Dear Friends:

Who's afraid of the Russian bear? As Russia makes a grab for power and influence, the rest of the world watches to see how the United States and her still-new president will react. As an investor, it's important that you're aware of global politics, as the ramifications reach beyond diplomatic relations and straight into the markets.

I've included a piece from my friend George Friedman's company, STRATFOR, on The Obama Administration and the Former Soviet Union. It's the seventh in a series that explores how key countries have interacted with the United States in the past, and how their relationships with Washington will likely be defined during the administration of U.S. President Barack Obama. It's a must-read for informed investors.

George has very kindly arranged for a special offer on a STRATFOR Membership just for my readers. I strongly encourage you to take advantage of this offer. Now more than ever, you need a wide lens on the world, as politics shapes the economy. There's no one better than George and his team at Stratfor at telling you what you need to know and why. I know you'll find them as valuable as I do.

Yours,
John Mauldin, Editor
Outside the Box

Part 7: The Obama Administration and the Former Soviet Union
By George Friedman

Editor's Note: This is the seventh piece in a series that explores how key countries in various regions have interacted with the United States in the past, and how their relationships with Washington will likely be defined during the administration of U.S. President Barack Obama.

U.S. President Barack Obama's administration seems to be largely focused on South Asia and the Middle East. Yet one of Washington's biggest challenges will come from its old foe: Russia. Obama's team must make some major decisions regarding Russia and American influence in Eurasia -- decisions that will affect not only U.S.-Russian relations but also future dynamics in Europe, the former Soviet Union and many other regions.

Russia's Geographic Position

In a nutshell, Russia is a large, untenable landmass that not only is difficult to hold together but also sees itself surrounded by enemies and other great (or potentially great) powers. The country's core -- where most of its population and commerce are concentrated -- actually consists of only the Moscow-St. Petersburg corridor and the surrounding European Russian regions up to the Ural Mountains. The only geographic barrier separating this core from both Europe and the Middle East is distance. The core is also disconnected from Russia's wealth of resources, which lie beyond the Ural Mountains in Siberia -- making the use of Russian resources very difficult and pricey, given the costs of transport and of operating in Siberia's marshlands and frozen tundra.

Russia -- the largest country in terms of landmass -- has difficulty being a land power because of its sheer size. Its land and sea borders are impossible to defend effectively, leaving the country very vulnerable to invasion. Because Russia is surrounded by countless countries and superpowers, it is constantly concerned about security. Its main focus, of course, is protecting its core; its south and east are its secondary focus. In order to fully protect itself, Russia must have a buffer zone surrounding it almost entirely, keeping other powers and threats at bay. This means Russia must conquer (or at least influence) a ring of states surrounding European Russia, the Caucasus and non-European Russia. This imperative led to the organization of the Soviet Union and its Warsaw Pact bloc, and it is now driving Russia to reassert control over the former Soviet states.

Russia wants to be a world power, but it must protect itself before extending its reach beyond its immediate sphere of influence. And since the collapse of the Soviet Union, Russia has lost a lot of ground, with Western powers (particularly NATO and the European Union) expanding into its realm. Therefore, Russia faces the task of reasserting control over its former Soviet states while pushing Western influence out of those states.

The Bush Administration and Russia

At the beginning of the Bush administration, it seemed as if a new era of U.S.-Russian relations was dawning. When U.S. President George W. Bush met with Russian President Vladimir Putin, Bush said he "looked the man in the eye" and "was able to get a sense of his soul." Putin (now Russian prime minister) was the first head of state to call Bush after the 9/11 attacks in the United States, and he was quick to offer Russia's support.

But there was an inherent problem with this new friendship: Neither country truly trusted the other, no matter the rhetoric. Russia had too much work to do in order to secure its strength and its future, and the United States never wanted to see a strong Russia again. At the time, Russia was a weak, fractured and crumbling state that needed time to consolidate internally. Furthermore, once it was stronger (which would take years), Russia needed the United States to be preoccupied enough to allow Moscow to resurge onto the international scene. This opportunity would arise when the United States became too bogged down with its wars in Iraq and Afghanistan to prevent Russia from pushing back against Western influence in its border regions.

