19 September 2015

Russia and Syria in the Context of the New Cold War

A good friend of this humble soapbox recently sent me a Robert Parry article regarding the dangers of starting a new Cold War with Russia and how the neo-con thinking could get the US into trouble again.

As you probably remember, the Prince of Darkness and his minions claimed credit for the demise of the Soviet Union. They argued that their policy of forcing the Soviet Union to try to keep up with America's disproportionate military spending enabled Saint Ronnie to yell "tear down this wall, Mr Gorbachev"and to put an end to both the Soviet Union and the Cold War.

The reality is, of course, more prosaic, as it has a well known liberal bias.

If you ask me, the Soviet system collapsed primarily because of its own key structural problems. Marx's labor theory of value was more of a critique of capitalism than an actual economic system and provided no viable incentive mechanism for innovation or productivity. The Soviet economy survived long enough because of the immense geography and natural resources involved; but given enough time, it simply folded under its own weight. As it would have, with or without Ronnie and Mommy.

Still, you could say it was the economy, stupid. And it was. It is quite possible that Reagan's new arms race provided the coup de grace. And that is why no one has challenged the neo-cons for this dubious causality.

The lucky break for the rest of us was the fact that it was the increasingly drunken Boris Yeltsin who replaced Gorbachev and not one of the cold apparatchiks like Vladimir Putin. The world would have been a very different place if the coup succeeded in 1991.

All of this to tell you that sometimes shorthand explanations could hide major errors of logic, like suggesting that economically starving the Russian state could lead to the ouster of Putin and the collapse of his increasingly authoritarian regime.

But neo-cons are true believers and this time they got the Administration to manipulate energy prices in order to push Putin into a corner. And Iran and Venezuela became the icing and the cherry (respectively) on their cake.

With oil prices falling below $50 for the first time in a long time, Russian economy has been in a free fall: it contracted by 3.5 percent in 2015. This is not surprising since energy is the largest sector of Russian economy representing, until two years ago, a third of its GNP (now it is down to a quarter), 68 percent of it exports and half of its budget revenues.

More worryingly for Putin, Gazprom, the company that was once touted as the first conglomerate likely to reach a trillion dollar valuation, has lost a staggering $300 billion of its market capitalization. It is now worth about $50 billion.

And this has profound operational implications.

To bypass Ukraine, Gazprom had planned a new pipeline through Turkey and an expansion of the Baltic Nord Stream network. The Nordic and Turkish Streams are estimated to cost roughly $25 billion or half of Gazprom's net worth. The Turkish stream is now on hold because Turkey insists on a significant discount.

Similarly, the $400 billion deal with China is negatively affected by the current situation: The pipeline is supposed to cost anywhere from $55 billion to $110 billion or double the net worth of the company. Moreover, with falling energy prices the deal is now worth a lot less than the estimated $400 billion. In fact, with probable cost overruns, the pipeline could conceivably be worth more than the natural gas it is supposed to carry.

Does this bleak picture mean the neo-cons who have been "so wrong for so long" are finally right this time and Putin will soon become a footnote in history books?

I seriously doubt it, as I believe Putin is aware of the American desire to start a new Cold War and he has his own strategy to counter it.

It is a high stakes gamble covering many regions and it involves many risks for all the parties involved.

A Foreign Policy Based on Energy

Putin believes that the fall in energy prices will not last long as Saudi Arabia and other OPEC producers will have to face up to harsh financial realities. The Kingdom has a significant budget deficit and at the going rate it would use up its Sovereign Fund reserves in about a decade.

Putin is also putting a lot of pressure on Qatar and other members of Gas Exporting Countries Forum (GECF) to turn them into an OPEC for gas producers.

In other words, Putin is doubling down on energy rather than diversify Russia's economy. This makes sense since he has no funds to invest in a New Economy and therefore he has to salvage the old one at any cost.

In the short run, he hopes to pull Ukraine back into Russia's sphere of influence in order to capitalize on Gazprom's five pipelines serving the European market. Crimea was his way of getting the Ukranian government's attention and with a de facto occupation of Eastern Ukraine he is telling them that they have the choice between losing a big chunk of their territory and adopting a pro-Russian attitude.

In that respect, his tactics were clear from the outset: Crimea provided him with a decent test case to see if the military build up could be achieved rapidly and whether European and American reactions would be anything significant. That annexation simply earned him a disinvite to G7 and some weak sanctions. Eastern Ukraine added some more sanctions and that was about it.

At the same time, Putin has been working over-time to expand the Nordic Stream, in case the pressure on Ukraine does not yield the desired result. Tellingly, despite the EU sanctions (and unlike the Turkish Stream), this one attracted a lot of investors from Western Europe.
Top-flight Western firms such as Shell, E.On, BASF, and Engie (formerly GDF Suez) have banded together with Russia’s Gazprom to double the capacity of Nord Stream, with hopes it will be operational by late 2019. If completed, the 10 billion euro project would enable Russia to finally bypass Ukraine as a transit country. 
Another critical component of Putin's energy-based foreign policy is to prop up Assad's government and thereby to prevent ISIS from forming a stable Sunni Pipelineistan from parts of Iraq and Syria.

