A conflict over resources

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Nonetheless, if Russia does succeed in carving out a stake in the Arctic's High North and then claiming any natural resources as its own, then its new prize would completely fail to meet the challenges that confront its energy sector. The country does not currently lack the large reserves that the Arctic might perhaps have to offer. But it does totally lack the skills and expertise to extract oil and gas from its existing offshore wells and would also be highly dependent on foreign oil companies to develop any large-scale discoveries in the Arctic region and elsewhere. Acquiring more resources in the Arctic or anywhere else would not necessarily take Russia any further forward than it stands at present.

Above all, although Russia has good reason to want to involve itself in this energy rich area and to claim as much territory as it can, it is most unlikely to want to risk any confrontation. For like almost any other country, it is only likely to enter into a conflict when it really has to. If it genuinely fears an imminent attack by a foreign power, for example, then Moscow would have little choice but to defend itself. But the prospect of acquiring natural resources in disputed parts of the Arctic would certainly not fall into this category simply because Russia's material losses would far outweigh what it could reasonably hope or expect to gain.15 Even in narrowly military terms, the Kremlin would have to assume that its losses would be considerable and its victory in the field, even against vastly outnumbered enemies, is far from guaranteed. In January 2009, a leading organization, the London-based Institute of Strategic Studies, argued that Russia's armed forces were essentially a 'paper tiger', whose 'shortcomings' were badly exposed by the campaign in Georgia even if some national pride had been restored.16 In the words of one much respected commentator, this is one reason why 'Russia, contrary to all the feverish talk about its presumed status as a revived superpower, is nothing of the kind'.17

Moscow would also forfeit the confidence of desperately needed foreign direct investment, destroying both its wider economy as well as its energy sector in particular. All foreign investors want to put their money down in a stable environment where their initial investment and its returns are relatively safe from any economic calamity that will undermine its value, or from a corrupt and extortionate regime that might take more than its fair share. If there are any such risks lurking in the background, then investors either demand the promise of higher rewards, such as a more generous rate of interest, to compensate or else pull their money out altogether and look elsewhere.

The Russian economy reached a low point in the summer of 1998 when the government effectively became bankrupt, running out of foreign currency and defaulting on its foreign debt repayments. But recovery followed as oil prices rose and by 2005 the major international credit agencies were sufficiently impressed to upgrade Russia's credit rating to investment grade on the basis of its stable economic performance. As a result, foreign banks soon began to lend there quite freely.

It is just such a stable economic environment that Moscow would destroy if it entered into any foreign war unnecessarily. Foreign investors would take immediate flight and it might conceivably take Russia years to rebuild their confidence in the country. In August 2008, Russia's military foray into Georgia had disastrous economic consequences that will make the Kremlin very wary of any repetition. On 8 August, the day of the attack, the stock market in Moscow plunged by nearly 7 per cent, and within a week capital outflow reached a massive $16 billion, suddenly squeezing domestic credit while the rouble plunged. This trauma was soon considerably aggravated by a wider credit crisis that swept the entire developed world, but the war in Georgia certainly shook investors' nerves badly and confirmed all their worst fears. Such intense economic pressures prompted Moscow to try and patch up relations with Washington in early 2009: 'Militarization does not solve problems', as Vladimir Putin told the World Economic Forum in Davos in January 2009.

Of course every country is fearful of the economic fallout of war, but Russia has more reason than most to worry about alienating foreign investors. This is partly because any conflict would reinforce the existing impression that Russia is a rather risky place in which to put money. This impression has already been fostered by a number of other events in recent years. For example, the government has become more intolerant of domestic criticism than at any time since the days of the Soviet Union, a trend that was most obviously exemplified by the murders of the journalist Anna Politkovskaya and the dissident Alexander Litvinenko, or the drafting of a new law, in December 2008, that expands the definition of treason to include critics of the state.18 In the summer of 2008, it seemed that the whims of a political leader can be more important than any legal institution when Prime Minister Putin made mildly threatening remarks about a steel company, whose share price immediately plummeted.19

