A silver lining for Russia

Can Moscow use the global meltdown to expand its influence?

Vladimir Putin
Amid the global financial bloodbath, few have been as hard hit as some of Russia’s oligarchs: the Kremlin-friendly super-rich. Aluminum magnate Oleg Deripaska, Russia’s richest man, has lost $16 billion in a month. Rumours suggest Deripaska—also embroiled in a political scandal in London—has sacked his servants, replacing them with cheap help from the provincial town of Tula. Russian No. 2, Roman Abramovich, who owns Britain’s famed Chelsea Football Club, has lost half his fortune. The word is he’s postponed his wedding to 26-year-old ex-model Daria Zhukova. Since the market peaked in May, Russia’s 25 richest men have lost a combined $230 billion, 62 per cent of their total worth; when the dust eventually settles, some will have been made “formergarchs,” forfeiting their metals, mining and telecommunication empires.

But it’s not just the oligarchs who are suffering. At a time when Prime Minister Vladimir Putin’s Moscow has been flexing its global muscle, the economic crisis could substantially weaken Russia and help curb its aspirations. At first glance, the country appears to be in deep trouble. Its two key stock indexes have lost over two-thirds of their value, wiping out nearly $1 trillion in wealth. Capital flight is running at over $12 billion a week. And the price of oil, crucially important to the Russian economy—and Russian power—has tumbled more than 50 per cent from a record high of $146 per barrel just three months ago. This week, it hit $64 a barrel, its lowest level in over a year.

In fact, the Kremlin has been forced to adopt a $200-billion rescue plan to shore up its troubled banks and companies. It’s unclear, however, whether the average Russian knows about these elite-level discussions, or, indeed, about the financial crisis itself (less than three per cent of Russians have mortgages or invest in the market). According to the English-language newspaper Moscow Times, Russia’s three main channels—Channel One, Rossia and NTV—have either played down or completely ignored the collapse of the main stock market, the RTS, which halted trading for the fourth time last week, after stocks took another plunge. Ekho Moskvy, Moscow’s independent radio station, says the Kremlin has banned state media from using the words “financial crisis” and “collapse.” (Russians do know, however, that Putin—whose personal popularity, one month into the crisis, has risen to 83 per cent—received a tiger cub for his 56th birthday this month, and that the prime minister, a marshal arts enthusiast, has released a judo DVD.)

Rather than financial ruin, however, some experts are predicting that Russia could emerge strengthened from the global meltdown—and in a position to exert even more pressure on its neighbours and others. The country is cash-rich, thanks to $1.3 trillion in oil and gas revenues over the past eight years, and the Kremlin is sitting on a $500-billion cash reserve: the world’s third-highest hard currency reserves. As well, Russia is largely debt-free (at 8.5 per cent of its GDP). The price of oil, meanwhile, is still double what was considered high just a few years ago. “Here in Russia, officials and experts see the crisis as much as an opportunity as a danger,” says Harvard University Russia expert Henry Hale, reached in Moscow. “They see opportunities to play a stabilizing role in the world economy, and to expand Russian influence.”

Indeed, while state media have downplayed Russia’s financial crisis, they have covered the West’s economic problems; ordinary Russians know that when Iceland was tottering on the brink of financial ruin, it turned to Moscow—not the International Monetary Fund, Washington, London or, indeed, any Western capital—a telling indication of Russian might. (At press time, Reykjavik, which last week agreed to a $2.1-billion loan from the IMF, was continuing discussions with Moscow for a loan worth as much as $5 billion.) And Russia has since announced a $2-billion loan to Belarus, a part of the former Soviet Union still within its sphere of influence. In return, Minsk has pledged to resume common currency negotiations with Moscow, edging it one step closer to all-out union with Russia.

