... Biden, however, is saying that whatever the current temporary
regional advantage the Russians might have, in the end, their economy is
crippled and Russia is not a country to be taken seriously. He went on
publicly to point out that this should not be pointed out publicly, as
there is no value in embarrassing Russia. The Russians certainly now
understand what it means to hit the reset button Obama had referred to:
The reset is back to the 1980s and 1990s. ...

... Biden has stated the American strategy: squeeze the Russians and let
nature take its course. We suspect the Russians will squeeze back hard
before they move off the stage of history. 

===========

The Russian Economy and Russian Power
by George Friedman | July 27, 2009
http://www.stratfor.com/weekly/20090727_u_s_policy_continuity_and_russia
n_response

U.S. Vice President Joe Biden's visit to Georgia and Ukraine partly
answered questions over how U.S.-Russian talks went during U.S.
President Barack Obama's visit to Russia in early July. That Biden's
visit took place at all reaffirms the U.S. commitment to the principle
that Russia does not have the right to a sphere of influence in these
countries or anywhere in the former Soviet Union. 

The Americans' willingness to confront the Russians on an issue of
fundamental national interest to Russia therefore requires some
explanation, as on the surface it seems a high-risk maneuver. Biden
provided insights into the analytic framework of the Obama
administration on Russia in a July 26 interview with The Wall Street
Journal. In it, Biden said the United States "vastly" underestimates its
hand. He added that "Russia has to make some very difficult, calculated
decisions. They have a shrinking population base, they have a withering
economy, they have a banking sector and structure that is not likely to
be able to withstand the next 15 years, they're in a situation where the
world is changing before them and they're clinging to something in the
past that is not sustainable." 

U.S. Policy Continuity
The Russians have accused the United States of supporting pro-American
forces in Ukraine, Georgia and other countries of the former Soviet
Union under the cover of supporting democracy. They see the U.S. goal as
surrounding the Soviet Union with pro-American states to put the future
of the Russian Federation at risk. The summer 2008 Russian military
action in Georgia was intended to deliver a message to the United States
and the countries of the former Soviet Union that Russia was not
prepared to tolerate such developments but was prepared to reverse them
by force of arms if need be. 

Following his July summit, Obama sent Biden to the two most sensitive
countries in the former Soviet Union - Ukraine and Georgia - to let the
Russians know that the United States was not backing off its strategy in
spite of Russian military superiority in the immediate region. In the
long run, the United States is much more powerful than the Russians, and
Biden was correct when he explicitly noted Russia's failing demographics
as a principle factor in Moscow's long-term decline. But to paraphrase a
noted economist, we don't live in the long run. Right now, the Russian
correlation of forces along Russia's frontiers clearly favors the
Russians, and the major U.S. deployments in Iraq and Afghanistan would
prevent the Americans from intervening should the Russians choose to
challenge pro-American governments in the former Soviet Union directly. 

Even so, Biden's visit and interview show the Obama administration is
maintaining the U.S. stance on Russia that has been in place since the
Reagan years. Reagan saw the economy as Russia's basic weakness. He felt
that the greater the pressure on the Russian economy, the more
forthcoming the Russians would be on geopolitical matters. The more
concessions they made on geopolitical matters, the weaker their hold on
Eastern Europe. And if Reagan's demand that Russia "Tear down this wall,
Mr. Gorbachev" was met, the Soviets would collapse. Ever since the
Reagan administration, the idee fixe of not only the United States, but
also NATO, China and Japan has been that the weakness of the Russian
economy made it impossible for the Russians to play a significant
regional role, let alone a global one. Therefore, regardless of Russian
wishes, the West was free to forge whatever relations it wanted among
Russian allies like Serbia and within the former Soviet Union. And
certainly during the 1990s, Russia was paralyzed. 

Biden, however, is saying that whatever the current temporary regional
advantage the Russians might have, in the end, their economy is crippled
and Russia is not a country to be taken seriously. He went on publicly
to point out that this should not be pointed out publicly, as there is
no value in embarrassing Russia. The Russians certainly now understand
what it means to hit the reset button Obama had referred to: The reset
is back to the 1980s and 1990s. 

