Russia-Egypt Rapprochement: is Russia Back to the Middle East?

November 14, Russia’s foreign minister Sergei Lavrov together with defense minister, Sergei Shoigu, paid ’the highest level visit in years‘ to Egypt. The talks were being held in a “2+2” format – two top diplomats and two military chiefs – for the first time in the decades-long history of relations between Egypt and Russia. In the talks, the Russian and Egyptian officials discussed military and technical cooperation, which usually implies arms sales. The latter intensified the earlier speculations about the renewal of Russia’s military assistance to Egypt following the partial suspension of military aid and equipment supplies from the United States.

Over the past three decades, the United States was Egypt’s strongest military and financial aid provider. U.S.-Egyptian relations have declined since the July 2013 coup, in which Egypt’s military overthrew Islamist President Mohamed Morsi. The subsequent crackdown on Morsi’s Muslim Brotherhood supporters, violent battles and killings of thousands of protesters in Cairo, instigated the Obama administration to withhold roughly a third of its $1.3 billion in annual military aid to Egypt. The United States has also frozen the delivery of F-16 fighter jets, M1A1 Abrams tank kits and Harpoon missiles. Al Jazeera reports, “Washington has said it would consider resuming some of the suspended aid depending on Egypt’s progress in following the interim government’s plans to hold elections.” Some view the Egypt-Russia conference as a message to the United States conveying the notion that Egypt has options beyond Washington as it seeks to arm itself; if Washington wants to maintain conditions for military aid, Egypt can simply do business with Russia. Meanwhile, Badr Abdelatty, an Egyptian Foreign Ministry spokesman, emphasized that “We are not replacing one party with another. We want to strengthen the independence of our foreign policy. We want to diversify. And Russia is a very important global power.” In fact, Russia’s return to the Middle East does not imply that Moscow’s overtures are an attempt to oust Washington from the region. First, the United States will simply never allow Russia to take control over the situation in the region. Second, Moscow and Washington are pursuing different goals in the Middle East. One seeks to maintain its naval and air defense forces, and the other, to have a constant access to the region’s rich energy resources.
Unlike the United States, who enthusiastically backed the Muslim Brotherhood taking power last year, Russia abstained from any explicit expression of support and refused to publicly criticize the debacle that brought the military back to power in July this year. “After the fall of the Muslim Brotherhood regime, Egypt flung back into the arms of its people and its sons. We have again become ourselves. I’d like to point out that we never forget our Russian friends. We greatly appreciate the position of the Russian people and the Russian government towards the June 30 Revolution…”, Nasser’s son Abdel Hakim Abdel Nasser spoke about that in interview with the Voice of Russia. Such a strategy has obviously scored points for Russia with the Egyptian authorities. Russia’s view of the Syrian crisis has also played in its hands. The Muslim Brotherhood was calling for military jihad in Syria, meanwhile the current Egypt administration entirely shares Putin’s standing on Syria. “We need a reliable friend, and hope that Moscow helps us to resist the pressure from the West”, said the former foreign minister Mohamed al-Orabi in his interview to Russia’s Kommersant newspaper. To further assure Egypt of their reliability, at the joint news conference with his Egyptian counterpart, Nabil Fahmy, Russian Foreign Minister Sergei Lavrov confirmed that “Russia is against any foreign intervention in internal affairs and we respect Egypt’s sovereignty and the rights of the Egyptian people to determine their future.”

Russia and the Middle East

Russia is particularly interested in reinforcing of its relations with Egypt given its weakening strategic positions in the Middle East over the past five decades. The wave of military coups in Northern Africa, that began in the winter of 2010, eventually entitled the “Arab Spring,” has dramatically undermined military and technical cooperation between Russia and the countries in that region. As a result, Russia lost its ties with Libya, Egypt, Saudi Arabia, and other major powers, leaving only Syria as a serious customer. Syria had, until recently, been Russia’s major stronghold in the Middle East. At the same time, Russia’s support for Bashar al-Assad’s regime has become part of the reason why Moscow has been at odds with most of the Persian Gulf states. Enhancing ties with the Arab world’s most populous country would give Russia another chance to fortify its foothold in the region, whose countries have largely aligned themselves with the United States. “Russia is returning to the Arab world because the Arab states are asking us to. They want someone to rely on other than the US and Saudi Arabia,” says Sergei Markov, a frequent foreign policy adviser to President Vladimir Putin. Another recent example of this trend is found in Iraq, whose new leadership started improving its relationship with Iran and restored its military and technical cooperation with Moscow. In the fall of 2013, Russians began the supply of Mi-35M helicopters to Baghdad based on a bilateral contract.
Besides the military and technical assistance that Russia provides its allies with, Islam and Russia’s religious pluralism are another mechanism for Moscow to rekindle its relations with the Islamic world. Russia recently hosted an international economic summit with the Organization of Islamic Cooperation (OIC). “Our goals are clear and transparent – at the October meeting with Russian Muslims’ muftis”, said Putin. “Russia is interested neither in split nor in reorganization of the Islamic world. We will continue support the reinforcement of the collective action in the international community in order to assure safety and security of the modern world”.
While U.S. diplomacy is failing to maintain its influence in the Middle East, Russia is restoring its reputation among Arab countries as a reliable partner whose assistance will persist even in the face of international pressure (case in point, Syria). So far, such a strategy seems to be working in Russia’s favor.

