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Original citation: Bradshaw, Michael J. and Connolly, Richard. (2016) Barrels and bullets : the geostrategic significance of Russia’s oil and gas exports. Bulletin of the Atomic Scientists, 72 (3). pp. 156-164.

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Barrelsandbullets:thegeostrategicsignificanceofRussia'soilandgasexportsMichaelBradshaw,ProfessorofGlobalEnergy,WarwickBusinessSchool,UniversityofWarwick,UKRichardConnolly,SeniorLecturerinPoliticalEconomy,CentreforRussian,EuropeanandEurasianStudies,UniversityofBirmingham,UKCorrespondingauthor:Michael.Bradshaw@wbs.ac.ukSubmitted:22February2016IntroductionAsastudentofthelateSovietperiodoneofusisfeelingastrongsenseofDéjàvu,then—inthe1980s—theSovietUnionwasstymiedbyaneconomicsystemincapableofreformanditsrelianceonoilandgasexportshadbeenlaidbarewhentheoilpricefell.Bytheendofthe1980stheSovieteconomywasincrisisandfailedattemptstoreformithadpromptedMikhailGorbachevtoseekanewrelationshipwiththeWest.Theeraofglasnost’(openness)andperestroika(restructuring)resultednotintherejuvenationoftheeconomy,butinthecollapseoftheSovietUnioninDecember1991.Nearly25yearson,wefindaRussianeconomystilloverlydependentonoilandgasexportrevenuesandthathasproveditselfincapableofdevelopingamorerobustandsustainableeconomicmodel.VladimirPutinhasreturnedforathirdtermandhasstirredupnationalistfervourtopaperoverthecracksofaflawedeconomy.TheannexationofCrimeaandsupportforseparatistforcesinEasternUkrainemayhavefoundfavourathome,buttheyhavealsoresultedinWesternsanctionsthathaveisolatedRussiafromglobalcapitalmarketsandtargetedtheabilityoftheoilindustrytoexploreanddevelopnewreserves.Sofar,PresidentPutinhasbeenabletoturnthesanctionstohisownadvantage,blamingthemfortheeconomicproblemsathome.Eventhefallintheoilprice,startingin2014,wasexplainedasUSandSaudiintrigueaimedatRussia.However,thecollapseofthetheoilpricein2014,andwithitadramaticfallinthevalueoftheRouble,hashittheRussianpopulationhardandisnowforcingtheRussianGovernmenttomakesubstantialbudgetcutstoavoiddrawingdownonitssignificant,butdwindling,NationalWealthFund.Ofcourse,mostoftheRussianGovernment’sdomesticexpendituresareinRoublesandthedollarsitgetsfromtaxingenergyexportsnowgomuchfurther;evensomanyofthepopulistmeasurespromisedbyPresidentPutininhiselectioncampaignhavebeenrolledbackorpostponed.Asaconsequence,thesocialcontractbetweentheelectorateandtherulingeliteisunderstrainjustasthesocialcostsofashrinkingandagingpopulationareincreasing.Atthesametime,therisingtideofnationalismathomeandamoreaggressiveforeignpolicyabroadisbeingbackedbyamodernisationofRussia’sarmedforces.Significantly,militaryexpenditureis