The Russian authorities can be forgiven if the prospect of any sudden exodus by foreign investors makes them sweat profusely. For this is a country where memories of severe economic crisis are still bitter and recent, and where another similar downturn might push an unforgiving general public too far. The economy reached its nadir during the financial meltdown of 1998, when the government devalued the rouble and in doing so wiped out the life savings of millions of ordinary Russians. But the spectre of not just another economic crisis but a further devaluation would haunt everyone if investors flee the country. At the end of 2008, the rouble dived in value partly because foreign investors were dumping their Russian holdings. The authorities in Moscow were spending the country's foreign reserves to buy up roubles and support the currency's value, but were fast running out of spare money.20 If this happens, then they would have no option but to let the rouble fall in value, bringing back bitter memories of August 1998 and perhaps forcing the architects of this devaluation to commit political suicide: Vladimir Putin, who became Russia's Prime Minister in 2008, has staked his reputation on avoiding a sharp depreciation of the currency.21

The Russians have good reason to fear the exodus of foreign investors not just in their wider economy, but also in their energy sector in particular. This is partly because their own energy companies have built up massive debts, largely by lavish spending on new pipelines and railway links, and therefore need support and cooperation from foreign banks that can help sustain them. For example, in October 2008, the state oil company Rozneft had debts of around $21 billion, and as the global credit crunch took hold, its creditors suddenly demanded repayment.22

It is also because, as the case of the Shtokman field illustrates, they lack the skills, technology and expertise to develop many new fields and to make the most of their existing ones, and they cannot afford to alienate the international companies that can help them to do so. This is why Gazprom has established joint ventures with foreign partners to develop not just Shtokman, but also the South Stream natural gas pipeline to link Southern Europe with Caspian supplies. Oil and natural gas are so vital to the Russian economy that Moscow cannot afford to put future supplies at risk. If output drops then the Russian economy would be starved of foreign exchange and faced with a perhaps unsustainable budget deficit. This was the dire situation that Russia faced at the end of 2008 when its international credit rating was suddenly downgraded by analysts who were scared off by its economic plight.23

It is not just the wrath of the markets that Russia would fear in the event of any war, particularly one that it is judged to be guilty of starting. Moscow could also be starved of foreign investment if the United States and the EU impose targeted sanctions not through the UN Security Council (Russia is a permanent member and would probably have Chinese support to veto any such move) but as a unilateral effort. International energy companies such as BP, Shell and Total have shied away from investing in Iranian or Syrian natural resources because Washington has threatened economic retaliation, and the United States could effectively threaten Moscow with similar draconian penalties. In practice, the United States government might be very reluctant to impose such measures, partly because Moscow could threaten its own retaliation - by building closer ties with China, for example - and because American companies could potentially earn huge profits from any involvement there. But the mere threat of any such move would nonetheless be a powerful one. In any event, the

Russians could also be penalized in all sorts of other ways: Moscow's long-held ambition to join the World Trade Organization, for example, has been blocked by the United States since the mid-1990s, but would become even more surreal in the event of any future conflict or confrontation over the Arctic.

This is not to say that Russia's behaviour in the Arctic, or elsewhere, has always been as cautious as this line of economic argument might suggest. On the contrary, the flag-waving expedition to the North Pole in August 2007 or the flights of its warplanes close to the airspace of neighbouring states have all been just as provocative as the flag-waving missions undertaken by Canada and Denmark in Hans Island or the journeys of NATO submarines around the Russian coasts during the Cold War.24 But to the Russians such actions are quite consistent with an essentially peaceful and peace-loving approach, just as their draconian laws and taxes are seen to be perfectly consistent with their efforts to lure foreign investors. These seemingly contradictory impulses need to be seen in the light of the traditions of a country that is both an inseparable part of the outside world but at the same time quite separated. The Russian mind, as its great biographer once wrote, is torn between recognizing its dependence upon the outside world on the one hand and feeling a world apart on the other.25

Far from being an ominous sign of hostile intent, it is in any case much more likely that Moscow has undertaken some of its seemingly provocative actions at least as much to impress domestic audiences as to send a signal to the watching world. For example, the flag-planting expedition to the seabed of the Arctic Ocean took place just seven months before the Russian presidential election, which was held in March 2008. President Putin was doubtlessly well aware that the expedition would allow him to play a nationalistic card that would help rally the Russian people behind him and make a big difference to the electoral chances of his preferred successor, Dmitri Medvedev.

The true risk of conflict in the Arctic region is really very different. For the strength of Russia's strategic interest is much more likely to provoke Moscow into a confrontation over the region than the presence of natural resources such as oil and gas, if they are there in any meaningful quantities at all.

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