Anders Åslund: Putin’s Bad-Neighbor Policy

WASHINGTON, DC – Russia has shown itself to be an international spoiler with its ardent support for Syrian President Bashar al-Assad. The contrast with its benign policy toward Libya in 2011 reflects how Russian foreign policy changed with the return of Vladimir Putin to the Kremlin. On foreign policy, at least, Russia’s former president, Dmitri Medvedev, mattered more than is commonly understood.

Russia has resumed its aggressive anti-American policy of 2007-2008, which culminated in war with Georgia in August 2008. Ironically, this bellicosity harms Russia the most, because it alienates all but international pariahs, such as Syria, Venezuela, and Belarus.

Even in the former Soviet Union, almost all countries are seeking trade and security with anyone but Russia, because Putin is using all sticks and no carrots. His three main policy instruments toward the post-Soviet states are the customs union implied by his proposed “Eurasian Union,” Gazprom, and the Collective Security Treaty Organization (CSTO). Each intimidates Russia’s neighbors, while none benefits them, leaving them with few reasons to cooperate with Russia.

Currently, Putin’s top priority is to persuade as many countries as possible to join the customs union, but so far only Belarus and Kazakhstan have done so. Belarus set a high price, demanding a bailout of no less than $20 billion last year, while geography condemns Kazakhstan to get along with Russia. But the other post-Soviet countries resist, because a customs union with Russia would force them to raise their import tariffs, hindering their trade with other countries.

If Russia were serious about economic integration, it would promote free-trade agreements to facilitate trade in all directions. In fact, in October 2011, Russia initiated such a new multilateral free-trade agreement in the post-Soviet space; but, owing to the Kremlin’s single-minded pursuit of the customs union, only Belarus and Ukraine have ratified it, leaving its relevance in doubt.

The Central Asian countries’ opposition to a customs union with Russia reflects their growing trade with China. In Europe, Moldova, Ukraine, and the Caucasian countries prefer free-trade agreements with the European Union, which the customs union would preempt. Moreover, the customs union makes it almost impossible for Russia to conclude any free-trade agreement with the EU.

Meanwhile, Gazprom, one of Russia’s key foreign-policy instruments, is probably the world’s most mismanaged corporation. Last year, investment bankers assessed its losses through waste and corruption at no less than $40 billion – a level of misconduct that has driven its stock price to rock bottom. Gazprom’s policy is to threaten client countries with high prices and stop deliveries until it gains full control over a country’s gas-pipeline system. Putin has ruled the company with a firm hand as both President and Prime Minister.

The mismanagement is not merely financial. In early 2009, when Gazprom could not sell all of its gas to Europe because of the Great Recession, it sought to cut its supplies from Central Asia. It did so suddenly and without warning, causing the pipeline from Turkmenistan to explode.

After the Turkmen repaired the pipeline, Gazprom reneged on the old price. Today, Turkmenistan refuses to cooperate with Russia. It delivers most of its gas through a new pipeline to China, as do Kazakhstan and Uzbekistan. As a result, Russia has lost its access to cheap Central Asian gas, as well as to the Chinese market.

Gazprom has pursued its most public fight with Ukraine, insisting on prices that are 50% higher than what its EU customers pay. In addition, Gazprom is increasingly diverting gas transported through Ukraine to Europe to its new Nord Stream pipeline, with plans to circumvent the country further when the proposed South Stream is completed in 2015. The current Ukrainian government would happily hand over half of its pipeline system to Gazprom in exchange for a lower gas price, but Putin demands that Ukraine also join the customs union.

In July, Putin went to Ukraine to discuss these issues with President Viktor Yanukovych. On his way to the Crimea, however, Putin encountered a notorious Russian nationalist motorcycle gang, whose members demand that the Crimea be transferred to Russia. Putin spent so much time with the bikers that he arrived four hours late to his meeting with Yanukovych, which was then cut to 20 minutes. Putin added insult to injury by talking to his associates rather than to Yanukovych.

Under these circumstances, not even Yanukovych, who governs in a Putinesque manner, can be pro-Russian. Since Putin offers Ukraine nothing, Ukraine has minimized its purchases of gas from Russia and downgraded all other bilateral relations.

Moldova is in a similar predicament. Although it surrendered control of its gas pipelines to Gazprom, it is still charged a usurious price in the face of Russian demands that it, too, join the customs union. Little surprise that Moldova, one of the most democratic post-Soviet states, wants a free-trade agreement with the EU to escape the vagaries of Putin’s policy.

Since 1992, Russia has tried to build its other main foreign-policy tool, the CSTO, as an alternative to NATO, but for years it had only six members – Russia and its closest allies, Belarus and Kazakhstan, plus three poor and insecure states (Armenia, Kyrgyzstan, and Tajikistan). In 2006, the Kremlin persuaded Uzbekistan to join, but, after Putin visited Tashkent in early June, President Islam Karimov suspended his country’s membership. The CSTO remains a paper alliance without military significance.

The happiest former Soviet countries are Estonia, Latvia, and Lithuania, all of which minimized their contacts with Russia in 1992 and joined both the EU and NATO in 2004. After its war with Russia in 2008, Georgia decided to leave the Russian-dominated Commonwealth of Independent States. Azerbaijan, Turkmenistan, and Uzbekistan regularly boycott the CIS’s meaningless annual summits. For how long will they bother to remain members?

Kremlin policy in the post-Soviet space makes little sense, because Russia gains nothing. Presumably, Putin hopes to whip up nationalist sentiment to strengthen his weakened hold on power at home. The problem for him is that, increasingly, Russians are not fooled.

Anders Åslund, a senior fellow at the Peterson Institute for International Economics, is the author of The Last Shall Be the First: The East European Financial Crisis, 2008-10.