Soviet and Putin’s Strategy

Do post-Soviet Russia’s designs for the European Union carry legacies of the strategies of the former Soviet Union?

The Union of Soviet Socialist Republics (USSR) – spanning an immense 22 million km² (nearly 8½ million sq. miles) – has been history since December 8 1991. The Russian Federation covers a “mere” 17 million km² (over 6.5 million sq. miles), i.e. four times the area of the European Union. Russia is still the world’s biggest nation, but has a population of only 142 million. Demographic forecasts suggest that the Russian population will have fallen to 126 million by 2050, partly as a result of low fertility rate. This, however, is not stopping today’s Russia, like yesterday’s USSR, from implementing a strategy.

Let us firstly look back at the Soviet strategy (I) then compare it with that of Vladimir Putin (II).

I. SOVIET STRATEGY

As the Soviet model ran out of steam, its elite concocted the fairy tale of glasnost (A) as part of a maneuver to weigh anchor and save the sinking system (B).

A. The fairy tale of glasnost

In the mid-1980s, Mikhail Gorbachev, General Secretary of the Communist Party of the Soviet Union from 1985 to 1991, found himself faced with a systemic crisis to which he attempted to bring a strategic response. Aleksandr Zinovyev explains the mechanism thus : “With the arrival of Gorbachev, the Soviet leaders offered the West the kind of lie that the latter would gladly swallow. The name of the game was “reform” and it meant doing away with all the reasons why the West hated the Soviet Union. We witnessed a grandiose campaign targeting international opinion on a hitherto unprecedented scale”. [1] In the words of Michel Heller, Gorbachev was a media hit because he knew how to “fit the image that was expected of him. He was precisely the Communist leader that the Western world had been hoping for since the 1917 October revolution : pacifist, liberal and democratic, while remaining true to socialism.” [2]

Reputedly Communist, Gorbachev’s USSR would soon be crawling with hundreds of mini-parties with countless tendencies. From its totalitarian label, the USSR suddenly came up with an attachment to the democratic ideal and the rule of law. Gorbachev himself told us that the USSR was to step out of its planned economy with “reforms” that would favor the adoption of a market economy. Feared as a military threat, Moscow now wooed the West with a deluge of proposals for disarmament… securing the withdrawal by the US of its Pershing missiles deployed in Western Europe. Gorbachev thus rewrote the script for Western perception of the USSR.

To revolutionize the image of the USSR, the Soviet management team gave itself a Western-style facelift, a "coming out", acknowledging previously well-kept secrets via the press : prostitution, drug addiction, and rail and air accidents. This closely controlled disclosure of ultimately very banal realities brought new credibility to Soviet-sourced information … effectively re-amplifying the voice of the Kremlin.

In the Soviet Union and abroad, “the aim was to control verbal communication, transforming it into a powerful weapon in the hands of the General Secretary” [3], wrote Michel Heller, who went on : “Everything was done to stem the tide of true information and mix it with lies, adapt it to the needs of the moment. […] One of the most magnificent successes of glasnost was to have obviated the need for foreign correspondents in the USSR to go out and root around for tasty news. The scoops dropped ready-made into their hands from Soviet sources : the TASS and Novosti news agencies, ministerial briefs, and intimate conversations with Soviet leaders. Why, now, look beyond the official sources ? […] Never before, even under the strictest censorship, had the foreign press been so successfully muzzled.” [4]

B. … a maneuver to weigh anchor and save the sinking system

Interviewed at the French Foreign Office, a French diplomat confided : “After parasitizing the peoples of the Soviet Union, then the nations of Eastern Europe, the Soviet leaders have done everything they could to parasitize the third circle : Western Europe. Here, deliberate indebtedness is a masterly means to weigh anchor.” [5] The Soviets effectively understood that once a substantial level of credit has been reached, the debtor has a hold on the creditor. Because the debtor can easily imperil the creditor by suspending payback, the debtor paradoxically gains the upper hand.