As you know, in the world according to Contrarian Progressive, a massive Qatari natural gas pipeline network that will connect their North Dome field to Europe via Turkey is the main reason for the Syrian civil way.

Finally, Putin is laying a huge claim on Arctic oil and gas resources as he believes the receding glaciers will reveal a massive energy reservoir and Russia should be the main beneficiary.

These last two elements require a closer look.

Russian Build-Up in Syria

If his previous ventures in Crimea and Eastern Ukraine should serve as a blueprint, it looks like Putin seems to have decided to intervene directly in the Syrian civil war. There is a massive military infrastructure being readied.
Housing units have been set up that can accommodate "hundreds of soldiers" as well as a portable air traffic control station near the Syrian port city of Latakia, US officials said on condition of anonymity. 
Aerial imagery showed Russia was focusing on Bassel al-Assad International Airport, south of Latakia on Syria's Mediterranean coast, and on the Russian naval facility in Tartus. 
Two tank-landing ships have recently arrived at Tartus and about a dozen Russian armoured personnel carriers are now at the airport, one US official said.
Syria-based observers report that Russia is actually expanding the Tartus military base and is building its first air base in Latakia.
"Syria has completely redone Latakia airport," journalist Thierry Meyssan, who writes for Al Watan, told Al-Monitor in an email. "The ground was leveled. A new runway was built for Russian aircraft. Sheds have been installed to house the aircrafts." Meyssan said workers also are building housing. 
"Work began at the beginning of August and continued day and night. They should be finished in a few days," he said, adding that Russia has begun delivering "more sophisticated weapons and especially satellite images." 
"This information will profoundly change the situation. So far only the jihadists had satellite images."
Foreign Policy had this picture showing the extent of the expansion.

Foreign Policy

And this was from Stratfor via BBC.

There are also reports that Russia intends to build a new base in Rmaileh, north of Jableh to facilitate the rapid unloading of larger Russian ships.

A base around Jableh would enable Syrian government to have access to satellite monitoring of the entire Syrian-Turkish border. Besides altering the balance of power, this could put a damper to Turkish government's plans to create a "safe zone" inside Syria.

No one knows for sure how far Putin will take all of this. But this is certainly more than expanding a military base to prop up Assad's government. Besides the uncanny resemblance to the rapid military build-up efforts in Crimea and Eastern Ukraine, there is also the fact that a large number of Russian troops were put on alert and told that they were going to fight "in a hot country."

And there are many Russian soldiers already in Syria putting their geo-tagged pictures online which shows them in various parts of the country.

Even John Kerry who was quite cautious initially began to wonder why there was such a massive build up and ha has been pressuring his counterpart Lavrov to give some indications on Putin's intentions.

Besides altering the balance of power in favor of Assad and therefore prolonging the civil war, the new Russian presence could complicate things further by putting regional players in a collision course with Russia.

Turkey is the obvious candidate with its dependence on Russian oil and gas on one side and its diametrically opposed positions on Syria and Kurds.

There is another less obvious regional player that might be affected by all this.
As much as Russia's military presence concerns Turkey, it is also of concern to Israel, which sometimes enters Syrian airspace and occasionally fires on targets there. According to the Lebanese daily Al-Akhbar, the Russian military presence will make Syrian airspace off-limits to Israeli planes.
Clearly, starving the Russian beast might lead to some very unexpected outcomes in the Middle East just as it did in Eastern Europe.

Ice-Cold War

Putin's policy of doubling down on energy is also evident in his Arctic strategy.

Just a month ago, Russia has submitted a bid to the UN claiming a huge chunk of territory.
The ministry said in a statement that Russia is claiming 1.2m sq km (over 463,000 sq miles) of sea shelf extending more than 350 nautical miles (about 650km) from the shore.
Moreover, last year while everyone was focused on Crimea and Ukraine, Russia quietly expanded its military presence in the Arctic.

As the Guardian reported in a piece entitled "Russia prepares for ice-cold war with show of military force in the Arctic" they restored a Soviet-era military base in New Siberian island and beefed up many military outposts.

This year,
[T]he military conducted sweeping manoeuvres in the Arctic that involved 38,000 servicemen, more than 50 ships and submarines, and 110 aircraft. As part of the drills, the military demonstrated its capability to quickly build up its forces on the Novaya Zemlya and Franz Josef Land archipelagos.
Interestingly, the US is in no position to counter the Russian threat. It has just one aging ice-breaker named Healy, whereas Russia has "has a fleet of six nuclear-powered heavy icebreakers, with 11 more planned or under construction." 

In short, the neo-con gamble is a very risky one, as Putin is well aware of the stakes and he is willing to raise them. He is a much more dangerous adversary than Yeltsin ever was and his moves might have far reaching consequences in Europe, Middle East and in the Arctic region.

Incidentally, there is one country that seems to be aware of the risks involved in the energy prices game and willing to go against the tide:
The Qatar Investment Authority has committed $2 billion to the government-connected Russian Direct Investment Fund for infrastructure projects in Russia. Coming as Western governments attempt to isolate Moscow economically, it is a significant gesture that the Kremlin will notice and understand — “business is business” also means “nothing personal.” As US and European relations with Russia continue to erode, that message may matter.
If I were a decision-maker, I would stay away from the neo-cons.

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