''More Conflict than Camaraderie Between Moscow and Washington''

he upcoming July 15 G-8 summit in St. Petersburg will inevitably showcase Moscow's strong foreign relations with the world's most powerful countries -- especially Russia's amiable dealings with the United States. Beneath the surface, however, a deeply adversarial relationship between Moscow and Washington boils, highlighted by Russia's well orchestrated foreign and economic policy assaults on the United States. These assaults are undermining Washington's global might. Buttressed by an immense supply of natural resources and strong relations with other natural resource rich countries, Russia may begin to rival U.S. power within the next 10 years -- a process which the Bush administration is unwittingly aiding.

Foreign Policy Assault on the United States

Russia's foreign policy has increasingly diverged from U.S. foreign policy in the past several years. During the past 18 months, conflict has replaced divergence. Moscow has assertively pursued stronger military, political and economic relations with countries whose governments have been targeted for regime change by Washington. These include Iran, Syria, Venezuela and the Palestinian leadership.

Washington is struggling to isolate Tehran in order to force it to abdicate its right, as a signatory country to the Nuclear Non-Proliferation Treaty (N.P.T.), to uranium enrichment. In stark contrast, Russia has steadfastly supported Tehran and its right to uranium enrichment. Moscow's support for Tehran led directly to the collapse of U.S. efforts to impose U.N.-backed sanctions on Iran in April 2006. It also produced skin-deep changes in the direction of U.S. diplomacy.

Although hailed as a diplomatic leap forward, U.S. Secretary of State Condoleezza Rice's offer to engage Iran in multilateral talks was bereft of security guarantees. This indicates that Washington continues to place regime change at the top of its Iran policy priorities. It also suggests that this diplomatic leap forward will fail. While Moscow has supported incentives encouraging Tehran to suspend uranium enrichment, the Putin government does not back any form of sanctions. Ultimately, Washington will be forced to impose sanctions on Iran outside of the U.N., with the help of a small number of countries. [See: "Intelligence Brief: Iran and the U.S. Maneuver Carefully Toward Confrontation"]

In addition to its direct involvement in the development of Iran's civil nuclear power program -- the very program condemned by Washington -- Moscow is Tehran's most important military equipment supplier. Moscow and Tehran inked the first of many military equipment deals in 1989. These deals have supplied Iran with a wide variety of Russian military equipment including tanks, fighter aircraft, naval ships and missile systems.

In February 2006, Moscow agreed to supply Iran with a very sophisticated missile defense system known as the Tor-M1. This deal was heavily criticized by Washington. Speculation abounds that Iran has also acquired the S-300 missile system from Russia. The Tor-M1 and the S-300 systems are designed to work in unison, with the Tor-M1 protecting the S-300 launchers. By selling increasingly advanced weapons to Tehran, Russia is helping Iran prepare to defend itself against a possible U.S. military strike.

Russia is also bolstering the defense capabilities of Syria and Venezuela. These two countries are regularly criticized by the Bush administration, currently subject to U.S. sanctions and are also targeted for regime change. In early 2005, President Putin and Syria's President Bashar al-Assad signed several far reaching deals covering energy, debt forgiveness and military equipment supplies.

Moscow agreed to help develop Syria's gas and oil resources with substantial investments. At the same time, Moscow forgave nearly 75 percent of Syria's US$13 billion in debt owed to Russia. Moscow also agreed to upgrade Syria's already formidable Russian surface-to-air missile systems with the addition of the Strelets weapon system. This vehicle-mounted missile system has a range of just six kilometers (3.7 miles) but is highly effective against aircraft and cruise missiles.

Moscow also proved to be a strong ally of Damascus in the fall of 2005 when international pressure on the Bashar government over the Hariri assassination mounted. Moscow's efforts on behalf of Damascus prevented the U.N. Security Council from imposing a range of new sanctions on Syria. In June 2006, reports in Russian media indicated that Moscow planned to establish two new naval bases in Syria. [See: "Intelligence Brief: Russia's Moves in Syria"]

While Iran and Syria fall within Russia's historic sphere of influence in the Middle East, such is not the case with Venezuela, which was a firm U.S. ally until 1999. In 2005, Moscow and Caracas agreed on an unprecedented military equipment supply deal, which provided Venezuela with 15 Russian military transport helicopters and 100,000 Kalashnikov rifles. Heavily criticized by Washington, this deal provoked the Bush administration to ban the sale of U.S. military equipment to Venezuela in September 2005.

A further ban of commercial arms sales to Venezuela was announced by Washington in May 2006. Soon after, Caracas announced its intention to purchase new fighter jets from Russia. In early June, Moscow revealed that it was working with Caracas to build two factories in Venezuela for domestic production of Kalashnikov rifles. In addition to the military equipment trade, Russia has also begun to invest in Venezuela's energy sector.

Unlike Iran, Syria and Venezuela, Moscow's support for the new Hamas-led government in the Palestinian Territories does not include the supply of military equipment, yet. However, links between Hamas and the Putin government are no less of a face slap to Washington. Just as the Bush administration thought it had succeeded in isolating the Hamas government in the Palestinian Territories, President Putin invited Hamas leaders to Moscow in February 2006. In addition to engaging an entity deemed as a "terrorist organization" by the United States, President Putin offered substantial financial assistance to Hamas officials. This represented a dramatic change in Russia's historical backseat approach to the Arab-Israeli conflict. [See: "Intelligence Brief: Recognizing Hamas"]

In addition to its rapidly growing support for Washington's favorite rogue regimes, Russia has increasingly opposed U.S.-led efforts to expand N.A.T.O. eastward. Most recently, Moscow has charged that N.A.T.O. membership for Ukraine and Georgia would produce a "colossal, geopolitical shift." Such a shift would force Moscow to respond in order to safeguard its security and national interests.

