West have not only targeted individuals determined to be in President Putin’s “inner circle,” but also major Russian banks (Bank Rossiya, Sobinbank, and SMP Bank). As a result, VISA and MasterCard stopped offering card services through these banks, and later resumed services only to the SMP Bank, creating difficulties for many Russian citizens, as well as the institutions themselves. In response to these and other measures, Bank Rossiya has stopped conducting business in foreign currencies and has begun a shift to ruble-only operations. While this may create added difficulties for the bank in the short-term, it does signal a critical trend – a shift away from the US dollar and euro, towards the ruble (and possibly yuan) as a debt settlement currency. Such a move would have very significant long-term implications, including opening the door to a host of other developments.

Russia’s alternatives:

First and foremost is the issue of energy revenue. While Europe may be ramping up the rhetoric against Russia, the fact remains that it is dependent on Russia for more than one third of its total gas imports. Any significant sanctions would jeopardize everything from Germany’s manufacturing base to France’s chemicals and aircraft exports. With this in mind, no one in Europe can seriously believe that punitive actions against Russia won’t have a deleterious effect on an already fragile EU economy. Surely Moscow understands this, which is why Putin and Co. don’t seem terribly intimidated by the bluster from Brussels and Berlin. However, should Russia decide to put the screws on Europe, it has the proverbial “ace in the hole” in China.

For decades, one of the world’s most intriguing and undoubtedly lucrative development projects has been the possibility of a Sino-Russian energy pipeline. Hampered by everything from Soviet-era political animosity to disagreements over pricing and construction subsidies, the project has never successfully gotten off the ground. However, this has begun to change in recent years. Although Russia’s Gazprom failed to secure a pricing deal with its Chinese partners in January, it seems that the two are inching closer to the deal, which will set in motion a development project that could have far-reaching ramifications for the two countries, and arguably for the world. Once the pipeline is finally in place (how long that will take is still unclear), it will give Russia tremendous leverage over Europe in all areas of cooperation and negotiation. Moreover, it will allow Moscow to expand its influence in other areas, free of the constraints of having to mollify Western “partners.”

Aside from energy cooperation with China, Russia has another important industry where it will continue to grow and flex its muscles: weapons exports. Russia, accounting for 27 percent of global arms exports in 2013, is second only to the US which accounts for 29 percent of global arms trade. In fact, Russia has announced recently that it is looking to expand its influence in this crucial industry, particularly in the traditional US sphere of influence, Latin America.

Alexander Fomin, the head of the Federal Service for Military-Technical Cooperation, recently explained at a defense exhibition in Chile that Russia is looking to expand its exports in South America, including traditional weapons and military aircraft. He added that “We are offering our Chilean partners a localization of production in their country, which is certainly a very beneficial aspect of our proposed contracts.” Taking a page out of China’s playbook, it seems Russia is expanding its influence in this key area of development by dangling the carrots of job creation and local manufacturing, rather than simply exports.

Additionally, Russia has outstanding contracts with Syria and Iran for delivery of all-important S-300 missile defense systems. Russia has, to this point, delayed the delivery of the systems to these countries out of political considerations to the US and Europe. As Russia was a key participant in the Iranian nuclear negotiations, as well as in the diplomatic efforts to resolve the war in Syria, Moscow has been wary of delivering on its contracts. However, given the belligerence of the US and Europe, it seems quite reasonable that Russia might rethink this strategy, adding an additional layer of defense for countries long since on America’s target list.

From the financial perspective, Russia has a great deal of leverage vis-à-vis its energy exports. Specifically, Russia could quite easily upset the entire Western economy by unilaterally refusing to accept US dollars as payment for its energy. Were Russia to demand payment in gold or some other currency, the entire petrodollar economy could come crashing down. It would force China to take countermeasures against rapid dollar devaluation, which would only exacerbate the problem. The Euro, itself being very closely tied to the dollar, would undoubtedly also come crashing down. To be sure, such a strategy would be dangerous to Russia’s own economy, but it could be seen as a possible weapon of last resort, should Washington decide to ratchet up the sanctions.

Many have speculated that Russia has already taken some of the initial steps toward exiting from the dollar. In early 2014, a “foreign government” dumped nearly $118 billion. Many experts believe that these deals have been quietly executed by Russia, and would constitute a stark warning to the US of Russia’s considerable influence in terms of its dollar holdings. Should Russian moves in turn make China nervous, then these actions would also have very dire consequences for the world’s reserve currency.

The geopolitical impact: … //

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(Eric Draitser is an independent geopolitical analyst based in New York City and the founder of Stop Imperialism).

Links:

The Financial Elite and the Global Land Grab, on Stop Imperialism, by Eric Draitser, March 24, 2014;

Philippines: The daily struggle of a Haiyan widow, on ILO, March 24, 2014 … “All I need … is a house to live in, food and work.”

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