Thus, the Soviet Union’s foreign trade debt more than trebled between 1985 and 1991 [6]. In December 1991, it attained $70 bn, spread almost equally between foreign banks and public creditors. When, on December 4 1991, the USSR suddenly put reimbursements on hold, faces in the West suddenly grew long.

The Western European countries top the list of creditors, accounting for over 75% of Soviet debt. Germany and France alone support 46% of Soviet foreign debt. Germany accounts for 36% and France 10%. France thus ranks second in the world among Soviet creditors. This is an ambitious, not to say, pretentious posture considering the current state of the French economy, notably on the unemployment front. Italy comes third with 7%, followed by the UK, fourth with 5%. Thus the four pillars of the European economic community alone bear nearly 60% of Soviet debt. It is worth noting that the commitments of the USA and Japan each account for less than 2.5% of the total. The term “overexposure” is, then, scarcely out of order when referring to Europe’s Russian liabilities.

At the same time, the leakage of Soviet capital has grown constantly since Mikhail Gorbachev came to power. In December 1 1991, just a few days before Russia suspended the refunding of $70 bn of foreign debt, specialists assessed at between $25 and 100 bn the Soviet capital deposited abroad, out of reach of creditors. This escapee capital is a potential threat to the stability of the financial markets. Coordinated movement could have a major impact. Whatever may or may not transpire, on December 4 1991, Moscow announced that it was suspending payment of its foreign debt. Its coffers were, unsurprisingly, empty.

The deliberate contracting of debt and the flight of capital engineered during the Gorbachev years could be two instruments used concurrently to serve one and the same strategy : anchoring the Soviet zone to the sphere of Western prosperity. This, then, would mean that it is no coincidence if Western Europe, an area of strategic importance for the Soviets, finds itself in the hottest seat. The USA, meanwhile, was waiting for the Berlin Wall to come down before committing its first billion.

However brilliant this Soviet strategy may have been, it could not effectively prevent the fall of the iron curtain, the dislocation of the Eastern Block in 1989… and the implosion of the USSR in December 1991.

II. PUTIN’s STRATEGY

After the Boris Yeltsin interlude (1991-1999), Vladimir Putin set out to convert energy into power (A) by controlling the supply chain to the consumer, end-to-end (B).

A. Convert energy into power…

Vladimir Putin was elected president for the first time in 2000, then re-elected in 2004 for a second four-year term. In 2008, with the Constitution proscribing a third consecutive mandate, he indulged in a game of musical chairs with his Prime Minister, Dmitry Medvedev.

Between 1999 and the summer of 2008, Russia experienced unbroken economic growth, fed by income from hydrocarbons. GDP grew at a rate of 6.4% in 2005, 7.4% in 2006 and 8.1% in 2007. Under the influence of clans spawned by the FSB ? heir to the KGB ? the Putin years (2000 – ) have seen the emergence of a bespoke Russian model of productivity, characterized by the subjugation of the oligarchs of the Yeltsin years, the re-appropriation of hydrocarbon income by the State, and the setting up of development institutions controlled by the authorities to serve a political ? and geopolitical ? project. Jean-Sylvestre Mongrenier unravels the story thus : “When Putin rose to the presidency, Gazprom was brought back under State control (the State’s share rose to 51%) and a new management team was instated, with a number of key figures also holding political functions. Thus, Dmitri Medvedev was both Chairman of the Board and Deputy Prime Minister. Gazprom had the monopoly of Russian gas and gas lines in Russia, and the group supplies around one fifth of the world’s production. Turnover accounts for 8% of Russian GDP and 20% of Russian tax income. […] Because of its strong connections with the Kremlin and role in foreign affairs, Gazprom is at the crossroads of politics and economics.” [7] Though it has been broken, there is still a continuity with the “Soviet Russian historic model”, if only because the FSB has a hand in this strategy.

