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2008 In Review: Was This The Year That Russia Peaked?

Russia's outlook was still rosy when Medvedev took office in March.

January 03, 2009

By Daisy Sindelar

2008 was a very good...half-year for Russia.

From its historic victory against Canada in the world ice hockey championships to skyrocketing oil revenues and growing international muscle, Russia spent at least the first half of the year the way it likes -- a winner on all fronts.

The signs were auspicious as early as January 2, 2008, when world oil prices passed the $100-a-barrel mark for the first time.

In energy-rich Russia, where the economy depends almost exclusively on natural resources, a single $1 rise in oil prices can translate into $1 billion in extra revenues a day. So by July, when prices hit their peak at $147 a barrel, Moscow appeared unstoppable.

It continued its revenue-fueled advance through Europe and Asia, buying up billions in energy holdings.

The EU's failure to progress with its plans for the Nabucco pipeline allowed Russia to inch closer to a monopoly on natural-gas shipments to Europe via its proposed South Stream and Nord Stream pipelines.

Moscow also remained the foreign-policy bully, delighting in the failure of Georgia and Ukraine to advance further in their NATO membership bids, and maintaining a fighting stance over Washington's Central European missile-defense plans.

The Kremlin even pulled off a potentially tricky political transition that moved Vladimir Putin from the presidency to the premiership with no apparent loss of power or public affection.

His presidential replacement, Dmitry Medvedev, proved a competent but unremarkable successor who appeared content to stay in Putin's shadow.

Paul Quinn-Judge, a Russia expert with the International Crisis Group, describes the first seven months of the year as a heady combination of "hubris and oil."

"This hubris reached its highest point when [Georgian President] Mikheil Saakashvili tragically gave them the opportunity to go to war in South Ossetia," Quinn-Judge says. "It was certainly seen in Moscow, and I think by Vladimir Putin personally, as a once-in-a-lifetime opportunity to take on one of his biggest enemies and most disliked people, and he moved in. Since then, the situation has changed totally."

Reversal Of Fortune

The August war -- and Russia's subsequent recognition of independence declarations in South Ossetia and Abkhazia -- was seen by many observers as a brazen move to reimpose Moscow's will on its "near abroad." But Russia, in the end, drew only mild censure from the West.

The United States, a key Georgia ally, was the most vocal of the Western countries in condemning Russia. It sent humanitarian aid to the Black Sea on NATO warships, but stopped short of a stronger response.

The European Union, whose energy needs have driven a more pragmatic Russia policy, had sharp words for Moscow, but waited only three months before resuming talks on a key partnership deal.

But if the Georgia war passed largely without penalty, a far bigger blow was awaiting Moscow in the form of the gathering global economic storm.

Although its early ripples could already be felt in Russia months before the Georgia campaign, the massive scale of its impact is becoming clear only now.

Oil prices dipped to $50 a barrel and lower, depriving Russia's monolithic economy of its primary revenue source.

Some estimates put capital flight since August at over $200 billion, as Russian and foreign investors flee a ruble that has sunk to a four-year low against the euro and which is being steadily devalued against the U.S. dollar.

The power struggle over TNK-BP, which ended with the British chief of the Anglo-Russian joint venture being forced out the country, was one of several high-profile cases to raise doubts about conditions for large-scale investment in Russia.

The stock market has dipped over 70 percent on the year, and the country's credit rating has been cut for the first time in nine years.

Despite the fall in oil prices, November 2008 marked a sharp dip in the country's industrial output -- the first month to register such a fall since early 1999.

Finally, a Russian economic official on December 13 announced that Russia had entered a period of recession, thus bringing to a definitive end a period of robust growth that had lasted for nearly a decade.

'Putin’s Russia Has Reached Its End'

Perhaps the most visible symbol of the sudden halt in Russian prosperity is the collapse in the construction market. In Moscow and St. Petersburg, numerous ambitious corporate projects now stand unfinished, with no certainty of completion.

Unfinished Moscow: photographs of construction projects stalled by the economic crisis

Most notable among them was the Federation Tower, a proposed skyscraper at the center of a new international business center that was slated to become the tallest building in Europe.

In late November, developers said the credit crisis had left them unable to secure financing needed to complete the building, and that demand for its office space had dried up.

