Why Russia’s Economic Leverage is Declining

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Constructing natural gas line in winter, Finland. © Gasum Oy/Jukka Isokoski

On April 20, 2016, the Transatlantic Academy published a paper by Fellow Christopher Miller entitled "Why Russia’s Economic Leverage is Declining," the seventh in its 2015-16 Paper Series.

Despite the Kremlin’s desire to reassert influence over its neighbors, Russia’s economic leverage in Eastern Europe is declining. After more than a decade of using trade and energy cutoffs to pressure its neighbors to accept its political aims, the Kremlin’s tools of economic coercion are losing their effectiveness.

On the energy front, two factors are limiting Russia’s ability to use gas as a political bargaining chip. First, the decline in oil prices and the global glut in natural gas production has caused energy prices to fall across Europe. This weakens the appeal of Russian offers of cheaper gas in exchange for political concessions. Second, Russian threats to cut gas supply to countries such as Ukraine are far less credible today. Better EU regulation combined with new energy infrastructure, such as interconnectors and liquefied natural gas facilities, are pushing Europe toward a more liquid and transparent gas market. These changes have reduced the role politics plays in Europe’s energy sector, guaranteeing that Russia will remain a gas supplier, which Europe needs, but limiting the Kremlin’s ability to subvert market rules.

In the trade of non-energy goods, too, Russia’s ability to use threats of sanctions and boycotts against neighbors is declining. In the past, Russia imposed sanctions on countries such as Georgia, Ukraine, and Moldova when they deviated from the Kremlin’s foreign policy line. Many such aggressive trade policies are still in place, but their efficacy in achieving their political goals has declined over time, and is likely to continue to do so. One reason is that non-Russian markets — not only the European Union, but also the Middle East and China — are becoming more important trading partners. A second reason is that producers in vulnerable Eastern European countries have learned to diversify away from reliance on Russian customers. The net effect is that Russia is now far less able to use trade sanctions to coerce its neighbors because its importance as an export market continues to decline.

The deterioration of Russia’s economic leverage is particularly important for the contested countries between the EU and Russia, notably Ukraine, Moldova, and Georgia. These countries are less at risk to Russian economic pressure today than a decade ago. Continuing to aid them in diversifying their energy supply and trade partners will help further limit the Kremlin’s ability to meddle in its neighbors’ affairs using tools of economic coercion.

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