Reset to the 1980s and 90s
To calculate the Russian response, it is important to consider how
someone like Russian Prime Minister Vladimir Putin views the events of
the 1980s and 1990s. After all, Putin was a KGB officer under Yuri
Andropov, the former head of the KGB and later Chairman of the Communist
Party for a short time - and the architect of glasnost and perestroika. 

It was the KGB that realized first that the Soviet Union was failing,
which made sense because only the KGB had a comprehensive sense of the
state of the Soviet Union. Andropov's strategy was to shift from
technology transfer through espionage - apparently Putin's mission as a
junior intelligence officer in Dresden in the former East Germany - to a
more formal process of technology transfer. To induce the West to
transfer technology and to invest in the Soviet Union, Moscow had to
make substantial concessions in the area in which the West cared the
most: geopolitics. To get what it needed, the Soviets had to dial back
on the Cold War. 

Glasnost, or openness, had as its price reducing the threat to the West.
But the greater part of the puzzle was perestroika, or the restructuring
of the Soviet economy. This was where the greatest risk came, since the
entire social and political structure of the Soviet Union was built
around a command economy. But that economy was no longer functioning,
and without perestroika, all of the investment and technology transfer
would be meaningless. The Soviet Union could not metabolize it. 

Former Soviet leader Mikhail Gorbachev was a communist, as we seem to
forget, and a follower of Andropov. He was not a liberalizer because he
saw liberalization as a virtue; rather, he saw it as a means to an end.
And that end was saving the Communist Party, and with it the Soviet
state. Gorbachev also understood that the twin challenge of concessions
to the West geopolitically and a top-down revolution in Russia
economically - simultaneously-risked massive destabilization. This is
what Reagan was counting on, and what Gorbachev was trying to prevent.
Gorbachev lost Andropov's gamble. The Soviet Union collapsed, and with
it the Communist Party. 

What followed was a decade of economic horror, at least as most Russians
viewed it. From the West's point of view, collapse looked like
liberalization. From the Russian point of view, Russia went from a
superpower that was poor to an even poorer geopolitical cripple. For the
Russians, the experiment was a double failure. Not only did the Russian
Empire retreat to the borders of the 18th century, but the economy
became even more dysfunctional, except for a handful of oligarchs and
some of their Western associates who stole whatever wasn't nailed down. 

The Russians, and particularly Putin, took away a different lesson than
the West did. The West assumed that economic dysfunction caused the
Soviet Union to fail. Putin and his colleagues took away the idea that
it was the attempt to repair economic dysfunction through wholesale
reforms that caused Russia to fail. From Putin's point of view, economic
well-being and national power do not necessarily work in tandem where
Russia is concerned. 

Russian Power, With or Without Prosperity
Russia has been an economic wreck for most of its history, both under
the czars and under the Soviets. The geography of Russia has a range of
weaknesses, as we have explored. Russia's geography, daunting
infrastructural challenges and demographic structure all conspire
against it. But the strategic power of Russia was never synchronized to
its economic well-being. Certainly, following World War II the Russian
economy was shattered and never quite came back together. Yet Russian
global power was still enormous. A look at the crushing poverty - but
undeniable power - of Russia during broad swaths of time from 1600 until
Andropov arrived on the scene certainly gives credence to Putin's view. 

The problems of the 1980s had as much to do with the weakening and
corruption of the Communist Party under former Soviet leader Leonid
Brezhnev as it had to do with intrinsic economic weakness. To put it
differently, the Soviet Union was an economic wreck under Joseph Stalin
as well. The Germans made a massive mistake in confusing Soviet economic
weakness with military weakness. During the Cold War, the United States
did not make that mistake. It understood that Soviet economic weakness
did not track with Russian strategic power. Moscow might not be able to
house its people, but its military power was not to be dismissed. 

What made an economic cripple into a military giant was political power.
Both the czar and the Communist Party maintained a ruthless degree of
control over society. That meant Moscow could divert resources from
consumption to the military and suppress resistance. In a state run by
terror, dissatisfaction with the state of the economy does not translate
into either policy shifts or military weakness - and certainly not in
the short term. Huge percentages of gross domestic product can be
devoted to military purposes, even if used inefficiently there.
Repression and terror smooth over public opinion. 