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theoneareathathasnotbeencut;infact,itcontinuestogrow,andin2015reached5.5%ofGDP(comparedtotheNATOaverageof1.5%in2014;seeSIPRI,2015).1Inthecurrentgeopoliticalandeconomicenvironment,thequestionremainscanRussiaaffordtocontinuetostrengthenitsmilitarycapabilityinthefaceoffallingoilandgasexportrevenues,economicrecessionandgrowingsocialdemandsonthefederalbudget?ThisessayexamineshowthechangesinglobalandRussianoilandgasindustryareaffectingRussia’sabilitytoundertaketherearmamentthathasunderpinneditsmoremuscularroleintheworld.Theessayconcludesbyconsideringtwoversionsofwhatmighthappennext,whichwedescribeas‘détenterevisited’anda‘newcoldwar.’Russia’soilandgasdependenceRussia’scredentialsasapetrostateareimpressive.In2013-14(USEIA2015),itwastheworld’ssecondlargestoilproducer,accountingfor12.6%oftotalproductionandalsothesecondlargestexporter,bothafterSaudiArabia(explainingthesignificanceofanyproductionagreementinvolvingthetwo).Itwasalsothesecondlargestproducerofnaturalgas,aftertheUS,andtheleadingnaturalgasexporter.EuropeisbyfarthemostimportantconsumerofRussia’senergyexports,in2014,morethan70%ofRussia'scrudeoilexportsandalmost90%ofRussia'snaturalgasexportswenttoEurope(USEIA2015).However,followingthecompletionoftheEast-SiberianPacificOcean(ESPO)oilpipeline,AsiaisrapidlygrowinginsignificanceasamarketforRussianoil.NaturalgasexportstoAsiaarecurrentlylimitedtoLNGfromSakhalin-2,buttheseareplannedtoincreasebytheendofthedecadewhenthePowerofSiberiapipelineshouldstarttodelivernaturalgastoChina.Intheearly1990sRussianoilproductionplummetedastheeconomycollapsed(Figure1).However,whenthingsrecovereditwasrelativelyeasytorampupproductionbasedonthelegacyfieldsfromtheSovietperiod.Afterthat,acombinationofinvestmentinwesterntechnologytoenhanceproductionfrombrownfieldsandthedevelopmentinnewfieldssustainedproductiongrowth.OverthelastdecadetherelativestabilityofRussianproduction—averaging10.3millionbarrelsperday(Mb/d)between2005and2014—hasresultedinan‘exportablesurplus’ofaroundthe7Mb/dlevel(EIA2015,3).AlongsidethedevelopmentoflighttightoildepositsintheUS,thisproductionplayedamajorroleinensuringsecurityofglobalsupplydespitetheturmoilinotheroilexportingnations.

1MilitaryexpendituredataforRussiafromCooper(2016).ThemethodologyemployedtocalculatemilitaryexpenditureisthesameasthatemployedbySIPRI.Fordetails,see:StockholmInternationalPeaceResearchInstitute(SIPRI),RecentTrendsinMilitaryExpenditure,Stockholm:SIPRIhttp://www.sipri.org/research/armaments/milex/copy_of_faqs#back-to-top,accessedFebruary162016.

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Figure1:Russianoilproduction1985-2014(ThousandBarrelsaday)Source:BP(2015)DependenceandvolatilityNotwithstandingtheinterruptionsinUkrainiangastransitin2006and2009,Russia(Gazprom)hasalsobeenareliablesupplierofasubstantialvolumesofnaturalgastoEurope,andexportshavecontinueduninterrupteddespitethecrisisinUkraineandtheimpositionofWesternsanctions.Infact,havingfallenfromapost-Sovietpeakin2005-06,lastyearRussiangasexportsoutsidetheformerSovietUnion(i.e.Europe,includingTurkey)increasedreaching158.6bcm,82%ofwhichwenttoWesternEuropeancountries.2In2013,accordingtotheEuropeanCommission(2016),65%oftheEU’sgaswasimported,with30%oftheEU’stotalgasconsumptionand39%oftotalEUgasimportscomingfromRussia.JustasRussiaisamajorplayeronglobalenergymarketsandasourceofenergy(in)securityforEurope,soitisthecasethattherevenuegeneratedbyoilandgasexportsisessentialtotheRussianeconomy.PrimeMinisterDmitryMedvedev(2015,1)madeclearthecentrallyoftheenergysectortoRussia’seconomicfortuneswhenhestated:“Thefuelandenergycomplexaccountsforoveraquarterofgrossdomesticproduct,almost30percentofthenationalbudget,morethantwo-thirdsofexportrevenueandaquarteroftotalinvestments.”Figure2chartsthedynamicsofRussianoilandgasrevenuesince2000.

