Mr. Chairman, I am privileged to contribute to the work of your committee at a time when the United States faces significant challenges to its national security, and seeks to find the right policies and partners to secure our homeland and interests. The subject of this heating is an important one, because in the context of a U.S.-Russian relationship that has proven so constructive and positive since summer 2001, Russia's ongoing (and possibly growing) economic ties with Iran and Iraq are a persistent obstacle to a truly serious partnership. We need to understand the interests behind Russia's relations with these countries in order to develop policies that allow the U.S. to cooperate with Russia, while securing U.S. interests. My assessment of Russia's "axis of evil" policies has two components. First, Russia's current leadership seeks power, status, and prosperity through economic modernization and international trade. This definition of Russia's national interests lead to a strategic choice for cooperation with the U.S., but it also means nurturing trade relations with countries that are markets for goods: Russia cannot sell on most international markets. Second, Russia is also playing out a geopolitical strategy to manage America's overwhelming global power. However, this is not the classic game of global of regional balancing: Russia's leaders are far too pragmatic, far too much practical realists to fool themselves that any balancing coalition can be effective, or that it is worth sacrificing recently hard won cooperation for quixotic tilting at American power. Russia's policy in not geopolitical balance of power, but rather constraining U.S. policy through international rules, institutions, and procedures. Not Quixote and windmills, but a Lilliputian enmeshing Gulliver in the law and institutions that the U.S. led in creating during the Cold War. The geopolitics of Russia's policies toward Iraq and Iran are the geopolitics of constraint and maneuver, not confrontation.
The Russian Economy and its National Interests
The first part of the puzzle is why a Russia that has improved it relations with the U.S and Western Europe, that has supported the U.S. in the fight against the Taliban and al Qaeda in Central Asia, and that seeks membership in the World Trade Organization and to attract foreign investment would maintain and even deepen trade with Iran and Iraq, countries with regimes that reject market and democracy. Furthermore, Russian trade with Iran and Iraq appears to support those regimes in the pursuit of what the U.S. believes to be policies to acquire weapons of mass destruction and the means for their use. This apparent Contradiction suggests that Russia does not hold as a priority economic transformation, international integration, and fundamental cooperation with the U.S. and its western allies. It suggests, some have argued, that Russia's true purpose is a new round of competition with the U.S., one determined by great power ambitions rather than Soviet ideology.
In fact, there is not much of a puzzle at all. The same conditions and objectives that led Russian President Putin to improve relations first with Europe and then with the U.S., that are driving Russian efforts to join the WTO, and that led Putin to deem Russian military bases in Central Asia and military assistance to Georgia are behind Russia's relations with these three countries.
The most important condition is that Russia has no future as the country we know today without significant economic growth, which requires working with the few strengths of what was inherited from the Soviet economy while building new capabilities that fit the modem global economy. The Soviet economy did not leave many strengths: the few are energy, metals and other exportable commodities, a space and satellite industry, a nuclear industry, and conventional arms. In the past few years with a better environment created by significant reforms implemented by the Putin government, new sectors of the domestic economy have become successful, including certain consumer goods, a developing information technology industry, and services.
While these new success stories are genuine, the main factors behind Russian economic growth rates of 9% in 2000, 5% in 2001, and 4% in 2002 are Russia's energy exports and high global energy prices. That is, while economic reform and some increase in investment and productivity have helped, Russian economic growth is due to its ability to sell oil and natural gas abroad, and on high prices for those commodities. The beneficial effects of Russia's devaluation in 1998 are now gone: future growth will come only from increases in productivity, and from selling abroad what is in demand at good prices. While productivity may well improve, investment is still far below what is needed simply to replace obsolete Soviet stock. Economic growth in the short to medium term depends on oil and gas. Analysts estimate that for each $1 change in the price of a barrel of oil, Russian GDP rises or falls 0.35% (Troika Dialogue, Russia Market Daily, 15 April 2002).
These facts have made Europe and the U.S. important for Russia. First, both are important foreign markets for Russian energy exports. Second, American and European corporations and financial institutions will have to be major investors if Russian productivity in a variety of new sectors is to improve. The Putin government seeks to join the WTO so Russian business can compete on international markets, so Russian business will face incentives to reach western standards, so Russia will become an attractive investment environment, and so Russia can bargain to reduce barriers to its exports.
These realities are the true reason why Russian policy on NATO became accommodating, and why Russia agreed to a new offensive nuclear arms treaty even after the U.S. withdrew from the ABM Treaty.
