(Cold) War Games?

News of Russian warships docking in the harbors of Venezuela, home to U.S. antagonist Hugo Chavez, understandably rang alarm bells in Washington this week. They preceded a visit by Russian President Dmitry Medvedev, who became the first Kremlin leader to ever tour Caracas. Although nothing revolutionary transpired – an energy pact was signed and joint naval exercises were scheduled – this visit, along with Medvedev’s subsequent talks with Cuba’s Raul Castro, signaled an attempt to undermine U.S. leverage in the region, a move that harkens back to the Cold War.

In many respects, the Cold War offered a certain degree of predictability. Both sides, the U.S. and the Soviet Union, knew their enemy and their respective spheres of influence. A Soviet action in the U.S. backyard, Latin America, often warranted a rebuke in the Soviet sphere of influence, Eastern Europe, and vice-versa. For instance, when Moscow got wind of the U.S. placing missiles a mere 150 meters from the Soviet Union, in Turkey, it responded by stationing warheads in Cuba, strikingly close to U.S. borders, thus sparking the Cuban Missile Crisis.

This simple dichotomy, oddly enough, offered comfort to many policymakers – fears of nuclear holocaust notwithstanding. Now, after the demise of the Soviet Union and the end of the Cold War, unfortunately, U.S.-Russian relations show signs of reverting back to this tit-for-tat Cold War model.

The fall of the Berlin Wall and the creation of newly-independent states in the Former Soviet Union ushered in a period of unparallel Western influence in Eastern Europe and Central Asia, what was previously the Soviet sphere of influence. NATO and the European Union gained members from across the region, spreading right up to Russia’s borders. Moscow, plagued by economic collapse and political turmoil, was then too weak to effectively withstand the Western march.

Putin’s Russia, fuelled by energy receipts and a resurgent nationalism, has recently pushed back. In April of this year, Putin, in no uncertain terms, deemed NATO expansion a menacing development, stating, “The emergence of the powerful military bloc at our borders will be seen as a direct threat to Russia's security.” Coinciding with U.S. President-Elect Obama’s electoral victory, on November 5th, the current Russian President, Dmitry Medvedev, declared, “What we’ve had to deal with in the last few years – the construction of a global missile defense system, the encirclement of Russia by military blocs, unrestrained Nato enlargement and other gifts . . . The impression is we are being tested to the limit.”

This rhetoric has been backed up by tangible measures: military intervention in Georgia and close collaboration with American adversaries, notably Cuba and Venezuela. Indeed, Caracas has recently purchased arms from Moscow in vast quantities, racking up a bill of over $4 billion since 2005, including 100,000 Kalashnikov assault rifles and fighter aircraft.

What is Washington to make of this? Russia certainly views its relations with Havana and Caracas as a tool with which to retaliate for Western forays into its “near abroad”. Its most recent acts have been labeled by many as payback for Western support for Georgia, especially in the aftermath of the recent conflict in August, and the missile defense program in Poland and the Czech Republic. As Dmitry Simes, Russia Analyst at the Nixon Center, observes, "The Russians want to demonstrate that two can play at this game. Clearly, the visit is a gesture towards the US. While business is a consideration, and Russian clearly has business interests in Venezuela, I don't think you need to send President Medvedev for this. The trip is motivated by politics."

Venezuela and Cuba, for their part, are more than happy to join forces with Russia to thumb their noses at Washington. Both need the arms and investment that many in the West are unwilling to provide, but just as it is with Russia, the partnership is largely spurred by geopolitical reasons. Mutual interests have seemingly converged for these parties.

In concrete terms, naval exercises and small economic deals do not constitute a genuine security concern. As Johanna Mendelson Forman, from the Center for Strategic and International Studies, points out, “There is no immediate threat to US security.” Clearly, the Cold War is not back. The rivalry, geopolitical landscape and inherent dangers are largely incomparable.

However, it does indicate a willingness and ability by Moscow and some countries in the region to frustrate U.S. efforts. Moreover, the Cold War paradigm of U.S. and Russian spheres of influence – if it ever fully subsided – is back in full swing. Moscow, like the U.S., does not appreciate meddling in its backyard, and will act if necessary.

