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by Scott B. MacDonald

NEW YORK (KWR) The political map of Eurasia is changing. Following the victory of the Western-oriented presidential candidate in Ukraine in December 2004, in what was a highly controversial election, Russian President Vladimir Putin is further consolidating his power at home and the more liberal members of his government are being shunted aside. The process of creating a more hardline government started earlier than the Ukraine election, but events in Russia’s neighbor re-emphasized that the Eurasian landmass is still very much in play in terms of political ideas. Along these lines, it should be alarming to the West and Asia that there is a shift from the democratic-capitalist experiment started under Boris Yeltsin to a soft authoritarianism dominated by strong nationalists, who have a marked preference for a larger role of the state in guiding the economy. While Russia has not quite returned to the state sitting at the commanding heights of the economy, it is certainly moving in that direction. Moreover, the nationalists are deeply concerned that the West is seeking to encroach further into what should be Russia’s sphere of influence.

Since the fall of the Soviet Union in the early 1990s, Russia’s international position has been highly challenged. Moscow lost control over its former empire in Central Asia, NATO and the European Union rolled the border back several thousand miles, and American influence became a factor in the Caspian Sea region’s oil fields. The once greatly feared Russian military struggled against a spirited Chechen uprising and terrorism. And at home, Russia’s leaders presided over a difficult and painful transformation that entailed an overhaul of an inefficient state-dominated economy, a feeble banking sector, and a weak grasp of market economics (including the idea of rule of law). That is beginning to change. Russia is beginning to re-assert itself.

President Vladimir Putin is remaking Russia’s role in the world. While he has consolidated his position at home by breaking the power of the oligarchs (the big business barons that came out of the 1990s), he is pushing a stronger, more vocal Russian agenda in its relations with its neighbors. Russia has been vocal about the disputed elections in Ukraine -- clearly favoring the pro-Russian candidate, critical of the U.S. “soft” approach in Afghanistan and for having moderates from the Taliban in the government, and is seeking to rekindle trade relations with India. The Russian military is also getting a weapons system upgrade.

Putin is also working to repay Russia’s Paris Club debt over the next 2-3 years, removing one possible area of economic weakness. In addition, higher energy prices are providing a nice cash inflow – Russia now has over $110 billion in foreign exchange reserves and the budget and current account are both in surplus. It is very possible that Russia will be upgraded by S&P in early 2005, making it fully investment grade.

What does this mean? Going forward, the United States, Europe, China and Japan are going to have to pay more attention to Moscow. Russian natural gas and oil is attractive to those nations and this means power. Indeed, Western Europe is increasingly dependent on Russian natural gas for its energy needs.

Putin is demonstrating to Washington, Tokyo, Berlin and Beijing that the Russian bear is back. Although Russian power is still no match for European economic and U.S. military power, it is growing and Russian national interests are increasingly going to be a factor. This ranges from trade and investment to the war against international terrorism and North Asian energy politics. The recent crisis in Ukraine underscores that although the old Cold War is over, the potential for a New Cold War remains.

We expect to see a more assertive Russia dealing with Europe, which will point out its energy dependence, playing off Japan and China over energy in North Asia, and a more pronounced role in the Middle East vis-à-vis the United States. Russia also wants and needs greater foreign investment. Russia now lags Eastern Europe and even parts of Latin America in terms of investment inflows. While much of this can be played out within the current framework of international relations, Russia’s desire to once again be seen as a player is one more factor for Washington and Tokyo to calculate in what is becoming an increasingly more complicated international environment.