Editor’s Note: Russia’s leadership is increasingly tense about its prospects for the future. An aging population, a rising level of drug abuse, crime, and diseases are taking their toll on the native Russian population, while the number of Muslims, hostile or otherwise continues to rise. The Kremlin is desperately searching for a way out of the quagmire, the result of decades of bad policy, and is pinning its hopes on membership in the World Trade Organization. Yet, the U.S. has significant differences with Russia on key requirements for WTO entry. The upcoming G-8 meeting, held in Russia, looks like a forum for discord between the two countries. In this analysis, originally penned on July 5, and July 7, 2006, Dr. Duarte looks at the situation, and potential repercussions.

Special Notice: Catch Dr. Duarte on CNBC’s “Morning Call” program, Wednesday, July 12th.

July 7, 2006
Russia Global Hopes On The Ropes

Russia's hopes for entering the World Trade Organization are growing slimmer by the moment, with the U.S. standing in the way of Putin's government entering the club.

The United States and Russia are likely to clash over trade policies at the upcoming G-8 meeting in Moscow, with the latter's entry into the W.T.O. as the centerpiece.

Russia's clumsy public relations campaign notwithstanding, repercussions from the potential clash of ideology are uncertain.

Russia has tried to bully the European Union with threats of cutting off their natural gas supplies, while at the same time pressuring the U.S. by changing the terms of oil exploration deals, and obstructing U.S. foreign policy at every new turn.

Over the last several years, after 9/11, Russia's helter skelter policy changes have squeezed billions out of U.S. companies, especially oil companies, while scuttling potential energy deals with various high profile entities such as the Carlyle Group.

And now, it looks as if the U.S. is about to pay Mr. Putin back for his efforts.

According to the Wall Street Journal: "Next week's summit marks the first time the G-8 has assembled on Russian soil, and the government of Russian President Vladimir Putin has made it clear it wants to use the gathering to showcase Russia's growing political and economic clout. But lingering controversies over Russia's antidemocratic crackdown and failure to better open its economy to foreign investment are casting a pall over the summit."

Stratfor.com suggests that Russia is indeed against the ropes, due to its own failed policies, and the inability to resolve their internal issues.

The intelligence service noted: "Every problem the Soviet Union faced in 1982 -- weakening demographics, an overdependence on resource exports, an inefficient distribution system, rising discontent among minorities, a dangerously exposed security environment -- also exists in 2006, but in a far more grotesque manner."

Stratfor added: "Simply put, the Russian government is trying to figure out what to do -- and there are no attractive options."

Conclusion

Russia is talking tough about its future in the W.T.O., with Mr. Putin threatening to reverse Russia's volunteered adherence to several pre-requisites for W.T.O. membership.

At the same time, Europe has offered Russia a favorable opportunity to develop a Free Trade Agreement, with one caveat, the liberalization of Russia's energy monopoly, giving Europe an entry into Russia's energy production and distribution network.

The U.S. and Europe, most likely independently are starting to squeeze the Putin government.

The U.S. is playing hardball, linking free trade to human rights and other ideological issues, while Europe is dangling the free trade carrot while attempting to ensure its own energy independence by leaning on Russia.

The Kremlin can't win, without giving up more ground.

If Putin caves to Europe and/or the U.S., he'll look weak domestically. If he sticks to his guns, it will most likely hasten his demise.

If he does what he always does, say one thing, and do another, it might buy him some time. But eventually, he'll be right back where he started.

No matter what, Mr. Putin is in some deep mud, which continues to get mushier by the minute.

July 5, 2006
Russia: More Confusion Straight Ahead.
No Straight Talk From Kremlin Is Sign Of Fear

Can anyone ever get a straight answer out of the Kremlin? Not likely, it seems. And therein lies the rub, as the disjointed stream on contradictions from Moscow could be a sign of an unraveling government.

An interesting Stratfor.com analysis on Russia caught our roving eye recently, and we thought we'd pass the gist of it on.

The intelligence service, referring to a recent spate of contradictory statements from different Kremlin types noted:

"These statements and others like them not only seem disjointed -- they are disjointed. These disconnects are the public symptoms of an underlying and systemic problem. Briefly stated, Russia -- after 25 years of the Andropov doctrine -- finds itself in a deepening crisis, with no immediate or effective solutions apparent."

Stratfor is saying what few seem to either get, or refuse to see: "The issues with which Russia grapples are multifaceted -- and they have only grown in scale since they were first recognized by the leaders of Andropov's generation."