But while the Bush administration was focused on its wars, it did not allow Russia free rein in Eurasia. Bush pledged to those states in Russia's sphere -- especially Poland, Ukraine and Georgia -- that the United States would protect them from their former Soviet master. Under the Bush administration, Washington did much to secure these states and solidify Western influence there, but there are four moves in particular that stand out in Moscow's mind:

• The Bush administration started its strategic moves into the former Soviet sphere by placing military bases in Central Asia in 2001. The bases were meant to support the U.S. effort in Afghanistan, but they also served to infiltrate a territory where the West had not had much influence. Involved in one war and about to begin another, the United States was not thinking foremost about countering a resurgent Russia. But the war in Afghanistan gave Washington an excuse to achieve its long-term goal of capping Russia's influence in Central Asia, where Russia had long been the sole power (although the West and China had dabbled in the region). Now, the United States was setting up permanent ties in the region (and military ones at that).
• Next, starting in 2002, Washington entered negotiations with many Central and Eastern European states about placing ballistic missile defense (BMD) systems on their soil. Washington's rationale was that they would protect against a strike from Iran. The move would place U.S. military installations in Central Europe, essentially moving the Warsaw Pact line from Germany eastward.
• In 2004, the United States ushered the three former Soviet Baltic states -- Lithuania, Latvia and Estonia -- into NATO. This put NATO on Russia's border and a stone's throw from St. Petersburg -- a nightmare for Moscow.
• The United States then demonstrated its commitment to Georgia and Ukraine after the two former Soviet states had their pro-Western revolutions (the 2003 Georgian Rose Revolution and the 2004 Ukrainian Orange Revolution). It did this by pushing for the two states to be quickly put on the path toward membership in Western organizations like NATO. The United States fiercely maintained this push despite the fact that other NATO members did not want to face Russia's ire should they agree to accept the two states as members. At present, the debate over further NATO expansion is heavily contested among its members, who allowed the Baltics to come in while Russia was still passive and weak but have had second thoughts about Georgia and Ukraine since Russia has become stronger and more assertive.

While Russia perceived them as genuine threats, these four moves actually helped Russia counter the United States. There was no question about who was behind them or whether Washington had NATO's unanimous support. Moscow knew the moves were all led by Washington, which had discounted much of NATO's concern over riling a resurgent Russia. Moscow also realized the power of fracturing the trans-Atlantic alliance into three main parts, each with its own strategic interests -- the United States, Western Europe and Central/Eastern Europe. This awareness also helped Russia fracture the European Union.

From the Kremlin's point of view, the Bush administration betrayed it by heralding American-Russian friendship while making the first moves to undermine a Russian resurgence. Bush drew many lines in the sand and agitated Russia almost to the point of igniting a new Cold War -- at least in Moscow's view, though it certainly contributed to the tensions by reasserting itself on the international stage. Russia understood what the Bush administration was attempting to achieve -- a permanent break in Russia's influence abroad so that it could never call itself a world power again. Moscow also understood that the United States was using an old Cold War handbook to find Russia's pressure points.

Today, with the Obama administration in place, Moscow wonders if priorities have truly changed in Washington and, if they have, how it can use this transition to regain control in its near abroad and fully achieve its geopolitical goals.

Russia's Goals

Though Russia has many things it would love to demand of the new Obama administration, there are four key areas of concern: NATO's expansion and influence in former Soviet states, renegotiating the Strategic Arms Reduction Treaty (START), U.S. BMD in Europe and the U.S. presence in Central Asia. The first two issues are the most critical for Russia, which believes it must preserve its buffers and maintain nuclear parity with the United States if it intends to survive as a nation-state.

Beginning in 1999, when it accepted Poland, the Czech Republic and Hungary as new members, NATO expanded into former Warsaw Pact states. These particular states were not exactly pro-Russian and were looking for heavyweight protection against Russia. It was a NATO expansion in 2004 -- when Slovenia, Slovakia, Bulgaria, Romania and the former Soviet states of Latvia, Lithuania and Estonia joined the alliance -- that shook Moscow to its core.

Today, the even more critical former Soviet states of Ukraine and Georgia are on the path toward NATO membership. If either of these states actually became part of the alliance, NATO would be positioned to undermine Russia's fundamental ability to defend itself and would be able to strike at the country's core. Moscow is looking for a firm agreement from Washington that it will not expand to Ukraine or Georgia -- as well as an understanding that, although the Baltic states are members of NATO, Russia still wields more influence in these three small, difficult-to-defend Eastern European countries.

One state that is not yet on NATO's agenda but may be at some point is Finland. This state has long maintained neutrality to avoid having to choose sides against Russia, its largest trading partner and with whom it shares its longest border. Finland's Scandinavian neighbor, Sweden, is considering joining NATO and, if it does, Finland could follow suit. Although Russia does not view Finland as a potential NATO threat, Moscow could move quickly to block its membership in the alliance by leveraging the many tools at its disposal (trade, energy, security) if it ever looked like it might become one.

