Analysis

At $600 billion, Russia’s capital reserves are the third largest in the world, behind China and Japan. Meanwhile, revenues are streaming in from Russia’s highly demanded raw materials and energy. Now, after years of biding its time and saving during the tight-fisted Vladimir Putin presidency, Russia has suddenly begun spending cash. Putin, now the prime minister, has decided that the time is ripe for Russia to undertake a number of expensive projects as well as to upgrade essential energy infrastructure to maintain cash flows.

New spending, however, has begun to deflate the cushiony budget surplus Russia has maintained since 2000. The Russian government’s budgetary expenditures are set to increase by 38 percent, from $261 billion in 2008 to $360 billion in 2009, whittling away at 2007’s nearly $50 billion dollar budget surplus and catching up to total revenues by 2010. According to the government’s latest budget, major areas of expenditure include national defense, “nationwide issues,” law enforcement, the economy, infrastructure development, “interbudget transfers” and, paradoxically, “off-budget expenses.” Many of these costs are growing, some by more than 20 percent year-on-year. Add in the recent war in Georgia (estimated as costing $16.1 billion) and the implications the war brings for increased Russian spending in the former Soviet Union to consolidate power in its near abroad, then the leap in Russia’s 2009 budget makes sense — as do the less drastic but still significant projected leaps of 14 percent in 2010 and 10 percent in 2011.

Yet the new spending spree entails that Moscow must once more face the risk of overextension, which, over the course of decades, proved to be the Soviet Union’s tragic flaw. In the aftermath of the Arab oil embargo in the 1970s, the Soviets were rudely awakened by the power that Saudi Arabia drew from its oil reserves. Starting from scratch, the Soviets ramped up development projects and production to begin reaping the full harvest of their own petroleum deposits. At the same time, the Soviet Union used the massive revenues to stretch its tentacles abroad, subsidizing its allies from the Middle East to the Caribbean and propping up otherwise poorer regimes such as Cuba, Nicaragua, Mali and Mozambique. This game became too expensive for the Soviets to maintain when oil prices suddenly dropped in the 1980s. All the pipelines,railroads and production facilities that Moscow had not finished constructing in Siberia, the Caucasus and Central Asia were suddenly abandoned, along with massive arms caches and military hardware. The lavish subsidies it lost on satellite states became a bitter pill for the Kremlin to swallow.

Modern Russia depends greatly on oil and natural gas exports to fill the government’s coffers — as did the Soviet Union. Today, the energy sector provides fully one half of government revenues. And since Putin rose to power in 2000, the government has kept up a healthy budgetary surplus by predicting oil prices conservatively and budgeting accordingly. In 2007, however, this began to change, as Putin felt that Russia had reached the point where it could afford to begin spending on improvements at home and reclaiming its international stature. Not only were the finances right, but he was granted a window of opportunity by the United States’ absorption in its Middle Eastern campaigns. Russia has taken further advantage of this window in 2008 with its decisive actions in the Caucasus, and 2009 promises the steepest increase in expenditures yet.

But Russia’s increasing assertiveness depends in great part on the mountain of reserves it has built up from high commodity and especially energy prices. If global energy prices precipitously drop, half of Russia’s budgeted revenues could suddenly evaporate. Therefore, Moscow can only hope that its prediction for the next three years comes true: up from only $34 per barrel in 2006 and $55 in 2007, Russia’s new budget predicts that oil will cost $95 per barrel in 2009, descending gently to $88 per barrel in 2011. With such high predictions for the cost of oil, the Kremlin seems to have forgotten the volatility of oil prices and the vulnerability inherent in spending too much to attempt big things quickly.

Fortunately for Russia, however, the Kremlin’s ambitions are far more manageable this time around, making a Soviet-style collapse unlikely even if energy prices do plummet. Unlike the Soviet Union, Putin’s Russia has not extended itself into the far reaches of the world to wage proxy wars against the United States. Instead, it has stuck close to home, reserving major energy and infrastructure projects for former Soviet Union countries. These countries cannot escape their geographical proximity to Russia, or their susceptibility to its political will; hence, expensive Russian investments into their societies and economies will not simply vanish if Russia is forced to withdraw or cut back on spending. Moreover, even if energy prices do fall, Russia’s massive rainy-day fund alone will be able to buoy the country for at least two years.

So far, there is no hint that Russia hopes to restart the Soviet strategy of sending massive subsidies to proxies on different continents. It has opened up lines of communication — and offered tokens — to Venezuela and Cuba recently. And Nicaragua has made a bid for Russian cooperation. Russia will also continue to deal with Middle Eastern allies such as Iran. But none of these activities show any sign of growing into full-scale regime-propping. As long as Putin and his followers avoid the urge to overextend themselves, they will be able to weather a sudden drop in prices. And if prices climb according to their predictions, the revenue might allow them to achieve big things within their periphery.

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