Here's a list, culled from the analysis:

1. "Demographically, the country is in terrible shape: The population is growing simultaneously older, smaller and more sickly. The number of Muslims is growing, while the number of ethnic Russians is declining. "

2. "Nearly all of the economic growth that has occurred since the 1998 financial crisis has stemmed from either an artificially weak currency or rising energy prices, and there are echoes of the Soviet financial overextension after the 1973 and 1981 oil price booms."

3. "NATO and the European Union -- once rather distant concerns -- now occupy the entire western horizon, and they are steadily extending their reach into a Ukraine whose future is now in play. "

According to Stratfor, the dimming picture for Russia, due to its multiple and major problems is leading U.S. military planners to reassess their relationship with Russia. More specifically, the U.S. is considering abandoning the START treaty, which controls the number of nuclear weapons that Russia and the U.S. can posses, by mutual agreement.

Stratfor reports: "The treaty, which took force in 1991 and obliges the United States and Russia to maintain no more than 6,000 nuclear warheads apiece, expires in 2009, and the United States is not exactly anxious to renew it. Among American defense planners, there is a belief that the vast majority of the Russian nuclear defense program is nearing the end of its reliable lifecycle, and that replacing the entire fleet would be well beyond Russia's financial capacity. From the U.S. point of view, there is no reason to subject itself to a new treaty that would limit U.S. options, particularly when the Russia of today is far less able to support an arms race than the Soviet Union of yesteryear."

Stratfor puts forth an interesting premise that sums up why Russia is where it is today.

Yuri Andropov rose to power in 1982, and realized the shabby state of things Russian at the time. With little to trade in the way of tangible assets such as technology and material goods, Andropov decided to trade away influence.

Stratfor notes the following: "The one common thread uniting Russian leaders over the past quarter-century has been this: the belief that without a fundamental remake, Russia would not survive. And the only way to gain the tools necessary for that remake was to give up influence. Consequently, everything from Cuba to Namibia to Poland to Afghanistan to Vietnam was surrendered, set free or otherwise abandoned -- all in hopes that Russia could buy enough time, technology or cash to make the critical difference."

Lately, though, things have changed: "This was the strategy for nearly 25 years, until the loss of Ukraine in the Orange Revolution raised the specter of Russian dissolution. The Russians stepped away from the Andropov doctrine, abandoned the implicit bargain within it, reformed the government under the leadership of pragmatists loyal to Putin, and began pushing back against American and Western pressure. It has not gone altogether well."

Indeed, Stratfor, citing a laundry list of recent Russian blunders, such as the Ukrainian natural gas crisis of early 2006, and the Russian's inability to coerce Iran during the current nuclear standoff with the U.S., concluding "Russia's weight does not count for nearly as much as it once did."

What may be happening, is that Russia is having a reality check: "For the first time in decades, those calling the shots in the Kremlin not only agree on the nature of Russia's problems and are not really arguing amongst themselves, but they also are no longer willing to subject their country to the false comfort of policies driven by ideology, national chauvinism or reformist idealism. This is the most unified and pragmatic government Moscow has known in a generation. But it is a unified and pragmatic government that is grasping at straws."

Conclusion: Putin's Days Might Be Numbered

According to Stratfor, fully aware of the failures, Russia's current government "with no good options available -- and all of the bad ones having been tried in some manner already" is in the midst of a period of "reactive, short-term policies."

The options left to Putin are limited, and few have any potentially pleasant outcomes:

"One is for Putin's team to ignore history and everything they know to be true and play geopolitical Russian roulette. In other words, they can push for confrontation with the West and pray that the counterstrikes are not too horrible. The second is to do nothing -- fearing the consequences of all actions too much to take any -- or continue with the recent trend of rhetorical spasms. Under this "strategy," the Russian government would succumb to the problems foreseen by Andropov a generation ago."

And here's an interesting alternative: "The third possibility is a leadership displacement. Just as Putin displaced Russia's oligarchs, reformers and siloviki because he felt their ideas would not translate into success for Russia, those power groups feel the same way about the Putin government. The option, then, is for one of these groups to somehow displace the current government and attempt to remake Russia yet again. Several caveats apply: It would have to be a group cohesive enough to take and hold power, committed enough to a defining ideology to ignore any deficiencies of that ideology, and either trusted or feared enough by the population to be allowed to wield power."

The outlook for Putin, according to Stratfor, is bleak: "Assuming Russia does not become paralyzed by fear, it appears destined to return to a model in which the nationalists, military and intelligence apparatuses call the shots -- a sort of Soviet Union with a Russian ethnic base. If this is the case, the only question remaining is: Who will lead the transformation? With every passing day, Putin seems less fit for the role."

From the market's point of view, a leadership shakeup in Russia, and the implications for the future of the energy markets, could be yet another reason to worry.

© 2006 Joe Duarte, M.D.
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