To be sure, there is an ongoing struggle for influence between Russia and the U.S., particularly in Eastern Europe and Central Asia. The Kremlin will retaliate in some fashion if it sees its regional interests threatened by the U.S. At least the next time it does, Washington should not be caught off guard.

The Upside of the Financial Crisis

The collapse of the U.S. sub-prime mortgage market has spiraled into a credit crunch and full-blown global financial crisis. While some have been hit harder than others, no nation is immune to the disastrous effects. Analysts and politicians alike have compared the current state of the economy to the great depression. Hundreds of billions of dollars have been earmarked to rescue banks worldwide. Yet amidst all this turmoil, one positive trend has emerged: a sharp decline in energy prices, which has temporarily weakened some of America’s adversaries.

As global prosperity has waned, so too has the demand for oil, which in turn has driven down prices. Oil now trades for roughly $65 a barrel – a far cry from its peak in July of over $145 a barrel – and should continue to fall. OPEC’s recent cut in production has so far failed to stem the tide. Michael Lewis, commodity strategist at Deutsche Bank, forecasts, “Production cuts will not rescue the oil price over the coming year. We target WTI (West Texas Intermediate) crude hitting $50 a barrel next year.”

Oil producing nations, unsurprisingly, have taken a financial hit. Many of them depend on relatively high oil prices to fuel their domestic economies and project power and influence on the world stage – both of which are momentarily undermined by the international economic climate.

U.S. foes, Iran and Venezuela, who have been among the most vociferous advocates of the OPEC slash in supplies, will be particularly vulnerable if this trend continues. Iranian President Mahmoud AhmadiNejad campaigned three years ago on redistributing his country’s vast oil wealth to the poor. Although his economic policies, notably the pressuring of banks to offer cheap loans, have led to skyrocketing inflation, he has still utilized oil windfalls to preserve his positive image among the downtrodden.

But the decrease in energy receipts may force him to reevaluate – just in time for the looming presidential election. As Iran analyst, Ali Ansari, asserts, “The one thing that will sabotage AhmadiNejad’s chances of re-election is the economy. It’s his Achilles heel that he has not delivered during this oil boom.”

Whether or not the price of oil will dip down to the dangerous level of $55 a barrel, upon which the Iranian budget relies, remains to be seen. Yet the political vulnerability of AhmadiNejad and the country’s over-reliance on energy exports have been exposed.

In Venezuela, President Hugo Chavez has gone on a similar spending spree in order to endear himself to his poverty-stricken constituency. With oil prices hovering above $100 a barrel, he could spend like a drunken sailor. He can no longer afford to do so.

Given the country’s extreme dependence on energy funds - oil constitutes almost 95 percent of total exports – Chavez could find himself in dire political and economic straits if oil prices do not rebound dramatically. Failing to diversify the economy, while at the same time scaring away many foreign investors, Chavez has ensured that the country’s energy dependence will continue.

Exacerbating these conditions, Caracas is having trouble even maintaining current oil production levels. Venezuela’s state-led energy group, PDVSA, cannot keep up, largely due to a dearth of new and efficient technology, which would normally be provided by foreign investors. If new resources are not tapped, the country’s economic lifeline will be jeopardized. All these factors point to the need for Chavez to adjust his statist economic model and may trigger his eventual demise.

Economic troubles at home would refocus these two regimes - and other prominent oil exporting countries such as Russia - away from the international scene. And without the financial and political bravado provided by high energy prices, their aggressive international forays, which are often contrary to U.S. interests, would likely subside. It is unfortunate that it took an economic meltdown, leaving many people hurting across the globe, to highlight these opportunities.

Energy prices fluctuate; the recent drop will not last forever. The world still needs oil, and nations such as Iran and Venezuela are more than happy to provide it. Yet recent events offer a preview of the tangible benefits that U.S. foreign policy could reap if Washington did finally take steps to achieve energy independence.