Russian policy is driven by military and political weakness as well. Putin welcomed U.S. military bases in Central Asia largely because there was little he could do to stop them, and similarly U.S. military training programs in Georgia. Acceptance of U.S. missile defense plans was in part a calculation based on the importance of the U.S. for Russia's economic future, but it also was a realistic acceptance that there was little Russia could do to prevent a decision allowed by the ABM Treaty.
Russia and the "Axis of Evil"
The very same package of objectives and weaknesses are behind Russia's trade and relationships with Iran and Iraq. Russia' s long-term objective is modernization, investment, and new sectors of development at the high-end of production and technology. But in the short to medium term, Russia needs to sell what is in demand abroad. This means primarily the Soviet legacy of fossil and nuclear energy. Selling nuclear reactors and conventional arms to Iran, investing in Iraq's oil industry, and selling manufactu red goods to Iraq is unfortunately part of the same policy, driven largely by the same factors, as selling natural gas to Germany or sending oil tankers to U.S. ports. It is to keep the Russia economy growing while it is weak so that it can be re-structured to support a strong Russia in the future.
So, in addition to the $10-12 billion or so in debt it is owed by Iraq that Russia seeks to recover from a post-sanctions Iraq (whether ruled by Saddam Hussein or not), Russia has a stake in the development of the future Iraqi oil industry. Russian oil companies stand to earn hundreds of millions and perhaps billions of dollars if they can realize promised commitments to develop Iraqi oil and natural gas fields. Several Russian companies are discussing building oil and natural gas pipelines in a post-sanctions Iraq, with contracts commonly worth $50 million or more.
But Russia's stake is broader than oil. Russian exports to Iraq were nearly $187 million in 2001, and over $61 million in the first quarter of 2002. Commodities sold include, for example, Volga cars, grain harvesters, and power generation equipment, with the consequence that the benefits of trade with Iraq extend beyond Russia's oil production and transport companies. Russian analysts estimate that the Russian industrial sectors could lose of $2.5 billion if industrial sector contracts signed with the current regime fall through.
It is worth noting, however, that even so Russia's main trading partners are not Iran and Iraq. Over half of Russia's trade is with EU and EU aspirant countries. Russia may have exported $187million in goods to Iraq in 2001, but that is a small slice of it total exports of $101.6billion. More significant that the amount is the concentration: Iraq buys manufactured goods and energy sector services that Russia for the most part cannot sell anywhere else. Iraq as an export market is part of a package of economic relationships that enables the Putin government to sustain a level of growth and stability while it buys time in modernizing and diversifying the economy.
Russia has another, less intuitive, but vital stake in Iraq's future oil industry. Although Russian oil companies stand to gain from Iraqi oil production, they stand to be severely harmed by too much success. To understand this, remember that Russia's healthy looking 4% growth in GDP for 2002 was essentially due to its foreign energy sales. In addition, remember that each $1 fluctuation in the price of a barrel of oil means a 0.35% change in Russian GDP.
As Russia faced US calls for enforcement of UN resultions on Iraq in the fall of 2002, these facts meant it would only take a $6 per barrel fall in the price of oil to halve Russia's GDP growth for last year. Such a drop in price is not beyond the expectations of industry analysts: in early 2003 with oil prices at $30 barrel Russian inindustry experts continue to forecast a fall in prices to $215/barrel or lower in the aftermath of a successful U.S. military operation. While the prospect of war has meant an increase in oil prices and windfall to the Russian economy, the subsequent peace will likely bring substantial western investment in oil production and a significant opening of Iraq's vast reserves, possibly resulting in a decrease in prices.
That is, in addition to being concerned that a successful U.S. war will mean they will be squeezed out of future development in Iraq, Russian energy companies are also worried that U.S. companies will so successfully and thoroughly develop Iraqi energy resources that global energy prices will fall. Mikhail Khodorkovsky, CEO of Yukos, recently expressed this concern to a British journalist in terms of its effects on the profitability of Russian oil companies themselves. If global oil prices fall to $11-13 per barrel, Russia's oil companies will fall below profitability. But in addition to eroding and possibly eliminating individual company profits, an American-led Iraqi oil boom could eliminate the only source of GDP growth in the Russian economy for the foreseeable future.
Russia's close relationship with Iraq, therefore, has been rooted in the peculiarities of its distorted, essentially weak economy. Russia's energy wealth, in the absence of any other dynamic and productive economic sectors, makes it vulnerable to a fall in global energy prices, which is one reason the government opposes a U.S. war that would lead to U.S. occupation of Iraq. On the other hand, the energy sector is one of the very few successful sectors of the Russian economy, so the logic of pursuing that advantage creates incentives to maintain and even improve relations with Iraq, even as the U.S. prepares for war. Russia's relations with Iraq are in conflict with U.S. interests, but Russia's relations with Iraq are not based on a Russian conflict of interest with the U.S. They are, quite ironically, based on the same objectives of economic modernization and internationalization that have been at the root of the overall improvement in U.S.-Russian relations.