2http://www.gazpromexport.ru/en/statistics/.ThesenumbersincludealltradingactivitybyGazpromExportandincludedeliveriesofsomenon-Russiangas.

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WhenVladimirPutincametopowerin2000theaverageoilprice(forBrent)was$28.50(BP2015,15).Thechartmakesclearthedominanceofcrudeoilexportsandtherisingroleofoilproductsexports.Naturalgasexportsarelowerinbothvolumeandvalue—thoughtheyarealsooilindexed—andtheleveloftaxationisalsolower.ResearchbyCliffordGaddyandBarryIckes(2005)hasinvestigatedRussia’scontinuedadditiontoresourcerentsandhashighlightedhowthevolatilityattachedtothisdependenceisaconstantsourceofeconomicinstabilityandanessentialcharacteristicofitspoliticaleconomy.

Figure2:DollarEarningsfromRussianoilandgasexports2000-20153(Source:CentralBankofRussia2016)Russia—anditsPresident—rodeawaveofprosperityastheoilpriceincreasedupto2008,butRussiawashithardestamongtheG20statesbythe2008globalfinancialcrisisastheoilpriceplummeted.ThepricereboundedwithoutRussiahavingtoexhaustitsstrategicreservesormakesignificanteconomicreforms.Despitetherhetoricofmodernisationanddiversification,Russia’sresourcedependenceremained.RussiafacesofperfectstormThecurrentcrisisismorecomplexandisaperfectstormofcollapsingoilandgasprices,acrashinthevalueoftheroubleandtheimpactofWesternsanctions.Overthefirsthalfof2014theaveragepriceforabarrelofUralscrudeoilwas$107,inthefirsthalfof2015itwas$57abarrel(WorldBank2015,16).Theoilpricecontinuedtofallinthesecondhalfof2015andwasbelow$30inearly2016.TheRussianGovernmentchosetostopdefending

3Thefull2015statisticsarenotavailableyetandwehaveextrapolatedthefallbetweenthirdquarter2014andthirdquarter2015toarriveatanestimatefor2015.Whiletheprecisenumbersmaynotbecorrect,thedirectionoftravelis.Theoriginalvalueshavebeendeflatedandarein2015USdollars.

