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

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

2008 In Review

2008 In Review

RFE/RL looks back at the stories that shaped 2008. More

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