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MSDI Kearney/Ermo lab Russia Oil Disadvantage

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oil/economy uniqueness.............................................................................................9
oil/economy uniqueness...........................................................................................11
soft power uniqueness........................................................................................ ......12
Relations high............................................................................................ ...............14
soft power links........................................................................................................15
soft power links........................................................................................................17
price links......................................................................................... ........................18
price links......................................................................................... ........................19
energy key....................................................................................................... .........20
high prices key.........................................................................................................21
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high prices key.........................................................................................................25
lng link............................................................................................................ ..........26
a2: dutch disease/diversification..............................................................................27
a2: dutch disease/diversification..............................................................................28
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diversification extensions.........................................................................................31
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diversification extensions.........................................................................................34
putin link................................................................................................................ ...35
a2: small decline okay..............................................................................................36
a2: small decline okay..............................................................................................38
Restorationists – now key time.................................................................................39
Imperialism extensions................................................................................... ..........40
russian economic collapse impact............................................................................41
Hard Power BAD.......................................................................................................43
Soft Power GOOD............................................................................................... .......44
A2: Russia-Europe turn.............................................................................................45
Russia Solves ME Dependence.................................................................................46
Russia Econ Impacts................................................................................. ................47
Loose Nukes Impact Mod 1/3....................................................................................48
Loose Nukes Impact Mod 2/3....................................................................................50
Loose Nukes Impact Mod 3/3....................................................................................51
Loose Nukes links.....................................................................................................52
A2: Russia will never turn imperialist........................................................................53
Fiona Hill Qualifications............................................................................................. 54
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A2: Critiques............................................................................................ .................63


A2: Critiques............................................................................................ .................65

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A. Uniqueness

Rising oil prices encourage deployment of Russian soft-


power over the resurgence of the Russian Bear.
Fiona Hill, a senior fellow at the Brookings Institution, is currently on leave as the
national intelligence officer for Russia and Eurasia at the National Intelligence
Council, Current History, " Moscow Discovers Soft Power " October 2006
Russia may not be able to rival the United States in the nature and global extent of its soft power. Harvard
Professor Joseph Nye, who coined the term, has defined soft power as emanating from three resources: a state’s
“culture (in places where it is attractive to others), its political values (where it lives up to them at home and
abroad), and its foreign policies (where they are seen as legitimate and having moral authority).” Nye notes that
“the Soviet Union once had a good deal of soft power. . . . Soviet soft power declined even as its hard economic
and military resources continued to grow. Because of its brutal policies, the Soviet Union’s hard power actually
Russia today is on its way to recovering the degree of soft
undercut its soft power.” But
power the Soviet Union once enjoyed in its immediate sphere of influence. This
resurgence is becoming increasingly apparent to careful observers in Eurasia. As one of the world’s most energy-
abundant countries, Russia has since 1999 benefited immensely from the combination of
dramatically rising oil
international concern about energy security, instability in the Middle East, and
prices. It has regained the prominence in global energy markets it enjoyed in the 1970s and 1980s when the
Soviet Union, not Saudi Arabia, was the world’s preeminent oil producer. The Russian economy, too, has
bounced forward on a wave of high oil prices and increased oil production. Since 1999,
Russia’s annual gdp growth has averaged between 6 and 7 percent. The government boasts a healthy budget
Russia’s economy may still be the size of a minorleague Brazil
surplus and record currency reserves. Although
energy resources seem to give it a shot at the premier league in the
or Mexico, its
future, especially if oil prices remain high. The striking growth of the economy since 1999 has also
begun to change the nature of Russian power and the way it is exercised. Although Russia has retained many of
the vestiges of Soviet hard power—including nuclear weapons and a massive conventional army—and is now
New energy
regaining the Soviet Union’s position in energy markets, it is not the superpower of old.
revenues have not been used to boost military spending or to revive Russia’s
defense industry at the expense of other sectors. On a range of different indices, Russia’s defense spending
remains roughly comparable to that of other major military powers like India, Japan, France, and the United
Kingdom. Since 2000, moreover, Russia has gradually begun to eschew the old Soviet approach of emphasizing
Instead, Moscow
the maintenance and deployment of its military power to ensure its geopolitical position.
has moved in the direction of first building up and now starting to use its economic
resources to encourage neighboring states to associate more closely with its
regional policies. At the same time, Russia’s growing economy, its consumer products, its popular culture,
and the persistence of the Russian language as the regional lingua franca for commerce, employment, and
education in many of the states of the former Soviet Union have all made Russia a more attractive nation for
regional populations than it was in the 1990s. At this juncture—in spite of the war in Chechnya and repeated
confrontations with Georgia in the South Caucasus—no regional state reasonably anticipates a Russian military
invasion. Meanwhile, Russia’s Gazprom is the primary provider of natural gas to the Eurasian states and has
regained its position in markets like Georgia, where other companies had entered in the late 1990s. The Russian
electricity provider Unified Energy Systems (ues) has similarly expanded its markets, especially in the Caucasus
and Central Asia, where early energy sector privatizations brought in foreign investors. And private firms like
If
Russia’s Wimm-Bill-Dann Foods have begun to dominate regional markets for dairy products and fruit juices.
the influx of migrants from surrounding regions continues; if Russian business
investment grows in neighboring states; if regional youth continue to watch Russian TV and films
and purchase Russian software, cds and dvds, and other consumer products; and especially if the heavy
hand of Moscow is pulled back and the hand of commerce is extended instead in
Russian foreign policy, Russia will achieve the economic and cultural
predominance in Eurasia that the United States has in the Americas. However, some skill
is required to draw on soft power resources in crafting policy—a fact demonstrated by the current failure of the
United States to capitalize on its own undisputed soft power and the global growth of anti-Americanism. And it is
by no means assured that Russia’s increasing soft power will be used to positive effect.

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B. Links

The plan would would cause a price decline – affecting


Russia especially.
Business Week, John Carey ”Taming the Oil Beast” February 24, 2003 lexis
Yet reducing oil use has to be done judiciously. A drastic or abrupt drop in demand could even be
counterproductive. Why? Because even a very small change in capacity or demand ''can
bring big swings in price,'' explains Rajeev Dhawan, director of the Economic Forecasting Center at
Georgia State University's Robinson College of Business. For instance, the slowdown in Asia in the
mid-1990s reduced demand only by about 1.5 million bbl. a day, but it caused oil
prices to plunge to near $10 a barrel. So today, if the U.S. succeeded in abruptly
curbing demand for oil, prices would plummet. Higher-cost producers such as
Russia and the U.S. would either have to sell oil at a big loss or stand on the
sidelines. The effect would be to concentrate power -- you guessed it -- in the hands of Middle Eastern nations,
the lowest-cost producers and holders of two-thirds of the known oil reserves. That's why flawed energy
policies, such as trying to override market forces by rushing to expand supplies or mandating big
fuel efficiency gains, could do harm.

Failure to capture soft-power from a growing energy-


industgry causes Russia to resort to hard power –
imperialism.
Fiona Hill, a senior fellow at the Brookings Institution, is currently on leave as the
national intelligence officer for Russia and Eurasia at the National Intelligence
Council, Current History, " Moscow Discovers Soft Power " October 2006
Despite the necessary cautions about the perils of overemphasizing the oil price windfall, energy will
remain the base of Russia’s power for the foreseeable future. It will underpin the
Russian economy and domestic stability, enhance Russia’s political and economic
position in Eurasia, and restore Russia to a degree of its former superpower status
—at least as an energy superpower, by making it a player in Asia as well as in Europe, and by increasing its
Its vast energy resources also have the potential to
attractiveness to the United States.
make Russia a different kind of power in the twenty-first century from what it was in the
twentieth (although, of course, this is in conjunction with the collapse of the Soviet Union, the end of the nuclear
Russia
and military confrontation with the United States, and the contraction of Russia’s geopolitical ambitions).
today is not the Soviet Union of the past. Russian oil no longer supports a massive
military-industrial power and military machine. This, in itself, could be one of the most significant
developments of this decade—especially when one considers the trajectories of Germany and Japan after World
Fueled by oil and gas, Russia may yet follow the same path after the end of
War II.
the cold war. It could become the dominant power in its immediate neighborhood
by virtue of its economic growth and new soft power resource potential—not as a
result of the old hard power that led it to invade, conquer, and colonize territory in
the past. Russian dominance of Eurasia in this manner would be much more palatable, even for the traditional
hawks in the United States and the West, who eventually became comfortable with the economic dominance by
Politically, however, Russia’s soft power
Germany and Japan of their immediate neighborhoods.
potential will not be realized if hard power advocates win out and squander
Russia’s developing economic relations with the cis by resorting to old strong-arm
tactics in pushing Moscow’s interests. The tension between soft and hard power
advocates remains acute. In addition, foreign policy and domestic policy are
intertwined. A harder, more authoritarian line in Russia’s domestic policy could
easily spill over into its foreign policy if the siloviki gain the upper hand in Moscow. This is a

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time for some optimism about Russia’s economic future and its new role in its
region and the world, but it is not a time for complacency. Russia’s partners need to
encourage Moscow to take steps to enhance and strengthen the energy sector and to use the revenues it
generates appropriately. This is a critical issue not just for Russia, but for a much broader region in Eurasia, as well
as for the primary consumers of Russian energy in Europe, Asia, and increasingly the United States.

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C. Impacts

Imperialism from falling energy-prices causes NATO to


bring in Ukraine.
Alexander J. Motyl, Professor of Political Science at Rutgers University, Columbia
University Press, “Imperial Ends: The Decay, Collapse, and Revival of Empires” July
2001
an imperial entity will be especially susceptible to all manner of
More important, so brittle
shocks, even relatively minor ones. Although it is impossible to predict when such stress surges will
strike, we can imagine that they will involve drastic reductions in easy money,
perhaps as a result of falling energy prices, and/or in the continued, or growing, refusal of the
Russian Federa- tion’s regions and republics to pay taxes to a core that may not be able to compel them to do so
anyway. Either way, such an empire would not survive. Indeed, it is not inconceivable that an imperial state so
brittle yet so over- extended could even disintegrate. 4 Only if partial reimperialization were to creep into place
during the next two to three decades, thereby enabling Russia to grow stronger relative to the non-Russians, could
it avoid advanced decay, brittleness, and well-nigh inevitable collapse. Although the Russian state’s collapse may
be good news for non-Russian nationalists, the disintegration of a decaying empire and huge state is un- likely to
be entirely peaceful. One need not be a pessimist to suspect that the stability and security of Russia, its
neighbors, and Western Europe can only deteriorate. 5 Is there no alternative to this gloomy forecast? Several,
even gloomier, possibilities exist. If the Czech Republic, Hungary, and especially Poland fail to join the European
Union before, say, 2005, the total overlap of political and economic institutions I referred to earlier may be
delayed for some years. 6 If the European Monetary Union produces social distress, economic dislocations, and
political infighting, Euroland could turn into an awkward amalgam of squabbling states. 7 And if, in ad- dition to
Bosnia and Kosovo, NATO experiences a few more blows to its self-esteem, it too might lose its élan. 8 If any or all
of these eventualities come to pass—and the odds may not be quite as long as they seem— Euroland’s expansion
if Russia becomes
would be far less significant institutionally than I have suggested. Alternatively,
outwardly imperialist, NATO is likely to respond by bringing the Baltic states and
even Ukraine into its fold.

Nuclear war.
George Friedman, Ph.D., internationally recognized expert in security and
intelligence issues relating to national security, and founder, chairman and Chief
Intelligence Officer of STRATFOR, "Finding Russia's Limit" December 3, 2004
If Ukraine were part of NATO, Russia would become indefensible. This does not mean
NATO would have the intention of invading Russia. It would mean that if NATO's intentions were to change -- and
Russia would find itself
nations must always assume the worst about the intentions of others --
fighting along nearly the lines of Adolf Hitler's deepest penetration into the country
in World War II. And they would find themselves fighting on those lines on the first
day of the war. They would lose the ability to defend themselves conventionally.
Looking at the map more closely, there is a solid NATO salient in the west, growing U.S. influence and presence in
the Caucasus and a growing U.S. economic presence in Kazakhstan and the Muslim republics in the south. U.S.
troops already are in Uzbekistan and Kyrgyzstan. Southern Russia to the Caucasus would be accessible to Moscow
only through the 300 mile-wide Volgograd corridor. The ability of the Russians to project credible power into the
Caucasus dramatically would decline. The Black Sea would be virtually surrounded by U.S. allies and become an
American lake. There would be U.S. naval bases in Odessa and the Crimea. Russian ability to influence events in
the Caucasus would evaporate. Under these circumstances, the ability of Russia to resist centrifugal forces inside
the federation would simply disintegrate. It would not be a matter of Chechnya alone. Secessionist movements in
the Russian Pacific Maritime Provinces, Karelia and in other regions would surge. Resistance could prove
particularly robust in Russia's titular republics such as Tatarstan and Bashkortostan, which incidentally not only
provide a sizable portion of Russia's oil output, but also sit astride the only infrastructure that pumps Siberian oil
Moscow -- and President Vladimir Putin -- would find itself
to the rest of Russia and the rest of the world.
presiding over the second wave of disintegration. Serious force projection even
inside Russia would become difficult, leaving Russia with a nuclear option and not
much else. If Ukraine were to move decisively to the west and join NATO, we do not think it too extreme to
raise the question of whether the Russian Federation could survive.

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oil/economy uniqueness
Russia's oil-driven economy is high but vulnerable.
Birmingham Post, Trevor Law, "Betting on the Russian Bear" March 8, 2008
lexis
Russia is rich in natural resources, especially oil and gas. Russian energy
companies are well-run, conservative companies that Robin Geffen, manager of the excellent Neptune
Russia and Greater Russia funds, thinks "are not going to get caught in the classic 'boom to bust' oil cycle that we
have seen at least twice over the last 25 years". Other than gas and oil, Russia is also one of the world's largest
producers of platinum and palladium. Both are important metals for needs as wide-ranging as fuel cell production,
microchips and, of course, jewellery. Russia is also a large and growing producer of gold. It is one of the two key
global producers of diamonds and this should be beneficial given the increasing demand of diamonds in Asia,
The rise of the Russian consumer is probably the most significant
particularly China.
development in this market. Average wages have increased by over 20 per cent
per annum in recent years in a relatively low inflationary environment. A recent
Goldman Sachs study stated that over the next 20 years we will see a middle-class spread across Brazil, Russia,
India and China of no fewer than 800 million people, which is larger numerically than the current combined total
population of the US, Europe and Japan. While this may seem encouraging news, it is a little misguided to view
Russia in the same terms as a Western democracy with similar economic values. According to recent surveys,
almost 70 per cent of Russians have no savings at all and you can hardly expect to find a significant pensions
industry when the life expectancy of the Russian male has been estimated as low as 59, a year before pension
age. The average Russian's distrust of banks is understandable if you look back to the 1990s. Millions lost their
rouble savings when the Soviet Union collapsed in 1991 and in the financial crisis of 1988, the rouble's value
against the dollar fell fourfold. Mr Putin's recent tirades against the West and the recent forced closure of the
British Council offices in his country owe more to the old Cold War regime than a bright new dawn of democracy.
Evidence that Russia should not be regarded as a happy ally searching for Western values came last month with a
somewhat chilling warning from a high-ranking official: "If you continue to preach to us, we will become your
enemies." In May, Mr Putin hands over the presidency to his hand-picked successor Dmitry Medvedev, but few
doubt he will remain the guiding light behind his country's policies. Perhaps St Petersburg University professor
Stanislav Tkachenko best illustrated the often confusing messages coming out of the new Russia when he
summed up Mr Putin's character saying: "You can't say he is a Slavophile or a Westerner because he is both, but
there have been high
above all he stands for a great Russian state." These considerations aside,
rewards for investors turning to Russia. Funds like the Neptune Russia and Greater Russia Fund
offering 215.2 per cent growth since launch on December 31, 2004, will look attractive to many investors. With
high returns come higher risk and volatility. We all know by now that there is no 'easy money' or
'easy ride' when it comes to equity investing. However, in these changing world dynamics,
Russia will play a very key role as a resource-rich country with a welleducated and
strongly motivated workforce so a sensible exposure within your portfolio may
prove beneficial.