"In the impoverished 1990s, we built the Church of Christ the Savior. It was a symbol," says Mikhail Delyagin, director of the Moscow-based Institute for Globalization Studies. "The Federation building complex is a new symbol -- a symbol of Putin's Russia. And halting its construction is no less significant a symbol. It's a symbol of the fact that Putin's Russia has reached its end."

Indeed, Russia's economic collapse may strike a serious blow to the political legitimacy of Putin, whose long-standing popularity is almost entirely dependent on the country's prosperity.

"He is very angry at the West -- and, typically, the United States, whom he feels to be responsible for the economic crisis, as if it has nothing to do with him," Quinn-Judge says. "He's still deeply ideological and not very practical. The most interesting thing is that he's looking more and more fallible in his policies, and he may come under pressure eventually by somebody within his own group to temper his policies."

In early November, as the economic picture grew increasingly grim, Medvedev announced proposals for constitutional reform that would extend the presidential term from four to six years. The plan was seen as paving the way for Putin's eventual return to the presidency.

It is highly unlikely that a viable contender could appear in Russia in the coming years to challenge Putin's authority. But the economic belt-tightening may force Putin to scale back on the aggressive foreign policy that has been a cornerstone of his popular appeal.

That vulnerability may lead to a shift in one of Moscow's most critical relationships, that with Washington.

Fresh Start With U.S.?

Russia's first gesture to the United States after the November win of Barack Obama was a threat to position missiles in Kaliningrad if the United States proceeds with its missile-defense plans in Poland and the Czech Republic.

Since then, however, both Medvedev and Putin have signaled a willingness to reexamine the Russian-U.S. relationship under Obama.

"There has been this sense for the last couple of years that the Russians have been overestimating their power and probably overestimating the weakness of the United States," says Andrew Kuchins, who directs the Russia and Eurasia program at the Center for Strategic and International Studies in Washington.

"We're not sure how long this economic slump is going to last, but it's going to force them to return to a structural economic reform agenda, and to tone down some of the most belligerent aspects of their foreign policy," he adds. "So I think there's an opportunity for the new Obama administration."

Kuchins says this new softening could mean progress on the nuclear-security agenda, which suffered from the withdrawal from key arms agreements such as START II and the ABM treaty.

The original Strategic Arms Reduction Treaty, which sets limitations on the nuclear stockpiles held by Russia and the United States, is due to expire next year.

Its renegotiation -- and continued talks on missile defense -- could allow Moscow and Washington to reach a more cooperative partnership than has been seen in recent years.

As a year that came in with a bang prepares to go out with a whimper, many are wondering if history will remember 2008 as the year Russia peaked. Kuchins says it's "certainly possible."

"The global financial crisis has reminded the Russians that not only are they more integrated into the world economy than they ever had been, but that it also makes them vulnerable to external shocks," he says. "I suspect that the Russians are going to recover. But I still think that the external conditions are such that they will be hopefully chastened a bit more than they have been for the last few years."

RFE/RL's Russian Service contributed to this report

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Comments 1-10 (of 17)

by: Gleb from: London

May 11, 2009 17:29

Blah-blah-blah, Russian people are not any less free that any of you guys in the west. This whole article is just another typical whitewash propoganda of a grand cyber warfare. People of the west, does this article help you feel better about where you live or does it make you forget about your own domestic problems? I think not.

by: Richard Mimna from: www.herbalindex.com

January 14, 2009 09:00

Ness, while you're enjoying another bowl of borscht soup, you might tell us about how great the russian economy is doing. Better yet, tell us about how free russian people are compared to the EU and the US. The EU could use a nice story to help them forget about how cold they are thanks to those great and powerful comrades of russia. Or, you could just throw another insult out there if it makes you feel better.

by: Ness

January 13, 2009 22:56

I think more appropriate would be the article "2008 In Review: Was This The Year That US Peaked?"

by: Richard Mimna from: www.herbalindex.com

January 13, 2009 08:09

It would be nice if the Ness that responded to me was the same Ness that I was responding to. I won't get into a debate over who's government is better... that is like two children arguing over who's daddy can beat who. If you are happy living in Russia - Great! I am quite happy living in the U.S. - que sera sera.