Russia-Egypt relations in hindsight

The Soviet Union and Egypt enjoyed close ties during the 1960s and early 1970s, when the Arab country was led by Gamal Abdel Nasser. Egypt’s president became popular in the Soviet Union both for his economic program and foreign policy, in which he was often critical of the West. Along with military support, the Soviets assisted Nasser with economic aid and helped to construct the Aswan High Dam along the Nile. In 1964, Soviet leader Nikita Khrushchev during his visit to Cairo awarded Nasser with the highest Soviet decoration – the Hero of the Soviet Union. After the death of Nasser, the new president, Anwar Sadat began to turn the country towards the West. In July 1972, he expelled roughly 20,000 Russian military advisers stationed in Egypt. Bilateral relations have never fully recovered.
In the November 14th talks, Nabil Fahmy, the Egyptian foreign minister, said Cairo was looking to “reactivate” an old relationship with Russia. “We want to give a new impetus to our relations and return them to the same high level that used to exist with the Soviet Union,” Fahmy said following a meeting with his Russian counterpart, Sergey Lavrov.
General Abdel Fattah al-Sisi, Egypt’s army chief and defense minister, told his Russian counterpart, Sergei Shoigu, that the visit indicated the continuation of “historic strategic relations via starting a new era of constructive, fruitful cooperation on the military level”, the state news agency reported. Additionally, for the first time since 1992, a Russian warship docked at the Egyptian port of Alexandria. The arrival of Russia’s flagship cruiser, Varyag, likely marks the resumption of joint naval maneuvers between the two countries. During their visit Russian diplomats and their Egyptian counterparts discussed military collaboration (arms supplies) and agreed to hold joint military drills to counter terrorism and piracy, said Shoigu. Nabil Fahmy said in an interview with Russia’s state-owned RT television channel that aired prior to the meeting on Tuesday, “the issue of purchasing new Russian weapons should be carefully examined.”
To some extent, Russian arms deals resumed back in the 2000s when Moscow upgraded the systems it had supplied to Egypt in 1960s and early 1970s: the S-125 Pechora surface-to air missile system (in the Pechora-2M version), the Kvadrat surface-to-air missile system (which received the missiles and some control elements from the modern Buk complex) and the self-propelled anti-aircraft Shilka weapon systems. The latter were upgraded with portable infrared surface-to-air Igla systems. Egypt also received new medium-range Buk-M1-2 and short-range Tor-M1E. The total volume of military trade between Russia and Egypt is not large by world standards, but nonetheless significant, $1.852 billion from 2005 to 2012 (19.4% of supply to Egypt), second only to the United States with $6.865 billion (71.8% of the total).
According to Russian media reports, the Russian Defense Minister might have also discussed the supply of modern weaponry to Egypt such as MiG-29 fighter planes, air defense systems, and anti-tank missiles – a package worth up to $4 billion.11 However, no agreement or pact on arms sale has been concluded so far. Russia’s supplies are contingent on Egypt’s ability to finance the purchases. “The economy will not permit major weapons purchases,” said Safwat el-Zayyat, a former general. “Policies in the region depend on the man in power, and that can change very easily.” After the coup and in the situation of unsettled government, Egypt’s economy remains unstable and the government is borrowing money from its neighbors (Saudi Arabia, the United Arab Emirates, and Kuwait). Thus, there is a big question mark over the prospect import of relatively expensive Russian armaments.
“We are ready to help Egypt in all the fields where it seeks cooperation,” Russian Foreign Minister Sergei Lavrov said. Sergei Lavrov and Nabil Fahmy discussed perspectives for trade and economic cooperation. “Russia is preparing offers, which include cooperation in the energy sector and heavy industry, the procurement of building and transport equipment…”. Besides, Russia is a major exporter of wheat, which Egypt desperately needs in light of the ongoing economic disruption.
Finally, the Russian and Egyptian foreign ministers discussed the situation in Syria and the elimination of chemical weapons there. Sergei Lavrov emphasized Egypt’s role in solving the Syrian crisis.