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theroubleandsinceearly2014ithaslost60%ofitsvalueagainstthedollar.Roubledevaluationisparticularlychallengingforindividualsandcompanieswhopurchaseimportedgoodsandservicesand/orhavedebtsinforeigncurrency.Onbothaccounts,thisincludesRussia’soilcompanies.AccordingtoRosstat’spreliminaryestimates,Russia’sGDPdeclinedby3.7%in2015(WorldBank2016).Yetdespitethedomesticeconomicturmoilandthecollapseinthepriceoil,Russianoilproductionactuallyincreasedin2015.But,asFigure2makesclear,thefallinthepriceofoilandgashasresultedinadramaticfallinexportrevenue.Acomparisonofexportearningstothethirdquarterof2015tothesameperiodin2014showsthatthevalueofoilexportsfellby42.7%,oilproducts39.9%andnaturalgas28.7%(CentralBankofRussia2016).Oilandgasisalong-termbusinessandthecurrentresilienceofRussianoilproductionreflectsinvestmentinenhancedrecoveryandinnewfielddevelopmentwhentheoilpricewasover$100abarrel.Atthesametime,Russia’soilandgasexportsgeneraterevenueinUSdollars,whilemostdomesticcostsareinRussianRoubles.Thus,eachdollarearnedfromabarrelexportedisworthalotmoreRoublesthanitwastwoyearsago.Thatsaid,theindustryisstilldependentonforeignoilfieldservicesandequipmentthatarenowcostlier.But,asHendersonandFattouh(2016,5)haveexplained:“thetaxsysteminRussiaprovidedsignificantprotectiontoRussianoilcompanies,becausethehighlevelofthemarginaltaxrateabove$25perbarrelhasmeantthatthegovernmenthastakenmostofthecostofthefallingoilprice.”AfurtherconsiderationisthatthemajorityofRussia’sproductionisinWestSiberiaandtherearetechnicalreasonsthatmakeitinadvisabletostopproduction.Finally,someRussianoilcompaniesareheavilyindebtedandneedtogenerateforeigncurrencywhatevertheoilpricetoservicethosedebts.AllofthismeansthatRussia’soilcompaniesareincentivisedtocontinueproduceevenatverylowoilprices.Gasexportsareadifferentmatterastheyaretiedtolong-termoil-indexedcontractsandthepricehasfallenbehindthatoftheoilprice.However,currentpricesarestillbelowthemarginalcostofsupplyforGazprom,butthereisspeculationthatitcouldbedrawnintoapricewartofendoffincreasedLNGexportsintoEurope(Henderson2016).WhenRussianannexedCrimeaandbecameembroiledinconflictinEasternUkraine,WesterncountriesimposedsanctionsonRussia,contributingthethirdelementoftheperfectstorm.HereweareconcernedwiththeimpactofsanctionsonRussia’soilandgasindustries.ThefirstthingtomakeclearisthatthesanctionsarenottargetedatreducingRussia’sshort-termabilitytoexportoilandgas.ThiswouldhavebeencounterproductiveasitwouldhaveraisedconcernsaboutenergysecurityinEurope.Ratherthetechnologysanctionshavetargetedkeyareasthatareimportantfordevelopingnewoilproductioninfrontierregions—theArcticanddeep-wateroffshore—andshaleprojects.ThesanctionshaveeffectivelystoppedcooperationbetweentheinternationaloilcompaniesandGazpromandRosneft.Thesecondelementoffinancialsanctionsistargetedatspecificcompaniesandindividuals,butthecautionofinternationalfinancialinstitutionsissuchthatallRussiancompaniesnow

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finditdifficultandcostlytoraisecapitaloninternationalfinancialmarkets,aswellasrescheduleexistingdebts.ThisisbeginningtohaveanimpactontheoilandgasindustryasRussiancompaniesareseeingtheirowncashflowsshrink—particularlywhencalculatedindollars-andarealsofindingitdifficulttoborrowtofinancenewdevelopments(Mitrova2016).Thisisaproblemthatisexacerbatedbythefactthat‘new’oilRussianoilproductionisprovingtobeincreasinglycostlyasitmovesintotheremoteregionsofEastSiberiaandalsohastoconfrontmorecomplexgeology(Gustafson2012).EventheRussianGovernmentisnowconcernedthatinthenextyearorsoRussianoilproductionwillstarttodeclineasinvestmentdriesup;particularlyiftheoilpriceremainslowerforlonger(Mazneva2016).Thus,theseshort-tomedium-termconstraintscouldrunupagainsttheimpactoftechnologysanctionstoreduceRussianoilproductionbytheearly2020s.ThisisnotaviewheldbyBP(2016),whoselatestEnergyOutlookpredictsthatRussianoilproductionwillremainstableatabout11MB/pdthrough2035andgasproductionwillexpandby30%by2035.But,asthecurrentsituationhighlights,fortheRussianGovernmentitismoreaboutvaluethanvolume.TheRussianeconomyisnotabouttocollapse,buttheseareundoubtedlychallengingtimesforPresidentPutin.IftheoilpriceremainslowerforlongerandWesternsanctionsremaininplace,Russianoilproductionmaysoonstarttodecline,furthererodingtheGovernment’staxbase.Thus,whenPresidentPutingoestothepollsin2018hecouldfaceahostileelectoratethatmayquestionhiscostlyrearmamentprogrammeinthefaceofrisingsocialneedsanddeclininglivingstandards.TheReturnoftheMilitaryIndustrialComplexTheboominthevalueofhydrocarbonexportsdescribedabovelaidthefoundationsforthereturnofthedefence-industrialcomplex(oboronnyi-promyshlennyikompleks,orOPK)toaleadingroleintheRussianeconomy.In2010,Russiabeganadecade-longmilitaryprocurementprogrammethatisintendedtobothequipRussia’sarmedforceswithmodernequipment,andtomodernisethedefence-industrialbase,sothatRussiacanproducemodernweaponsystemswellintothefuture.ButgovernmentplansfortheOPKareevengranderthanthere-equipmentofthearmedforces.In2012,PresidentPutinexpressedthehopethatthisrearmamentprogrammewouldnotonlyresultinamoreeffectivemilitarymachine,butalsothatadefence-industrialrenaissancewouldactasa“driverofmodernisation”acrossthewiderRussianeconomy(Putin2012a,2012b).Alongsidethebuoyanthydrocarbonssector,areinvigoratedOPKhasunderpinnedRussia’sgrowingassertivenessininternationalaffairs(Cooper,2015).Indeed,thepoliticalimportanceattachedtorebuildingthedefence-industrialbasecannotbeunderestimated:itwas,afterall,theresistanceofAlekseiKudrintothefundingtherearmamentprogrammethatresultedinthehighlyregardedformerFinanceMinisterandlong-timeconfidantofVladimirPutinresigningfromgovernmentin2011(Nikol’skii,2011).TheprecisenatureoftheexpansionindefenceprocurementislaidoutintheStateArmamentsProgramme2011-2020(gosudarstvennayaprogrammavooruzheniya,orGPV-