Russia's economy high now.


The Korea Herald, "Leadership transition, Russian style" May 12, 2008
lexis
But more than anything else, growth of the Russian economy has been helped by
the rising prices of energy. Revenues from oil and gas, metals and timbers
constitute 80 percent of total exports, and they provide up to 30 percent of
government income. The oil bonanza has allowed Moscow to pay back foreign
debts and achieve a 7 percent growth for close to a decade.

Russia's oil-rich economy high now.


Daily Mail (London), Alex Brummer, "Oil-rich Russian economy ready to take off"
May 21, 2008 lexis
Oil-rich Russia is buzzing. On our arrival here the city is celebrating the victory of
the Russian national team in the world ice hockey championships. This essentially
consists of Moscovites driving their cars up and down the vast boulevards at
unimaginable speeds in an urban environment, sounding their horns and hanging

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out of the sunroofs in daredevil style. The speeding German cars now outnumber
the Ladas ten to one as they whizz pass Zara, Canali and the Western designer
stores. But there is not a Marks & Spencer or Tesco in sight. Our nation of
shopkeepers has not yet had the courage to make the journey from the old Soviet
empire of Eastern Europe to Prime Minister Vladamir Putin's mother state. Putin,
with the assistance of the natural resource economy, has brought a normality to
the Russian economy.

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oil/economy uniqueness
Oil prices and Russia's economy will remain high.
The New York Times, Clifford Krauss, "Commodities' Relentless Surge"
January 15, 2008 lexis
Now, with the United States economy slowing, the question is what happens next.
One possibility is that a recession in this country, should it occur, would suppress
demand enough that commodity prices would fall substantially for the first time in
several years. But many economists argue that demand overseas would keep
prices high even with a recession in the United States. That would compound the
economic pain for Americans, forcing them to continue paying a premium at the
meat counter and the gas pump even as their paychecks suffered. These
economists say it will be hard to stop the ascent in commodity prices because it is
connected more than at any other time in recent years to events beyond the
United States, particularly the industrialization of China, and to a lesser extent of
India, and in booming oil economies like Saudi Arabia and Russia. ''The world is
coming alive and the lights are coming on across Asia,'' said James Glassman, a
senior economist at JPMorgan Chase. ''What we are dealing with is a tremendous
demand for resources.''

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soft power uniqueness


Russia’s oil revenue invests in butter, not guns
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
The striking growth of the economy since 1999 has begun to change the nature of
Russian power and the way it is exercised. Although Russia has retained many of
the vestiges of Soviet ‘hard power’ – including nuclear weapons and a massive
conventional army – and is now regaining the USSR’s position in energy markets, it
is not the superpower of old. New energy revenues have not been used to boost
military spending or to revive Russia’s defence industry at the expense of every
other sector as in the Soviet period.3 Oil wealth has been transformed more into
butter than guns.

No chance of Russian invasion – oil revenues tradeoff with


military might
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
At this juncture – in spite of the war in Chechnya, repeated confrontations with
Georgia in the South Caucasus, and a recent show of force in a dispute over
ownership of the Black Sea Kerch Strait with Ukraine – no regional state reasonably
anticipates a Russian military invasion.4 Instead of the Red Army, the penetrating
forces of Russian power in Ukraine, the Caucasus, and Central Asia, are now
Russian natural gas and the giant gas monopoly, Gazprom, Russian electricity and
the huge energy company, UES, and Russian culture and consumer goods.
Gazprom is the primary provider of gas to the Eurasian states and has regained its
position in markets like Georgia where other companies had entered in the late
1990s. UES has similarly expanded its markets, especially in the Caucasus and
Central Asia where early energy sector privatisations brought in foreign investors.5
And private firms like Russia’s Wimm-Bill-Dann Foods have begun to dominate
regional markets for dairy products and fruit juices.6 In 2002, Russia’s
accumulated investments in the countries of Belarus, Moldova, Armenia, Ukraine,
and Kazakhstan reached about $1 billion.7 While from January-September 2003,
Russia’s trade turnover with the neighbouring countries of the Commonwealth of
Independent states (CIS) increased by almost 30 per cent over the same period in
2002, with exports far exceeding imports.8 As UES head Anatoly Chubais remarked
in an interview in the Russian press at the end of 2003: ‘Russian business is
expanding across borders with confidence’.9

Russia no longer maintains its imperialist ambitions


Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Putin’s annual addresses, other high-level policy statements, and the thrust of
Russia’s recent relations with its immediate neighbours would all seem to indicate
that Moscow no longer embraces the grandiose imperial ambitions of the Soviet
period.39 However, Russia clearly still has geopolitical aspirations even if they are

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more modest. These aspirations are very much focused on the CIS – Russia’s
immediate neighbours and fellow former Soviet republics.

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Relations high
US-Russian relations high
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Putin got off to a rocky start with the Bush Administration owing to a series of spy
scandals, and disputes over Washington’s decision to withdraw from the Anti-
Ballistic Missile (ABM) treaty and to pursue a national missile defence program. But
a gradual improvement in relations was effected through personal contacts
between the two presidents, and meetings of the respective foreign ministers. The
September 11, 2001 terrorist attacks on the United States gave Putin’s policy its
greatest boost. They presented an opportunity for cooperation on tackling
terrorism, an issue of common concern. President Putin was the first foreign leader
to telephone President Bush after the attacks to offer the U.S. condolences and
support for subsequent action. This support was extended to acquiescing in the
establishment of U.S. bases in Central Asia to back-up the military campaign in
Afghanistan, in spite of considerable opposition within the Russian armed forces.
Putin has also been very careful to couch subsequent overtures and initiatives with
the United States in the context of the war on terrorism – as the reference in his
May 2004 annual address to strengthening ‘the anti-terrorist coalition’ suggests.

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soft power links


High oil prices key to Russian soft power
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
But, ultimately, the possibility for Russia to change modalities in Eurasia comes
directly back to energy. Russia’s new ability to wield soft power resources and
expand its economic and political influence comes from its oil power. The
increasing windfall from high oil and gas prices since 1999 has spurred Russia’s
economic growth, enabled it to push through some important reforms, and
afforded it the opportunity to become a ‘new Russia’ at home and abroad,
including well beyond the boundaries of CIS. Oil and gas have made Russia
something of an indispensable power on today’s global stage.

Decline of Russian oil industry would spill over into


militant foreign policy
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
In many respects, since 2000, Russia’s greatest contribution to the security and
stability of its vulnerable southern tier has not been through its military presence
on bases, its troop deployments, or security pacts and arms sales, but through
absorbing the surplus labour of these states, providing markets for their goods,
and transferring funds in the form of remittances (rather than foreign aid). Central
Asian states in particular are fearful of the social consequences of large numbers
of labour migrants returning to the region from Russia. This migration has become
a safety valve of sorts and has taken the edge off the kinds of social conflict and
regional disparities that contributed to a ruinous civil war in Tajikistan in 1992-
1997. Regional experts and officials have expressed genuine concern that if and
when Russian oil production declines, and Russian economic growth ends, there
could be a major spillover effect.113

More evidence
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
These developments may ultimately have a negative impact on economic growth
if they increase the perception of Russia as an increasingly less open society, if
they stifle independent initiative, and if they frighten off domestic, as well as
foreign investors. The Khodorkovsky trial has raised fears in Russia and in the West of a wholesale revisiting
– beyond the energy sector – of the results of the privatization of state assets in the 1990s. Other investors are
being targeted at the regional, not just at the federal level, and the state is now seizing control of private property.
In June 2004, an editorial in the International Herald Tribune went so far as to suggest that Russia itself was ‘on
trial’ over its handling of the Khodorkovsky affair.106 While many in Moscow see these fears about the broader
impact of the fate of Khodorkovsky on the Russian economy and on future private investment decisions as entirely
overplayed, it is clear that questions over Yukos’ potential division and existing property rights could play out
negatively for the Russian energy industry.107 As the Stanford researchers, Wright and Czelusta, make clear in
their article on mineral resources and economic development – security of property rights is one of the keys to
success for both domestic and foreign investors, including for innovation purposes in the natural resource sector:
‘Insecure ownership has adverse effects on production and exploration in minerals [including hydrocarbons] as it
does in other industries’.108 In addition, domestic changes and negative trends will inevitably spill over into
foreign policy as they did in the 1990s. Observers in Russia’s immediate neighbourhood, not

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just in Europe and the United States fear that a stronger and harder hand at home
may soon be extended abroad.

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soft power links


Russian oil checks the military-industrial power machine
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Despite the necessary cautions about the perils of over-emphasizing the oil price
windfall, energy will remain the base of Russia’s power for the foreseeable future.
It will underpin the Russian economy and domestic stability, enhance Russia’s
political and economic position in Eurasia, and restore Russia to a degree of its
former superpower status – at least as an energy superpower, by making it a
player in Asia as well as in Europe, and by increasing its attractiveness to the
United States. Energy also has the potential to make Russia a different kind of
power in the 21st Century than it was in the 20th Century (although, of course,
this is in conjunction with the collapse of the USSR, the end of the nuclear and
military confrontation with the U.S., and the contraction of Russia’s geopolitical
ambitions). Russia today is not the Soviet Union of the past. Russian oil no longer
supports a massive military-industrial power and military machine.

Halting economic advances will mark a Russian hard


power takeover
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Politically, Russia’s soft power potential will not be realized if hard power
advocates win out and squander Russia’s developing economic relations with the
CIS by resorting to old strong-arm tactics in pushing Moscow’s interests. The
tension between soft and hard power advocates remains acute. In addition, foreign
policy and domestic policy are inter-twined. President Putin himself acknowledged
this in his July 2004 address to Russia’s Ambassadors, when he noted that ‘in
modern conditions, the line between the domestic and foreign policy is becoming
thinner’. A harder, more authoritarian line in Russia’s domestic policy could spill
over into its foreign policy if the siloviki get the upper hand in Moscow.

17
MSDI Kearney/Ermo lab Russia Oil Disadvantage

price links
Price decline would crush Russia.
David Blair, "Analysis Putin's aggressive posturing cannot hide an underlying
weakness" August 23, 2007 lexis
Russia’s nuclear bombers are permanently airborne once again and President Vladimir Putin loses no opportunity
to strut the world stage and flex his country's muscles. Yet all the sound and fury disguises one essential fact: far
from being a rising power like China or India, Russia is locked in long-term decline. At present, high oil
prices give Russia's economy a temporary lift - and afford Mr Putin the cash to display his
military prowess. But demographics underlie every dimension of national power. Mr Putin cannot avoid the fact
that Russia's population falls by about 800,000 people every year. Instead of the present level of 142 million,
Russia will probably have fewer than 100 million people by 2050 and vast swathes of the country will be
depopulated. Nations with a real chance of shaping events in the late 21st century do not have falling
populations. National decline is virtually guaranteed by low life expectancy, alcohol abuse and the remarkable
fact that Russian women experience more abortions than live births. Power in the 21st century will divide between
America's 300 million people, the European Union's 460 million and China and India with more than a billion each.
Putin's second Achilles Heel is the Russian
Against this background, Russia looks insignificant. Mr
economy. Its dependence on oil and natural gas is a blessing when, as now, prices
are high. If prices fall or a long period of volatility begins, Mr Putin will quickly feel the pinch.
The uncomfortable fact is that Russia is not a centre of innovation. There are no world class Russian
the economy is largely
manufacturing companies, no universities churning out new inventions. Instead,
resource-dependent and rises or falls with global energy prices. In other words, Mr Putin
has virtually no control over Russia's economic destiny. The vagaries of the world energy market will decide how
belligerent he can afford to be.

Price decline wrecks Russia's economy.


BBC Worldwide Monitoring, "Russian finance minister warns of effects of possible
oil price fall" April 12, 2008 lexis
A fall in the oil price could inflict a serious blow on the Russian economy,
[Presenter]
Finance Minister Aleksey Kudrin has said during a visit to Washington. He said that at
the moment the country's economy is seriously dependent on the oil price, and
that in the case of a fall in the price a crisis will affect both the state and private
sectors.

18
MSDI Kearney/Ermo lab Russia Oil Disadvantage

price links
High oil prices are responsible for Russia’s economic
strength declining prices will reverse this
The International Herald Tribune, Erin E. Arvedlund, January 7, 2004
lexis
Despite a year of turmoil in the world of Russian business, the economy steamed
ahead in 2003, almost entirely on the back of a surge in oil prices, a series of reports
showed on Tuesday. Many economists are crediting President Vladimir Putin for shepherding Russia out of
economic paralysis by cutting taxes and seeking to cultivate some level of political stability in his first term. But
oil remains the main driver of Russia's economic boom. Rising oil prices, combined with
Putin's policies, have spurred the nation to average 6.5 percent gross domestic product
growth annually in each of the past four years. Asked what were the positives and negatives in
the Russian economy in the past year, German Gref, Russia's minister of economic development and trade
answered easily: "High oil prices." With a barrel of Brent crude oil from the North Sea, a benchmark in the
industry, averaging $28.80 last year, high prices clearly padded Russia's economic and
market indicators, Gref said. But he warned that high oil prices were "also negative, because it created the
impression that everything was good, and that we could postpone radical economic reforms a little bit longer."
The surge in prices helped Russia grow at a 6.8 percent rate in 2003, Russia's Economic Ministry said. "World
prices of crude oil were an initial and defining factor of general economic growth, as well as exports," the ministry
said in a report this week. As oil rocketed higher, Russia was exporting more of it than last year. The country now
continuously jockeys with Saudi Arabia for the No.1 spot as a world oil supplier. Russian oil exports outside of the
Commonwealth of Independent States in 2003 were 3.1 million barrels a day, up 12.4 percent from 2002.
Evidence of economic strength -- even if derived largely from Russia's dependence on oil sales --
helped the country stave off massive capital flight last year, despite the arrest last fall of
Russia's richest man and oil magnate, Mikhail Khodorkovsky. Net capital flight from Russia slowed to $2.9 billion
for all of 2003, versus $8.1 billion in 2002, central bank officials said. A total of $14.8 billion left Russia in 2001
and $20 billion a year reportedly was sent abroad in the 1990's amid the post-Soviet economic collapse. In the
fourth quarter, Russia attracted $2.5 billion in capital inflows. Investors had taken $8.7 billion out of Russia in the
third quarter, the central bank said, the biggest quarterly flight since January 2001. Russia continues building up
foreign currency and gold reserves, which totaled $77.8 billion as of Dec. 26, up from $74.5 billion the previous
Given its dependence on oil revenue, a steep decline in
week, according to the latest data.
oil prices would pose a threat to the economy, analysts say. Russia can withstand a
serious crisis as long as oil remains above $13.50, according to one economist.

19
MSDI Kearney/Ermo lab Russia Oil Disadvantage

energy key
Energy makes Russia key.
Fiona Hill, a senior fellow at the Brookings Institution, is currently on leave as the
national intelligence officer for Russia and Eurasia at the National Intelligence
Council, Current History, " Moscow Discovers Soft Power " October 2006
In many respects, by virtue of its more limited foreign policy focus on the cis, Russia is in a better
position today to use its soft power resources to positive effect than the Soviet
Union was. Part of the attraction of association with the Soviet Union for some of the far-flung members of the
Soviet bloc in Cuba, Afghanistan, the Middle East, and Africa was the potential for trade, infrastructure subsidies,
technical assistance, and training and education programs in Soviet universities. But the possibility of large arms
transfers and the sheer implacability of Soviet military power always tended to eclipse these benefits. The Soviet
Union was also overtaxed and overstretched in its abilities to entice effectively. Today in the cis, Russia can be
more focused and draw to its benefit on the cultural, linguistic, and other ties that persist in the region from the
Ultimately, though, the possibility for Russia to change modalities in
Soviet period.
Eurasia comes directly back to energy. Russia’s new ability to wield soft power
resources and expand its economic and political influence comes from its oil
power. The increasing windfall from high oil and gas prices since 1999 has spurred Russia’s
economic growth, enabled it to push through some important reforms, and afforded it the opportunity to
become a “new Russia” at home and abroad, including well beyond the boundaries
of the cis. Oil and gas have made Russia something of an indispensable power on
today’s global stage.