Conclusion

Recently, some commentators have claimed that Russia’s revival of Cold War-era friendships with Middle Eastern states, long a part of the American sphere of influence, are a sign that Cold War rivalries are back. Realistically, however, such comparisons with the Cold War are laughable, at best. Most importantly, Russia is no longer a superpower. With an economy basically reliant on natural resources, Russia’s economic growth has stagnated. Today, its GDP is only about 15 percent of the United States. Additionally, Russia’s population is fleeing the country.

Second, Moscow is rapidly losing its influence in the so-called “zone of privileged interests”- namely the countries of the Commonwealth of Independent States (CIS). Several Central Asian former Soviet republics, the Ukraine, and Georgia have all opted to sympathize with the European Union rather than ally with Russia. China is expanding westwards and plans to rent 5 percent of Ukrainian agricultural land. How coincidental it is that Chinese Xi Jinping has recently concluded a ten day-long journey throughout Central Asia, signing a series of economic agreements with the local republics, clearly drawing Central Asia closer to China – and away from Russia?
Driven by its historically imperialist ambitions (inherited from the Russian Empire and then the Soviet Union), Russia is reaching out to the Middle East, seeking to take on a role of mediator, thereby boosting its, inter alia, international prestige. So far, Russian diplomatic mediation efforts have been a failure. Allying with very unpopular Assad regime, Moscow is further alienating nearly all the major powers in the region- Turkey, Israel, Saudi Arabia. Thus, as the Washington Post article highlights, Russia is increasingly despised throughout the Middle East. If any of the Arab states happen to deal with Russia these days, Egypt in our case is such an example, they must do so out of sheer pragmatic interest, namely, the desire to purchase arms. Russia also has an interest in commercial deals with Middle Eastern customers such as Syria, Iraq, Saudi Arabia, UAE, Iran, but the arms trade turnover with them should not be overstated. The major foreign contracts on weapons supplies have largely gone to China and India. Overall, Russia’s trade with the Middle East still represents a smaller portion of its overall trade volume than its trade with India, China, or the European Union.
Moscow’s current interests in the region are more political/strategic than economic in nature. Russia’s aims to restore its image as a powerful player and a mediator, a country that not only shares a similar religious tradition, due to the large Muslim minority of Russia, but also will not attempt to pressure Middle Eastern states towards democracy (unlike the West). Another strong motivation for Moscow to actively engage with the Middle East is the urgent need to improve its image among its own citizens. In the ongoing protest movements in Russia one can clearly recognize methods and technology the rebels used in the Arab states. The idea of replication of the Arab Spring in Russia with a popularly organized opposition is of great concern to Putin. If Russia loses its two last major client states in the region, Iran and Syria, it will appear that Russia has lost its influence in the Middle East, and that Russia has lost its credibility both at home and abroad. These concerns explain why Russia’s rapprochement with Egypt appears to have considerable momentum.

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Russia’s Oil and Gas Economy

Today, Russia is the world’s largest oil producer and also one of the leading exporters of the fuel, nearly five million barrels a day. Russia alone accounts for 12% of world oil output. Very recently, it yielded its leading position in natural gas reserves to the United States. Unsurprisingly, Russia’s economy is highly dependent on the oil and gas exports. “More than 40% of Russia’s budget comes from oil-and-gas related duties and taxes”, says Tatiana Mitrova of the Russian Academy of Sciences’ Energy Research Institute. The Russian Federation relies on oil prices to remain at or above $110 dollars per barrel to balance its federal budget. The combination of high production and relatively high world oil prices have propped up both the Soviet and Russian economies for decades, however, such a situation cannot last forever. The country’s “known oil reserves”—primarily located between the Ural Mountains and the Central Siberian Plateau—are enough to sustain current production levels for just 20 years, according to a study in December by the European Bank for Reconstruction and Development (EBRD), vs. 70 years for Saudi Arabia and 90 years for the United Arab Emirates. Many experts have suggested that falling energy prices could prove fatal to Russia’s economy. Until Russians adopt a smart approach to managing its energy sector and start developing new sources for sustainable economic development, the future of Russia’s economy remains highly uncertain.