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2020).TheGPV-2020isa10-yearprogrammethatenvisagesthelarge-scaleprocurementofawiderangeofweaponsystems.4Itishopedthat70%ofthearmedforces’equipmentwillbemodernwhentheGPViscompleted.5ThisloftyobjectivefollowedyearsofneglectandunderfundingafterthedisintegrationoftheSovietUnionin1991.ThisneglectwasmademoreacutebythefactthattheOPKwasoneofthe-ifnotthe–highestprioritysectorsintheSovieteconomy.Itenjoyedpreferentialaccesstoresources–financial,physicalandhuman-andwaspoliticallypowerful(Gaddy,1996;Cooper,2013a).However,theOPKsawitselevatedstatusdiminishoverthecourseofthe1990sassavagespendingcutsandeconomicreformsstarvedtheOPKofmuchofitsfunding.Asgovernmentfundingcollapsedoverthe1990s,theOPKshrankdramatically,withonlyarmsexportstothelikesofChinaandIndiakeepingmanyenterprisesafloat(Cooper,2013a).AfterthepoorperformanceoftheRussianarmedforcesduringthebriefconflictwithGeorgiain2008,theOPKwasboostedbythegovernment’scommitmenttoexpandprocurementspendingundertherearmamentprogramme.AtotalofRUB20.7trillion(orc.USD640billionattheaverage2011exchangerate)wasallocatedtofundtheprocurementofmodernequipment,aswellasthedevelopmentoffutureweaponsystems(Falichev,2011).6Whileprogressinsomeareashasnotbeenasfastasoriginallyplanned(e.g.therehavebeendelaystothedevelopmentofthehighprofileT-50PAK-FAfifthgenerationfighteraircraftandtheArmatamainbattletank),therearmamentprogrammehassofarresultedinthedeliveryofawiderangeofmodernweaponsystemsthathavecontributedtoasignificantupgradingofRussianmilitarycapabilities.7ThenewleadingsectoroftheRussianeconomy?AswellasenhancingRussianmilitarycapabilities,theroleoftheOPKinthewiderRussianeconomyhasgrownsubstantiallysince2011.TotalRussianmilitaryexpendituregrewfrom3.8%in2010to5.5%in2015.8Thisfigure,ofcourse,includesmilitaryexpenditurebeyondprocurement,suchasexpenditureonmilitarywages,pensions,housing,trainingandexercises,andoperationalexpenditure.Buttheshareofdefenceprocurementrose