The energy sector is key.


Fiona Hill, Senior Fellow, Foreign Policy , Brookings institute, “Worries Over Russia
as Fuel Supplier” 2006
CONAN: And does it tell us also something about Russia today?—I mean, the explosion not only of gas and oil
prices but the proportion of Russia's industry that—or Russia's exports that compromises. This is an OPEC nation
almost. Ms. HILL: Well, it's a real vulnerability for Russia, just as you're pointing out here. The
Russian economy is incredibly tied up with oil and gas revenues. Cheap gas within
Russia subsidizes its manufacturing industry. And Russia today is much more
vulnerable to oil shocks, you know, that—a drop in the price of oil and gas than at
any other point since the Soviet period. So for Russia, it's certainly a double-edged
sword. On the one hand, oil and gas are its major strategic assets. You can't blame the
Kremlin for thinking that they can use these for influence. At the other hand, they're also a great
source of vulnerability, as many Russian economists and Russian political commentators have pointed
out.

20
MSDI Kearney/Ermo lab Russia Oil Disadvantage

high prices key


High oil prices have been essential to the Russian oil
industry
David Lamb, Johnson’s Russia List, November 15, 2001
www.cdi.org/russia/johnson/5548-9.cfm
Putin sought to assure oil executives and investors--some of whom had lost
fortunes in Russia as it emerged from communism a decade ago--that economic
reforms are being put in place and that Russia is showing strong growth. He
insisted that investors face less risk than they did a few years ago and referred to
his country as a "reliable and predictable partner" in supplying oil and gas.Russia
is rich in natural gas, oil and coal reserves. Surging oil revenue enabled Russia's
real domestic product to grow 8.3% last year, while inflation fell, the foreign debt
was reduced and industrial output expanded. "Russia is a place you have to be,"
said Rob McKee, executive vice president for exploration production for Houston-
based Conoco, which has invested $600 million in Russia and has developed a
productive oil field north of the Arctic Circle.

High prices key to Russian oil


Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
High oil prices were also the major factor in promoting the recovery of Russia’s oil
industry, which had been adversely affected by the collapse of the USSR and
entered a prolonged period of decline in the 1990s. Beginning in 1993, the
industry was gradually carved up and partially privatised.21 A number of vertically
integrated oil companies were established, each combining oil exploration,
production, refining, distribution, and retailing, with some companies organized on
a regional basis, and some retaining a degree of state ownership.22 The
privatisation and division of the oil industry made it possible for new economic
actors to enter the sector. The decade was marked by the emergence of new
Russian oil barons or ‘oligarchs,’ like Mikhail Khodorkovsky of YUKOS, and Boris
Berezovsky and Roman Abramovich of Sibneft. They had no prior experience in the
Soviet oil industry but instead had access to financial capital from private banks,
which they owned and controlled, and close political connections to the Russian
government.

21
MSDI Kearney/Ermo lab Russia Oil Disadvantage

high prices key


High prices are linked to every corner of the Russian
economy
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
In some respects, it is even possible to argue that the entire Russian industrial
economy has become dependent on oil prices. Some important industrial sectors
that are not oilrelated currently act as if they are also responding to the oil price.
One of the factors driving this phenomenon is China and its rapid economic
development. China is absorbing huge quantities of every major commodity –
including oil, gas, coal, steel, scrap metal, and timber – and pushing up their
prices. The world price of steel, for example, mirrors the rise of world oil prices.
Russia is a major steel producer and exporter to China – as well as an exporter of
scrap metal and timber – and Russia’s economy has benefited significantly from
the surges in China’s commodities demand.79

Russia’s economy is directly linked to oil prices


Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Although Russia’s future energy potential remains great, the current oil price
windfall masks pitfalls ahead. The Russian economy is not as robust as it might
currently seem on the surface, and some of its weaknesses may eventually
undermine Russia’s ability to capitalize on its new soft power resources. While
Russian energy companies have restructured, and improved their efficiency and
performance sufficient to ride out oil bust cycles, the Russian state has in fact
restructured in the opposite direction. It has become more dependent on the oil
price than before. Looking carefully at Russia’s economic growth since 1997, there
is a clear correlation between growth and the rise in world oil prices. This is
particularly tricky as world oil prices are currently far above ‘normal,’ and oil is a
commodity that goes through well-documented boom and bust cycles. For
decades, the median world oil price has tended to be around $18 a barrel. Since
1999, Russia has become addicted to a price regime well above this. It could
expect little GDP growth at the median price – and indeed no growth or even a
collapse in growth rates at prices well below. In 1998, the drop in world oil prices to
around $10 a barrel coincided with the worst of Russia’s economic crises and the
collapse of the ruble.70

22
MSDI Kearney/Ermo lab Russia Oil Disadvantage

high prices key


Three-Fourths of Russia’s GDP is banked on high prices
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
As already noted, the Russian federal budget is in the same predicament. Budget
revenues have risen and fallen in line with world oil prices. The Russian
government may now have a very healthy budget surplus after a decade of
crippling deficits, but the IMF’s Goohoon Kwon has calculated that the Russian
budget is five times more sensitive to oil prices than it was before 1998-1999.71 It
will be a major challenge for the Russian government to figure out how to buffer
the economy as well as the budget against oil shocks – as key Russian economists
acknowledge. Indeed, in March 2004, Putin’s economics minister, German Gref,
went so far as to warn the President that three quarters of Russian GDP growth
was in his estimation due to the high level of world oil prices. He noted that prices
would inevitably go down – bringing GDP growth down as well. Gref cautioned that
Russia’s time to take action to stimulate other sectors of the economy might be
very short. Putin, however, disagreed with Gref’s pessimism. He responded that oil
prices were not likely to go down in the foreseeable future, and stressed that tax
reform rather than major sectoral restructuring would suffice to stimulate the
development of industry and the growth of Russia’s consumer market.72

High oil prices must continue for Russia to avoid economic


downturn
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Russia is back on the global strategic and economic map. As one of the world’s
most energy-abundant countries, Russia has since 1999 benefited immensely from
the combination of international concern about energy security, instability in the
Middle East, and dramatically rising oil prices. It has regained the prominence in
global energy markets it enjoyed in the 1970s and 1980s when the USSR, not
Saudi Arabia, was the pre-eminent world oil producer. As a result, Russia has
transformed itself from a defunct military (although still nuclear) superpower into a
new energy superpower. The Russian economy has also bounced forward on a
wave of high oil prices and increased oil production.1 Although Russia’s economy
may still be the size of a minor league Brazil or Mexico, its energy resources seem
to give it a shot at the premier league in the future, especially if oil prices remain
high.2

23
MSDI Kearney/Ermo lab Russia Oil Disadvantage

high prices key


High prices empirical save Russia’s economy
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
The turnaround came in 1999-2000 with the start of the post-crisis recovery of the
Russian economy. The World Bank and other observers of the Russian economy
typically cite a number of factors as key in stimulating Russian economic growth
after the crash of 1998: relative price readjustments and the collapse in the real
exchange rate, which resulted in import substitution and provided a stimulus to
domestic producers of consumer and manufactured goods; a decline in real wages
and underutilised productive capacity of labour and capital as a result of the
decline of Russian industry in the 1990s; and a series of reforms encouraged by
the government in the wake of the crisis that led to improvements in efficiency
and industrial restructuring.19 The most significant factor of all, however, was the
rise of world crude oil prices from a low of around $10 a barrel in December 1998
(with an annual average of only $11.80 for 1998) to around $33 a barrel in
September 2000.20 This provided a major injection of cash into the domestic
economy.

24
MSDI Kearney/Ermo lab Russia Oil Disadvantage

high prices key


High prices key to Russian economy
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
For most of the 1990s, Russia's new energy oligarchs structured their operations in ways that significantly
reduced tax revenues to the state and moved large amounts of capital offshore as oil production in Russia was
largely unprofitable.23 Demand for oil declined by more than 40 per cent between 1990-
1995, owing to the contraction of energy-intensive manufacturing industry and the huge military-related Soviet-
era oil outlays. This caused a glut on the internal market. Oil exports were constrained by capacity limitations in
the old Soviet pipeline system. The only real profits to be made were in refining. Between 1988 and 1998, Russian
oil production dropped by approximately 50 per cent from over 11 million to around 6 million barrels per day (bpd)
– in large part because of a sharp reduction in drilling, and little or no investment in new wells, or in technology to
There were simply few incentives to produce more
increase recovery from depleted wells.24
and do better. The sudden infusion of cash from soaring world oil prices into an
essentially stagnant industry changed the underlying incentive structure. The oil
price rise boosted company revenues even without increases in production, while the
1998 devaluation of the ruble had already significantly lowered ruble-denominated input costs (including labour)
After 1999, low input costs and high energy prices proved
for Russian energy producers.
the winning combination. They gave Russian oil companies the internal capital to improve production
efficiency without infusions of new outside investment. And they gave the new oil barons every reason to
restructure and improve the management of their assets. Idle wells were brought back on line, new machinery
was purchased, and new technology was introduced to enhance well recovery. By the end of 2001, Russian oil
production had increased by around 1 million bpd to stand at just over 7 million bpd. New infrastructure, including
the Baltic Pipeline System (BPS) and a new oil terminal at Primorsk on the Gulf of Finland, was built to increase
export capacity by a projected 12 per cent. Plans for further export network expansion were underway.25 By
2004, Russia’s oil production had bounced back even further to reach 9 million bpd – with
medium-term potential for still more increases, at least up to 11 million bpd (close to peak Soviet levels of
production) – with exports reaching more than 4 million bpd of oil.26 Russia’s export capacity was increased not
just by new pipeline and port networks but also by the fact that its own oil demand remained low as a result of the
continued decline of heavy industry. In contrast with Russian gas, where only about one third of production is
exported, about half of Russian oil production is available for export. The bulk of Russian natural gas is used for
While oil has predominantly brought cash
power generation, home heating, and industry.
flowing in from abroad, gas has kept the Russian economy afloat at home – as the
main subsidiser of domestic industry and households. Unlike the oil industry, the gas sector was not carved up in
the 1990s and is still controlled by the state-dominated monopoly, Gazprom, whose export revenues were also
High oil prices and Russia’s oil production rebound
boosted after 1999 by high energy prices.
after 1999 were extremely good news for the Russian federal budget. Natural resources
constitute around 80 per cent of Russian exports, and oil and gas account for 55 per cent of all exports, making
the budget particularly dependent on the energy sector. In fact, 37 per cent of budget revenues are provided by
each dollar
taxes on oil and gas.27 Recent research by the World Bank and the IMF has shown that
increase in the price of a barrel of oil (Ural crude) raises Russian federal budget
revenues by as much as 0.35 per cent of GDP. And, indeed, the IMF’s Resident Representative in
Moscow, Goohoon Kwon, has argued that the oil sector accounted for as much as 80 per cent
of total revenue gains at the general government level in the period from 1999-2001.28 At
the same time, changes in the world oil price accounted for 60-75 per cent of oil revenue gains between 1998-
2001.29 In short, as a result of the sudden spurt in oil prices and the revival of the Russian
energy industry, Russia’s economic fortunes vastly improved. And with economic
growth, Russia suddenly began to have something more to offer its neighbours than a brandished fist. It
gradually became a more attractive country to do business with.

25
MSDI Kearney/Ermo lab Russia Oil Disadvantage

lng link
High demand key to Russian gas industry
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Two decades from now, the real energy potential for Russia may be in gas rather
than oil. Increased Asian energy demand, particularly in the static power
generation sector is pushing natural gas demand up. China is especially eager to
shift from coal to gas given the significant environmental toll on Chinese cities
associated with burning coal.67 China, Japan, and neighbouring South Korea would
all like to meet more of their future energy demand through increased gas
consumption to mitigate dependency on Middle East oil. Global gas markets are
changing in response. Gas now accounts for over 20 per cent of world energy
consumption, and is projected to account for almost 30 per cent of world energy
consumption by 2020.68 Domestic energy sectors in many countries still need
major structural changes and large-scale infrastructure development to shift to
greater gas use, but gas is rapidly becoming a globally traded rather than a local
commodity. More than a quarter of gas consumed globally crosses international
borders, either by pipeline or in the form of LNG. LNG in particular and its
transportability beyond regional borders suggests great long-term potential for
Russia, including for exports to the United States. Russia eclipses Saudi Arabia and
other energy-producing countries in gas. Its gas reserves, at just under one third of
the world’s total of proven reserves, far exceed those of any other country. And
Gazprom, as a company, single-handedly holds 25 per cent of world gas reserves.
Russia through Gazprom is already the dominant world gas exporter. If current
trends in European gas consumption continue, Russia will certainly be the primary
supplier in gas – if not overall in energy – to Europe in the next several decades.
Russia is better poised for expansion into future markets in Asia in natural gas than
in oil. LNG contracts have already been concluded for Sakhalin gas. And China and
South Korea are engaged in negotiations for the construction of a gas pipeline from
Irkutsk on Lake Baykal with the Russian-British joint venture TNK-BP, which is
developing the region’s massive Kovytka gas field along with Gazprom.69 As BP’s
Peter Davies noted in a June 2004 presentation: ‘a new period of Russian gas is
emerging’.

26
MSDI Kearney/Ermo lab Russia Oil Disadvantage

a2: dutch disease/diversification


Thanks to high prices Russia is diversifying now.
The International Herald Tribune, Alex Nicholson, Bloomberg News
"Russia's oil windfall fund to hit $158 billion this year" November 29, 2007 lexis
Russia, the world's biggest energy producer, is benefiting from high prices for oil
and natural gas. Oil has not fallen below $90 since Oct. 31. Oil futures reached $99.29 on Nov. 21, and
prices are up 58 percent from a year ago. The Stabilization Fund, which was created to hold windfall oil revenue,
will be split into the Reserve Fund and the National Wellbeing Fund on Feb. 1. The Finance Ministry has said that
3.07 trillion rubles will be channeled into the Reserve Fund to act as a cushion for government spending, should
energy prices fall. The remainder will go into the National Wellbeing Fund, which was created to finance future
The government plans to spend 1.07 trillion rubles more than
pension savings.
previously planned this year to build infrastructure including roads and increase
pensions and other social spending. The finance minister said he expected a budget surplus of 1.73
trillion rubles for 2007, adding that 180 billion rubles earmarked for the new development bank might be
''It is possible that we will transfer money to the first of these
transferred this week.
institutes this week - the development bank,'' Kudrin said. The bank, which operates
under the brand of Vnesheconombank, which is run by the state, will invest most
of the money in infrastructure and high-technology projects.

High Prices key to diversification

A. Investor confidence
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
The growth of the economy after 2000 made it possible for Putin to pay foreign debts on time and to free Moscow
from the huge infusions of foreign financial assistance from the IMF, the United States and other major bilateral
lenders that it had required throughout the 1990s.31 A balanced federal budget passed into law at the end of
2000 for the first time in post-Soviet history. By the end of 2001, the Russian economy had experienced its best
performance since the fall of the Soviet Union. In 2001, GDP grew by 5.5 per cent, industrial and agricultural
production by 5-6 per cent. Exports reached a record $108 billion. The population’s real incomes grew 6 per cent
as wages soared by 20 per cent and pensions by 23 per cent. Official reserves of gold and hard currency also
thanks to high world oil prices, the
increased.32 Three years after the financial crash of 1998,
ruble was relatively stable. Investors operating in Russia were more positive about
the prospects for the economy and for doing business in Russia.