Price Fluctuations

On October 28th, North American Brent crude oil on the spot-market closed at $108.90 a barrel, reported Reuters. Russia’s Urals oil has been balancing at $107.60 per barrel. Texas WTI traded modestly lower at $96.70. Germany’s BND intelligence agency said it is possible that crude oil prices will fall to about $80 per barrel. In the next three years, “black gold” will cost around $100 per barrel, said experts at Russia’s Ministry for Economic development. With regard to the 2014-2016 budget, the Ministry of Finance estimates rely on $93-95 oil prices. Energy Research Institute at Russian Academy of Sciences predicts that Russian oil exports could fall 25% to 30% after 2015, reducing gross domestic (GDP) product by more than $100 billion.
The price declines anticipated are mostly the result of newly unveiled oil reserves in the United States. The American Petroleum Institute (API) recently summarized the growth in energy fuel reserves in the country. According to the API, the oil reserves in the U.S. have increased by 2.9 million barrels in October alone. According to the EIA report, “since 2008, U.S. petroleum production has increased by 7 quadrillion Btu, with dramatic growth in Texas and North Dakota. Natural gas production has increased by 3 quadrillion Btu over the same period, with much of this growth coming from the eastern United States. Russia and Saudi Arabia each increased their combined hydrocarbon output by about 1 quadrillion Btu over the past five years.” The surplus production in the energy market can be observed from the increasing oil stockpiles in China. As the Chinese information agency Xinhua reports, in September, China increased its oil stockpiles by 1.43%, up to 237.6 million barrels, as compared to August this year. “Steven Pifer, a Russia expert at Brookings Institute and a former U.S. ambassador to Ukraine, says that Gazprom is becoming increasingly wary of the changes taking place around it in the global energy market.”

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According to predictions by BP, the U.S. will outpace the world’s largest oil-producers, Russia and Saudi Arabia by the end of 2013. The catalyst for this change is American adoption of new technology enabling the exploitation of non-conventional oil. Thus far, over the past five years, oil outputs from low-permeability shales in the U.S. has increased by 20% and is now 2.1 million barrels a day. The cumulative daily oiloutput in the U.S. in 2012 was 8.9 million barrels. Thanks to horizontal drilling and hydraulic fracturing technology, the U.S. oil production would increase by 46%, equivalent to the entire output of Nigeria, says Daniel Yergin, vice chairman of consulting firm IHS. “Think of it like a non-OPEC country appearing in North Dakota or southern Texas,” Yergin told executives at the St. Petersburg forum in June.

Similar trends have been seen in gas industry. The U.S. last year tapped more natural gas than Russia for the first time since 1982, according to data from the International Energy Agency. America’s unexpected return as an energy superpower with its rapidly developing pipeline-free liquefied natural gas (LNG) market may cause a drastic shift in pricing power from suppliers to consumers. The latter poses a direct threat to Russia’s interests in Europe. Gazprom, the state-owned energy giant, is seemingly losing its grip on the European energy market, where it used to supply about 25% of the gas. According to a recent Bloomberg Business Week interview, “Yergin predicts natural gas, both conventional and liquefied, will be the No. 1 energy source by the end of 2030.” Meanwhile, Russia has only one operational plant with LNG capacity – in Sakhalin. Any potential competition in the energy supplies market would lower prices and thus cause Europe to seriously consider other options to its not-so-friendly gas supplier, Russia. Europe has not forgotten the freezing winters of 2006 and 2009, when Russia tried to gain the upper hand in pricing negotiations with Ukraine by cutting off natural gas exports for days. “Europe is certainly looking for alternatives,” says Pifer.
The European Commission recently approved a list of 250 projects in energy infrastructure, that qualify for funding of €5.85 billion in 2014-2020. None of the projects from Russia got nominated, says the Kommersant, Russian business newspaper. Thus, two major Russian pipeline projects, Nord Stream and South Stream received no grants from Europe. The European Union is switching its policy toward the South, yielding preference for three projects – “the Southern Corridor” (annual supply of 23 billion cubic meters of gas from Turkmenistan and Azerbaijan), the Algeria-Italy pipeline (7.5 billion cubic meters), and the Cyprus-Greece pipeline (8 billion cubic meters). However, Turkmenistan has already agreed to sell significant supplies of gas to China, and the idea to build the pipeline westwards, across the Caspian seabed , has been vociferously opposed by Russia. Thus, only Azerbaijan will be able to supply gas via the Southern Corridor, and its volume will be restricted to 10 billion cubic meters a year. Meanwhile, the European Union’s natural gas production is falling due to the exhaustion of the North Sea reserves. By 2020, production is expected to drop by more than 40 billion cubic meters per year, down to 250 billion cubic meters, according to the International Energy Agency. Europe is going to compensate for this decline by importing large quantities of liquefied natural gas (LNG) and some coal.