4Thoughspendingisback-loaded,sothatonethirdisscheduledtoplacebefore2016,withtwo-thirdsthereafter(Barabanovetal,2013).5Aswellasneworrecentlydevelopedweaponsystems,thisincludes‘modernised’equipmentfromtheSovietera.Forexample,modernizedMiG-31fighterandTu-160strategicbomberaircraftwerealldevelopedduringthe1980s,whiletheTu-22andTu-95aircraftweredevelopmentevenearlier.6AccordingtoBOFIT,theaveragedollar-RUBexchangeratein2011was32.2RUBper$.See:http://www.suomenpankki.fi/bofit_en/seuranta/venajatilastot/Pages/default.aspxGPV2020.Inaninterview,thethen-FirstDeputyDefenceMinister,AlexanderSukhorukov,describedthefundingmechanismsfortheGPV-2020(Falichev,2011).7Itshouldalsobenotedthatmanyweaknessesremain.ItisthereforeimportantnottoexaggeratetheimpactofRussia’smilitarymodernizationprogramme(Renz,2014).8TheshareofGDPdevotedtomilitaryexpenditureishigherthanforanyNATOcountry,aswellasChina,IndiaandJapan(SIPRI,2015).

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especiallysharply,risingfrom1%ofGDPin2010toover2.3%ofGDPin2015.9Thishascausedareorientationofgovernmentspending.In2010,militaryexpenditureasashareoftotalfederalgovernmentspendingwas15.9%;by2015ithadrisento25.8%.10ItisthereforeclearthattherenewedemphasisonthedefenceindustryinRussiahascausedtheroleoftheOPKintheRussianeconomytostrengthenconsiderably.ThisisnotsuggestthatRussiaisanywhereclosetotheSovietUnion’slevelofmilitarisation,wheremilitaryexpenditureaccountedforanywherebetween15-20%ofGDPinthe1980s(Gaddy,1996;Cooper,2013).Clearlyitisnot.Nevertheless,thereisevidenceofacreepingyetdiscerniblereorientationtowardsmilitaryproductionthatmaybecomemorepronouncedshouldthegeopoliticalenvironmentnotimprove.Indeed,shouldRussiamaintainwhatCliffordGaddyandMichaelO’Hanlonrefertoasa‘Reaganov’posture–i.e.apolicymixthatemphasisesastrongmilitary,aconfidentandassertiveforeignpolicy,andaneconomicpolicythatfocusesonscientificachievementinstrategicsectors–inthenearfuture,itislikelythattheOPKwillenjoyanelevatedstatusinRussia’spoliticaleconomyintheyearstocome(GaddyandO’Hanlon,2015).SanctionsandthefalloftheoilpriceRussia’sambitiousplanstore-equipitsmilitarymay,however,bederailedbythesharpdeclineinglobaloilprices,aswellasbythechangingstructureofRussianoilproductiondescribedinthefirstsectionofthisarticle.Thisisbecausethedeclineinoilpriceshasexacerbatedapre-existingslowdownineconomicgrowth.Thisslowdownhasbeenevidentsince2012,andwaslikelycausedbytheexhaustionoftheeconomicgrowthmodelthatservedRussiawellbetween1999and2008.11Afterannualeconomicgrowthhadaveragedover7%between1999and2009,growthslowedconsiderably.In2014,annualrealGDPgrowthslowedtojust0.6%,downfrom1.3%in2013,andaround4%in2012.Thisslowdownwaslikelycausedbyacombinationofmanyfactors,includingashrinkinglabourforce,theslowdowningrowthofgovernmentandconsumerspendingand,perhapsmostimportantly,alowanddecliningshareofinvestmentineconomicactivity(Connolly,2011;GaddyandIckes,2014).Thus,whenoilpricesplummeted,aneconomybuffetedbythecombinationofWesternsanctionsandahome-grownstructuralslowdown,plungedintorecession,withGDPestimatedtohavecontractedby3.7%in2015.Thedeepandso-farprotractedrecessionhasimposedconstraintsonfederalgovernmentspending.Theshareoffundsallocatedtosupporthealthandeducationhasdeclinedinrecentyearsastheshareallocatedtodefencerose.Facingasevererecessionin2015,theRussiangovernmentwasforcedtocutspendingastaxrevenuesdwindled.Whilesomeareasofgovernmentspendingwerecutbyover15%,theallocatedfundsfor‘nationaldefence’werecutbyjust4.8%percent(MinistryofFinanceoftheRussianFederation,