B. CIS state trade and migration


Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
This is a two-way street. Growth in CIS states and increasing trade within the CIS benefit
Russian manufacturing industries and further stimulate the Russian economy as export
demand for Russian manufactured goods, fertilizers, and chemicals not produced by neighbouring
countries grows.49 And migrants from the CIS fill growing niches in the lower-paying
sectors of the Russian service industry, agriculture, and the construction industry as Russia’s
continuing demographic decline produces long-term labour shortages.50 Finally, as a
result of the expanded economic interaction of the last five years, the Russian language has been restored as the
regional lingua franca and as an asset for non-ethnic Russians in Eurasia, facilitating their work in Russia. The
Russian language is no longer so readily perceived as the instrument of old imperial domination and political
pressure that it was in the 1990s.51

27
MSDI Kearney/Ermo lab Russia Oil Disadvantage

a2: dutch disease/diversification


C. Construction, manufacturing, and transportation
sectors
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Recent research findings from several sources (the World Bank, the IMF, Brookings Economist Clifford
Gaddy, and Pekka Sutela of the Bank of Finland’s Institute for Economies in Transition) indicate that growth
across the manufacturing and service sectors in Russia can be directly traced to
the oil price windfall. Rather than a trickledown effect on the rest of the Russian economy from oil, there
has been a huge flood, boosting the construction, manufacturing, and
transportation sectors in particular. The growth in Russia’s machinebuilding and manufacturing
sector, for example, is attributable to a jump in the production of railway cars (for both Russia and neighbouring
oil-rich Kazakhstan) to transport increased oil production to markets in Europe and Asia (including to China).
Demand has not been met by construction of enough new export pipelines. The construction and defence industry
sectors also show increased production to meet various demands from the oil and gas sectors.78

E. Consumer spending
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Beyond the commodities and heavy industrial sectors like machinebuilding/ railway wagons, many analysts have
pointed toconsumer spending as a key indicator of the Russian economy’s health,
and as an important sign of more broad-based growth. Consumer spending has
grown exponentially over the last four years , especially in relation to its earlier low levels.83 But
again, a good deal of this has been driven by the rise in world oil prices and the
subsequent windfall to the Russian economy and budget. As Brookings Institution Economist Clifford Gaddy noted
in a March 2004 presentation on the Russian economy, factors such as investment and consumption ‘are not
They are merely the transmission belts or conveyor belts that
independent drivers of [Russia’s] boom.
transfer the oil price impetus more broadly throughout the economy’.84

F. Social sectors
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Disparities in living standards and inequalities would certainly be exacerbated by the contraction of the Russian
budget and thus of subsidies to those living in the weakest regions. Ten out of Russia’s 89 administrative units
account for more than half of Russia’s economy.87The richest regions beyond Moscow in terms
of per capita gross regional product are all oil or other key commodities producing
regions. As a recent Russian report on regional disparities notes: ‘despite having less than 10 per cent of the
population, the two wealthiest regions in Russia – oil-rich Tyumen in West Siberia and the city of Moscow – now
account for nearly a third of GDP’.88 There is great suspicion at the popular level in Russia that current plans to
shift on January 1, 2005 from subsidized health, transportation, and other social benefits to lump-sum cash
payments for the poorest and most vulnerable segments of the population – as part of the Russian government’s
social sector reforms – will not be sustainable if oil prices fall and if central
government budget revenues fall along with them.89 Fears over the fate of these benefits
provoked a rash of public protests in June 2004 (a current rarity in Russia) and the first nationwide street
demonstrations in many years.90

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MSDI Kearney/Ermo lab Russia Oil Disadvantage

a2: dutch disease/diversification


G. Awareness
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Russia’s current problem is not the development of its oil resources per se, but the
risk of over-extending itself under the influence of the oil price windfall and of not adequately
recognizing and addressing the weaknesses of the Russian economy. A corollary danger is the temptation to strip
vital investment capital away from the energy sector to prop up and expand other areas of industry to the
there is currently
potential detriment of the overall health of the economy.99 For example,
considerable pressure on the Russian government from various quarters – including
most prominently from former Russian Prime Minister and current president of Russia’s Chamber of Trade and
to use the super oil profits in the Russian state budget and stabilization
Industry, Evgeny Primakov –
fundto stimulate manufacturing and new hi-tech industries, as well as to launch
large scale construction and infrastructure projects.100

H. Debt Payment
World Markets Analysis September 30, 2004 Budget 2005: Russian
Draft Passed by State Duma
The draft budget for 2005 was yesterday passed in its first reading in the State
Duma, the lower house of the Russian parliament. The fiscal scheme, presented by
Russian Finance Minister Alexey Kudrin yesterday, sees budget revenue at
Rbl3.33trn (US$115bn) and expenditures at Rbl3.05trn. Thus, next year's budget is
projected to record a surplus of some Rbl278bn. If the country's Stabilization Fund,
which holds the extra revenue generated when oil prices are higher than normal,
exceeds Rbl500m, the funds can be used for debt repayment or to reduce the
deficit of the Russian Pension Fund. Kudrin forecasted the Stabilization Fund to
exceed the critical Rbl500m mark in the beginning of the year. Foreign debt
repayments are seen at Rbl168bn. Spending on national security, defence and law
enforcement will come to 5% of GDP in 2005, growing by 17.6% in real terms (see
Russia: 23 August 2004: Budget 2005- Russian Draft Sees Surplus of 1.5% of GDP
and Russia: 21 September 2004: Budget 2005- Opening Russian State Duma
Sessions Dominated by Anti-Terror Spending). Significance: Russia needs to be
careful in spending the money accumulated in the Stabilization Fund, as the
economy is still very dependent on the current high oil price. A large chunk of
budget revenue is highly dependent on oil: from the projected revenues of
Rbl3.33trn, some Rbl450bn-Rbl500bn is directly attributed to oil exports.

Oil revenues turn

A. Oil expansion is the core strategy for reform


The Washington Post March 16, 2002 Putting OPEC Over a Barrel;
Russia's Oil Could Push Western Pump Prices Down
Russia's whole strategy for economic revival is based on the assumption that the
nation's oil production will expand and that the government's budget will expand
with it. The government plans to use the extra tax revenue to create economic
incentives that will help diversify the economy and reduce the nation's
dependence on petroleum.

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MSDI Kearney/Ermo lab Russia Oil Disadvantage

a2: dutch disease/diversification


B. Low prices empirically falter reforms
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
If we think about the possibility of a low oil price regime in the future (although it
looks quite remote right now, with prices hovering in the vicinity of $40 a barrel,
instability in the Middle East, and continued demand growth in China and Asia) the
prospects could be quite sobering for the Russian economy. We also have a
reference point for this potential future. For a brief period from October 2001 to
March 2002, early in Putin’s first term as President, oil prices dipped to around $15
a barrel. Reforms faltered in a number of regions. Economic and political tensions
mounted in the Urals and Siberia, prompting Putin to make an emergency visit to
Krasnoyarsk to meet with local leaders. Russian industrial companies that had
been profitable the year before posted losses in 2002 as a consequence of
cancelled orders from the oil and gas sectors. As Economist Clifford Gaddy noted in
reviewing these developments, ‘the effect of the 2002 experience on the Russian
economy was dramatic. It confirmed that the entire economy was vulnerable to
lower oil prices’.91

C. At the very least, revenues spot Russia 100%


probability of growth
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Russia is also not necessarily doomed to fall victim to the ‘resource curse’ by
virtue of its massive energy endowment. Russia may have inherited considerable
problems from the Soviet Union, but it has also inherited a knowledge and
technology-intensive energy sector that can promote and sustain the country’s
long-term development. Russia’s oil and gas resources are not a curse. Nor are they,
however, necessarily a blessing in the sense of guaranteeing success. Russia’s major
dilemma is how to use its energy wealth economically and politically to its best
advantage. The Russian economy still needs to be restructured and buffered
against oil price shocks, and Russia has to avoid the trap of diverting itself away
from investment in the development its energy sector to pursue the chimera of a
‘more balanced’ economy and by launching costly infrastructure and new
industrial projects. The Russian government must also make difficult decisions
about ownership of and foreign investment in the oil sector – as well as its
regulation and taxation – to maximize the opportunities for its growth.

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MSDI Kearney/Ermo lab Russia Oil Disadvantage

diversification extensions
Oil revenue from high prices key to economic reforms
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Fortunately, for Putin and the Russian economy, world oil prices rose again quite
quickly after March 2002. Since then, the high oil prices and budget surplus have
alleviated the pressure on the Russian government to restructure the economy and
to tackle the hard reforms remaining from the agenda outlined by Putin’s
economics team in 2000 – natural monopoly reform (electricity, gas, pipelines, and
railways in particular); housing and communal services; education and health; as
well as the financial sector; civil service and public administration; and corporate
and social taxes. Many of these reforms have been long in planning, with elaborate
concepts drawn up but little sign of implementation. Some longpromised reforms,
like a far-reaching military reform, seem to have been virtually abandoned. With a
large budget surplus in hand, the government can still keep the failing areas of the
economy and Russian state institutions functioning. Putin’s economic team, led by
German Gref and Alexei Kudrin, fully recognize the imperative to try to advance
some of the more costly and difficult issues – like the current social benefits reform
– while the cash is available to soften the inevitable blows, as well as to seed and
grow new initiatives and benefits delivery mechanisms.

Oil is key to Russian economic reform and long term


success
Banking and stock exchange (Russia) April 7, 2004 Result of
innovations can now be calculated
Western analysts examined indexes of Russia's payment balance and volume of
gold and foreign currency reserves and made a conclusion that Russia is currently
full of money. However, their evaluations are based on volumes of oil deliveries
abroad. The Russian economy still depends on oil. The Russian currency is
strengthening, too. The share of the external debt in the GDP is gradually
decreasing. Foreign experts believe that current high oil prices give Russian
splendid opportunities. However, if the state doesn't take advantage of this in the
next few years and the Russian economy is diversified, Russia will remain
vulnerable. Reduction of prices will have a strongly negative impact on its
economic development, believes an analyst from Intelligent Unit. "Over the last
few years, Russia's dependency on export and situation in the world markets has
considerably increased," says Isaac Tabor, director of the research department at
Merrill Lynch investment bank.

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MSDI Kearney/Ermo lab Russia Oil Disadvantage

diversification extensions
The US oil market is key to Russian stability and reform
Edward Morse and James Richard, Foreign Affairs, Nov/ Dec 2002 Does
Saudi Arabia Still Matter?
It is Russia's export infrastructure of pipelines and ports -- a potential area of
foreign investment -- rather than its resource base or production capacity that
serves as the real impediment to increasing exports. This year, in an effort to
overcome the limitations, two major Russian oil companies, Yukos and Lukoil,
began deliveries to the U.S. market. These companies believe that after proving
the economic viability of such shipments they can propel Russia's share of the U.S.
market from being virtually negligible to some five percent of total consumption.
Russia's moment has therefore arrived. Since April, Royal Dutch Shell, TotalFinaElf,
and bp have made commitments that could bring billions of dollars in new
investments over the next five years. They have done so in a burgeoning market
economy that is becoming increasingly dynamic. Moscow and the private sector
are now reinvesting in the transformation of the entire Russian economy, which, as
a result, will make energy a smaller and less vital component of the country's GDP
in the coming decades.

US oil investment in Russia now. This is key to economic


diversification and growth in Russia, global energy
security and a good US/Russian partnership
Petroleum Report September 24, 2003
Yusufov said bilateral cooperation in gas projects and oil refining projects was of major significance, but
increasing supplies of Russian oil to the U.S. market requires expanded transport
infrastructure. We need an answer from U.S. companies- are they ready to receive
this volume of oil, he said. Yusufov said Russia's energy strategy requires an
estimated $700 million in investment, of which $500 million will go directly to
sector and the rest will be used to develop engineering and related industries. U.S.
Interest in Increased Supplies of Russian Fuel- Ambassador. The United States also is interested in increasing
an increase in
imports of Russian fuel, U.S. Ambassador to Russian Alexander Vershbow said. Vershbow said
oil and gas supplies to the United States would not only help strengthen our
partnership but would help strengthen global energy security. It is in the interest of
global stability that there be a more diverse and balanced range of suppliers so
that there will not be instability in the market if there were a temporary reduction in supplies
from any one region, the ambassador said. The biggest task that stands before us is to work to expand Russia's
export capacity and in particular to expand its export pipeline capacity. In this regard we have two special
interests, the pipeline from Western Siberia to Murmansk and also the expansion of the Caspian Pipeline
Consortium's existing pipeline so it can ship more oil to international markets," he said. The United States would
consider purchasing oil for the country's strategic petroleum reserve as it did last year, Vershbow said. This is a
commercial matter and if we need additional oil for the reserve and the price of Russian oil is competitive it is
quite possible that we will buy some more, he said. Concerning Russian oil interests in Iraq, Vershbow said the
matter is for the new Iraqi authorities to decide. "Generally I think that the Iraqis will be looking for cooperation
and investments from many international companies, so I think that as the situation stabilizes we will see more
and more of these opportunities begin to be seen," he said. Iraq last year announced that a contract signed in
March 1997 with Russian oil major LUKoil for the West Qurna-2 field had been terminated after LUKoil failed to
meet its conditions. LUKoil considers the contract, with a term to 2020, to be valid and plans to turn to the Geneva
Arbitration Court. The West Qurna-2 field has possible reserves of 20 billion barrels of oil, estimated at $6 billion.
Vershbow said he could not comment on LUKoil's chances of uphold the contract. I think that the status of the
earlier contract at West Qurna is a legal question that the new Iraqi government will have to decide, he said. I am
not very well informed about the status of LUKoil's discussions with both the coalition representatives in Iraq and
with the interim Iraqi governing council." The United States does not make any linkage of any kind between
decisions on Russian companies' participation in the reconstruction effort and the country's contributions to the
military stabilization or to any other aspect of the international effort." We encourage Russian companies to
compete for the different contracts that may be awarded, either by the coalition authority or by the future Iraqi
authorities, and that is again something that is handled on a commercial basis, Vershbow said. U.S.

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MSDI Kearney/Ermo lab Russia Oil Disadvantage

Commerce Secretary Points to Possible Massive Investment in Russia. U.S. Commerce


Secretary Don Evans said Russia can expect large U.S. investment in the energy sector
soon. There is no more important partner than Russia, he said. Economic growth is
not possible without an accessible and progressive energy sector, and to achieve global
economic growth in the next centuries energy sources must be diversified for the United States and the rest of the
world, Evans said.

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MSDI Kearney/Ermo lab Russia Oil Disadvantage

diversification extensions
Russian oil not likely to run out, but in order to keep up
infrastructure, high prices are key
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Although Russia’s energy resources are not likely to ‘run out’ anytime soon,
without a major redirection of industry effort toward of new energy transportation
infrastructure, Russia may soon face similar problems to the Soviet Union in the
1970s and 1980s. It is almost certain to encounter increasing costs of production
and transportation, by moving to fields in East Siberia that are more difficult to
exploit just as growth rates in West Siberia decline and, potentially, as oil prices
also drop. And finally, as in the Soviet period, Russian domestic demand has to be
factored into the picture. If Russian manufacturing industry grows further, if new
transportation networks are constructed, and new large-scale infrastructure
projects launched (thanks to heavy subsidization and investments from Russian
government funds, fuelled by the oil price windfall), this will increase the domestic
demand for oil. As in the Soviet period, increased domestic demand could depress
Russia’s export capacity unless high oil and gas production growth rates continue.
The state will need more revenues from oil and gas exports and taxes if it is to
complete and maintain these kinds of ambitious initiatives. The bottom-line from
all this is that the energy industry itself needs more investment and policy focus to
fulfil its long-term, not just its short-term, potential to stimulate Russian economic
growth. The Russian oil industry should not be raided at this time of seeming
plenty to serve political or other economic interests.

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MSDI Kearney/Ermo lab Russia Oil Disadvantage

putin link
If oil prices fall, Putin will be blamed
Nikolai V. Zlobin, PhD, CDI Senior Fellow, Russian Scholar, November 2001
http://www.cdi.org/aboutcdi/zlobin.html
In Russia, the backing for Putin's foreign policy is not as strong as it could be and public opinion is split. Of course
Putin enjoys more support than the leaders of Pakistan, Egypt or Saudi Arabia, but if Russia's economy begins to
if oil prices drop further, there will be mass criticism of President Putin.
deteriorate,
What will happen then? Past experience shows that in a situation like that, Putin
might change his foreign policy objectives. The Russian president already has developed an image
as a politician whose actions do not always follow his words. A former highly-placed official in the Clinton
administration once articulated that when Yeltsin said "no, no, no," he usually meant "yes." As for Putin, it seems
that while he's been saying "yes, yes, yes," he often means "no." Furthermore, during his meeting with Lord
Robertson, Putin declared that he will hold office for four years, and that his successor might not be as pro-
Western. This has led Western leaders to consider the extent to which they can trust Russia, and the ways in
which they can help it to remain on the path of integration into Western structures. Even if Bush trusts Putin,
future American presidents might have to deal with future Russian presidents that are not so trustworthy. As such,
the basis for a closer strategic partnership has to be more than just personal chemistry.