Former Russian Energy Minister Igor Yousoufov, currently a member of the board of directors of Gazprom, believes that there is nothing to worry about. Gazprom can satisfy domestic consumption and export needs without turning to shale gas. 28 trillion cubic meters of gas under Gazprom is sufficiently enough to last for decades – to satisfy both the domestic needs of Russia’s economy and to comply with our obligations to our allies and foreign partners. While Russia’s position as a dominant energy player has been undermined by the West, the country needs to at least secure its stance in faster-growing Asian markets. “We are really behind the curve and need to accelerate,” says Ildar Davletshin, an oil and gas analyst with Renaissance Capital.

China – Cooperate and Be Alert

Even though Russia still controls the majority of Central Asia’s energy exports, its strategic position is being overtaken by China. Russia, which for years has tried to exploit the former Soviet republics using exclusive contracts and unfavorable oil and gas prices, has effectively pushed those countries into China’s arms. Kazakhstan and Turkmenistan with their ample energy reserves are now more prone to cooperate with China over their gas supplies. In this context, Russia’s recent $85 billion deal to supply oil to China comes as quite a surprise. Instead of concentrating its own efforts to build strong industry in the remote eastern regions as a counterweight to China’s rapid expansion north- and westward, Russia’s government agreed to jointly construct an oil refinery, in which 49% will be owned by the Chinese and 51% by Russians, and to jointly extract oil in Eastern Siberia. Under the agreement, Russia’s biggest oil producer, Rosneft, will supply an additional 70 million barrels of crude oil a year to China for 10 years. The Chinese government, for its part, is eager to obtain Russian supplies, as it fears a potential security weakness coming from the current China’s reliance on crude oil supplies from unstable Persian Gulf. In June, the two countries signed an agreement for Russia to supply 2.5 billion barrels of oil valued at an estimated $270 billion to China over the next 25 years. Russia’s second-biggest natural gas producer, Novatek, also announced a deal to supply liquefied natural gas (LNG) to China’s largest oil and gas company, CNPC, for the next 15 years. Most importantly, the terms of the deal, including pricing, are being kept secret.
At first glance, it might look like Russia has a giant client who is eager to consume its oil and gas and is willing to pay hard currency, lessening its reliance on exports to Europe. However, if we look at the structure of exports from Russia to China in 2012, we will see that the share of technology and machinery was only 0.7%, with the rest being mineral resources (such as hydrocarbons – around 69%). In hindsight, the first significant agreement between Rosneft, Transneft and CNPC to supply 300 million tons of oil until 2030 ended in scandal. The two parties each calculated the transportation rates differently. The potential loss for Russia’s Rosneft and Transneft could have amounted to $16.9 billion and $11.3 billion, respectively. The parties could not settle the dispute for over a year, during which CNPC underpaid for the Russian oil. In the end, the Russian companies agreed on an intra-state discount of $1.50 per barrel. Thus, given the aggregate volume of Russian oil supplies to China at the rate of 760 million tons per annum until 2038, Beijing could technically save up to 56.8 billion.

So, for now, the both parties seem to be in a win-win situation: China secured supplies of oil (lessening a reliance on maritime routes the U.S. could easily blockade) and Russia has found an offset to the new reality in Western Europe (including “gas conflicts” with Belarus and Ukraine). However, Russian government should not get too excited about the new contracts with China and millions of dollars they got from China in loans. Given the persistent presence of Chinese business in Central Asia and its further expansion to the north and west, the Russians should look two or three decades ahead and think where the current dynamics could ultimately bring the country. One of the possible perspectives is that Russia will gradually yield its economic sovereignty to China’s ambitions, turning into its mineral resource fringe in the East and into an object of Chinese expansion overall. The Chinese have already started exploring Russian market. The largest construction corporation, China State Construction Engineering Corporation (CSCEC), won a tender to build 1.5 million square meters of housing in the Far Eastern city Khabarovsk. China massively invests both human and economic capital in Russia’s Far East, and the Russian government endorses such investments since it itself has no available funds for the region’s development. As Sergey Sanakoyev, responsible secretary at the Russian-Chinese chamber for assistance in trade of machinery and innovations, says “as we can see from the current debate around the sources for the Far Eastern region development, there is no 5 billion ruble available in the budget as it requires. This means that the budget funding is going to be less while the remaining expenses could be covered by private funds. The only place the state could borrow money is Asia”. For all its profitability, such a close cooperation with China could result for Russia in both financial dependence and total loss of control over the remote territories.

