We should note the continued strains within the Russian economy. The Russians are now moving towards a major bank bailout. The World Bank expects the Russian economy to shrink by 7.9% this year and that its unemployment rate will rise to 13% by the end of the year.

Others predict a marginally less dramatic fall of 6.3% in the economy in 2009 but this decline is still significant. Investors will be recalling the $40bn debt default in 1998.

The real social damage will take place in the single factory towns where the impact of unemployment will be much worsened by wage arrears. Industrial production fell a record 17.1% in May and capital investment fell 23.1%.

Whichever way the numbers add up, this is the worst annual contraction for Russia in fifteen years and much of it relates toa collapse in demand for its commodity exports. Russia is still the world’s largest energy exporter so, on fundamentals, it should recover well on global recovery.

The coming Russian bank bailout is likely to be massive, targeting only banks with £1bn minimum assets, much larger than the equivalent US rescue. It will place the Government in pole position to administer the banking system in a partial re-socialisation of the economy.

Current plans seem to suggest that the Government will take board seats and gain veto rights although it has to be said that the relative immaturity of Russian banking suggests that this is a pragmatic move rather than some neo-communist coup.

Russian Military Reform

Quite separately, the Russians are undertaking (much like the US and other smaller powers) significant military reforms that will fundamentally transform Russian military power.

The Russians are also sending strong signals that they are prepared to make substantial cuts in nuclear stockpiles if the US meets its concerns over the missile defense system. The NATO-Russia Council will meet in Corfu on June 27th.

In essence, Russia is unwinding its longstanding model where massive intercontinental nuclear weaponry deterred extra-continental rivals while equally massive numbers of boots on the ground both challenged any prospect of land invasion and offered its own deterrent threat to the West.

The probable outcome of the latest round of reforms (the first of this scale since the Crimean War) is a force of around 1m men with a proportionately smaller but better trained officer corps and the ending of conscription as fundamentally inefficient.

Russia has an armed complement of some 1.4m (down from 3.4m at the end of the Soviet era) but its new wars are largely about border settlement and against disorder within its sphere of influence.

The calculation must be that Russia only needs sufficient deterrence to stop other powers from interfering in its attempts to consolidate its Eurasian core or from making opportunistic incursions on to its territory.

Continued Global Energy Influence

In any case, a global stranglehold over energy provision should keep Europe wary of undertaking any ‘adventurism’. Typical of Russia’s drive towards global energy influence is the announcement yesterday of Gazprom’s $2.5bn deal with Nigeria to explore and develop its gas reserves.

Traditionally, West Africa is European territory, certainly part of the Atlantic system, yet both the Russians (energy) and Chinese (oil) appear to be moving into the region in force.

Given Russian influence in Libya and noting Atlantic irritation with Berlusconi’s pally act with Putin, the African gas lines up through to Southern Europe are definitely drifting into Russian hands. The question is really who will bring the cash to the table.

Every time the Russians appear on the scene, their implied large-scale funding (regardless of the actual state of their economy) raises the price for the Western powers who can ill-afford, at this time, to direct scarce capital into full control of such apparent necessities as the Nabucco and trans-Saharan pipelines.

The Russians are simply staking their claim to influence but it should not be assumed that supply as such is threatened, only the terms of that supply.

On the ‘Chinese’ front, state-owned Sinopec agreed this week, in principle, a £4.4bn takeover of the Swiss-based oil company Addax (listed in London and Toronto) which has significant interests in Africa and in Iraqi Kurdistan.

This would be China’s largest outbound investment in the oil and gas sector. There continues to be much speculation about the value of concessions in Kurdistan but the holdings in Nigeria, Gabon and Cameroon are significant.

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