SAUNDERS: Oil losses pull Russia's claws

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By Paul Saunders

OP-ED:

Secretary of State Hillary Clinton has already learned that producing a reset button for the U.S.-Russian relationship is no simple task.

But recent months have also been a learning experience for Russian leaders, whose new tone suggests they are increasingly coming to grips with the realities of financial decline as their country's energy-dependent economy collapses. As a result, these hard times provide an important opportunity for the United States and the West to re-engage with Russia.

While it will not be easy, we have a strategic interest in working carefully with Russia to strengthen energy security - especially now, when prices remain relatively low - and we should seize the moment.

In a speech late last month on Russia's far eastern Sakhalin Island, home to a number of major energy projects, Russian President Dmitry Medvedev remarkably said, “We ourselves make mistakes at times; we do not fully calculate political risks and practical consequences” - a clear acknowledgement of Moscow's failure to foresee the European reaction to January's natural gas spat between Russia and Ukraine. He called for “consolidation of the efforts of producers and consumers of energy” and more active dialogue with the United States, the European Union and others (including the Organization of Petroleum Exporting Countries). Prime Minister Vladimir Putin made a similar call for dialogue in Davos, Switzerland, in January.

Many are appropriately skeptical of Moscow's sincerity, particularly so soon after Russia's decision to shut off gas deliveries to Europe through Ukraine for the second time in three years. Others might also argue quite legitimately that previous efforts at energy dialogue hardly inspire confidence that another try could succeed. In today's economic crisis, however, all sides might be more motivated to develop a more investment-friendly environment and a new system of rights and responsibilities for energy suppliers, transit countries and consumers.

In Russia's case, the crisis has clearly profoundly damaged both the overall economy and the energy sector. Russia's stock market is down around 75 percent, its officials project a 2.2 percent contraction of gross domestic product in 2009, and the Central Bank has already spent more than $200 billion, one-third of Moscow's reserves, trying (largely without success) to defend the value of the ruble, now down by one-third against the dollar. At the same time, Russian officials admit to $130 billion in capital flight in 2008, with the true figure possibly significantly higher.

The state gas monopoly Gazprom also faces growing pressure as prices tumble in the European market, which provides an estimated two-thirds of the company's profits.

Even when energy prices were higher, Moscow was concerned about “security of demand,” Russia's long-term ability to earn predictable revenue from energy exports. Now that prices are low, and the illusion that energy wealth would make Russia “an island of stability” has been shattered, Russian leaders may well be more open to real dialogue on energy issues. After all, Moscow's gas supplies were most reliable in the 1980s, when the cash-strapped Soviet Union fell under increasing financial pressure due to low energy prices. Then it was Soviet officials, not their Western counterparts, who wanted to keep politics out of the energy business.

In Sakhalin, Mr. Medvedev concluded his remarks by noting that “in the final account our situation and the welfare of our citizens will depend on how actively and consistently we function in the international arena, in energy cooperation.”

Notwithstanding Moscow's new signals, working with Russia will not easy. Three particular challenges stand out: the close connections between senior officials and energy firms, the opaque dynamics of the Medvedev-Putin leadership team, and Russia's complex domestic politics - where precisely because Moscow is weaker, officials will be especially sensitive to avoiding any hint of subservience to Washington or Brussels. Mr. Putin made his career as Russia's president as the anti-Yeltsin - restoring his country's economy and international role - and he and other top leaders will likely go to great lengths to avoid comparisons to Russia's first president, perceived in the country as far too deferential to America.

The global economy has given the Obama administration a real opportunity to make a lasting contribution to European energy security and America's relations with Moscow by pursuing a new energy dialogue with Russia as part of a broader effort at seeking a fresh start. But the opportunity will not last indefinitely. A global recovery - which all hope for quite soon - may well embolden Russia again. This is the time to reach out and to seek a solid foundation for the future.

Paul J. Saunders is executive director of the Nixon Center.