Putin checks private businesses from destroying the


economy
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
In many respects, the mere fact that GDP growth and budget revenues are now tied to
high world energy prices is a mark of considerable success for the Russian
government. Vladimir Putin’s greatest accomplishment since 2000 may be that he
has ensured that as much as possible of the windfall from high oil prices has gone
into government coffers rather than into the private hands of oligarchs. Prior to 2000,
this was not the case. Oligarchs, like Mikhail Khodorkovsky of Yukos and Roman Abramovich of Sibneft, were able
to retain the superprofits from the oil price windfall for themselves. They accumulated staggering personal
fortunes as well as boosted the value of their companies by exploiting tax avoidance loopholes, engaging in
transfer pricing (including creating a series of on and off-shore trading companies to purchase oil at low cost from
production sites and then sell it back again through intermediaries), and other methods. Analysts calculate that
Yukos and Khodorkovsky alone may have cost the Russian treasury $5 billion in
potential revenues, and the Russian government is claiming $3.4 billion in back
taxes from Yukos for the year 2000 alone.73

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MSDI Kearney/Ermo lab Russia Oil Disadvantage

a2: small decline okay


Your empirically denied arguments are wrong – in Russia’s
rebound from 98 it has become significantly more
vulnerable to price fallouts
Goohoon Kwon, IMF Representative, IMF, August 1, 2003
http://www.imf.org/external/country/rus/rr/2003/pdf/080103.pdf
15. Despite these caveats, we can conclude that the Russian oil sector including the gas
industry was indisputably a major contributor to the post-crisis revenue gains,
accounting for at least 80 percent of total post-crisis revenue gains. We can also
conclude that oil prices played a primary role in the oil revenue buoyancy, based on a
detailed attribution accounting and a cross-country comparison. Tax reforms certainly helped realize the windfall
gains by making tax rates and tax bases more responsive to world oil prices but played clearly a secondary role—
an assessment supported by equally strong oil revenues in other oil exporting countries and their similarly
Our findings strongly challenge the notion
stagnant non-oil revenues in the same period. 16.
that the post-crisis revenue gains in Russia are largely irreversible due to
successful tax reforms, political stability, and economic growth. Our counterfactual
analysis suggests that, on the contrary, the fiscal stance of Russia has become
more vulnerable to a downward correction in oil prices than was the case in the
pre-crisis period. These findings highlight the need for measures to shield its budgetary stance against oil
price volatility.

Price simulations prove 2003 price sensitivity is 5 times as


sensitive as 1998 levels
Goohoon Kwon, IMF Representative, IMF, August 1, 2003
http://www.imf.org/external/country/rus/rr/2003/pdf/080103.pdf
10. One way to assess the strength of underlying revenues is to adjust actual
revenues to a constant oil price.6 For this counterfactual exercise, we have first assigned oil price
sensitivity to each oil tax in accordance with statutory factors and economic nature of tax bases: zero elasticity to
wage-based taxes, 0.3-0.5 to consumption-based taxes, 1-1.2 to advalorem oil taxes and profit-based taxes, and
statutory factors to export tariffs and oil extraction tax. We have then derived constant-oil-price revenues by
applying the oil price sensitivity to each oil tax. Table 5 presents our revenue estimates at counterfactual Urals
As a robustness test, we have
prices of $12, $16, $20 and $24 as well as at actual oil prices.
experimented with different sets of sensitivity estimates. The main results presented below
have not changed materially. 11. First, the numerical outcome validates our observation that
the budgetary sensitivity to oil prices has increased substantially since the 1998
crisis. The magnitude is nonetheless striking, with oil prices affecting the 2003
budget as much as 5 times compared with the precrisis level. This means that a low oil
price of $12 a barrel, as in 1998, could cost the federal budget as much as 3 percent of GDP in 2003, strongly
challenging the notion that the postcrisis revenue gains are largely irreversible due to successful tax reforms,
political stability, and economic growth.

Their empirical arguments are theoretically flawed –


studies prove that cross-year theories are bad math
Goohoon Kwon, IMF Representative, IMF, August 1, 2003
http://www.imf.org/external/country/rus/rr/2003/pdf/080103.pdf
13. In addition, the outcome of our numerical exercise cautions against a simple
extrapolation of one sensitivity estimate to other years and other oil price ranges.
The results show that the aggregate revenue sensitivity to oil prices differs by year
and across price ranges. Cross-year differences are large, testifying to dramatic changes in
tax laws and macro environments during the post-crisis period. This cross-year variation is even
comparable to cross-country variations, which are normally high in reflection of large cross-border

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MSDI Kearney/Ermo lab Russia Oil Disadvantage

differences in tax rules, macro environments, and structural specifics of oil industries. Sensitivity is not uniform
across price ranges, mainly reflecting the asymmetric rules of oil export tariff as described in Annex Table.

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MSDI Kearney/Ermo lab Russia Oil Disadvantage

a2: small decline okay


Price checks to falling prices will not work – their evidence
sorely underestimates the harm low prices would have on
all sectors of the Russian economy
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Another major element in the Russian government’s strategy to capture the oil
price windfall has been the creation of a fiscal stabilization fund from all crude oil
export duties and resources extraction tax revenues that accrue above a baseline
oil price of $20 a barrel (for Urals crude).76 The fund is intended to insure the
federal budget against oil price volatility by creating a reserve to cover the Russian
government’s current expenditures for domestic and foreign debt and interest
payments, and social commitments when oil prices fall below $20 a barrel. Russian
leaders now claim they are bolstering the Russian budget and thus the economy
against a future oil bust cycle by stashing away sufficient revenues to cover a two
to three year period of low oil prices.77 However, covering foreign debt obligations
and social commitments in the event of an oil price decline will be only part of the
picture for the Russian government in the future. The effect of the oil price on the
rest of the economy is greatly under-estimated, both by Russian economists and
many Western analysts.

Russia cannot take a shock – saving rates are non-existent


Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Another issue to bear in mind when considering consumer spending in Russia is
that, just as in countries the United States and United Kingdom, people have high
spending and low savings rates. Especially as a large proportion of household
expenditures are still covered by the Russian government, Russian consumers tend
to spend all their disposable cash. The fact that the Russian government has more
money in hand from oil revenues to pay state wages and pensions, to continue to
subsidize housing, household utilities and services, and public transportation,
encourages people to spend more than they might otherwise. Although the
proposed reforms of many of these benefits may alter future spending patterns.
The scale of Russia’s consumer spending is not so high, when viewed from the
perspective of a more advanced consumer economy where credit card usage and
mortgages are widespread, but there is still great potential for more consumer and
service sector growth if oil prices do not fall precipitously.

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MSDI Kearney/Ermo lab Russia Oil Disadvantage

Restorationists – now key time


Now is the key time - Russia could swing either way.
Joseph S. Nye, professor at Harvard and author of Soft Power: The Means to
Success in World Politics, Canberra Times (Australia), “The pendulum of world
politics has not found equilibrium” February 9, 2007 lexis
With higher energy prices, many Russian officials are enjoying their renewed
power. I was asked to comment on United States-Russian relations at a dinner with top officials from the
government and Gazprom, I said that America and Europe had too many illusions about democracy in Russia in
the 1990s, and were now going through a stage of disillusionment. There is concern about Russia's
future, how it will use its new- found power, and how the West should respond.
One view is that Russian politics is like a pendulum. It had swung too far in the
direction of chaos under Yeltsin, and has now swung too far in the direction of
order and state control under Putin. It has not swung back to Stalinism; Czarism might be a better
historical metaphor. Observers debate whether it will eventually reach a new equilibrium. The optimistic
view is that property rights are becoming more deeply anchored than they were in
the past, and that Russia's future will depend on how fast a middle class with a stake in law-based government
can be created. But others are not so sure. Sometimes pendulums continue to oscillate wildly unless there is some
Pessimistic observers foresee a
friction to slow them down, and sometimes they get stuck.
continual decline of freedom rather than a liberal equilibrium. Faced with this uncertainty
about the future of liberal democracy in Russia, how should western countries respond? This question is
particularly difficult for the Bush Administration, which is torn between the President's early endorsement of Putin
and his pro- democracy agenda. Secretary of State Condoleezza Rice declared in 2005 that the fundamental
character of regimes matters more today than the international distribution of power, and Senator John McCain, a
US presidential candidate, has urged removing Russia from the Group of Eight advanced countries. Yet, in addition
to its democracy agenda, the West has a realist agenda based on very tangible interests. The West needs Russian
cooperation in dealing with issues like nuclear proliferation in Iran and North Korea, the control of nuclear
materials and weapons, combating the current wave of radical Islamist terrorism, and energy production and
security. Moreover, Russia possesses talented people, technology, and resources that can help to meet new
challenges like climate change or the spread of pandemic diseases. There may not be as much conflict between
these two agendas as first appears. If the West were to turn its back on Russia, such isolation would reinforce the
xenophobic and statist tendencies present in Russian political culture and make the liberal cause more difficult.

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MSDI Kearney/Ermo lab Russia Oil Disadvantage

Imperialism extensions
Russian restorationists wait in the wings. Oil interests
prevent hard power.
Fiona Hill, a senior fellow at the Brookings Institution, is currently on leave as the
national intelligence officer for Russia and Eurasia at the National Intelligence
Council, Current History, " Moscow Discovers Soft Power " October 2006
Putin’s emphasis on soft power and economic integration suggests something of a
departure from Russia’s more traditional heavy-handed and military force-oriented
approach to its relations with the cis. However, hard power is still present and
deployable. Saber-rattling tendencies persist, and a real danger remains that
“restorationists” in the military and security services, as well as in the Russian
parliament, will try to reassert themselves in foreign policy. The more hard-line circles—the
so-called siloviki—in Moscow make their opinions on the means of reconstituting Russia’s authority in Eurasia
quite clear in private discussions, as well as in public articles and presentations. They still favor exclusive Russian
leadership over the cis expanses that Putin warned against and the use of coercive force to secure Russian
interests. Their views are also shaped by the fact that the United States under the Bush administration has been
more assertive elsewhere in the world, including in areas of former superpower competition in Asia and the Middle
East. The feeling in these circles is very clearly that if Russia now has to leave the rest of the world to the United
States, then the United States should leave Eurasia and the cis to Russia. Although freelancing has been
discouraged, and Putin has repeatedly set forth his foreign agenda, the fact that policy making is now confined to
the relatively narrow circles of the Kremlin and presidential administration means that Putin has few elite cadres
There are many more people
to rely on to implement a policy based on Russia’s soft power resources.
sitting on hard power resources on Russia’s borders and in bases in cis states,
sharing views similar to those of the hard-liners in Moscow. They may be tempted
to deploy these resources on their own, or someone else’s, initiative, and are very
difficult to rein in—especially from behind the Kremlin walls many hundreds or even thousands of miles
away. Even so, desires to deploy the hard power of military resources have been
tempered to a degree by the debacle of the war in Chechnya. With the high costs
of the conflict—including tens of thousands of Russian military and civilian casualties; the total
destruction of the city of Grozny, a key refining and training center for Russia’s oil
industry; a massive humanitarian disaster; and increasing linkages with international terrorism—Chechnya
offers a sobering, negative example of the use of force and Russian hard power. It
underscores how quickly and easily the use of military force can become self-
debilitating and counterproductive.

Restorationists will turn Russia into an imperial master.


Leon Aron, testimony, House Committee on International Relations, “Domestic
Determinants of Russia's Policy toward the United States” March 18, 2004
the “restorationists” are likely to go outside the consensus
In foreign and defense policy,
and seek to restore Russia as a global superpower counterbalancing the United
States. They will go beyond assertiveness and to a tougher, even provocative stance toward the U.S. especially
in what they consider Russia’s “sphere of influence”: the Caucasus, the Central Asia, the Far East, and North
Another item on the agenda is a massive re-armament and expansion of
Korea.
conventional and nuclear forces. The reactionaries have already succeeded in slowing down and
diluting the progressive military reform, which couples modernization with a sharp reduction in the number of
on the territory of
soldiers, the abolition of the draft and the creation of all-volunteer armed forces. Finally,
the former Soviet Union, the “restorationists” are likely to push beyond the current
Russian position of a strongest economic and military power and toward that of an
overlord and, perhaps, an imperial master.

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MSDI Kearney/Ermo lab Russia Oil Disadvantage

russian economic collapse impact


Russian economic collapse would cause civil war,
environmental poisoning, wars with China, Europe, and
the United States, and nuclear annihilation
Steven R. David, Professor of Political Science at the Johns Hopkins University,
Foreign Affairs, February 1999
At no time since the civil war of 1918 -- 20 has Russia been closer to bloody conflict than it
is today. The fledgling government confronts a vast array of problems without the power to take effective
action. For 70 years, the Soviet Union operated a strong state apparatus, anchored by the KGB and the
Communist Party. Now its disintegration has created a power vacuum that has yet to be
filled. Unable to rely on popular ideology or coercion to establish control, the government must prove itself to
the people and establish its authority on the basis of its performance. But the Yeltsin administration has abjectly
failed to do so, and it cannot meet the most basic needs of the Russian people. Russians know they can no longer
look to the state for personal security, law enforcement, education, sanitation, health care, or even electrical
power. In the place of government authority, criminal groups -- the Russian Mafia -- increasingly hold sway.
Expectations raised by the collapse of communism have been bitterly disappointed, and Moscow's inability to
If internal war does strike Russia, economic
govern coherently raises the specter of civil unrest.
deterioration will be a prime cause. From 1989 to the present, the GDP has fallen by 50 percent. In a
society where, ten years ago, unemployment scarcely existed, it reached 9.5 percent in 1997 with many
economists declaring the true figure to be much higher. Twenty-two percent of Russians live below the official
poverty line (earning less than $ 70 a month). Modern Russia can neither collect taxes (it gathers only half the
revenue it is due) nor significantly cut spending. Reformers tout privatization as the country's cure-all, but in a
land without well-defined property rights or contract law and where subsidies remain a way of life, the prospects
for transition to an American-style capitalist economy look remote at best. As the massive devaluation of the
ruble and the current political crisis show, Russia's condition is even worse than most analysts feared. If conditions
A future conflict would quickly
get worse, even the stoic Russian people will soon run out of patience.
draw in Russia's military. In the Soviet days civilian rule kept the powerful armed forces in check. But
with the Communist Party out of office, what little civilian control remains relies on an exceedingly fragile
foundation -- personal friendships between government leaders and military commanders. Meanwhile, the morale
of Russian soldiers has fallen to a dangerous low. Drastic cuts in spending mean inadequate pay, housing, and
medical care. A new emphasis on domestic missions has created an ideological split between the old and new
guard in the military leadership, increasing the risk that disgruntled generals may enter the
political fray and feeding the resentment of soldiers who dislike being used as a national police force. Newly
enhanced ties between military units and local authorities pose another danger. Soldiers grow ever more
dependent on local governments for housing, food, and wages. Draftees serve closer to home, and new laws have
increased local control over the armed forces. Were a conflict to emerge between a regional power and Moscow, it
is not at all clear which side the military would support. Divining the military's allegiance is crucial, however, since
the structure of the Russian Federation makes it virtually certain that regional conflicts will continue to erupt.
Russia's 89 republics, krais, and oblasts grow ever more independent in a system that does little to keep them
together. As the central government finds itself unable to force its will beyond Moscow (if even that far), power
devolves to the periphery. With the economy collapsing, republics feel less and less incentive to pay
taxes to Moscow when they receive so little in return. Three-quarters of them already have their own
Strong ethnic bonds promoted by
constitutions, nearly all of which make some claim to sovereignty.
shortsighted Soviet policies may motivate non-Russians to secede from the
Federation. Chechnya's successful revolt against Russian control inspired similar movements for autonomy
and independence throughout the country. If these rebellions spread and Moscow responds with force, civil war
is likely. Should Russia succumb to internal war, the consequences for the United
States and Europe will be severe. A major power like Russia -- even though in decline -- does not
suffer civil war quietly or alone. An embattled Russian Federation might provoke
opportunistic attacks from enemies such as China. Massive flows of refugees would pour into
central and western Europe. Armed struggles in Russia could easily spill into its neighbors. Damage from
the fighting, particularly attacks on nuclear plants, would poison the environment
of much of Europe and Asia. Within Russia, the consequences would be even worse. Just as the sheer brutality of
a second civil war might
the last Russian civil war laid the basis for the privations of Soviet communism,
produce another horrific regime. Most alarming is the real possibility that the
violent disintegration of Russia could lead to loss of control over its nuclear
arsenal. No nuclear state has ever fallen victim to civil war, but even without a clear precedent the grim

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consequences can be foreseen.Russia retains some 20,000 nuclear weapons and the raw
material for tens of thousands more, in scores of sites scattered throughout the country. So far, the
government has managed to prevent the loss of any weapons or much material. If war erupts, however,
Moscow's already weak grip on nuclear sites will slacken, making weapons and
supplies available to a wide range of anti-American groups and states. Such
dispersal of nuclear weapons represents the greatest physical threat America now
faces. And it is hard to think of anything that would increase this threat more than
the chaos that would follow a Russian civil war.

