In assessing the balance of power between Russia and the West throughout the Eurasian space, many analysts have focused on political decisions. Does the Obama administration’s decision to cancel the deployment of a missile-defense system in Poland and the Czech Republic leave pro-American governments in the region anxious to be integrated into the Euro-Atlantic community exposed? Is delaying a decision on whether to offer membership in NATO to Ukraine and Georgia a tantamount recognition of a re-emerging Russian “sphere of influence” in the region?

 

But as I noted back at an Atlantic Council roundtable back in July, politicians and business figures alike throughout the region are preoccupied with a much more essential question: Who will recover first from the economic crisis?

The recent resurgence of Russia’s ability to project power and influence rested upon the economic and financial power accrued from the export of energy. In turn, the expansion of the Euro-Atlantic community eastward-first into central Europe, and then the Balkans-rested on the willingness of Europeans to invest in their economies. Today, the fundamental question is this: If Russia’s economy bounces back before the economies of central and eastern Europe, not to mention other parts of the Eurasian space, how will this change the landscape of the area? Will attempts to integrate with the West continue, or will these countries be more prepared to reach an accommodation with Moscow?

In 2007, Georgia could be optimistic about its future and its choice of a Western orientation. The economy was growing at a robust 12.4 percent, leading to a major influx of foreign capital in 2008-more than 1.5 billion dollars. But the August 2008 conflict with Russia, political instability inside the country and the impact of the global financial crisis has dried up this river of gold. Foreign direct investment has fallen 80 percent for the first half of 2009 in comparison with the previous year. The economy is now expected to contract by 1.5 percent this year.

Ukraine’s record is also not good. It also benefited from major inflows in foreign capital in 2007. Those sources have dried up. The International Monetary Fund now estimates that Ukraine’s gross domestic product will shrink by 14 percent in 2009-not a particularly pleasant fact to confront as Ukraine moves into elections that may determine Ukraine’s future orientation and Ukrainian voters confront the question, “Are we better off then we were four years ago?” More worrying for investors, Ukraine’s state gas firm has been unable to pay back a $500 million Eurobond and is trying to convince investors to accept a new arrangement that would pay them back by September 2014. A lack of capital raises questions about Ukraine’s ability to pay Russia for natural gas deliveries and certainly impacts plans for new investment in Ukraine’s indigenous gas fields that might help reduce dependence on Russia.

And those countries of “new Europe” which have been the biggest proponents of further EU and NATO expansion are themselves facing trouble. The IMF notes that this region has experienced massive falls in capital inflows, particularly from Western Europe and concludes that “the availability of foreign investment to central and eastern Europe will remain
below pre-crisis levels for some time.” This means that not only will the economies of “new Europe” grow more slowly than expected but that investment from “old Europe” is likely to go elsewhere where it can find a more profitable return.

So now we come to Russia. When the Russian economy contracted in 2008-09, the ripple effects were felt throughout the region. With most other post-Soviet states still dependent to some extent on Russia as an export market for their goods (and also receiving remittances from guest workers living in Russia), the economic downturn helped to tank their economies as well. But there are no other opportunities-Europe and the U.S., for instance, are not importing more of what these states produce and are not offering any opportunities for these countries to send laborers westward. Nor are they prepared to pour in fresh amounts of capital. So, if Russia recovers, then the ties of economic dependence will be renewed. In the case of a country like Ukraine, it may be more difficult for westward-leaning politicians to continue to hold out what seem like illusory promises of “eventual” membership in Euro-Atlantic organizations against the calls to seek closer ties with a recovering Russia.

What also bears watching is the extent to which European investors who are reducing their exposure in central and eastern Europe are continuing to maintain or expand their holdings in Russia. A series of ambitious Russian-sponsored energy projects-including pipelines such as Nordstream and South Stream-if brought to fruition, have the capacity for redrawing the map of the region-including giving Russia the ability to deal directly with its core European customers such as Germany, Italy and France-while being able to bypass some of those neighboring states who have had problematic relations with Moscow.

Of course, the Russian economy itself remains vulnerable. The banking system is quite fragile and there may not be enough cash in the Kremlin’s rainy day funds to guarantee the still-substantial debts owed by Russian companies. Energy and commodity prices could once again fall, especially if worse-than-expected economic performance slows the demand of Europeans and Americans for raw materials (and China and India aren’t as hungry as they were a few years back).

But if Russia’s recovery is real and sustained, its influence in the area resurges. And faced with economic realities, will political leaders in the neighboring states be prepared to reach a new accommodation with the Kremlin? Yuliya Tymoshenko, prime minister of Ukraine and a symbol of the Orange Revolution, once called for the West to help “contain Russia”. Now, she stresses how she and her Russian counterpart, Vladimir Putin, “have managed to carry out constructive work and build mutual understanding.” Will this be the harbinger of the future?

Nikolas K. Gvosdev, an Atlantic Council contributing editor, is on the faculty of the U.S. Naval War College.  The views expressed are his own and do not reflect those of the Navy or the U.S. government.