Moscow's growing military, economic and political support for Washington's enemies speaks much louder than glib statements asserting the strength of Russia-U.S. relations. From its actions, it is exceedingly apparent that Moscow views U.S. foreign policy directed not at promoting democracy but at overthrowing rogue regimes in order to install U.S.-friendly governments. In essence, the primary goal of Russia's foreign policy has become thwarting U.S. regime change efforts. Russia has a strong weapon, however, with which to fight the United States -- control over vast energy supplies.

Economic Assault on the United States

Although the foreign policies of Russia and the United States directly conflict with one another, the Russian economy has benefited greatly from Washington's policy of regime change in unfriendly countries. This obsession is directly responsible for the steep rise in international energy prices during the past three years. Higher energy prices have been a boon for Russia, which accounts for about 15 percent of the world's oil exports and 25 percent of the world's natural gas exports.

The Bush administration's fixation on regime change has also benefited Russia's defense industry, which has profited from booming arms sales to countries targeted for regime change by Washington. Russia has also seen a surge in arms sales to China in the past four years. Overall, U.S. foreign policy has given Russia's economy several hundred billion dollars since 2001. It is for this reason that Russian officials periodically croon about the strength in relations between Moscow and Washington. Without Washington's foreign policy initiatives, Russia would be in no position to stage an economic assault on the United States -- an assault that is now unfolding.

During his annual State of the Nation speech to Russia's Duma on May 10, 2006, President Putin announced that Russia would make the ruble fully convertible for international transactions on July 1, 2006. According to Putin, the new fully convertible ruble would be used as the currency for Russia's massive energy exports. To facilitate the ruble's use in energy trade, President Putin also revealed that a ruble-denominated commodity exchange would soon begin operating.

On June 8, 2006, Moscow's leading stock exchange, the Russian Trading System (RTS), began trading cash-settled futures and options on Urals oil and refined fuels. Exchange-based energy trading in Russia may take some time to get off the ground. Eventually, however, almost all of Russia's energy trade will be routed through ruble-denominated oil and gas exchanges. The government's tight grip on Russia's energy sector ensures that oil and gas producers will be increasingly compelled to direct domestic and foreign energy trading toward the new ruble-denominated energy exchange. Importers of Russian energy products will have little choice but to direct their purchases toward Russia's ruble-denominated energy market.

About two-thirds of Russia's crude oil exports are bound for Eastern and Central Europe via pipelines. The remaining one-third is exported via ship and rail. Most of these exports are bound for Western Europe. Almost all of Russia's natural gas exports are also bound for Eastern, Central and Western Europe. Russian imports fill more than 40 percent of both oil and natural gas demand in Europe. Europe's dependency on Russian energy has become a heated topic recently.

Europe has tried unsuccessfully to use its power as Russia's primary energy buyer to force changes in Russian energy trading and pricing practices. As Europe's primary energy supplier, however, Russia has all the leverage. Europe cannot turn to other producers to make up any shortfall in Russian energy exports. Because it is Europe's key energy supplier, European countries have little choice but to follow Russia's energy trading demands. In other words, if Moscow tells its European customers that they must buy their energy products via Russia's ruble-denominated energy exchange, these countries will have to comply or face energy shortages.

By actively seeking alternate oil export markets in Asia, Russia is increasing its energy leverage over Europe much to the chagrin of European leaders and Washington. In 2005, about seven percent of Russia's oil exports were bound for China. Another two percent of oil exports were bound for other Asian countries. Although Russia's oil export pipeline system is operating at full capacity, current pipeline expansion plans are focused exclusively on routing oil east to Asia rather than to Europe.

Undoubtedly, most of Russia's crude oil exports to Asia will go to China. Relations between Russia and China are at their strongest ever. In addition to unified foreign policy positions against Washington's regime change goals, Moscow and Beijing have cultivated close military and energy trade relations. China has also strengthened its energy relations with Iran and Venezuela, inking multibillion dollar energy investment deals with both countries in the past two years.

Interestingly, Iran and Venezuela are O.P.E.C.'s most vociferous supporters of non-dollar oil trade. Iran is expected to launch its own euro-denominated oil futures exchange in 2006. Both Iran and Venezuela intend to increase China's share of their crude oil exports above 40 percent by about 2010. China has already supplied Iran with very large tankers for oil shipment and agreed to supply similar tankers to Venezuela in May 2006.

Russia, Iran and Venezuela, which combined control 25 percent of the world's oil exports, could easily forge an agreement to direct new oil trade with China to Moscow's ruble-denominated energy exchange. By 2008, as much as 10 percent of the world's crude oil trade could be conducted in rubles. By 2012, 20 percent of this trade could be ruble-denominated. The shift toward ruble-denominated oil trade will strengthen the ruble's exchange rate over the long-term as foreign central banks add rubles to their reserves to cover payments for oil imports.

The ruble's gain will be the dollar's loss as central banks jettison dollars from their reserves in the process. Moscow's increasingly strong stance against Washington's global foreign and economic policy dominance will lead to a further reduction in global oil supplies, forcing international oil prices ever higher. High energy prices could eventually trigger a U.S. economic recession forcing oil prices lower. However, declining global oil supplies and tight production control in Russia, Iran and Venezuela will create strong support for oil prices, preventing a price collapse.

Russia's sway over international energy prices will ultimately control the energy dependent U.S. economy. Simultaneously, Moscow's multilateral foreign policy might increasingly isolate the United States, greatly weakening Washington's influence over other countries. Within 10 years, Russia could rival the United States as the world's dominant economic and foreign policy power.

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