Since 2004, by several times cutting off the flow of gas and oil to dictate its conditions to its neighbors – notably Ukraine and Belarus – Russia has been asserting itself as an “energy superpower” ready to use energy as a weapon to both economic and political ends. As the same time, these […] crises have revealed the strong energy dependence of the European Union on Russia”, noted a report by the French Senate’s delegation for EU affairs. [8]

It is true that Russia is the world’s leading producer of natural gas, owning 25% of proven reserves. From one year to another, Russia and Saudi Arabia trade places as the world’s first and second-ranking oil producers, Russia’s share of global oil reserves ranging from 8 to 10%. Russia is the EU’s no°1 supplier of both gas and petroleum, making it dependent on this export market, but also giving it a strong position, provided it plays its cards right.

Russia’s new energy-driven diplomacy revolves around three goals : keep control of export channels, buy assets abroad – notably via sovereign funds – and raise the stakes by announcing its intention to diversify its outlets, targeting Asia or the USA, while signing “rear alliances” with other oil and gas producing nations.

Since the start of the millennium, in the name of defending Russian interests, the Kremlin has gradually (re)established itself in a position where it can control the exploitation of raw materials and natural resources on its territory and exert a monopoly on transit, while taking advantage of the opening up of European markets by locating there. [9] This will enable Russia to establish positions of strength for the future and attain its old goal of anchoring itself to Europe.

B. … by controlling the supply chain to the consumer, end-to-end

In a geopolitics essay written at the Ecole de Guerre, Laurence Gabouleaud, France’s Chief Armaments Engineer, laid bare the Kremlin’s strategy aimed at anchoring Russia not only through oil and gas pipelines but also via investment [10]. She wrote : “Aware of the advantage it has built up from hydrocarbon resources, Russia is investing in the European Union in a methodic, organized way to gain control of the energy supply chain, end-to-end.”

In hydrocarbon transit, Russia aims to take control of transport infrastructures, a strategy aimed at safeguarding its export business. The collapse of the USSR has cost Russia the control of some its transit paths. Building new pipelines is one alternative to the possible obstruction of hydrocarbon transit to Western Europe, its leading customer. Thus the North European gas pipeline project with Germany (Nord Stream), or the Southern European alternative involving Italy (South Stream), are part of this strategy. Likewise, via an agreement between Russia and Austria, Gazprom can send its gas directly through Austrian territory ; given that the volume of Russian gas carried through Austria each year exceeds 30 bn m3. The ability to control transit channels should make Russia an unavoidable player in both the development of new infrastructures and the control of transit tariffs that weigh significantly on the gas company’s export costs. Moscow’s idea is to strongly secure these export routes and find new outlets.

For gas storage, Gazprom and the Austrian firm OMV have signed a cooperation agreement to develop a central European gas hub at Baumgarten, Austria, close to the Slovakian border. This facility would have a storage capacity of some 2.5 bn m3 making it the second biggest gas storage centre in Central Europe. It will be built by Gazprom for an estimated cost of €260 million. Further north, Gazprom Germania is planning to develop Europe’s biggest underground natural gas storage facility, north of Berlin, a site that would be supplied by the Nord Stream gas pipeline. In Belgium, a Memorandum Of Understanding (MOU) was signed in 2006 between the gas operators Fluxys (a subsidiary of Suez-Tractebel) and Gazexport (a wholly-owned subsidiary of the Russian Gazprom), aimed at setting up a joint venture that would examine the development of an underground natural gas storage facility in the north of the country.

In refining, Russia negotiated in 2009 with Serbia to buy the NIS refinery. With Germany, Gazprom – via its Gazprom Germania subsidiary headquartered in Berlin – signed an agreement in November 2007 with Dow Chemical for the processing of natural gas. In petroleum, Lukoil – Russia’s second-ranking oil group – examined the purchase of a refinery in Italy in 2008.