9Thisincludesbothmoneyspentonthestatedefenceorder(GOZ),andstateguaranteedcredits(SGCs)providedtoweaponsmanufacturers(Cooper,2016).10Datafor2015takenfromCooper(2016).Datafor2010fromCooper(2013b,p.63).11Essentially,thismodelwasbasedontheredistributionoffast-growingnaturalresourcerevenuestootherpartsoftheeconomy.ThecausesofthisslowdownarediscussedinZamaraevetal(2013),Mau(2013,2014)andKudrinandGurvich(2015).

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2015).Tellingly,thefundsallocatedtorearmamentwerenotreduced,withcutsmadeinsteadtootherareasofmilitaryspending.Evenastheeconomycontinuedtoshrinkin2016,fundingforrearmamenthasstillbeenshieldedfromcuts.Whilethebudgetfor2016statedthatthedirectgovernmentfundingallocatedtorearmamentwouldbeslashedby10%(over180billionRUB,or$2.3bnatcurrentexchangerates),state-backedloansofroughlythesameamountweremadeavailabletosupportrearmament,ensuringthattherealleveloffundingremainsthesame.TheRussiangovernment’sreluctancetocutspendingonrearmament,eveninthefaceofalongandseriousrecession,showsthepoliticalimportanceattachedtorebuildingRussia’smilitarycapabilities.WiththeRussianmilitaryakeycomponentofamoremuscularforeignpolicy,thisisunlikelytoendsoon,evenasthewidereconomysuffers.Evenifcutsarefinallymadetotherearmamentprogramme,itislikelythattheywillfallonareaswhereRussianindustryhasstruggledtomakeprogress.Forexample,thebreakdowninrelationswithUkrainehasseveredwhatwereclosedefence-industrialtiesbetweenthetwocountries.ThishascausedseveredelaysinRussia’snavalprocurementprogrammebecauseRussiacannotyetproducethepowerunitsusedinmajorsurfaceshipsthatitpreviouslysourcedfromUkraine.Thismeansthatanycutscouldwellaffectanareawhereplannedprocurementmightsimplynotbepossibleanyway.Otherprojectsthatmaysufferdelaysincludeplanstoproduceanewgenerationoffighterandstrategicbomberaircraft.Butevenifsomeaspectsofrearmamentmakeslowerprogressthanoriginallyintended,theinfusionofextrahydrocarbonrevenuesintothedefenceindustryhasalreadyensuredthatRussia’sarmedforcesaresignificantlymorecapablethantheyhadbeeninthepasttwodecades.Inthelastfiveyears,Russiahastakendeliveryofnewnuclear-poweredsubmarines,dozensofnuclear-tippedstrategicmissiles,andhundredsofmodernfighteraircraft,helicopters,andarmouredvehicles.Eventhoughrearmamenthasnotenjoyedentirelysmoothprogress,ifcontinued,itislikelytofurnishRussiawithamongthemostnumerousandsophisticatedmilitaryforcesintheworld.Tosumup:evenwithanimpairedeconomyhobbledbytumblinghydrocarbonprices,theRussiangovernmentappearsdeterminedtoupgradeitsmilitarycapabilities.ThiscouldfurtherdistortaneconomicstructurethatisbecomingincreasinglysubordinatedtoservingtheRussiangovernment’ssecurityandforeignpolicyobjectives(Connolly,2016;Monaghan,2016).ThismaywellreducetherateofeconomicgrowthinRussiaandcauselivingstandardstostagnate.ButitwillcertainlymakeRussiaamuchmorecapablemilitaryactor,andonethatothercountrieswillneedtolearntodealwith.Backtothefuture:whathappensnext?Itisclearthatdevelopmentsintheoilandgasindustry–bothatthegloballevelandinRussia–areimposingfinancialconstraintsontheKremlinandarelikelytocontinuetodosointhenearterm.WhileitisevidentthattheRussianleadershipcontinuestoassignagreatdealofimportancetoenhancingitsmilitarycapabilities–andhasdonesosincewellbeforethecrisisinUkraine-itisequallyclearthattoughchoicesneedtobemadeifthisrevitalisationofthosecapabilitiesistocontinueatitscurrentpace.Quitesimply,inconditionsofincreasingscarcity,maintainingcurrentlevelsofmilitaryspendingwillleadto