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Hard Power BAD


Russian hard power causes civil wars, armed conflicts, US-
Russian tensions and economic collapse
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Elsewhere in the region, in the South Caucasus states of Georgia, Armenia, and Azerbaijan, and in Moldova and
Russian politicians exploited state weakness and civil wars to retain
Tajikistan,
Russia’s presence on key military bases and borders. Moscow also employed
military force to rein in countries trying to move beyond Russia’s orbit, as well as
to gain the upper-hand in the arbitration of relations between regional states. This
included permitting ‘volunteer forces’ to cross Russian borders to assist opposing sides in conflicts, and
deploying Russian military personnel and hardware in armed clashes – most notably in
the conflict between Georgia and Abkhazia that led to the latter’s secession from the Georgian republic in 1993.15
Russia also used threatening rhetoric, political ultimatums, and economic pressure
to induce countries like Azerbaijan, Georgia, and Moldova that initially refused to join the CIS to
become members of the Russian-led political and economic bloc. And these methods
were used to try to discourage Central Asian states for pursuing closer economic and political relations with
Turkey, China, and Iran. And, in the case of Ukraine, the Russian government repeatedly cut access to critical gas
supplies during a series of disputes over the dismantling of Ukraine’s nuclear arsenal, the division of the Soviet
Coercion
Black Sea fleet, and the future of Ukraine’s ethnic Russian dominated Crimean peninsula.16
involving the deployment of hard power resources to force former Soviet states to
comply with Russian interests served to turn states away from, not toward Russia.
Moscow was increasingly perceived as the bully on the block. Over the course of the 1990s, it lost its formerly
dominant position in the region as well as the confidence of its neighbours. Only the most desperate countries like
Armenia, Tajikistan, and Belarus (beleaguered by civil war, security concerns, and economic decline) clung to
close relations with Russia. Countries like the Baltic States, Ukraine, Georgia, and Azerbaijan turned pointedly
toward the West. And the Baltic States appealed directly to the United States, European
countries, and international institutions for assistance in dealing with the issue of Russian troops on their soil and
For example, international
in mediating the growing conflict over their Russian-speaking populations.
pressure on Moscow and US threats to withhold vital financial aid and technical
assistance to Russia were instrumental in securing the withdrawal of Russian
troops first from Lithuania in August 1993, and then from Estonia and Latvia in August 1994.17 Russian
hard power exertion also drew unfavorable attention from Western analysts and
policymakers in the 1990s. They saw a revival of Russian imperial ambitions and desires
to reconstitute the USSR, albeit on the cheap.18 This led to a series of policy responses to shore up the
independence of the other former Soviet states and to offer them at least a modicum of security from Russian
predation. These included the expansion of NATO and extending membership to the states of the former Soviet
bloc in eastern Europe, including to the Baltic States; innovations like Partnership for Peace (PfP) as a NATO
halfway house for other states of the former Soviet Union; and bilateral US initiatives emphasizing economic and
technical assistance and closer political relationships with regional states, especially those perceived as most
vulnerable to Russian pressure like Ukraine and Georgia. US and other international investors also moved into key
commercial ventures in the increasingly attractive energy sector in the Caspian Basin. International investment in
Caspian energy development was backed by the United States government, which spearheaded the creation of a
new east-west corridor for the export of oil and gas to world markets from the Caspian across the Caucasus and
Russia finally reached the nadir in
Turkey, avoiding Russia as a potential risk and bottleneck.
August 1998 with the collapse of the Russian ruble and resulting financial crisis. The
1998 crash diminished Russia’s regional economic standing even further.

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Soft Power GOOD


Russian soft power quells tensions with CIS states
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Other recent developments in Russia’s neighbourhood demonstrate that Moscow
can gain more traction in priority areas by deploying soft rather than hard power
resources and, in the words of one leading Russian analyst, by ‘turning Russian into
an economic magnet for [the states of the CIS]’.44 In June 2004, for example,
Moscow saw a reversal of negative trends in two key relationships in Central Asia,
with Tajikistan and Uzbekistan. In the case of Tajikistan, the government in
Dushanbe sought the removal of Russian troops from Soviet-era bases in the
republic, and Russian guards from its border with Afghanistan. Although there was
still some arm twisting, the two sides reached a mutually acceptable agreement in a
relatively speedy manner. Russia secured its troops and military installations –
including ownership of a strategic space surveillance centre – in return for
forgiveness of a portion of Tajikistan’s debts to Russia and energy investments
(which also give UES eventual ownership of a hydro-electric power facility). Most
importantly for Tajikistan, it secured an agreement on the entry of its labour
migrants into Russia.45

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A2: Russia-Europe turn


Russian energy will not cause Russian-European conflict.
Fiona Hill, senior fellow, foreign policy, The Brookings Institute, "Beyond Co-
Dependency: European Reliance on Russian Energy" July 2005
Ensuring European energy security, as well as more competitive markets, will also
require a coordinated strategy between the European Commission and individual
European governments to include the Europe Union’s more vulnerable neighbors
like Ukraine. Continued geographic diversification of oil and gas imports beyond
Russia and the Middle East would be part of this strategy. The opening of the Baku-
Tbilisi-Ceyhan oil pipeline in May 2005, for example, increases the prospect for
new oil supplies to Europe from the Caspian Basin. And there are new gas supplies
from Azerbaijan and Iran that can be piped through Turkey and Southeast Europe
(a gas pipeline between Turkey and Greece was inaugurated on July 3, 2005, with
an extension planned to Italy after 2006); as well as piped gas from North Africa
(Algeria and Libya); and LNG from a variety of global sources that can be shipped
to new European coastal terminals. The further development of alternative fuels,
and energy conservation are also elements in this strategy. In short, there are
ample possibilities to reframe the debate about European energy security. And
Europe’s “oil phobia” about Russia can be addressed in practical ways that benefit
both Europe and Russia and do not lead to unnecessary political confrontation.

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Russia Solves ME Dependence


Russian oil will solve Middle East oil dependence
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Conclusions such as these and Russia’s willingness to challenge OPEC’s decision to
impose production and export cuts in late 2001 turned Russia in 2002-2003 into
the new great hope of Western energy to diversify U.S. and global oil supplies
away from the Middle East and Persian Gulf.59 American policymakers and
commentators declared Russia ‘a separate nucleus of the energy equation,’ and
‘the next Houston – the global capital of energy’.60 In a 2002 article in the pre-
eminent American journal, Foreign Affairs, two energy analysts even suggested
that Russia could soon displace Saudi Arabia and OPEC in oil markets in the U.S.,
Europe, and Asia.61 And major international oil companies such as Shell,
ExxonMobil, BP, and Chevron explored the expansion of existing investment in
Russia’s energy sector, as well as new ventures. In late May 2002, at a summit in
Moscow, the U.S. and Russia announced a strategic energy dialogue that would
focus on bringing more Russian oil to world markets as well as increasing
commercial cooperation in the energy sector.62 Russian oil majors like Yukos
claimed that, with anticipated production increases, Russia could eventually supply
as much as 1 million barrels per day to the United States––a significant proportion
of the U.S. consumption of around 20 million barrels of oil per day.63

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Russia Econ Impacts


Russian economic decline will cause accidental nuclear
war
Presbyterian Washington Office, October 22, 2003
http://www.pcusa.org/washington/issuenet/gs-001211.htm
The threat of accidental or unauthorized launch of nuclear missiles is more
dangerous now than during the Cold War. The decline of Russia's economy has
lead to deterioration of their early warning network and an increasing inability to
distinguish a missile attack from natural phenomena or peaceful space ventures.
Two-thirds of their ground based radar and satellites are inactive or failing. And, the significant gaps in the
The ailing Russian
country's early-warning network make Russian military planners ever more nervous.
economy has made it difficult for Russia to deploy most of its survivable forces
(those nuclear forces capable of surviving a U.S. nuclear attack) - submarines at sea and mobile land based
rockets. Because lack of qualified personnel and resources, the Russian navy has been forced to cut back a
considerable portion of its operations. Currently, it is able to keep only two of its 26 ballistic missile submarines at
sea on combat patrol at any one time. Russia has also been constrained to keeping most of its truck mounted
mobile missiles parked in garages, leaving them vulnerable to attack. Only one or two regiments can
be hidden by dispersing them in the field. This amplifies what Russia sees as its need for launch on warning as
they fear they would have only a few nuclear weapons that would survive after absorbing a full nuclear attack
from the United States. Russia's deteriorating infrastructure increases the risk of a
terrible mishap. There have been reports of utility companies' shutting off power to nuclear weapons
facilities because the military has not paid the bills and of nuclear control equipment failing because thieves have
stolen communications cables for their copper. In addition, the equipment that controls nuclear weapons
malfunctions frequently, and crucial computers and other electronic equipment have moved into combat mode for
no apparent reason. Russia's nuclear establishment is facing a similar demise with a host of human and
organizational problems. Because of increasing food and housing shortages, morale in the military has severely
decreased. This disaffection affects all sectors from the elite Strategic Rocket forces to the custodians of Russia's
This increases the danger that a desperate member of the
stockpiles of nuclear weapons.
armed forces might take unauthorized control of nuclear weapons. According to the CIA,
some submarine crews may have the capability to fire their ballistic missiles with out having to obtain the special
even at the top levels of government it is possible that
codes held by the General Staff. And,
the authority to launch a nuclear attack could be usurped by the military if there
were an internal crisis. Some in Russia have argued that if the situation continues
Russia will reach a point where it will no longer be in control of its missiles and
nuclear systems.

Economic decline will affect the global economy


Steve Nettleton CNN 2001
http://edition.cnn.com/SPECIALS/1998/09/crisis.russia/overview/
Some Russians wait for months to be paid. Workers, and even state enterprises,
resort to bartering to survive. Discontent is widespread, and revolt is a possibility.
The troubles in Russia already have sent ripples through the world economy, and
could trigger much worse.

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Loose Nukes Impact Mod 1/3


A. The Russian economy is the greatest threat of WMD use
– it is directly responsible for poor safeguarding of nuclear
material
William Potter, Director, Center for Nonproliferation Studies, Monterey Institute of
International Studies, Carnegie Endowment for International Peace, January 12,
1999 http://www.ceip.org/programs/npp/potter.htm
It is hard to exaggerate the negative impact of the August 1998 economic
meltdown in Russia on safeguarding its WMD material, technology, and technical
knowhow. Matt Bunn, Ken Luongo, Todd Perry and others vividly have pointed out many examples of the
desperate economic situation at nuclear facilities where workers are not paid for
months, guards leave their posts in search of berries and mushrooms, electricity
and heat are intermittent, and the only commodity in abundance is fissile
material--hundreds of tons of the stuff that have never been subject to a physical inventory. Less obvious, but
perhaps even more debilitating for efforts to enhance safeguards are the psychological effects of the August
economic crisis. Previously there was always a hope that Russia would find its way, that it was a matter of time,
that progress might be slow but that it was linear. Today that faith in economic recovery is largely extinct. An
associated casualty is any prospect in the foreseeable future that Russia will assume its own MPC&A
responsibilities and sustain over the long-term an indigenous safeguards program. In case these points are still
too abstract, let me be more specific. Of the three dimensions of MPC&A, the area where the safeguards program
at many of the central
has been most successful is physical protection. And yet it remains the case that
storage buildings, which are bursting at their seams with weapons-grade material, there are no
perimeter fences, armed guards, vehicle barriers, operational surveillance
cameras, and metal detectors at entrances. At some of these facilities the United States has
installed motion detectors and other alarms systems, but they have been shut off by the guards who were
even where there are functioning alarm
disturbed by the high false alarm rate. Unfortunately,
systems, it is problematic if anyone will respond. That is because the Ministry of
Interior guards, who have not been paid for months, are supposed to be at posts
that are unheated in below freezing conditions. That was the situation I viewed in mid-October
before winter had even set in! Indeed, what is most remarkable given the extraordinarily difficult conditions under
which many Russian nuclear workers and guards live is that there have not been more confirmed instances of
proliferation significant diversions and exports. Hopefully the emergency supply of warm uniforms and space
heaters that DOE wisely procured for the guard force once Washington became aware of the problem will make a
difference. I am doubtful, however, because physical protection is the easy part of the problem. 2. Material
Accountancy A much more difficult part of the MPC&A problem to correct, and one where very little meaningful
progress has been made, concerns material accountancy. Put starkly, I would argue that no physical inventory has
been completed at any Russian nuclear facility with ton quantities of highly enriched uranium or plutonium
present, that there is no realistic prospect of any such inventory being completed in the foreseeable future, that
most Russian accountancy experts recognize that the task is unmanageable, and that one, two, or three years
from now at future Carnegie Endowment conferences the situation is unlikely to be any different. One reason for
this gloomy assessment, in addition to the amount of material involved, is that there are as many different
material accountancy systems being developed as there are Russian nuclear facilities--a development reinforced
by the lack of coordination among U.S. nuclear laboratories in their approaches to the development, certification,
and implementation of material accountancy systems. To give just one, hopefully extreme, example, at one so-
called model facility, we recently have had five different labs trying to purchase and install nine different
measurement systems in two of the facilities buildings. If this is the picture at one model facility, you can imagine
the degree of standardization and coordination across sites. [Ironically, the only accountancy system to date that
has been certified by appropriate Russian governmental organs was developed at the Kurchatov Institute.
Because Kurchatov is an independent entity outside of Minatom's jurisdiction its system is unlikely to be
sanctioned for use at Minatom facilities.] 3. The Human Factor Even more difficult than completing physical
inventories of nuclear material and of greater necessity for the long-term sustainability of Russian safeguards is
the transformation of the attitudes or mind-sets of Russian nuclear workers and guards. In my view, DOE has
relied too much on technical solutions to MPC&A problems and only recently has discovered that people are the
key. Installation of hundreds of portal monitors, control cages, motion detectors, and intrusion alarms are among
the necessary components of an effective safeguards system. They are next to worthless, however, if they are not
installed properly, are disconnected because of the inconvenience they pose, or are applied only selectively. The
first time I experience a greater delay in visiting a central storage facility of HEU or Pu than I do in passing
through the gate at the Hotel Danilovsky in Moscow, will signal to me that maybe the seeds of a safeguards
culture in Russia are taking root. Regrettably, I believe it remains the case that with the exception of a small
number of individuals--most of whom are former IAEA inspectors--the MPC&A workforce in Russia today has at
best only a very vague understanding of why safeguards (or nonproliferation) are important. This deficiency is

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even more acute among the guards, who constitute by far the weakest link in the Russian physical protection
system and pose the greatest Ainsider threat. Expressed somewhat differently, I worry that the emerging MPC&A
workforce in the former Soviet Union will have excellent technical credentials but an inadequate appreciation of
why their work in nonproliferation is important. For that reason, I regard as particularly significant the kind of
broad-based safeguards curriculum being introduced with DOE and NGO support at the Moscow Physical
Engineering Institute (MEPhI). The related, but more narrowly focused MPC&A training program at Obninsk also is
an essential component of what I believe should be a much higher priority for U.S.-Russian MPC&A cooperation--
namely, facilitating the orderly transfer of MPC&A activities from the United States to Russia. III. What Can Be
Done? What Should the NGO Community Do? A. Education and Community-Building There are no easy solutions to
the problems I've identified. I believe, however, that an important and underutilized nonproliferation