For its distribution needs, Gazprom was authorized to buy a large stake in Austria’s domestic gas distribution business, more specifically in Salzburg and the provinces of Carinthia and Styria, accounting, in terms of population, for half of Austria’s nine provinces. Gazprom sells its gas at a price of $240 per 1,000 m3 while in 2009 Austrian consumers were being charged nearly $1,000 for the same quantity. This is the first agreement of its kind signed by Russia on the European market. In France, Gazprom and Gaz de France extended their existing natural gas supply contracts till 2030, stepping up procured volumes as soon as Nord Stream goes live [in 2011. This contributes to complicating the task for Europe’s Nabucco project to access the gas fields in Central Asia without crossing Russia].

Finally, in April 2007 Soteg – supplier of natural gas and electricity to the Grand Duchy of Luxembourg – announced the signature of a MOU with Gazprom Marketing&Trading for the construction of a combined-cycle plant (CCP) at Eisenhüttenstadt (Germany). The total outlay was assessed at €400 million for this joint venture in which the two operators were to hold equal shares.

Russia is also looking to diversify its resources and technologies. Deficient in liquid gas, Gazprom has shares in the Hungarian company MOL and, in Croatia, finances a deliquifying company, thus acquiring the skills that it lacks. It is also seeking to buy new technologies that would enable it to tap deposits that are hard to access.

All these examples show that Russia is no longer content to be an energy producer. It is investing in all segments of the European energy market.”

As 2008 gave way to 2009, Russia nonetheless slid into a brutal recession. By 2010, the State was announcing that it would be spinning off significant assets to fill its coffers. However, from past experience, we can safely bet that the Kremlin will know how to use these circumstances and its networks to make some smart moves.

The European Union has been blinkered for years, but, if a 2009 directive is anything to go by, does appear now to be appreciating the risks of an imbalanced deregulation of its energy market, [11]. Effectively, the third EU directive on gas stipulated that the member States separate their production, distribution and transport activities. Deployment was announced for March 2011. This was a serious snub to Gazprom’s monopoly strategy and triggered much bluster and threat [12]. At the EU-Russia summit on June 4n 2012, in St Petersburg, Russia continued to challenge the measure, a “thorn in the flesh for the Gazprom gas monopoly.” [13]

Though it is not necessarily easy to separate impotence from the economic crisis, Russian flows of Foreign Direct Investment (FDI) into the EU-27 nations have fallen dramatically since this directive was announced. From €11.28 bn in 2009, Russian FDI in the EU-27 fell to 7.02 bn in 2010 and collapsed to 1.37 bn in 2011 [14].

After having practically nipped in the bud the European project for the Nabucco gas pipeline, completed the construction of Nord Stream and started work on South Stream, it is true that Russia has found in Ukraine, since 2010, a political regime that is particularly obliging to its EU-destined construction projects. The Kremlin will also be quick to make good use of Croatia’s accession to the European Union in July 2013. This means that the Croat government’s investment program should sit nicely with Russia’s policy for its energy industry. The Prime Minister and Minister of the Economy, Radimir Čačić, returned from Moscow in March 2012 with a set of agreements, offers and promises : a subsidiary of Gazprom could lay its hands on Petrohemija. Serbia is another player in Russia’s energy strategy, via loans and cultural exchange … and the routing of the South Stream gas pipeline. The combined effect of all this is to enable Russia to continue to uphold its stance with regard to a European Union that is struggling to develop a unified policy for the Kremlin. Meanwhile, business is flourishing as the EU-Russia trade deficit has hit new highs.

