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Affluent Investor | June 24, 2017

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Trump’s Trump Card with Russia

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How should President Trump deal with Russia? His stated hope to improve relations with Moscow must be tempered by the realization that persuading Putin to stand down from his massive arms buildup, threatening posture towards Europe, and dangerous adventurism across the globe can only be accomplished from a position of American strength.

Aside from rebuilding America’s diminished conventional and strategic forces and reviving relations with allies, President Trump has a significant card to play, one which affects the economic survival of the Putin regime: Russia’s dependence on energy sales for financial survival.
Russia’s dependence on energy sales is clear.

The U.S. Energy Information Administration  reported in 2014″

Russia is a major exporter of crude oil, petroleum products, and natural gas. Sales of these fuels accounted for 68% of Russia’s total export revenues in 2013, based on data from Russia’s Federal Customs Service. Russia received almost four times as much revenue from exports of crude oil and petroleum products as from natural gas. Crude oil exports alone were greater in value than the value of all non-oil and natural gas exports. Europe, including Turkey, receives most of Russia’s exports of crude oil and products, as well as virtually all exports of natural gas. Asia (especially China) receives substantial volumes of crude oil and some liquefied natural gas (LNG) from Russia. Recently, Russia finalized a 30-year, $400 billion deal to supply China with natural gas from fields in Eastern Siberia, which will further increase Russian export revenues. North America imports some Russian petroleum products, particularly unfinished oils used in refineries. Although Russia exports less crude oil and less natural gas than it consumes domestically, domestic sales of crude oil and natural gas are much lower in value than exports because of vertical integration of the oil and natural gas industry and subsidized domestic prices.

In 2006, The Brookings Institution noted:

Energy is at the heart of Russia’s remarkable change of fortune over the past seven years. Emerging from a state of virtual bankruptcy in August 1998, the country now enjoys large surpluses, has inverted its debt burden with the outside world, and has racked up successive years of economic growth and low inflation. This dramatic turnaround is directly related to Russia’s status as the world’s largest producer of oil and natural gas-the country has benefited tremendously from soaring prices on the world market. With this newfound economic strength, Russia has also regained a sense of sovereignty. No longer content to play second fiddle to the West or China, it is reasserting itself as a major global player and reversing the international humiliations of the 1990s. In charting an independent foreign policy course, Russia is exerting dominance over the former Soviet republics of Eurasia (its so-called ‘near-abroad’). And it is trying to leverage self-proclaimed status as an ‘energy superpower’ with other oil and gas consuming nations in Europe and further afield. Behind the scenes, however, Russia’s entire political and economic system is extremely tenuous. Rather than rebuilding the economy through judicious policymaking and modernization, Russia has balanced its future on the twin pillars of oil and gas, which are vulnerable to the vagaries of the global market. The country’s success depends on high energy prices and the ability to sustain production-both of which are in question.

Research from The American Enterprise Institute (AEI) reveals:

One of the world’s two largest oil producers and the leading provider of natural gas to Europe, Russia has increasingly used its revenues from energy exports to strengthen the Putin regime…In an article published a year before he became president, [Putin] reiterated that Russian mineral resources would be central to the country’s economic development, security, and modernization through “at least the first half” of the 21st century…In Putin’s view, the only way for Russia to achieve economic growth of 4 to 6 percent per year-the tempo he deemed minimally necessary for Russia to reduce its lag behind the developed countries-was via ‘extraction, processing and exploitation of mineral raw resources.’ This was the key to Russia’s becoming ‘a great economic power,’ Putin believed…For Putin, oil and gas were also paramount politically as guarantors of the security and stability of the Russian state. As he put it, ‘The country’s natural resource endowment is the most important economic and political factor in the development of social production.’ Furthermore, the ‘raw material complex’ was the ‘basis for the country’s military might’ and an ‘essential condition’ for modernization of the military-industrial complex. Finally, he believed the mineral extraction sector of the economy ‘diminishes social tensions’ by raising the ‘level of well-being’ of the Russian population.

Targeting Moscow’s dependence on energy sales is a tried-and-true strategy. A Newsweek analysis encapsulated the concept:

In truth, the might of the Brezhnev-era USSR was built on high oil and gas prices. When those prices began to fall in the 1980s-with more than a little help from Ronald Reagan’s White House-Soviet power crumbled with it… ‘Putin looks strong now, but his Kremlin is built on the one thing in Russia he doesn’t control: the price of oil,’  says Ben Judah, author of Fragile Empire, a study of Putin’s Russia. ‘Eventually, the money is going to run out, and then he will find himself in the same position Soviet leaders were in by the late 1980s, forced to confront political and economic crises while trying to hold the country together.’ Energy is a potent weapon for the West in the new Cold War against Vladimir Putin-just as it was the last time around.

 

Originally published on New York Analysis of Policy and Government.

Frank Vernuccio serves as editor-in-chief of the New York Analysis of Policy & Government (website usagovpolicy.com). He is the co-host of the syndicated radio program, Vernuccio/Novak Report, and is also a contributor to Fox News. His columns appear in many newspapers. After graduating Hofstra Law School, he was a legislative editor for a major publishing company, then served in both Republican and Democrat Administrations. Following the 9/11 attack, he was appointed to run the hard-hit Manhattan branch of the New York State Workers Compensation Board.

 

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