The return of the Bear

01 Jan 2009

Russia’s re-emergence as a military superpower

10 years of Vision: Nine years ago we suggested Russia might seek to reassert itself militarily over former Soviet states - so it proved with the invasion of Ukraine in 2014. Elsewhere it has been involved militarily in Syria, although it has also tried to play peacemaker in the dispute between the USA and North Korea. It has been implicated in a number of cyber-attacks and this, rather than conventional military activity, may be its preferred way of exerting influence in future. 

Vision 2009 focused on Russia's influence over its surrounding countries and its intentions, or not, to expand its empire.

Political tensions were raised and European stability put at risk when Russia invaded Georgia last year. At a time when many Western budgets are stretched we consider Russia’s motives and whether this is the start of a longer term plan to build a new empire. Whether or not it poses a real threat, we believe that fear will drive Western decision making and defence spending despite budget pressures created by the credit crunch.
 
It is nearly 20 years since the Berlin Wall fell, the Soviet era ended and many European countries, although officially independent, were liberated from communist control. In 1990 Germany was peacefully reunited and in 1991, following the fall of the iron curtain, the Soviet Union ceased to exist. Many former communist countries including the Czech Republic, Estonia, Hungary, Latvia, Poland, Bulgaria and Romania subsequently joined the European Union.
 
In order to understand Russia’s motives it is important to consider its history. During the early 1990s Russia was at low ebb, national pride was dented and the success of its reforms to develop a market economy very mixed. Yeltsin’s policies and government overspending had resulted in an economic collapse and there was widespread poverty, corruption and crime.
 
The fates of Europe and Russia are inextricably linked by oil and gas.
An increase in the money supply that was intended to ease the situation resulted in crippling inflation and a sharp fall in its currency, the rouble. It was not until 1997, following a deep depression, that the country started to stabilise and not until Putin came to power in 2000 that it started to recover. In recent years, relative peace has prevailed, albeit reliant on swings in oil prices for its prosperity and despite some mistrust for and from the outside world.
 
To a large extent, the fates of Europe and Russia are inextricably linked by oil and gas. Europe depends on Russia for a large percentage of its supplies and Europe is Russia’s biggest customer; it should therefore be in both parties’ interests that a peaceful relationship is maintained. The situation between Russia and the United States is quite different.
 
The United States has urged Russia to participate in sanctions against Iran and to stop supplying arms to the country. Russia wants the United States to stop taking control of the world’s oil resources and meddling in its affairs. It seems unlikely that the two will become close allies at any stage in the near future.
 
On 8th August 2008 and in response to Russia’s attack on border country Georgia, the world’s spotlight returned to the former Soviet Union and its intentions. Over many years Russia had seen its influence on surrounding countries gradually decline and from its perspective, the Western world increase its power and move its military bases, such as in Iraq and Uzbekistan, ever closer. Perhaps increasing American influence on Georgia was the final straw?
 
Russia is trying to reassert its influence over former Soviet states and reinstate itself as a leading world force.
From the point of view of the West, and despite its declared peaceful intentions, fears are that Russia is trying to reassert its influence over former Soviet states and reinstate itself as a leading world force. The West is concerned that similar attacks could occur in other nearby countries such as the Ukraine, another post-Soviet state that is currently trying to join the European Union.
 
Russian President Vladimir Putin once said that the fall of the Soviet Union was a geopolitical disaster and in his book, First Person, published in 2000, referred to establishing a new Russian empire.
 
Today, with its government coffers buoyed by the rising oil price, the uncertainty is how far Russia will be prepared to go to achieve this aim, whether it will be successful, and in the midst of the current financial crisis, will the West be able to defend its current position of authority?
 
In view of its growing government deficit, we expect US military expenditure to be closely examined by President Obama and some resources to be reallocated, for example, from Iraq following a planned withdrawal in 2009, to more funding for Afghanistan. But, as spending as a percentage of its GDP is already at a relative low and due to a combined fear of China, Russia and Iran we believe that defence budgets are unlikely to be cut.
 
On the other hand, as a result of the current financial crisis, there is probably little scope for an increase either. It is a similar story in the UK; in 2007 a defence budget was set that would grow by about 1.5% per annum in real terms until 2011, but many industry leaders and experts have argued that this is far too low.
 
US defence spending
 
In a speech made last year, Guy Griffiths, a BAE Systems director and Chairman of the Defence Manufacturers Association said that government expenditure budgets were constrained and that defence was failing to compete for its resources. He also pointed out that the UK defence market had seen little growth in recent years while other countries including China, Russia and India were all committing significant increases. However, in the current economic climate we doubt that additional UK government funding will be made available.
 
military expenditure graph
 
As far as Russia is concerned, it has the financial cushion of its Stabilisation Fund that was set up in 2004 and higher oil prices have been a benefit. Putin’s 2008 – 2010 budget address said that amongst other things, national security and public safety were essential and a top priority of spending was ensuring a high level of combat readiness for its armed forces, maintaining a modern weapons system, creating a professional mobile army and combating terrorism.
 
The chart above illustrates the top countries by military expenditure. The United States is unsurprisingly the biggest with 45% of total world spend. The United Kingdom along with China has a 5% share. Although still relatively low in terms of the total, as a percentage of GDP, many emerging markets, particularly oil rich countries, are growing fast as they try to catch up with modern equipment in the Western world. However, the recent fall back in the price of oil as well as slowing exports may mean that for some, including Russia, this may now slow.
 
Russia has the financial cushion of its Stabilisation Fund, set up in 2004, and higher oil prices have been a benefit.
We should expect that the combined fear of China, Russia and Iran means that US defence budgets are unlikely to be cut and due to a perceived or real threat from terrorism or emerging markets the US will continue to make national security a top priority. In our view, despite its budget deficit, it will make every effort to maintain its position as the world’s leader and Europe will not want to change the current status quo.
 
Similarly, we do not believe that Russia has any immediate plans to cause disruption and will not want to upset its European trading partners during the current economic slowdown. However, if given the opportunity and finances are intact, Russia may, in the longer term, try to reassert itself and its influence over former Soviet states.
 
After years of hardship and poverty, Russia has emerged as a stronger force and is seeking recognition from the outside world. Political uncertainty is usually a negative for world stock markets, although the safe haven status of the US dollar usually benefits and this may be a contributing factor to its recent strength.
 
In terms of industries, we have many leading western defence companies with share prices discounting cut backs in military spend; this may not be the case. A chill wind is blowing but we suspect that if global stability is further threatened, far from being cut, Western defence budgets could be raised.

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