On 7 October, President Medvedev made his first video podcast. He had a serious message, ‘the crisis of the international financial system demands urgent joint action.’ On 8 October, standing alongside President Sarkozy at Evian, he proposed a new security pact to resolve the stand-off over Nato expansion. Both these proposals are intended to bolster Russia’s shattered reputation as a good neighbour.
How swiftly the pendulum has swung. Only a month ago, Russia and the west were threatening one another with a new cold war. ‘Joint action’ had been swept off the conference table. Europe was considering sanctions and Russia was talking about suspending its help to Nato operations in Afghanistan. Today, the situation is very different. Russia saw $60 billion of foreign investments pulled out in the last month and has been forced to lend $170 billion to its banks. The western banking system is also on its knees; yesterday, Britain’s three biggest banks were part nationalized.
Russia’s economic troubles, however, began before the worldwide banking crisis. The oligarch Aleksandr Lebedev has blamed the war in Georgia for 40 percent of the Russian stock market’s collapse. Foreign investors took a particularly dim view of Russia’s invasion of Georgia and began pulling out their money in response. The war damaged both Russia’s reputation as a safe haven for investment and its credentials as an international partner.
Russia is particularly vulnerable to the ongoing financial crisis. The RTS has lost more than 60 percent of its value since May last year. Many experts fear that Russia could enter a period of stagflation; living standards will be hit as inflation remains high while tighter credit slows demand. There are already signs that the financial crisis has begun to affect the real economy. MMK – Russia’s largest steel mill - dismissed 3000 workers at the beginning of the week and cut the working day by two hours. Many experts have also predicted a price of $50 per barrel of oil in a year’s time, which would cut the country’s growth rate in half.
But Russia is in a uniquely strong position to help the west. Its $560 billion in foreign currency reserves are larger than its total bank debt and can be used to ease the global financial strain. There are signs that Russia is considering such moves. It was rumoured that Russia was planning to grant Iceland – a founder member of Nato – a 4 billion Euro loan. Opening its coffers in this way would help shake off fears of Russian isolationism and go a long way to reassuring foreign investors that Russia is a reliable partner.
The west – particularly America – has remained implacably opposed to Russia’s invasion of Georgia. Both presidential candidates, John McCain and Barack Obama, were fierce in their condemnation of Russia’s actions in their debate on the 26 September. They have ignored the American foreign policy establishment who have, on the whole, been more cautious in their criticism. Mr McCain even said that when he looked into prime minister Putin’s eyes he saw three letters: KGB. How much safer would the world be if he could look into Mr Putin’s eyes and see $$$?
If Russia cooperates in helping to mitigate the current financial tsunami, its actions in Georgia would soon be forgotten. If it comes forward with an imaginative design for a new security pact, it would create an entirely new context for negotiations over the future of Nato. Russia would no longer be held up as the west’s bogeyman and its interests would be given much greater respect. Foreign investors would return and the threat of a new cold war would be averted. I have often written in this column that Russia needs to improve its image abroad. Now is the moment.