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Loose Nukes Impact Mod 2/3


approach that needs to be embraced more fully by the NGO community is education and community-building. In
the context of this panel, this approach means, among other things, devising and implementing an educational
strategy that reinforces proliferation restraint by fostering the development of nonproliferation norms, political
constituencies, and a nonproliferation safeguards culture in Russia. That orientation has informed our work for the
past eight years in training over five dozen young professors, journalists, scientists, and policymakers in
Monterey; developing new nonproliferation courses for introduction in universities in Russia, Kazakhstan, Ukraine,
and Belarus; and helping to nurture the growth of new, indigenous NGOs in the region--some which have become
very influential such as Vladimir Orlov's PIR Center in Moscow and Sasha Pikayev's Center for Critical Technologies
and Nonproliferation. Changing attitudes and promoting nonproliferation cultures, however, cannot be
accomplished easily or quickly and will require far more concerted training efforts on the part of many NGOs. The
recent initiative by Ken Luongo and Frank von Hippel to join in the development of nonproliferation expertise at
places such as Snezhinsk and Obninsk is most welcome and can help sustain the growing group of
nonproliferation specialists who have already been trained at these and other Russian nuclear facilities. The use of
education as a nonproliferation tool also needs to be applied more effectively at home. Although Rose
Gottemoeller is as knowledgeable a Russian expert as one can find, few of DOE's MPC&A personnel in the field
have much training in Russian history, politics, economics, science, or language. As Senator Moynihan put it
succinctly when asked what needed to be done to improve the $27 billion/year U.S. intelligence effort, "Learn to
read!" One might apply this admonition to those nonproliferation governmental bodies and NGOs offering
nonproliferation assistance to Russia. Basic area studies skills are essential in navigating Russia's turbulent
waters. B. Share Lessons Learned I have intentionally focused my remarks on Russian MPC&A shortcomings
because I regard the problem to be immense and the U.S., international, and Russian response to be inadequate.
To be sure, however, there also have been notable accomplishments, for which Sandy and his colleagues at DOE
(past and present) deserve great credit. The success stories are most apparent if one looks at specific facilities
such as the Luch Scientific Production Association in Podolsk, which was the site of the first confirmed diversion of
HEU, was an absolute mess two years ago, but today stands out as an example of what can be accomplished
when the right conditions are present. Unfortunately, neither DOE nor Minatom currently has in place an efficient
mechanism for distilling the lessons of Luch and sharing them with other U.S. and Russian labs and facilities. Nor
is there a mechanism in place in either country to discern and disseminate the lessons of minor and major
disasters in U.S.-Russian MPC&A collaboration, the repetition of which need to be avoided. The absence of routine
lateral communication among MPC&A directors and senior personnel is especially acute in Russia, and the often-
cited and useful but one-time gathering of U.S. and Russian personnel at Obninsk in 1997 is not the answer. I
would urge DOE, perhaps with the assistance of knowledgeable NGOs, to institutionalize meetings for the explicit
purpose of information sharing on positive and negative lessons learned. Although it would probably be most
desirable to hold these meetings routinely in Russia, one also might dedicate a portion of the annual meeting of
the Institute of Nuclear Materials Management--which attracts many Russian MPC&A specialists--to that mission.
C. Don't Forget the Non-Russian Republics Finally, let me caution those who think that the MPC&A problem is
simply a Russian problem. DOE pronouncements over the last several years, for example, would have us believe
that MPC&A activities have been completed in Belarus, Georgia, Latvia, Lithuania, and Ukraine. A similar
pronouncement is planned soon for Kazakhstan. While we managed to get out much of the fissile material in
Georgia before it was diverted, growing economic difficulties throughout the former Soviet Union point to
continuing MPC&A vulnerabilities at many of the non-Russian facilities. A uranium "buy up" approach, such as one
Sandy and I both recommended in the past remains the most cost-effective means to safeguard the relatively
small but nevertheless proliferation significant quantities of weapons-usable material in the non-Russian republics.
IV. Conclusion Let me conclude my presentation by returning to my opening remarks that the Russian
economy is the world's greatest WMD proliferation challenge. One way to think about this
threat was suggested to me by a Russian friend who didn't like the spate of Titanic jokes this past summer after
the movie opened in Russia. Most of the jokes naturally compared economically-crippled Russia to the ill-fated
ship. My friend, however, pointed out that Russia and its vast arsenal of WMD was more appropriately viewed as
the iceberg, and that we all ignore at our own peril its safety and security.

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Loose Nukes Impact Mod 3/3


B. Loose Russian control of nuclear weapons causes
nuclear holocaust and extinction
San Francisco Examiner November 16, 1999
www.gsinstitute.org/archives/000028.shtml
The bomb has been developed further. One super bomb could now let loose more
destructive energy than all that has been released from all weapons fired in all
wars in all history. The power of self-extinction is now in our uncertain hands . The
leaders responsible for America’s defense warn that the only significant threat today to the security and survival
of the U.S. is nuclear proliferation. Their Alice in Wonderland position seems to be that the danger lies in nations
that do not possess nuclear weapons, not in those that do. Actually, nuclear weapons beget nuclear weapons. The
threat of a Hitler bomb begot the American bomb. The American arsenal begot the Soviet arsenal. The U.S. and
Soviet arsenals led to the British, French and Chinese arsenals. These led to bombs of Israel, India and Pakistan.
What next? The U.S. Senate’s recent rejection of the Comprehensive Test Ban Treaty, and the Russian Duma’s
failure to ratify START II, suggest the two nations with the largest nuclear arsenals intend to hang onto them
forever. This is a prescription for more begetting. The Non-Proliferation Treaty was a bargain. The 180 nations
without nuclear weapons pledged not to acquire them—and they haven’t. The five nations that had nuclear
weapons when the treaty was negotiated decades ago—China, France, the Soviet Union (Russia), the United
Kingdom and the United States—pledged to get rid of them—but they haven’t. The 180 are losing patience. Some
may withdraw from the Non-Proliferation Treaty, advising the U.S. and the other nuclear nations: "If you need
these weapons so badly, maybe we need them too." Today’s rogue states and terrorists seek the
bomb. And there’s grave danger that "loose nukes" can be bought or stolen in
Russia, where command, control and custody are deteriorating. Russian chaos
could cause an accidental or unauthorized nuclear launch that could provoke a
U.S.-Russian holocaust. By no means immune from error, too, are U.S. missiles and warheads, the
computers that direct their use, and the human beings who command the computers. It is more likely now
than it was during the more stable days of the Cold War that weapons of mass
destruction will be used. Former Secretary of Defense William Perry says, "It isn’t a question of whether,
but of where and when." Gen. Charles Horner, who commanded Allied Air Forces in the Gulf War, says he expects
that a nuclear weapon will be exploded in some city in the next 10 years. Former Ambassador Robert Galluci, who
negotiated on nuclear weapons with Iraq and North Korea, agrees and predicts it will be an American city. Galucci
described how it could happen:

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Loose Nukes links


Decline in Russian economy causes loose nukes
PBS 1998 http://www.pbs.org/wgbh/pages/frontline/shows/nukes/stuff/faqs.html
Russia's economic collapse has also hindered action by the Russian government.
Budget shortfalls have meant that many factory workers have their wages delayed
for months. The nuclear complex has not been immune to such difficulties. In such
an economic environment, the Russians don't have the money to fund the
necessary safeguard improvements at their nuclear facilities by themselves. But
working in partnership with the U.S., the initiatives to increase security in the
Russian nuclear complex are steadily progressing. It is clear to observers that this
work must continue and be carried out as quickly as possible.

A strong Russian economy prevents proliferation


Rose Gottemoeller, Senior Associate of the Carnegie Endowment for
International Peace November 7, 2001
http://www.senate.gov/~gov_affairs/110701gottemoeller.htm
The Bush Administration, however, has not been enthusiastic about the shut-down
plan, which involves replacing the three plutonium reactors with fossil fuel
alternatives. They have apparently argued that we should not be building fossil
fuel plants in Russia when the Russians could be building them themselves. The
Bush team does have a point. The Russian Federation is no longer in such
desperate straits as it was a decade ago. Indeed, while the U.S. economy has
ceased growing, the Russian economy is growing at an annual rate of over 5
percent. Russia should therefore be in a position to shoulder more of the
responsibility for nonproliferation priorities.

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A2: Russia will never turn imperialist


This Red Dawn scenario would cause a US-Russian nuclear
war
J.R. Nyquist, Geopolitical Global Analysis, October 14, 2004
http://www.financialsense.com/stormwatch/geo/analysis.htm
The destruction of America's nuclear deterrent in a surprise attack is not fantasy.
Russia has been training its forces for exactly such an opportunity. In fact the entire
international landscape of today, down to the anti-U.S. shift of France and Germany, the diversionary nature of the
While our
"war on terror" and the Russia-China strategic partnership fits snuggly into this scenario.
strategic attention is fixed on al Qaeda and Iraq, America's nuclear deterrent may
be vulnerable to surgical strikes. "Terrorist" hits against critical U.S. communications might
conceivably negate U.S. early warning systems. New methods for tracking ballistic missile submarines may
already exist. Russian intercontinental missiles, launched in the wake of diversionary terror attacks, might destroy
America's missile silos and bomber bases. Pundits and so-called "experts" are often guided by the mistaken
notion that nuclear weapons exist solely for the purpose of obliterating population centers; but the shock wave of
a 25-megaton bomb detonated in the ocean will destroy all submarines within an 18 to 20-kilometer radius.
Smaller nuclear weapons can take out bomber bases and missile silos. The truth that Mr. Bayer has put forward in
It is not simply that Russia
the pages of the Wall Street Journal, therefore, has much wider significance.
has the power of launching a suicidal strike that could destroy America. Russia
possesses weapons that have a war-winning potential if used in proper
combination with other forces (regular and irregular). In this context, President Vladimir
Putin's resuscitation of the USSR is hardly a spontaneous shift. There is a growing
body of evidence that this shift was long in the making; that it may have been
conceived prior to the Soviet Union's collapse.

The elites mislead you, Russia is the largest threat to the


United States
J.R. Nyquist, Geopolitical Global Analysis, October 14, 2004
http://www.financialsense.com/stormwatch/geo/analysis.htm
the leading threat to
In the real world, as opposed to the mythical world of the sixty-second sound bite,
U.S. security is not al Qaeda (an organization with nonexistent oil reserves, spurious WMDs and
shadowy cave-dwelling leadership). The main threat to the United States is a large country with
thousands of nuclear weapons. As Alexei Bayer pointed out in his Oct. 8 commentary ("Russia off the Radar
Screen") for the Wall Street Journal: "[F]oreign policy elites in Washington have been mislead
by their own claims and have come to believe that the U.S. is now the world's only
military superpower, holding an overwhelming advantage over any potential rival.
This is patent nonsense." One might ask how this "patent nonsense" attained currency? As with all widely
accepted nonsense, it was enthroned by that cleverest of clever in-groups - "the smart set." The problem with
Washington, and the problem with America in general, is that too many people want to belong to the "smart set."
And here is where comedy and tragedy become as one. With sadness I must report that there is no "smart set,"
and there never was. There is only a dominant herd that demands intellectual compliance as the price of
admission. What is genuinely smart doesn't come in "sets," cannot be bottled, packaged or sold to mass
audiences and political climbers. Thoughts and ideas that are bottled, packaged or sold to mass audiences are
necessarily simple and shallow. The problem with the democratic process is that packaging
political "truth" for the masses involves our leaders in dangerous mythologizing. As
Mr. Bayer pointed out in his October 8 commentary, "The Pentagon Budget may be larger than
the sum total of what the rest of the world spends on defense, but Russia can still
incinerate all of the U.S. in about 15 minutes - hardly a condition for world
domination by Washington."

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Fiona Hill Qualifications


Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Dr. Fiona Hill is a Senior Fellow in the Foreign Policy Studies Program at The
Brookings Institution. She has published extensively on a diverse range of issues
related to Russia, relations among the states of the former Soviet Union, the Caucasus region, Central Asia,
ethno-political conflicts in Eurasia, and energy and strategic issues. Her book with Brookings Senior Fellow Clifford
Gaddy, The Siberian Curse. How Communist Planners Left Russia Out in the Cold, was published by Brookings
Press in December 2003. Other recent publications include: ‘The Caspian Region: Pipelines for Politics, Peace and
Prosperity?’ Georgetown Journal of International Affairs (Winter/Spring, 2004); ‘Central Asia and the Caucasus: The
Impact of the War on Terrorism’, Nations in Transit (Freedom House, 2003); ‘Seismic Shifts in Eurasia: The
Changing Relationship Between Turkey and Russia, And its Implications for the South Caucasus’, Journal of South
Eastern European and Black Sea Studies (2003); ‘Does Saudi Arabia Still Matter? Differing Perspectives on the
Kingdom and its Oil’, (with Shibley Telhami) in Foreign Affairs, November/December 2002; and ‘Fueling the Future:
Hill was Director
The Prospects for Russian Oil and Gas’, (with Florence Fee) in Demokratizatsiya, Fall 2002.
of Strategic Planning at the Eurasia Foundation in Washington, DC, from 1999-2000, and
continues to serve as an advisor to the Foundation’s president. From 1994-1999, she was Associate
Director of the Strengthening Democratic Institutions Project (SDI) at Harvard
University and, from 1991-1994, she was Director of Harvard’s project on Ethnic
Conflict in the former Soviet Union and Coordinator of Harvard’s Trilateral Study on Japanese-
Russian-U.S. Relations. Hill is also a Trustee of the London-based Institute for War and Peace Reporting; on the
Advisory Board of the Central Eurasia Project of the Open Society Institute in New York; a Board Member of the
Russian language international news service, Washington ProFile; and on the editorial boards of Demokratizatsiya
and the Journal of Southeast European and Black Sea Studies. She is a member of the Council on
Foreign Relations.

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Affirmative answers
High oil prices postpone economic reforms in Russia
The International Herald Tribune, Erin E. Arvedlund, January 7, 2004
With a barrel of Brent crude oil from the North Sea, a benchmark in the industry, averaging $28.80 last year,
high prices clearly padded Russia's economic and market indicators, Gref said. But he
warned that high oil prices were "also negative, because it created the impression
that everything was good, and that we could postpone radical economic reforms a
little bit longer." The surge in prices helped Russia grow at a 6.8 percent rate in 2003, Russia's Economic
Ministry said.

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MSDI Kearney/Ermo lab Russia Oil Disadvantage

Affirmative answers
Low oil prices will not affect Russia - they have shielded
themselves from price decline and diversified their
economy.
Belfast Telegraph, Mary Dejevsky, "Russia will not cut oil and gas production,
Putin says" September 17, 2007 lexis
Mr Putin was answering questions from foreign Russia-watchers at his summer
residence near the southern resort city of Sochi. What had prompted a response
that should reassure Russia's Western customers, at least in the short term, was a
comment by a senior official two days before to the effect that Russia's oil and gas
bonanza was almost as much trouble as it was worth. He had said that, while
Russia had benefited hugely from the high energy prices of recent years, these
had also created problems. Because the Russian economy simply could not absorb
so much money productively in such a short time, the government had to spend
much specialist time and energy on how best to use it. A proportion goes to the
"stabilisation fund", now standing at $130bn, seen as an insurance against energy
prices falling. Another share goes into an "investment fund" for infrastructure
projects, higher pensions and public service salaries. What is left over is invested
abroad, much of it in foreign bonds, to be as safe as possible. Russia's foreign
investment policy was, the official said, deliberately"conservative". The official also
said that Russia was looking to invest more in foreign companies, and would
already have done so but for what it saw as unwarranted suspicion of Russia's
intentions and closet protectionism on the part of foreign governments. It was in
this context that a participant in the discussion with Mr Putin asked this question:
Why, if Russia found administering its new oil and gas wealth so burdensome, did
it not consider cutting production? Keeping the stuff in the ground, he suggested,
would have several beneficial effects for Russia. It would raise the world price, so
yielding more money for less effort. It would, assuming no dramatic fall in prices in
the near future, guarantee Russia a good income for many more years. And it
would save ministers the time and effort involved in figuring out how to invest its
windfall. The question clearly appealed to Mr Putin. He smiled and described the
proposition as interesting, as he seemed to turn it over in his mind. But his
response was categorical. "We will extend and increase production of both oil and
gas, and we will do that because global demand is growing." He said that Russia
had no intention of banking on further rises in energy prices. "We remember that
there was a time when coal was the main source of energy, and then all at once
the price fell sharply. What good would come of speculating?" Russia, he said,
"wants to behave responsibly" not for its own sake, but because "harmonious
relations" with the rest of the world was as much in the national interest as high
energy prices. Apparently alluding to Western charges that Russia used its position
as an energy supplier as a weapon, Mr Putin said that Russia had never "
blackmailed" the world market. He went on: "We are not a member of Opec though
we keep a close eye on what it does and one reason is that we don't have the level
of state monopoly over energy production that most Opec countries have."