But across the former Soviet sphere, where Russia has stoked separatist fires in recent months—handing out Russian passports in the Ukrainian republic of Crimea, and invading Georgia over the issue of breakaway South Ossetia—banking systems are teetering on the brink of collapse, making those countries more susceptible to the influence of their cash-rich neighbour. So far, they have gone elsewhere for aid. This week, Ukraine, whose stock market has fallen nearly 80 per cent this year, and which recently saw a panic run on deposits, received a $16.5-billion, two-year loan from the IMF; Hungary, its neighbour to the immediate southwest, whose currency and stock market are in free fall, will also receive a “substantial financing package,” from the institution.

Each of the Baltic states, meanwhile, has reportedly entered secret consultations for international assistance. Estonia, which ran into financial difficulties even before the global crisis, is already in recession. So is Latvia—dubbed an economic “basket case” by Britain’s Guardian newspaper. Lithuania is not far behind. “Iceland was the canary,” wrote Lars Christensen, head of emerging markets research at Denmark’s Danske bank, in a research paper tabled before Hungary and Ukraine even appealed for international aid.

Whether Russia will be able to leverage its massive cash reserves to buy assets and influence from its neighbours rests entirely on the price of oil. “If prices stabilize, there will be a great opportunity for Russia to pursue economic influence in the former Soviet countries,” says Shamil Yenikeyeff, a Russia expert with Oxford University’s Institute for Energy Studies. Kyrgyzstan, which has an external debt of $2 billion—“and never really wanted independence from Russia in the first place”—will be the first country to fall under Russian control, Yenikeyeff predicts. “But,” he cautions, “if oil goes below $40, you can forget about Russian influence in eastern or central Europe, you can forget about Russia using its newly found economic power in its foreign policy, and you can forget about the resurgence of Russia’s influence.”

Already, oil prices have dropped below the budget-critical $70 per barrel, he says. If they go much lower, Russia will start running a deficit. Its rainy day reserves, designed to deal with low oil prices in times of crises, can only sustain the country for up to a year and a half. So far, there’s no sign the bottom has been reached, says Peter Boone, an associate at the Centre for Economic Performance at the London School of Economics: “The world is at the start of what appears to be a potentially deep, global recession, and could expect demand for oil to fall sharply.” During the Asian economic crisis of 1997, non-OECD oil demand fell by four million barrels per day, he says. “It is difficult to predict how large the decline will be this time, but it is very plausible that oil prices will fall back to early 2000 levels”—of $30 per barrel—“or less.”

If they do, the Russian government will face a choice: “To either bail out its own companies or to bail out itself,” says Yenikeyeff. Russia’s oligarchs have borrowed a combined $530 billion on external markets, using shares in their companies as collateral, explains Russia expert Nick Gvosdev, professor of international relations at the Naval War College in Newport, R.I.; all told, some $47.5 billion will have to be repaid to jittery creditors by the end of the year. In order to keep assets in key companies, including gas giant Gazprom, from falling into Western hands, Moscow will be forced to bail them out; so far, the state has set aside a $50-billion state loan to assist Deripaska and the cash-strapped oligarchs.

In the weeks ahead, Putin and President Dmitri Medvedev will decide whom to bless with the rescue funds, bringing even more of Russia’s financial sector under state control—which does not bode well for Russian efficiency, growth or the battle against corruption, says Jeff Mankoff, associate director of International Security Studies at Yale. Indeed, expect some decisions to be explicitly political, he says: “What has oligarch X done for government? Has he played by the rules? Do we like him?”

The “next big oligarch” says Cliff Kupchan, a Russia analyst with the New York-based consulting firm the Eurasia Group, will be “the Russian state.” Russia will effectively be re-nationalizing many of the country’s strategic industries, he says, an ironic reversal from the chaotic privatization of the 1990s. Then, of course, a small group of Kremlin-friendly businessmen was able to acquire the state’s newly privatized assets at a fraction of their real value from a nearly bankrupt Russian state. In sharp contrast, Moscow, today, is very much in the driver’s seat. As many highly leveraged companies totter, the Kremlin even seems poised to regain control of the industries it so recklessly sold off over a decade ago—so long, of course, as the price of oil stays above $40 per barrel.

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