Russia’s Eurasian vision

The escalating conflict in Ukraine between the Western-backed government and Russian-backed separatists has focused attention on a fundamental question: What are the Kremlin’s long-term objectives?

Although Russian President Vladimir Putin’s immediate goal may have been limited to regaining control of Crimea and retaining some influence in Ukrainian affairs, his longer-term ambition is much bolder.

That ambition is not tough to discern. Mr Putin once famously observed that the Soviet Union’s collapse was the greatest catastrophe of the 20th century. Thus, his long-term objective has been to rebuild it in some form, perhaps as a supranational union, like the European Union (EU), of member states.

This goal is not surprising. Declining or not, Russia has always seen itself as a great power that should be surrounded by buffer states. Under the tsars, Imperial Russia extended its reach. Under the Bolsheviks, Russiabuilt the Soviet Union and a sphere of influence that encompassed most of Central and Eastern Europe. Now, under Mr Putin’s similarly autocratic regime, Russia plans to create, over time, a vast Eurasian Union (EAU).

While the EAU is still only a customs union, the EU’s experience suggests a successful free-trade area leads over time to broader economic, monetary and, eventually, political integration.

Russia’s goal is not to create another North American Free Trade Agreement; it is to create another EU, with the Kremlin holding all the real levers of power. The plan has been clear: Start with a customs union — initially Russia, Belarus and Kazakhstan — and add most of the other former Soviet republics. Indeed, now, Armenia and Kyrgyzstan are in play.

GROWING THE RUSSIAN EMPIRE

Once a broad customs union is established, trade, financial and investment links within it grow to the point that its members stabilise their exchange rates vis-a-vis one another.

Then, perhaps a couple of decades after the customs union is formed, its members consider creating a true monetary union with a common currency (the Eurasian ruble?) that can be used as a unit of account, means of payment and store of value.

As the eurozone experience proves, sustaining a monetary union requires banking, fiscal and full economic union. And, once members give up their sovereignty over fiscal, banking and economic affairs, they may eventually need a partial political union to ensure democratic legitimacy.

Realising such a plan may require overcoming serious challenges and the commitment of huge financial resources over a period of decades.

But the first step is a customs union and, in the case of the EAU, it had to include Ukraine, Russia’s biggest neighbour to the west. That is why Mr Putinput so much pressure on former Ukrainian President Viktor Yanukovich to abandon an association pact with the EU. It is also why Mr Putin reacted to the ouster of Mr Yanukovich’s government by taking over Crimea and destabilising eastern Ukraine.

Recent events have further weakened market-oriented, Western-leaning factions in Russia and strengthened the state-capitalist, nationalist factions, which are now pushing for faster establishment of the EAU.

In particular, tensions with Europe and the United States over Ukraine will shift Russia’s energy and raw-material exports — and the related pipelines — towards Asia and China.

Likewise, Russia and its BRICS partners (Brazil, India, China and South Africa) are creating a development bank that is to serve as an alternative to the Western-controlled International Monetary Fund and the World Bank.

Revelations of electronic surveillance by the US may lead Russia and other illiberal states to restrict Internet access and create their own nationally controlled data networks.

There is also talk of Moscow and Beijing creating an alternative global payment system to replace SWIFT (Society for Worldwide Interbank Financial Telecommunication), which the US and Europe can use to impose financial sanctions against Russia.

NOT LOOKING WEST, BUT EAST

Creating a full EAU — one that is gradually less tied to the West by trade, financial, economic, payment, communication and political links — may be a pipe dream.

Russia’s lack of reform and adverse demographic trends imply low potential growth and insufficient financial resources to create the fiscal and transfer union that is needed to bring other countries in.

However, Mr Putin is ambitious and, like autocrats in Central Asian nations, may remain in power for decades to come. And, like it or not, even a Russia that lacks the dynamism needed to succeed in manufacturing and industries of the future will remain a commodity-producing superpower.

Revisionist powers such as Russia, China and Iran appear ready to confront the global economic and political order that the US and the West built after the collapse of the Soviet Union. However, now, Russia is pushing ahead aggressively to recreate a near empire and sphere of influence.

Unfortunately, sanctions that the US and Europe are imposing on Moscow, though necessary, may reinforce the conviction among Mr Putin and his nationalist advisers that Russia’s future lies not in the West, but in a separate integration project in the East.

US President Barack Obama says this is not the beginning of a new Cold War. Current trends may soon suggest otherwise. PROJECT SYNDICATE

ABOUT THE AUTHOR:

Nouriel Roubini is Chairman of Roubini Global Economics and Professor of Economics at the Stern School of Business, NYU.