Russia’s Oil Industry is in Decline

Given that Russia views its natural gas and oil as the main gears for its economic development, it should probably ensure that its energy industry infrastructure should always be modern so that its resources could be most efficiently utilized. However, the reality is the opposite. “The industry’s traditional core, the giant West Siberian fields inherited from the Soviet Union, has been in decline since 2007.” The reason that oil production still goes upward (by about 1.6% in 2012 and 1.4% in 2013) is that Russia continues infill drilling in the older fields and developing new sites on Russia’s periphery. The domestic energy market in Russia appears to be scarce. As Maxim Barskiy, a joint holder of an independent company Matra, says “almost all more or less attractive assets have gone over the past few years, whereas the Soviet reserves have been running short, yet the new sites are not being developed”. He says that there are only two or three assets in the market that could be of interest to an investor.
Russia has not started extracting oil from low-permeability formations as the preparations are still in progress. Large oil reserves, about 22 billion barrels, are in the Bazhenov shale in Western Siberia. Rosneft holds a license for 50% of the reserves. In 2012, Rosneft started cooperating with ExxonMobil, using its technology and experience.
At a high level, Russia’s oil and gas industry is its main resource, yet its infrastructure remains in dire condition and needs to be renovated, in addition, new sites and technology should be exploited. With the notable exception of the military and defense sector, most other areas of the Russian economy have been poorly maintained and are in need of modernization. Worse, few new industries have grown at all. Such a situation is dangerous for the country’s economy. Oksana Dmitrieva, economist, deputy chair of the Just Russia party (Spravedlivaya Rossiya), says “if the Federal budget’s zero growth is balanced by the oil export revenues, regional budgets do not get “oil money”. Hence, “the current stagnation causes a huge budget hole of $12.5 billion in regional budgets. The Federal budget has no solutions to how to make up this regional budget deficit yet,” says Oksana.

Russia needs to innovate and modernize

Since the country’s economy is still predominantly commodity-driven, Russia’s oil-rentier state is in urgent need of dramatic modernization. The most sustainable and safe new oil sites should be prioritized in terms of investments; oil development in climate-impacted and geologically more complex zones demand more knowledge and sophistication. The government should therefore channel investments into research and technology, including partnerships with other energy-rich states, subsidize the development of energy efficient and less carbon-intensive fuels. Russia could start exploring offshore Arctic fields and develop unconventional sources like oil sands, shales and deep marine shelves. According to some estimates, if Russia takes this path, it will potentially be able to extract 1.4 million barrels of shale oil per day by 2030.

By and large, the next generation of Russian oil will have to be extracted from places that are colder, deeper, less accessible, and more complex. To be able to tackle these challenges, Russia should stimulate the innovations in the industry today. Alas, innovation is a long-term business that rarely brings quick profits, and often results in failures that never pay back. Russian oil oligarchs show little incentive to invest their oil income back into the modernization of the oil industry. This is a notorious example of short-time preference whereby they would rather invest in offshore ventures, foreign real estate, bonds and gold, etc., all things that would bring relatively quick benefits. “The major demand for innovations will most likely take place when the oil prices are no longer high,” said Russia’s vice-president Igor Shouvalov at the World Economic Forum in Moscow in October 2013. Thus, consistently high energy prices have allowed the country to survive but not to develop. In fact, high commodity prices have created stagnation in Russia’s economy: by propping up the ruble, they have rendered Russia’s non-oil exports less competitive and hampered increases in productivity. triggered inflation. In other words, high oil prices have held the country off the path toward advancement and innovation.
Another mechanism to encourage Russian shale oil activity is a more favorable taxation system. In September 2013, the government introduced long-awaited tax breaks. As Platts, McGraw Hill Financial reports, “the stimulus gives oil producers a reduction of between 20% and 100% in the mineral extraction tax (MET) rate, depending on reservoir permeability and layer thickness. In particular, crude produced from the most promising Bazhenov oil play in West Siberia will enjoy an MET rate of zero. Other shale and more broadly tight oil reserves will see tax reductions at between 20% and 80% from the standard rate.”
In the long run, Russia’s economy should stop being dependent on favorable oil prices. Hydrocarbons should gradually become a back-up plan. Russia, as well as all other oil-producing nations, should start thinking about a post-oil economy and diversify its economy into high-tech industries (e.g. renewable energy, semiconductors, chemicals, and aerospace). Innovation is important not only in the energy sector but also in manufacturing where Russia lags far behind the countries with developed economies. Investment in advanced manufacturing and increasing labor productivity would render Russia’s economy more sustainable and competitive. Siberia, besides its oil and gas reserves, is rich in other natural resources (timberland, fresh water reserves, etc.) that could be practically utilized if efficiently organized and managed. Thus, Russia has large potential for economic growth based, not necessarily on its hydrocarbons, but other forms of capital (human, intellectual, land) in which Russia is rich.

