Business Forum: For Russia, oil is a slippery path to power

Since he came to power in 2000, Vladimir Putin has launched a campaign to recover Russian pride, prestige and influence lost with the collapse of the Soviet Union.

Early on, he decided that Russian's gas and oil supply would finance both the country's economic recovery and its return as a global power. Even after stepping aside as president in 2008, Putin continues to make the idea of Russia's comeback his personal project. His successor, President Dimitry Medvedev, has, by all accounts, identical aims.

The invasion of Georgia, a former Soviet republic, in August sent a message to the world that Russia intended to flex its muscles regarding border sovereignty. Who exactly sparked the hostilities is debatable. But a major reason for slapping down Georgia was to make it clear to all in the region that Russia would not tolerate any action that would threaten its newfound position of economic power as a major supplier of gas and oil to the energy-hungry countries of Europe.

Russia's energy arsenal is vast. According to the 2008 survey of Oil and Gas Journal, Russia holds the world's largest natural gas reserves, with 1,680 trillion cubic feet -- twice the reserves of the next-largest country, Iran.

In 2006, Russia was the world's largest gas producer and the largest exporter. All but one of the largest importers of Russian gas are European countries including, in order of the amount imported: Germany, Turkey, Italy, France, Czech Republic, Poland, Hungary, Slovakia and Austria.

At the same time, Russia has the eighth-largest proven reserves of oil in the world at 60 billion barrels. But it is the second-largest producer and exporter of oil, behind Saudi Arabia.

According to Prof. Alexander Dynkin, director of the Moscow-based Institute of World Economy and International Relations, nearly 40 percent of the total 2008 Russian budget came from the production and sale of gas and oil.

The invasion of Georgia was about making sure that a proposed competitor -- the Nabucco pipeline project, supported by the European Union -- does not threaten Russia's market power in the region. The Nabucco line would extend from Turkey to Austria, going through Bulgaria, Romania and Hungary.

According to the Carnegie Moscow Center, Putin now has concluded, like so many leaders in the West, that military might alone would not be sufficient to implement Russia's master strategic plan for a return to world power.

But this gas-induced euphoria of a new powerful Russia may prove to be a tough but shortsighted strategy.

Russia in the doldrums

The economic crisis that has engulfed the world has also affected Russia. According to the Economist World Report, one of the reasons the West had very little leverage over the actions of more aggressive Russia was because for most of Putin's term in office, gas and oil prices were on the rise and the flow of cheap credit from foreign banks emboldened Putin.

Credits from foreign banks have started to dry up, oil prices have fallen and Russia's trade surplus is starting to show the effects of stronger imports. While some in Russia predict that real income may grow much more slowly than in the past, Dynkin suggests that it may even slow to zero for the next few years.

Putin already has seen the results of those factors reflected in the sometimes-violent demonstrations in the streets of Moscow as jobs start to fade away and the good life enjoyed by many Russians over the past few years starts to disappear.

Most developed economies recognize that the growth of the "knowledge economy" will require a shift from old-line manufacturing to the innovative technologies required by the 21st-century industries yet to be developed.

As Dynkin reiterates, Russia is dealing with a choice between innovation and the old industries of the past, in much the same way that the United States has moved from its Rust Belt industries to its high-tech sector.

So far, Russian companies prefer not to invest in new technologies, instead buying already developed and sometimes outdated technologies and processes from others. Putin's short-term and dangerous strategy will almost guarantee that if Russia is left behind again economically, it would be tempted to revert to the military "hard power."