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Affirmative answers
Russia is not diversifying - high profits are ruining
Russia's soft power.
Joseph S. Nye, professor at Harvard and author of Soft Power: The Means to
Success in World Politics, Canberra Times (Australia), “The pendulum of world
politics has not found equilibrium” February 9, 2007 lexis
A better approach would be to look to the long run, use the soft power of
attraction, expand exchanges and contacts with Russia's new generation, support
its participation in the World Trade Organisation and other market-oriented
institutions, and address deficiencies with specific criticisms rather than general
harangues or isolation. In any case, the sources of political change in Russia will
remain largely rooted in Russia, and Western influence will inevitably be limited.
But advocating engagement over isolation should not prevent friendly criticism,
and in Davos I offered four reasons why Russia will not remain a major power in
2020 unless it changes its behaviour and policies. First, Russia is failing to diversify
its economy rapidly enough. Oil is a mixed blessing. Riding on record- high energy
prices and raw material exports, in January 2007 Russia became the world's 10th-
largest economy. But energy exports finance about 30 per cent of a government
budget that is based on forecasts that oil remains at $US61 a barrel. Russian
industrial exports primarily consist of armaments, with advanced aircraft
accounting for more than half of sales. That leaves Russia vulnerable. A related
problem is that Russia lacks a rule of law that protects and encourages
entrepreneurs. These are precisely the people needed to help foster a vibrant
middle class the bedrock of a stable democratic market economy. Instead,
corruption is rampant. Moreover, Russia's demographic crisis continues, sustained
by poor public health and inadequate investment in a social safety net. Most
demographers expect Russia's population to shrink significantly over the coming
decades. Adult male mortality is much higher than in the rest of Europe, and it has
not been improving. Finally, while one can understand a former superpower's
temptation to seize its opportunity to return to a muscular foreign policy, Russia's
bullying in the energy area is destroying trust and undercutting Russia's soft power
in other countries. Both Russia's neighbours and Western Europe have become
more wary of depending upon Russia. Most Russian participants at the Davos
dinner seemed to ignore these criticisms, but it was interesting to hear one
important official admit that reform might progress faster if oil prices dropped
somewhat, and another accept the point that criticism should be welcomed as long
as it is offered in a friendly spirit.

Russia has used oil profits for currency reserves - a drop


in prices will have no effect.
George Friedman, Stratfor, "THe Geopolitics of $130 Oil" May 27, 2008
The Chinese dilemma is present throughout Asia. But just as Asia is the big loser
because of long-term high oil prices coupled with food disruptions, Russia is the
big winner. Russia is an exporter of natural gas and oil. It also could be a massive
exporter of grains if prices were attractive enough and if it had the infrastructure
(crop failures in Russia are a thing of the past). Russia has been very careful, under
Vladimir Putin, not to assume that energy prices will remain high and has taken
advantage of high prices to accumulate substantial foreign currency reserves. That
puts them in a doubly-strong position. Economically, they are becoming major
players in global acquisitions. Politically, countries that have become dependent
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MSDI Kearney/Ermo lab Russia Oil Disadvantage

on Russian energy exports — and this includes a good part of Europe — are
vulnerable, precisely because the Russians are in a surplus-cash position. They
could tweak energy availability, hurting the Europeans badly, if they chose. They
will not need to. The Europeans, aware of what could happen, will tread lightly in
order to ensure that it doesn’t happen.

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Affirmative answers
No threat of Russian economic crisis from energy.
Washington Post, Steven Mufson, "Oil Price Rise Causes Global Shift in
Wealth" November 10, 2007 lexis
Inside the Kremlin, with Putin nearing the end of his second and final term as
president, that sum now looks like peanuts. Russia's gold and foreign-currency
reserves have risen by more than that amount just since July. The soaring price of
oil has helped Russia increase the federal budget tenfold since 1999 while paying
off its foreign debt and building the third-largest gold and hard-currency reserves
in the world, about $425 billion. "The government is much stronger, much more
self-assured and self-confident," said Vladimir Milov, head of the Institute of Energy
Policy in Moscow and a former deputy minister of energy. "It believes it can cope
with any economic crisis at home." With good reason. Using energy revenue, the
government has built up a $150 billion rainy-day account called the Stabilization
Fund.

High oil-revenue deters economic liberalization.


Christian Science Monitor, Fred Weir, Correspondent of The Christian
Science Monitor, "Has Russian oil output peaked?" May 28, 2008 lexis
Oil profits, on the other hand, are taxed at nearly 90 percent, which has filled the
state's coffers as prices for crude oil have risen from $10 per barrel a decade ago
to more than $130 last week. Petrowealth was a key factor enabling Mr. Putin to
concentrate political power in the Kremlin, which he used to take over huge slices
of the formerly private oil and gas industry. The looming production crunch,
therefore, suggests a need for sweeping political reforms as well as economic
adjustments, some experts say. "As long as energy prices keep going up and the
easy money keeps rolling in, there is no incentive to liberalize," says Yevgeny
Gavrilenkov, chief economist at Troika Dialog, a Moscow investment bank. "If the
golden goose stops laying eggs, then they'll start to recognize the need for
change."

Forcing Russian liberalization now key to Russia's


economy.
Christian Science Monitor, Fred Weir, Correspondent of The Christian
Science Monitor, "Has Russian oil output peaked?" May 28, 2008 lexis
A sharp debate is breaking out among economists, some of whom argue that the
crisis is an opportunity for Russia to develop a long-term strategy to husband its
remaining energy resources and diversify its economy. They point to figures
showing that gas and oil exports have risen since 2000 from under half to over 60
percent of Russia's gross domestic product and say that to continue trading
nonrenewable resources for rapidly devaluing dollars is a big mistake. "Russia
should not be a colonial country that provides raw materials to more developed
countries," says Nodari Simonia, director of the Center for World Energy Studies,
an independent Moscow think tank. "We don't need to export more crude, we have
to invest resources in our manufacturing base." Russian oil profits, taxed by the
state, have been accumulating in a special 'stabilization fund' that now totals
about $130 billion. Earlier this year the government put another $32 billion into a
sovereign wealth fund that is expected to begin investing in Russian infrastructure
and social welfare schemes. "Russia's economy so far can't absorb the oil cash
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that's coming in. That, not increasing oil output, is our biggest worry," says Sergei
Glaziev, head of the National Institute for Development, a Moscow think tank. "We
urgently need to diversify our economy away from this dependence on natural
resources."

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Affirmative answers
Diversification Turn
A. Oil money further divides cleavages that moot out
diversification
Fiona Hill, Senior Fellow in the Foreign Policy Studies Program at The Brookings
Institution, Director of Strategic Planning at the Eurasia Foundation, The Foreign
Policy Centre, http://fpc.org.uk/fsblob/307.pdf September 2004
Unfortunately, the benefits to Russia’s economy have not been evenly distributed.
The oil and commodities effect has instead reinforced a dual economy that has
already existed in Russia for some time between domestic-oriented industry and
exportoriented. 80 Export industries tend to be oligarch-dominated, resource-
based, and high-revenue earning, but generate only a limited number of jobs. The
oil sector, for example, according to the World Bank, only accounted for 1 per cent
of total Russian employment in 2002.81 The growing cleavage now is between
those industries that can benefit from the flood down from oil prices and the
energy sector, and those that can not. To some degree this is sectoral, but in many
respects it is also regional.

B. Insert peak oil cards

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MSDI Kearney/Ermo lab Russia Oil Disadvantage

Affirmative answers

Low prices would not cause an economic catastrophe


Andrei Illarionov is economic adviser to President Vladimir Putin, Moscow Times
December 6, 2001 http://www.cdi.org/russia/johnson/5584-7.cfm
If the oil price falls by $1, the budget loses approximately $1.4 billion over the
year. If the oil price falls by $5, then the budget loses roughly $7 billion. Is this
catastrophic or not? Planned budget revenues for 2002 are $67 billion to $68
billion. If the price of oil falls by $5 per barrel, budget revenues will be reduced by
approximately 10 percent to $60 billion to $61 billion. However, even in this case,
they will be more than twice as high as revenues for 1999 ($25 billion) and even
for 2001 (expected to be $55 billion).

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A2: Critiques
Academic criticism of the state decreases US power
necessary to prevent extinction
JR Nyquist, Geopolitical Global Analysis, The Advent of Peacekeeping, June, 9,
2004
http://www.financialsense.com/stormwatch/geo/pastanalysis/2004/0609.html
In his book The Abolition of Man, C.S. Lewis warned against the teaching of value-
skepticism in the schools. This new teaching (which has spread throughout the western world) subtly
disparages traditional moral concepts. The new educators, wrote Lewis, “claim to be cutting away the parasitic
growth of emotion, religious sanction, and inherited taboos, in order that ‘real’ or ‘basic’ values may emerge.” But
men do not typically choose what is good by reason. Men do not become good citizens and adopt new values
because of skepticism. Something else is needed in education – something that modern educators have neglected
and modern instruction has excluded. Those who are good are good because their sentiments have been trained
to goodness. They are good by habit and upbringing. “It still remains true,” wrote Lewis, “that no justification of
virtue will enable a man to be virtuous. Without the aid of trained emotions the intellect is powerless against the
I had sooner play cards against a man who was quite skeptical about
animal organism.
ethics, but bred to believe that ‘a gentleman does not cheat,’ than against an
irreproachable moral philosopher who had been brought up among sharpers.” To
what is man reduced when sentiments of duty and honor have been removed for want of scientific validation?
According to Lewis: “The impulse to scratch when I itch or to pull to pieces when I am inquisitive is immune from
the solvent which is fatal to my justice, or honor, or care for posterity. When all that says ‘it is good’ has been
debunked, what says ‘I want’ remains.” While pundits and media “analysts” argue about the occupation of Iraq
and the “war against terror,” the fundamental problem of our time is ignored. Whether the West defeats the
terrorists or fails miserably, the significance of victory depends entirely upon the moral quality of the people who
there can be no
triumph. If Western institutions are in the process of deconstructing themselves,
meaningful victory for America. If we fail to transmit traditional values to our
children: the anti-Western, totalitarian, despotic, dehumanizing type of regime must inevitably triumph –
regardless of who wins on the battlefield. Lewis warned: “The process which, if not checked, will abolish Man goes
on apace among Communists and Democrats no less than among Fascists. The methods may differ in brutality.
But many a mild-eyed scientist in pince-nez, many a popular dramatist, many an amateur philosopher in our
midst, means in the long run just the same as the Nazi rulers of Germany.” Consider an article written by Alison
Schneider in The Chronicle of Higher Education. According to Schneider, insubordination and intimidation are on
the rise in America’s college classrooms. We are reminded that the parent is the child’s first teacher, the first
authority. The university professor comes later. But this last and final figure of authority and respect is not
respected. Today’s professors are increasingly stalked, threatened, cursed and assaulted. The reason? Some
observers have noted that bad behavior is no longer punished. Schools will not expel a student who curses a
teacher, calling her a “withered hump” in retaliation for low marks. Now that educators have cut away the
“parasitic growth of emotion, religious sanction, and inherited taboos” the only real value that has emerged is a
grotesque selfishness. Since our educators have unwittingly undermined the very basis for their own authority, it
is no wonder they are helpless against this rising tide of barbarism. “Most students aren’t ill-mannered brats,”
we’re not talking about a few
wrote Schneider, “but it takes only a few bad apples to spoil the pie.” But
bad apples. We are talking about a growing epidemic – a contagion of incivility and
disrespect. Some university professors say that student misbehavior has doubled
or tripled in the last ten years. A professor from the Yale Law School told Schneider, “If you haven’t
civilized young people by the time they get to college, I don’t think you’re going to civilize them at all.” While the
talking heads yammer about U.S. overseas involvements, moral decline is eating them up from below. This
decline is real, with global ramifications. Those who pretend to understand what is happening in the world have
understood nothing if they do not see the decline in standards, the decline in morals, the decline in civility,
Men have always been bad, but badness is a matter of
gratitude and subordination.
degree. There is a crossing point between civilized order and chaos: here freedom
is used to undermine freedom, wealth is used to undermine wealth and authority is
used to undermine authority. And wherever authority limps, death is not far off.
The ultimate personification of authority in our country is the President of the
United States. When he is attacked, trivialized, mocked, betrayed and undermined,
no successor is likely to put the broken office together again. The greatness of the
Ronald Reagan (who we are presently remembering) was that he glued the presidency back
together in the wake of the disastrous Nixon and Carter years. But the Cult of
Presidential Disrespect remains an ever-growing octopus. It was nourished during the Clinton
scandals; and now, at a time of war, it throttles the commander-in-chief. The malicious anti-Bush web site, Capitol

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Hill Blue, has advanced the rumor that CIA director George Tenet was forced to resign last week because the
president thought Tenet had been disloyal. Does this signify Bush’s mental deterioration under pressure, as the
Bush-haters would love to assume? Does it signify a divided government? When we look back we find that
President Reagan also

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A2: Critiques

struggled with disloyal lieutenants. There were those who whispered that Reagan had mentally deteriorated
during his second term. There was the Iran-Contra affair. There were dirty deals and bad men in high places. And
all of this can be traced back to the same issue that troubled C. S. Lewis. Since the administrative staff of the
Executive Branch is university-educated, they are caught up in the value-skeptical orientation that C. S. Lewis
We know – as a matter of public record – that Reagan’s presidency was
warned against.
undermined from within (see Constantine Menges’ Inside the National Security Council). Bush’s
presidency is not immune from this same disease. One thinks back to the logic of Nixon’s final
days as president, when he allegedly roamed the White House drunk, talking to the portraits of his predecessors.
Here we catch a glimpse of the disintegrating world of King Lear, the senile personification of authority in decline.
When
When civilization hovers on the brink, whoever occupies the place of Lear must face the madness of Lear.
civility cracks, when loyalty is no more, the levers and gears of state are
compromised. The executive finds himself besieged by secret enemies. What good
can come of this? Such men as exist are either misled by false ideology or sink into
the rationalization of bad behavior. When Friedrich Nietzsche was in the first stages of his madness,
having debunked good and evil, he imagined he had unleashed a universal political cataclysm. He knew that
“cutting away the parasitic growth of emotion, religious sanction, and inherited taboos” would not pave the way
to “real” or “basic” values. “The
concept of politics,” wrote Nietzsche, “will have merged
entirely with a war of spirits; all power structures of the old society will have been
exploded … there will be wars the like of which have never been seen on earth.” In
his notebooks, posthumously published under the title The Will to Power, Nietzsche wrote: “Skepticism regarding
morality is what is decisive.” Weapons of mass destruction are next to nothing. The perversion of man’s will – now
that is something. The tool is not decisive. The toolmaker’s values are decisive. These determine whether man
becomes a builder or destroyer. These determine whether man will enjoy political freedom or suffer under tyrants.
The passing scandals, the backbiting and gossip of Washington do not determine
our fate. Our fate is determined in grade school classrooms and by Sunday school
teachers and mothers and fathers who honor something greater than the latest
intellectual fad of the counter-culture. And their success is our only hope.

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