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furthercutstootherareasofspending,suchashealth,educationandinfrastructure.ThisthreatensRussia’slonger-termsocio-economicdevelopmentandwithitPresidentPutin’ssocialcontractwiththeelectorate.Weareatacrossroads.ThegeopoliticalsituationfacingRussia,asperceivedinMoscow(andnotinWesterneyes),willbecrucialtoshapingwhichdirectionRussiachoosestotake.If,ontheonehand,theKremlinperceivesRussiatobefacingathreatening‘arcofcrisis’,itislikelytheywillcontinuetoplacegreateremphasisonmobilisingdomesticresources–political,economicandcultural-toprevailingeopoliticalconflict.Undertheseconditions,militaryexpenditureisunlikelytofall.Whilea‘moreguns,lessbutter’strategywouldcertainlycarrysignificantrisks,notleastthatofalienatingamateriallyworse-offpopulation,Russianactionstodatesuggestthisisaplausiblefuture.If,ontheotherhand,theviewfromMoscowisofamorebenigninternationalenvironment–atleastfromtheWesterndirection-itispossiblethatpolicy-makerstherewillpursuealessradicalcourseofaction.ItisinthissensethattheWesthasanimportantchoicetomake.ItcouldchoosetorespondinkindtoRussianremilitarisationbyenhancingitsownmilitarycapabilitiesintheNATOtheatre.Thismightinvolveamixofchangestomilitaryposture,deploymentofforcesandexpenditureonforcesintheregion.Ingeopoliticalterms(althoughnotideological),thisscenariomightbecalleda‘NewColdWar’.However,thismightproducetheverythingtheWestwishestoavoid:apricklierandwell-armedneighbourthatperceivesarisingthreatfromitsWesternborders.Thiscouldprovecostlyforbothprotagonists.Itwouldbecostlyfromaneconomicpointofview(Europe’seconomiesarenotperformingmuchbetterthanRussia’s),andwouldalsodrasticallyincreasetheprobabilityofconflictbetweenNATOandRussia.AsmarterresponsewouldbetoalleviateRussia’sheightenedsenseofinsecurityandpreventareturntoamoreadversarialrelationshipofthetypethatprevailedintheColdWar.Inthisscenario,greaterengagementbasedontherecognitionofmutualinterestsmightpreventbothsidesfromembarkingonprogrammesthatenhancemilitarycapabilitiesinEuropeyetraisetheperceptionofinsecurityonbothsides.Thisscenariomightbecalled‘newDétente’andwouldinvolveWesternpolicy-makersworkingtopersuadetheirRussiancounterpartsthatthatremilitarisationwillonlyweakenRussiafurther,andthatreintegrationwithWesternpoliticalandeconomicstructuresbestservesRussia’sinterests.BibliographyBarabanov,M.andK.Makienko,R.Pukhov(2013)‘Voennaiareforma:naputiknovomuoblikuRossiiskoiarmii’[Militaryreform:OnthepathtoanewmodelRussianarmy],Moscow:CAST,June2013BP(2015)BPStatisticalReviewofWorldEnergyJune2015.London:BP.Availableat:http://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html

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