The Russian Economy and the Government's Interests
In addition to Russia's national interests, we need to understand that global oil prices also affect the government's fortunes. Russia will hold Duma elections in December 2003, and presidential elections in the spring of 2004. Studies of Russian public opinion and voting behavior show that the Putin government's popularity and support come from a more stable and successful economy, as well as a belief that the current government has improved the security and predictability of Russian life.
That is, much of the government's support comes from the relatively low inflation, balanced government budgets, prompt payments, and improving living standards made possible in an economy that has grown at rates between 4% and 9% for the past four years. With two very important elections coming up in just over a year, the government has a big stake in the performance of the economy. Since global energy prices have such a large and direct impact on Russian growth, the Putin leadership's political fortunes are affected rather significantly by the global price of oil, and Russia's involvement in a post-war Iraq.
Because the Russian economy is so dependent on global energy prices, so is the Russian government budget. One of the main reasons Russia's budget has been in surplus (enabling it to meet its obligations without budget deficits) has been its revenues from taxes and energy export duties. So dependent is the Russian government on oil prices for fiscal health and creating the economic stability Russian voters now value so dearly, that its budget planning includes assumptions about global oil prices on which it bases projections of government revenues. If global oil prices fall much below $20/barrel, the Russian government budget goes from a healthy surplus to deficit.
Russia is not only an energy economy, its government has to watch global oil prices in much the way Western politicians watch poll numbers.
Therefore, Russia's stake in Iraq and its energy sector is not merely a matter of national interests and a strategic for economic modernization that affects foreign policy, it is a matter of the direct political interest of its leadership. As long as elections figure in Russia's political future, political leaders have to be directly interested in economic performance. As I've argued, that means a long-term strategy of western orientation and integration. But it also means, in the short run, a stake in Iraq and its future.
The Russian Economy and Narrow Interests
To this point, I have argued that the Russian-Iraqi relationship is rooted in a set of Russian strategic economic priorities that the U.S. has otherwise welcomed. The priorities lead Russia to Iraq because of the realities of Russia's energy dependent economy, and the weakness of its manufacturing sectors, which find an eager (indeed, nearly captive) market in Iraq.
The economic calculations that lead Russia to Iran are similar, but they are more strongly narrow than national, and primarily opportunistic rather than strategic.
In one sense, Russia's economic relations with Iran are driven by the same factors of weakness in the legacy of a distorted Soviet economy that produces only a limited set of exportable goods. The Soviet Union invested heavily in its nuclear industry, and attracted its best scientific minds. Similarly, its conventional military industries produced goods that were, and still are, in demand on foreign markets. Revenues for arms sales varied between $2 and $4 billion annually from the mid-1990s to the present, and for nuclear materials and technology between $2 and $2.5 billion annually in the mid to late 1990s. While not a huge proportion of Russia's yearly exports, they are very significant because in both cases there is virtually no domestic demand for either of these industries. Russian energy use fell with the decline of its economy in the 1990s, so the Ministry of Atomic Energy (Minatom) has not been selling on the domestic market. Similarly, the Russian military has not spent any significant amounts on procurement, so Russian defense plants have either been idle, or have produced for foreign customers.
Foreign sales, therefore, are a significant asset for keeping these two industries alive.
In the case of arms, it is clear why the Russian state would have an interest in sustaining a defense production capacity for a time in the future when it will be ready to buy arms for its own military. Customers like China, Iran, and India play a role in preserving Russia's defense industrial capacity until the Russian military becomes a customer again.
Minatom and Russian nuclear sales to Iran is a much more murky and problematic case. On the one hand, the $800 million that Iran will pay for Russian completion of the Bushehr power plant (and the recent February 2003 agreement to build 2 more nuclear plants) is obviously welcome to an industry with little new domestic demand, and not many foreign markets.
However, the consensus of experts is that these commercial relations serve little in the way of strategic economic objectives in support of modernization and integration. The amounts of money are welcome, but do not have a larger impact on Russia's fiscal health or adaptation to a more competitive economic future. The contracts arguably keep some Russian nuclear scientists employed, which is valuable to prevent them from becoming a proliferation risk, but since there is evidence scientists affiliated with the project have contributed to Iran's nuclear fuel cycle knowledge it is at best a weak claim.
