September 2008 - The Russia’s Gambit

As the dust settles over the perturbed Caucasian landscape, the world tries to adjust itself to a new global environment. Unlike the previous situation when only one power could operate beyond the bounds of international law when expedient, now Russia claims to have the same right of convenience. This new development creates a qualitatively different setting that divides the world in two unequal groups of players – active and passive – who compete in the market for establishing international norms. Using game theory framework the first group can be described as the existing monopoly and entrant while the rest of world composes countries that take the global order for granted. Ignoring passive players, the composition of potential strategies that the two active players – the USA and Russia – can pursue, payoffs associated with them and their revealed actions indicate what the world will look like in near future.

Up to recently, the USA was the only power whose implicit right to recast international norms was unquestionable. Using the first mover’s advantage, Washington could often preclude global developments detrimental to American national interests without resorting to explicit actions. It sufficed to indicate American displeasure – often portrayed as the defense of democracy or human rights – that a presumed offender would fall back in line. When oral notation did not work, several layers of sanctions were invoked one by one until the determined trespasser was relegated to the lowest rank of international “pariah”. Other countries were expected to follow the suit or face the danger of being sanctioned next.

For some time Moscow felt that the USA defined global rules to its own benefit and that Washington used big words to cover the promotion of its national interests. Finally, the Kremlin decided that it should not follow the rules that give it solely headache.

That is against this background Moscow moved its military might to destroy the Georgian army last August. A week later, sensing that Washington prepared to launch its usual system of sanctions, the Kremlin made a number of pre-emptive diplomatic strikes. With blistering speed Moscow announced that it froze cooperation with the NATO, postponed negotiations on the WTO accession and expressed indifference to the proposal to replace G8 group with another formation that excludes Russia.

This combination of actions is very similar to what a “mean and lean” entrant would do expecting retaliation from the existing monopoly. Russia has both entered the domain occupied by another power and committed itself to staying in by raising the cost of its exit. It worked. Judging by US reactions, it took time for Washington to realize that its contingency plans were in shambles. The White House behaved as if a “strong warning” from its side would do the trick, apparently, not realizing that the Kremlin’s moves rendered “milder” forms of sanctions useless.

Because of higher stakes, Washington faces stark choice between going straight to the “hard” form of sanctions – that is officially demoting Russia to the group of global outcasts – and eventual accommodation.

Currently, the first option prevails as seemingly optimal. Indeed, by preserving the status quo Washington retains a powerful tool to protect its interests that may be further eroded if other countries – such as China, India and, possibly, the EU – decide that following in Russian footsteps is safe. To enforce the “hard” sanctions, the USA needs to establish a quarantine zone around Russia hoping that this country suffocates slowly in isolation. This task is daunting. It has to build a coalition of western powers including Germany and France that is willing to severe ties with Russia. The “old” Europe is visibly unenthusiastic about such a prospect. This move has grave consequences for its own economic wellbeing and, hence, to assure European cooperation Washington should offer a serious incentive or make a credible threat. Second, even if Washington succeeds in uniting Europe, Russia is still able to hang on by redirecting its trade flows to other countries. Its top export staple – energy products – is fully marketable abroad and, hence, immune from sanctions while the composition of its imports shows relative competitiveness among suppliers many of whom, like China or countries of South America, would be more than happy to replace EU exports to Russia. To widen the blockade, Washington needs to unite the world against this country by portraying Russia as an “Evil Empire”. In this respect, Moscow has clear advantage because to defend its new status it is not obliged to pick up every fight. Recent developments show that the Kremlin has chosen the tactic of avoiding confrontations it is unsure to win; for example, it did not respond to provocative US and British actions in Ukraine and revealed its “dovish” side approaching the conflict in Moldova.

From the Russian point of view, the new situation carries some early costs but delivers greater dividends down the road. So far, the costs were reasonably low. The cost of military conflict was covered from contingency funds. Investors pulled out of the Russian stock exchange in anticipation of US sanctions but the outflow of speculative capital made hardly a dent in national currency reserves. Rumors say that a couple of wealthy Russians were seen selling assets at home, thus opening the way for their eventual desertion to the west, but most of elite expressed solidarity with the Kremlin. The talk that Russian acquisitions in the west should be placed under greater public scrutiny intensified but no consequences followed. The costs of preparing for the next armed conflict in the Caucasus, as the USA seems to rearm the Georgian army under the leader who vows to fight again, were anticipated and budgeted in advance.

Potential advantages are mostly of long-term character and they are less visible today. They rank from greater negotiating power in foreign trade, for example in energy sector, to a higher international status that may eventually help Moscow to re-establish a regional union with Russia at the helm. There are early indications that payoffs are coming, especially in the Caucasian region and Central Asia, but their actual value cannot be estimated today.