Snowden’s N.S.A. Revelations and their Impact on Russia

Recently, Edward J. Snowden, 30, the former National Security Agency (N.S.A.) contractor, disclosed several secret American surveillance programs. He fled to Hong Kong and then to Russia. In June 2013, Snowden arrived in the transit zone of Moscow’s Sheremetyevo Airport and in early August was granted asylum in Russia for one year under the condition that he stopped harming the United States. Recently, from the words of his lawyer, Anatoly G. Koucherena, he was offered and accepted a job with one of Russia’s major Internet companies. Putin, a former KGB agent, rejected U.S. pleas to send Snowden back to America where he would face espionage charges. By and large, Snowden’s revelations about U.S. phone and internet surveillance on and Russian officials’ behavior have had considerable repercussions for the country, – in its both foreign and domestic policies. On the diplomatic front, the fallout from the N.S.A. scandal has harmed U.S.-Russian relations to the point that experts have declared “the end of reset”, referring to the thaw initiated in 2009. From the standpoint of domestic policy, the Russian government has become more alert regarding IT security within Russia proper and has hastily started equipping its communication systems with extra protection. One important side-effect has been the creeping infringement of the privacy rights of Russia’s own people. Finally, the surveillance revelations have altered the global outlook on intelligence gathering and have spurred interest in multilateral regulation of cyber-espionage.
Regarding its foreign policy, “Russia’s disappointing decision to grant Edward Snowden temporary asylum” has punctured relations with the United States. President Obama canceled his planned bilateral meeting with Putin due to take place in Moscow in September. Former Secretary of State Condoleezza Rice approvingly commented on Obama’s decision, saying that Russia’s gesture was a “slap in the face to the United States of America”. Aleksei K. Pushkov, chairman of the Russian Parliament’s foreign affairs committee, said the move heralded the end of the Obama administration’s “reset” policy. “The bilateral relationship has come to an impasse,” he said in a telephone interview to the New York Times. However, the cancellation of the meeting was not a complete break in Washington-Moscow relations. Obama still attended the annual conference of G-20 in St. Petersburg. Also, more importantly, the bilateral agreement on Syria appeared to signal more cooperative relations, at least for that moment.

The relationships between the two states will continue to develop with their usual ups and downs unfolding around different issues of international importance. Nevertheless, the bomb has exploded and the consequences are likely yet to come. The exposure of U.S. surveillance and the global fury that followed may lead to a major review of intelligence gathering rules in the global community and the formulation of an internationally binding agreement on spying through telecommunications and cyberspace. However, the latter would be hard to accomplish, both because agreements are time-consuming and context-dependent, ultimately limiting their usefulness. What other states can do now, however, is to protect themselves using their own ingenuity.
Russia is in the process of rethinking its information security policy and adopting robust measures to protect information and communication within the country. However, acting under guise of greater transparency, accountability for government, and better protection from foreign intelligence, Russian government actions are creating more secrecy, while at the same time attempting to obtain greater access to personal information of its citizens, in form of social networking and email data. Russia plans to fortify its information security by creating a state segment within the Internet that would protect the state-owned web-sites including communication and documentation. The Federal Guard Service (FSO) plans to launch the project on January 1, 2017. Individual users will be able to use it under condition that they pay for storing their data in the FSO servers. The work on the hosting-provider will be led by Russia’s major IT-companies such as Kaspersky Lab. The New York Times reports that “the Russian Senate is also proposing the creation of a United Nations agency to monitor collection and use of personal data, akin to the International Atomic Energy Agency, which oversees nuclear materials, to keep tabs on firms like Facebook and Google that harvest personal data.” Russian government employees are required to use special FSB-licensed applications instead of Microsoft’s built-in encryption on Windows. For Russian-based technology companies, the security requirements have gone even further. The FSB ordered Yandex, Russia’s largest search engine, to identify people offering any kind of support (online donations in particular) to the opposition leader Aleksey Navalniy. Yandex complied, and later, as New York Times reports, “these people received harassing phone calls from a Kremlin youth group.”