Instead, Minatom appears to have privatized Russian foreign policy toward Iran, at least in the nuclear technology realm. There is no effective government oversight of Minatom programs, and no evidence that contract revenues make their way to government revenue accounts. Increasingly, there are reports of corruption, disappeared funds, and scientists providing knowledge beyond the contracted and monitored work at Bushehr. Although technically legal under the Nuclear Nonproliferation Treaty and buttressed by a Russian-Iranian agreement that spent fuel from the plant will be returned to Russia, Bushehr poses a proliferation risk by contributing to Iran's knowledge for developing an independent fuel cycle for producing weapons grade fuel. Revelations in February 2003 of Iran's uranium deposits further weaken the case that IAEA procedures and Russian control of the fuel cycle materials will not contribute to an independent Iranian nuclear weapons capability.
There is no evidence that Russia seeks to provide Iran with this capability for strategic or political reasons. Russia sees some advantage in good relations with an important country in the difficult region of the Caucasus and Central Asia. But to a greater degree, Russia has substantial competitive interests with Iran. It has clashed with Iran over the division of the Caspian Sea. It competes with Iran in provision of natural gas to Turkey. Russia's natural gas prospects and export interests would be negatively affected if Iran were able to export more successfully on regional and global natural gas markets: indeed, Russia and Iran are in many respects natural competitors as energy providers. Many Russian analysts point out that Iran's policies on Islam are a potential problem for Russia's relations with its neighbors in Central Asia and the Caucasus, and within the Russian Federation itself.
Instead, the best explanation for Russia's nuclear relationship with Iran is the capture of this foreign policy relationship by a very large player, with very narrow and specific interests. The Russian government allows capture and privatization of its policy by Minatom because it brings contracts and resources to a noncompetitive sector of the economy which is too big and powerful to be relegated to irrelevance. It also helps that the Minatom projects with Iran are technically legal under the NPT, meaning Russian officials can dismiss U.S. complaints as unfounded and demands to end the construction as illegal.
The Geopolitics of a Former Superpower
Russia does not have substantial common interests with any of the three countries grouped together as the "axis of evil." Russia has no interest in an isolated, pariah North Korea. Last year, Putin played a constructive role in encouraging Kim Jong-I1 to mend relations with Japan, resulting in North Korea's admission that it kidnapped Japanese citizens, many of whom since died in captivity. Russia's economic stake in North Korea is twofold. The first is having a role in its future emergence from isolation, whether that be in partnership, confederation, or union with South Korea. The second is development of a transportation infrastructure that links Russia's Far East with sensible land and sea facilities in both Asia and Europe. Neither is a threat to U.S. interests.
Certainly, many in Russia take some pleasure in defying the US when it demands that Russia cut off economic ties with Iraq and Iran, and in asserting an autonomous RuSsian foreign policy. But there is no evidence, and no logic, to believing that Russia's relations with these countries is rooted in a policy targeted at undermining the United States, re-creating Cold War zero-sum competition, or seeking a countervailing alance of power against the U.S.
Russia is led by hard-headed realists. Putin and his team aspire to renewed national power and status, but the path they have identified to realize that goal is one that conforms to U.S. power and bows to the realities of a Western-defined global economy. Leading Russian politicians and analysts have come to argue that playing a balance of power game against the U.S. is a losing proposition, and one that threatens to undercut the foreign policy achievements since 2001. Dmitry Rogozin, chairman of the Duma's International Relations Committee and not known for pro-American views, put Russia's options in starkly realist terms: "we either cooperate with America, a great military, economic, and political power, and try to influence them through cooperation, or we quarrel and leave the USA alone with its own ambitions and interests." (Ekho Moskvy radio, 20 February 2003).
Since the UN Security Council passed Resolution 1441, Russia's diplomatic efforts have focused not on power balancing, but on weaving a web of rules and procedures around U.S. military options. Russia's approach to international institutions has always been instrumental and pragmatic. Russia favors the UN because the Security Council with its unique rules according a veto to the P5 is an institutional vestige of the great power status Russia inherited from the Soviet Union. If Russia were playing a simple balance of power geopolitical strategy, we would expect its leaders to offer countervailing alliances and security guarantees, not to call on the U.S. to observe UN rules. Russian leaders could not complain that the U.S. seeks to disarm Iraq. In fact, in recent days Russia's Foreign Minister Igor Ivanov has publicly called more firmly and harshly for Iraq to disarm and cooperate fully with UN weapons inspectors, accepting tacitly the U.S. argument that Iraq is not yet in full compliance. While Russia has called for a diplomatic and political solution, it has not ruled out the use of force should iraq fail to comply: Russia has concentrated on demanding that the U.S. comply with international law in enforcing Iraq's disarmament.
