Russia Re-Establishing Ties With Cold War Allies

History is a great teacher.  Just think, it was less than 100 years ago when a fateful crime was committed that started a chain of events affecting most of the world for arguably 80 years.  The crime was the assassination of the ArchDuke of Austria, Franz Ferdinand, by Serbians ostensibly authorized by top officials of the Serbian government.

The response by Austria was an ultimatum that, if accepted, could have changed the course of history.  But that isn’t the subject of this article.  Serbia was backed by Russia and Austria was backed by Germany.  Both of the small Baltic countries knew that they had “super powers” who would help them defeat their opponent.  The result was the first of two World Wars that would dominate the 20th Century and a cold war between the remaining super powers that would only end in the twilight of the Century.

What is occurring now in Eastern Europe is eerily reminiscent of 20th Century politics.  The US has encroached into Eastern Europe, threatening Russia, and Russia has been consolidating their influence on their former satellite countries.  And today it was announced that Syria, another of Russia’s Cold War allies, is in talks to purchase Russian weapons in exchange for allowing Russia to re-establish a port base in their country, giving Russia’s Navy ”its first foothold in the Mediterranean for two decades.”

Poland just signed a treaty with the US for a missile system, and both Poland and the Ukraine are desperately trying to get into NATO before a feared Russian invasion of their countries.  Georgia’s membership has “kicked off” already.

Arguably, the real driver that is causing this unrest to “bubble up” is oil.  Oil is still at record prices and the area is flush with the stuff.  It is still the rule that he who controls the oil controls commerce. 

What this means to business is, unfortunately, the end of two great decades of record sustained growth.  Political unrest and widespread war that affects oil supplies will keep the money of investors away from the volatile markets (and thus sapping the life out of the main driver of risk and by extension growth).  Our best hope is to keep inflation at low levels to maintain the value of our currency.

From the looks of it, that too is taking a turn for the worse.  Globally, central bankers are avoiding the tough decisions and are keeping interest rates low.  The reasoning, according to Lehman Brothers Holdings’ chief economist Ethan Harris is that “[n]ext year we’re going to have extremely low inflation, and a lot of that weakness is due to the decline in energy prices“.  We’ll see.  For the moment, the federal reserve has decided not to raise interest rates in the hope that Harris’ prediction pans out.

The fall of the Soviet Union wasn’t a quick process.  It seemed that way on Christmas day, 1991, when Gorbachev resigned and ceded power to Boris Yeltsin.  Moreover, the time period between the start of Gorbachev’s glasnost and perestroika programs and the dissolution of the Soviet Union was only 4 years.  Perhaps ironically, it was the war with Afghanistan that was one of the driving forces behind perestroika. 

Today the US almost mocks Russia with its rhetoric.  Calling Russian comments “bizarre” and “losing their credibility”, Secretary of State Rice joins others who still look at Russia without respect for its past.  You’d think that one who had served under Brent Scowcroft as his “Soviet Expert” in the National Security Council under George H.W. Bush would understand the Russian mindset.  In fact, “according to R. Nicholas Burns, President Bush was ‘captivated’ by Rice, and relied heavily on her advice in his dealings with Mikhail Gorbachev and Boris Yeltsin.” 

I am not sure whether Georgia started this or if Russia is using the situation to expand its influence.  The fact is that Russia is expanding its influence.  Whether the alliances are short term or if this is the beginning of a military build-up is not certain.   

We can only hope that the alliances Russia is toying with creating is more a show of frustration rather than long-term intent.  We seriously can’t afford another cold war.