by: Ness

January 12, 2009 20:30

Well Richard...
You see - that was exactly my point - you have no clue what's going on in Russia if you make statements like these: "Your government tells you this crap, while threatening you with punishment should you question anything that they say or do..." That's exactly the kind of opinion US gov't through US media wants Americans to have of Russia. For years, I lived in US, Europe and Russia and believe it or not, Russia has a lot more personal freedoms than in any other place --- in US, to my surprise, its the minorities who dictate their will upon majorities, in many aspects of life, creating paranoid population, who are terrified to express their true opinions on many issues openly. Hey, in Russia there is a freedom to be politically incorrect if you wish and express yourself as you wish.
Society in US is way more restrictive, practically speaking not that far away from the police society - before you know it, you'd be tazed and handcuffed, or even better, shot by some dumb cop.
It's US Gov't who "tells you crap", as Mr Bush put it “The hardest part of my job is to connect Iraq to the war on terror....”
I wouldn't believe US gov't on domestic issues, let alone foreign issues. US gov't opinion on Russia is crap and dictated by nothing more than eliminating major obsticle in the unchallenged world hegemony.

by: Richard Mimna from: www.herbalindex.com

January 10, 2009 19:47

Well... Ness, if "Mother Russia" would stop seeing the world as a place to conquer, and stop seeing the US as a roadblock to world domination, maybe the world would be a better place for all of us. It's hard to see clearly when you've spent most of your life under the rule of a russian dictator, isn't it? Nobody fears or hates russia; Your government tells you this crap, while threatening you with punishment should you question anything that they say or do. You should fear and hate the tyrany at home first.

by: Ness from: Mother Russia

January 09, 2009 21:40

Any dictator who ever seeked to conquer world has always looked at Russia as the main obsticle. Now same behavior is demonstrated by US - even though Russia is much better and more democratic place for its people than, say, Turkey, Russia is always portrayed by US gov't as super evil and hell-like: they want portray Russia that way to form public opinion in the West -- Russia is enemy -- never mind the pragmatic Russia today, never mind true admiration and support of Putin and his policies by vast majority of Russian people (and russians are no dummies, they've seen the extremes of USSR and know fake from far away). Hey, US has to prepare it's people for attack on Russia. If the people in US knew the true matter of things and prospoctive of russian people, they would never support war with Russia. That is why it is important to maintain this artificial negative outlook of Russia. US only "liked" Russia when it headed for collapse and disintegration under Yeltsin. They always hated and always will hate strong Russia, no matter how democratic and capitalist it becomes.-- Because Russia is the only road block for unchallenged US dominance - just like in economics people are driven by greed, in politics they are driven for ultimate power. I HOPE if not US citizen, but at least the rest of the World would recognize that sooner, than leter.

by: Richard Mimna from: www.herbalindex.com

January 07, 2009 13:24

Well, Anton, if the US were to rebuild Georgia to a model standard of living that may serve as the example needed. This can be done without threatening Russia, though russia seems to always feel threatened no matter what. The middle-east is not a good example since the religions there shun any form of modernization. We fight with extremists there that are hell bent on our destruction. We have yet to ever attack cold and hungry russians - and, most likely never will. They just aren't that scary anymore (even with their missiles).

by: Anton from: Auckland

January 07, 2009 04:43

Interestingly enough, Richard, but so far there is no practical examples of such foreign aid, which can be presented to Russians for them to refuse from their traditional ways of thinking. All they see is Iraq, Afghanistan, Yugoslavia - and I doubt very much these models look too attractive to them. The more US demonstrates the democratic "technologies", the more effort they put in new missile systems.

by: Richard Mimna from: www.herbalindex.com

January 06, 2009 14:58

Tearing apart russia sounds good. We can rebuild them, make them better, stronger. We have the technology. But first, we need to get the russian people to look far enough ahead to see the benefits. This, "better the devil you know", attitude might keep the russian people under oppressive rule unnecessarily. Democracy can also provide warm homes and plenty to eat, without all the bitterness that comes with Putinism. Settling for pain and misery because it's all you've ever known is a poor excuse for change.

Comments 1-10 (of 17)