Furthermore, after December 2002, Russian analysts have noted that Russia is more likely to realize certain economic gains only if the U.S. is successful in dislodging Saddam Hussein. In December, reportedly after Russian interests contacted Iraqi opposition groups to discuss a postSaddam honoring or Iraqi-Russian oil contracts, Iraq's government cancelled its contract with LUKOIL to develop the West Quma fields. In doing so, Iraq lost one of the loudest and most influential supporters it had in Moscow, and created a strong incentive for LUKOIL to favor a post-Saddam future for oil development in the region. Similarly, it is clear that Russia stands no chance of recovering the $10-12 billion debt Iraq owes it as long as Saddam's Iraq is penned in by the sanctions regime.
As the overall positive atmosphere in U.S.-Russian relations has made it possible for Russia to press its case for U.S. support for post- Saddam repayments, contracts, and "price stability" (that is, higher prices) in global oil markets, Russia has availed itself of France's leading opposition to U.S. policy. France's policy has been a beneficial umbrella for Russia, allowing it to press for U.S, adherence to international law, for restraint, for taking the UN Security Council seriously: all while leaving it to France to take the brunt of U.S. anger.
For these reasons, it is most likely that Russia would not veto a U.S. led effort to pass a UN Security Council resolution declaring Iraq in material breach of its obligations to cooperate. with the UN. Russia could lose from the war, but it would lose far more from confronting the U.S. on Iraq. In fact, a U.S.-led military action against Iraq could well be a net win for Russia if it creates the opportunity for new energy contracts and debt repayment, as long as oil prices do not fall too low -- all in the context of a U.S. that acted with UN Security Council approval. This would be a new geopolitics of economic profit and tactical finesse, not bad for an aspiring great power undergoing reconstruction after a tough decade.
The next challenge in U.S.-Russian relations to contemplate will then be Iran. This analysis suggests that any potential for improvement lies in a U.S. policy that focuses Russia on the bigger picture and Russia's broader economic and security interests in the region.
The U.S. should press on the issue of Iran's substantive, not merely narrow legalistic, compliance with the NPT and IAEA. It should press for reasonable oversight and control of Russia's nuclear export sector, and the accountability of the firms and scientists that do business in Iran. The U.S. should think about ways to make cooperation with the U.S. more valuable to business interests within Russia which could press their own government to restrict nuclear sales to Iran, since domestic political pressure by important business leaders is likely to be more effective than foreign criticism. The goal should be a Russia in ten years that does not get much benefit, relatively speaking, from selling nuclear technologies to Iran. Although that development is far from certain, given the structural weaknesses of the Russian economy, it is a realistic goal given the assets and advantages trade and cooperation with the U.S. has to offer.
On many of the issues truly important to the U.S. in its relationship with Russia in the past two years (NATO enlargement, national missile defense, a new offensive arms control treaty, US bases in Central Asia and military presence in the Caucasus, a new energy strategy), Russia has largely accommodated U.S. policies and priorities. If Russia sought to counter the US, it could have done so on issues far more important than oil contracts with Iraq, or far less self-defeating than turning a blind eye to Iranian nuclear ambitions.
The key to U.S. policy in dealing with Russia on its relations with these countries should be to leverage Russia's long-term strategic economic objectives. Where Russia's policies with these countries threaten to harm U.S. interests, it is always because Russia is grasping for short-term benefits. It is in U.S. interests to help Russia's political and economic leadership focus on its long-term objectives, because these offer greater benefits. A single contract with Iran that benefits Minatom is not worth as much as joint development of new oil fields and pipelines (Russia is suffering from an excess of oil and limited ways to get it to markets) that has beneficial effects not only for oil companies, but the Russian economy and government budget. Loss of lucrative nuclear contracts might be acceptable if Russian steel producers had the opportunity to compete on western markets, or if Russia's higher value information technology industries benefited from integration and competition in the context of Russian accession to the World Trade Organization.
Most of all, U.S. policy would benefit if it did not put Russia's relations with the countries in the rubric of the Axis of Evil. They pose problems for U.S. interests, and Russia's relationships with them exacerbate those problems. However, while there, is a common thread in RUssia's relations with them, it lies in Russia' s economic ambitions, which are very different in each of these cases, and in its efforts to play a weak political hand through international law and institutions. As it struggles with Russian policy toward Iran and Iraq, the U.S. should keep in mind that these are fields in which the U.S. can play on its own terms, given U.S. political and economic predominance, as well as military might. We only burden our own ability to use our considerable assets in engaging Russia's interests in the western economy and western rules of the game by using this construct, and will find it easier to tackle the challenge of eliciting constructive Russian engagement if we free ourselves of it.