After seven years of sanctions and accusations of malign activities by both sides, political relations between Russia and the United States are the worst since the mid-80s and the trend could continue to worsen. The momentum has been in that direction for some time. But is there is a chance that the political engagement initiated by President Joe Biden may now stabilize the relationship and allow for the building of a better platform from which to move forward in the future?
One of the key questions is the willingness of both sides to make compromises to start repairing the relationship. President Biden, and his key foreign policy advisors, were very consistent and clear in their view that their greater priorities would be the containment of China and the repair of trans-Atlantic relations. Russia was almost sidelined as irrelevant. That has changed, but not to the extent that improving relations with Moscow is regarded as an equal third priority. Instead, it appears more as an effort to stabilize the relationship and to return to ‘predictable strategic stability’, which is the phrase most heard in Washington these days. The relationship with Russia is, at best, top of the 2nd tier priority list rather than a 1st tier target.
Russia sees itself to be in a much stronger position today than was the case in 2014. Financially, that is certainly the case, as the country has the world’s fifth-largest financial reserves (over $600 billion) and the sixth-lowest national debt at under 20 percent of GDP. The economy is recovering from a relatively modest 3 percent decline last year and the Federal Budget is back in surplus. That is largely thanks to the need to deal with sanctions since 2014. It means that the balancing oil price this year is less than $50 per barrel compared to $115 in 2013. Public support for President Putin is strong and, according to recent polls, he would comfortably be reelected in March 2024 should he wish to stand again. The threat of large-scale opposition protests never materialized and the country’s military has showcased the results of a decade of spending and upgrades on the Ukraine border in recent months.
Moscow is also more confident because it is much less vulnerable to trade with and investment from the West. After briefly talking about a so-called Asia-pivot in 2014-15, the strategy now is one of diversification in relations, both trade and politics. China is today the country’s largest trade partner, with over $100 billion of trade in 2020. That is set to double by 2025 because of projects already agreed in the energy and transport sectors. Moscow-Beijing political ties have also improved. The OPEC+ agreement has greatly helped improve relations with Saudi Arabia and other Gulf Arab states. Trade and joint investment deals with Japan and India have also grown and are set to increase.
Nobody expects any specific agreements to be made at the Geneva meeting, but it should clarify the areas of mutual interest and the reasons why President Biden asked for the summit. Chief amongst them is climate management. This is a huge legacy priority for President Biden and one that requires Russia’s involvement because of its size, environmental diversity and geography.
Russia has been slow to move on climate action but is now eagerly engaging in the topic as Putin recognises this as not only good economics but also presenting an opportunity for Russia to reengage with the West and to stay at the top table of global politics. President Putin devoted fully one-quarter of his 45-minute keynote speech at the recent St Petersburg Economic Forum to climate change. His main theme was that the problem presents huge international challenges which cannot be tackled by countries acting individually. He has instructed the government to develop and deliver a whole host of measures in the arena of climate change action, with a detailed plan to be published by October 2021 and just ahead of COP26, which will be held in Scotland in November.
Russia’s critics have often dismissed the country as no more than a large gas station, although one that was necessary for the global economy. As the age of hydrocarbons now enters the twilight stage, the hope of those critics that Russia would also fade in importance is not going to be realized. Russia has a major role to play in green energy, climate management and carbon reduction. That is something that is well understood by the Kremlin, and it is a competitive advantage that Putin will seek to use effectively as part of the effort to end the deteriorating relations with the West.
The outcome of the Geneva summit also matters for multinational investors in Russia and for the economy. The Kremlin has enough money to fund medium-term recovery and to advance the major investments set out in the National Projects Program. This is a near $400 billion plan to transform and modernise the economy and to improve social conditions. It is, in effect, Putin’s legacy program. But, for it to achieve the ambitious targets set out, Russia will need to soon start attracting more foreign and domestic private sector investment.
For much of the past seven years, foreign companies working in Russia have made money, with several reporting record profit growth in 2020, despite the pandemic. But all have had to contend with a backdrop of political and sanctions uncertainty. That has led to a reluctance by boards to add to Russia investment and, for many, to worry about reputational risk. Thus, if the upcoming summit is deemed to have gone well (i.e., not badly) then there is a real chance of drawing a line under the threat of further risk deterioration and damaging sanctions expansion.
Clearly, a lot will also depend on how Moscow reacts, but given that the Kremlin makes no secret of its wish to attract investment, a quiet sigh of relief will be the hoped-for reaction as Putin’s plane departs Geneva.