The czar used repression widely, and it was not until the army itself
rebelled in World War I that the regime collapsed. Under Stalin, even at
the worst moments of World War II, the army did not rebel. In both
regimes, economic dysfunction was accepted as the inevitable price of
strategic power. And dissent - even the hint of dissent - was dealt with
by the only truly efficient state enterprise: the security apparatus,
whether called the Okhraina, Cheka, NKVD, MGB or KGB. 

From the point of view of Putin, who has called the Soviet collapse the
greatest tragedy of our time, the problem was not economic dysfunction.
Rather, it was the attempt to completely overhaul the Soviet Union's
foreign and domestic policies simultaneously that led to the collapse of
the Soviet Union. And that collapse did not lead to an economic
renaissance. 

Biden might not have meant to gloat, but he drove home the point that
Putin believes. For Putin, the West, and particularly the United States,
engineered the fall of the Soviet Union by policies crafted by the
Reagan administration - and that same policy remains in place under the
Obama administration. 

It is not clear that Putin and Russian President Dmitri Medvedev
disagree with Biden's analysis - the Russian economy truly is
"withering" - except in one sense. Given the policies Putin has pursued,
the Russian prime minister must believe he has a way to cope with that.
In the short run, Putin might well have such a coping mechanism, and
this is the temporary window of opportunity Biden alluded to. But in the
long run, the solution is not improving the economy - that would be
difficult, if not outright impossible, for a country as large and
lightly populated as Russia. Rather, the solution is accepting that
Russia's economic weakness is endemic and creating a regime that allows
Russia to be a great power in spite of that. 

Such a regime is the one that can create military power in the face of
broad poverty, something we will call the "Chekist state." This state
uses its security apparatus, now known as the FSB, to control the public
through repression, freeing the state to allocate resources to the
military as needed. In other words, this is Putin coming full circle to
his KGB roots, but without the teachings of an Andropov or Gorbachev to
confuse the issue. This is not an ideological stance; it applies to the
Romanovs and to the Bolsheviks. It is an operational principle embedded
in Russian geopolitics and history. 

Counting on Russian strategic power to track Russian economic power is
risky. Certainly, it did in the 1980s and 1990s, but Putin has worked to
decouple the two. On the surface, it might seem a futile gesture, but in
Russian history, this decoupling is the norm. Obama seems to understand
this to the extent that he has tried to play off Medvedev (who appears
less traditional) from Putin (who appears to be the more traditional),
but we do not think this is a viable strategy - this is not a matter of
Russian political personalities but of Russian geopolitical necessity. 

Biden seems to be saying that the Reagan strategy can play itself out
permanently. Our view is that it plays itself out only so long as the
Russian regime doesn't reassert itself with the full power of the
security apparatus and doesn't decouple economic and military growth.
Biden's strategy works so long as this doesn't happen. But in Russian
history, this decoupling is the norm and the past 20 years is the
exception. 

A strategy that assumes the Russians will once again decouple economic
and military power requires a different response than ongoing,
subcritical pressure. It requires that the window of opportunity the
United States has handed Russia by its wars in the Islamic world be
closed, and that the pressure on Russia be dramatically increased before
the Russians move toward full repression and rapid rearmament. 

Ironically, in the very long run of the next couple of generations, it
probably doesn't matter whether the West heads off Russia at the pass
because of another factor Biden mentioned: Russia's shrinking
demographics. Russian demography has been steadily worsening since World
War I, particularly because birth rates have fallen. This slow-motion
degradation turned into collapse during the 1990s. Russia's birth rates
are now well below starkly higher death rates; Russia already has more
citizens in their 50s than in their teens. Russia can be a major power
without a solid economy, but no one can be a major power without people.
But even with demographics as poor as Russia's, demographics do not
change a country overnight. This is Russia's moment, and the generation
or so it will take demography to grind Russia down can be made very
painful for the Americans. 

Biden has stated the American strategy: squeeze the Russians and let
nature take its course. We suspect the Russians will squeeze back hard
before they move off the stage of history.