Eurostat : Strong recovery of trade in goods between EU-27 and Russia in 2011. An EU27 deficit of 91 bn with Russia in 2011

Following a sharp fall in 2009, EU27 trade in goods with Russia grew strongly in 2010 and 2011 to reach record levels. EU27 exports to Russia fell from 105 billion euro in 2008 to 66 bn in 2009, then rose to 86 bn in 2010 and 108 bn in 2011. Imports decreased from 178 bn in 2008 to 118 bn in 2009, then increased to 160 bn in 2010 and 199 bn in 2011. As a result, the EU27 trade deficit with Russia rose from 52 bn in 2009 to 74 bn in 2010 and 91 bn in 2011. This increased deficit was due to EU27 imports of energy from Russia, which grew from 120 bn in 2010 to 158 bn in 2011, partially offset by EU27 exports of manufactured goods to Russia, which rose from 74 bn to 95 bn. In 2011, Russia was the EU27’s third most important trading partner after the USA and China, accounting for 7% of EU27 exports and 12% of EU27 imports.

Germany, Italy and France accounted for half of EU27 exports to Russia.

Among the EU27 Member States, Germany (34.3 bn euro or 32% of EU exports) was by far the largest exporter to Russia in 2011, followed by Italy (9.3 bn or 9%) and France (7.5 bn or 7%). Germany (38.0 bn or 19% of EU imports) was also the largest importer, followed by the Netherlands (25.8 bn or 13%), Poland (18.1 bn or 9%), Italy (18.0 bn or 9%) and France (13.2 bn or 7%).

Most Member States recorded deficits in trade with Russia in 2011, the largest being observed in the Netherlands1 (-18.7 bn euro), Poland (-12.0 bn), Italy (-8.7 bn), France and Spain (both -5.8 bn) and Finland (-5.7 bn). The highest surpluses were recorded in Latvia (0.7 bn) and Slovenia (0.6 bn).

Just over 85% of EU27 exports to Russia in 2011 were manufactured goods, while energy accounted for more than three quarters of imports”. [15]

This document effectively shows that, in 2011, European imports of Russian energy accounted for 157.62 bn euros from a total of 199.4 bn for all imported Russian goods.

Conclusion

Do post-Soviet Russia’s designs for the European Union carry legacies of the strategies of the former Soviet Union?

Vladimir Putin’s Russia is pursuing the same goals as Mikhail Gorbachev : to anchor Russia to the sphere of European prosperity. Only the means have changed. It is still too early to say whether the European Union’s counterfire will suffice to prevent the Russians from gaining control of the whole energy supply chain, from extraction to the consumer. In the meantime, the countries of the EU are conscientiously filling up the Kremlin’s coffers by paying an exorbitant price for gas.

Meanwhile, Russia’s networks of influence, partly revitalized, are working hard to prevent Russia from being marginalized, notably via the publication of articles and other writings designed to demonstrate how vital it will be to develop an alliance with Russia, naturally on Moscow’s conditions. These influencers of opinion are generally fascinated by the sheer size of Russia, its natural resources and its practice of political violence. This too is a legacy of the Soviet Union, even though the latter’s demise occurred over twenty years ago.

After another game of musical chairs, Vladimir Putin again became President of the Federation of Russia in 2012, swapping roles with Dmitry Medvedev, back in the Prime Minister’s seat again. This caused a moment of chagrin for those who wanted to believe that Medvedev was a “democrat attached to the rule of law”. Putin’s return to the center of the stage was played out to perfection from the end of 2011 into the first half of 2012 but not without irritating part of Russian civil society. The copious filling of ballot boxes was contested on social networks, blogs and Web sites. The regime riposted by introducing new legislation and regulations to clamp down on public demonstrations. At the same time, Russia teamed up with China to prevent the UN Security Council from taking decisions to prevent Bachar al-Assad from continuing to massacre the Syrian opposition. This unswerving veto has tended to tarnish the Kremlin’s image in the eyes of Western public opinion.

The Constitution has now been amended to enable Vladimir Putin to segue two consecutive six-year mandates, which, if completed, would see him through to 2024. There are no guarantees, however, that he will preserve the minimum of credit he will need to get there.

Diploweb.com