The Izvestiya newspaper suggests that Russia has gone even further in its protection measures against global electronic snooping – so far as returning to typewriting. The FSO submitted an order for 20 Triumph Adler typewriters on the government procurement agency website (Zukupki.gov.ru). According to their manufacturer’s description, the typewriters are designed to create relatively complicated documents and are recommended for printing secret documents.
Russia intends to apply enhanced security measures during the Olympic Games in Sochi. Russia’s FSB seeks to insure that no communication by both competitors and spectators remain unnoticed during the event, according to the report compiled by Russian investigative journalists who had achance to look into preparations for the 2014 Games. The journalists, Andrey Soldatov and Irina Borogan, found that major alterations have been made to telephone and Wi-Fi networks in the Sochi region. The main target of attention is the modernization of Sorm, Russia’s telecommunications interception system. Rostelekom, Russia’s largest telephone connection provider, is installing Deep Packet Inspection (DPI) technology on mobile communication networks, allowing rich analysis of data passing through the network. For example, traffic can be monitored and recorded based on specified key words. DPI can also identify the individual user. Combining Sorm and DPI technologies allow authorities to identify users who have visited webpages of protesting groups or opposition activists and intercept the pertinent communication.

Besides protection against external espionage, such policy provides the state authorities with more power to control its citizens’ privacy. The latter threatens to severely tarnish trust (which already has repeatedly been proven to be weak) between an individual and a state. When citizens realize that their routine emails or Facebook updates can be spied on, they don’t feel more comfortable, but rather they think twice before sharing anything on the Internet or even having a personal call to a friend. Hence, the question – how much of our day to day life should be monitored in thename ofsecurity?where is the balance between privacy of an individual and transparency of a society? On the larger scale – globally – this question could be raised around the balance between sovereignty of a state and confidence in its relations with other states.

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The disclosures of the N.S.A’s vast data collection program would not have been such a scandal had it solely monitored phone and internet communication of suspected terrorists. Although espionage has always been granted frowned looks, it has remained part and parcel of any country’s national security – to collect intelligence with a purpose to advance national security needs. However, in the N.S.A. case, when it became known that, Angela Merkel, Chancellor of Germany, and one of America’s closest allies, was among the group of 35 foreign leaders with their phones tapped for over ten years, and when Google admitted that every email (including those of ordinary individuals) can be tracked, it was clear that America’s surveillance agencies have overplayed their hand. Most importantly, the scandal undermined international confidence not only in the United States, but it jeopardizes trust in relationships between international partners. ‘We don’t know if we’re only seeing the tip of the iceberg or if other governments are acting in the same ruthless manner,’ Swiss president Ueli Maurer told the Schweiz am Sonntag weekly.
Now, states are undertaking collective actions aimed to combat further abusive electronic surveillance and to create binding regulations within the United Nations framework. Germany and Brazil drafted a joint UN resolution that condemns “indiscriminate” and “extra-territorial” surveillance, and ensures “independent oversight” of electronic monitoring. Russia, China and other countries “have submitted a draft international code of conduct for information security to the UN, and are working to advance relevant negotiations,” China’s Foreign Ministry spokesman, Hua Chunying said October 29.
Realistically, once programs like those revealed by Snowden are started, they tend to continue despite numerous political efforts to halt them. Perhaps anger and pressure from the world community will influence Washington to restrain its behavior, but sooner or later, the restrictions and UN resolutions will fade into insignificance, as a result of the determination of U.S. intelligence and the relentless march of technological progress in the digital age. The United States will not willingly give up surveillance. Rather, it is more likely that it will upgrade to more sophisticated and subtle technologies – to continue actions that better serve its perceived national interest.