The 1991 START treaty was a Cold War-era arms reduction treaty that was highly specific and contained rigorous declaration, inspection and verification mechanisms. Since the collapse of the Soviet Union, Washington has become disillusioned with this sort of arms agreement, concerned as it is about being locked into bilateral arrangements with one country while another -- China, say -- starts ramping up its nuclear arsenal. But this does not mean that the transparency of the START framework does not have value, and both the Kremlin and the White House are interested in further reductions (even beyond those called for by 2012 in the 2003 Strategic Offensive Reductions Treaty).

Russia considers arms control of central importance. With a decaying arsenal, the Kremlin relies on treaties like START to lock the Pentagon into a bilateral strategic balance. Russia simply does not have the resources (money or technical skills) to compete in another arms race. For Russia, a renegotiation of START, which expires at the end of 2009, is all about long-term survival; nuclear balance has come to play an increasingly central role in ensuring Russian sovereignty and territorial integrity.

The other two issues on Russia's agenda -- U.S. BMD efforts in Europe and U.S. meddling in Central Asia -- are not as critical as the first two, but they are being packaged into some sort of grand agreement in negotiations now under way between Moscow and Washington. For Russia, the BMD installations slated for Poland and the Czech Republic are more about the precedent they set for U.S. military troops on the ground in former Warsaw Pact territory than about the strategic nuclear balance.

Russia is deeply concerned about the long-term impact of BMD on the Russian nuclear deterrent, but the Polish installation with 10 interceptors would have little effect on Russian intercontinental ballistic missiles directed at the United States (which would travel over the Arctic). Nevertheless, Poland is a country with which Russia has legitimate concerns, and the BMD issue is one in which Moscow can easily appear to be the aggrieved party (it was Washington, after all, that withdrew from the 1972 Anti-Ballistic Missile Treaty). But the issue is symptomatic rather than central to the Kremlin's larger concerns.

Then there is Central Asia, where Russia wants to remove U.S. influence from its southern region. The United States no longer has a strong hold inside any Central Asian state, though it does have a base in Kyrgyzstan (as of this writing) and is currently using most of the Central Asian states as transport routes into Afghanistan -- with Russia's permission. But Moscow wants it understood that Central Asia is its turf and that the United States is there with Russia's permission and can be ejected at any time. Central Asia is a tougher region for the Americans to project into, but it is becoming more important to the United States as the Obama administration reconsiders its strategy in South Asia.

Russia's Expectations and Concerns

Russia is viewing this new American administration with the same reservations it had when it viewed the old one. Moscow simply feels it was burned by Bush, and the Obama administration has come in at a time when the United States could use Russia's help. With Pakistan increasingly unreliable, the United States needs other supply routes into Afghanistan, and going through Russia and its former Soviet turf in Central Asia is the best alternative. At the same time, Russia has supported Iran in helping it develop its nuclear facilities and providing air-defense missile systems -- in effect, giving Iran just the tools it needs to bargain with the United States and making Iran itself a bargaining chip for Russia to use for its own needs.

Of course, asking Russia for either concession would come with a price. It is Russia's time to place its goals on the table and ask for real actions by the new American administration in reversing or at least freezing certain Bush policies. In return, Russia would be more than happy to help the United States with its war in Afghanistan and cease supporting Iran, as long as such tactics would help Russia meet its own geopolitical objectives while keeping the United States at least partially distracted.

The Obama administration started to make overtures to Russia even before taking office, sending envoys led by former Secretary of State Henry Kissinger to Moscow for negotiations. Obama, Vice President Joe Biden and Secretary of State Hillary Clinton have said they are open to renegotiating START and possibly freezing the BMD plan, and they have already relayed to Ukraine and Georgia that NATO membership will most likely not happen. In return, Russia has allowed small shipments of supplies to start rolling from Latvia through Russia, Kazakhstan and Uzbekistan into Afghanistan, and it is helping negotiate airspace rights for the United States over Tajikistan and Turkmenistan.

But for any further commitment, Moscow wants tangible assurances from Washington that its major concerns -- particularly NATO expansion and START renegotiation -- will be addressed. The Kremlin does not trust the new White House and understands it can be betrayed at any moment, especially as the United States becomes less bogged down in Iraq. Russia is also concerned about how much the United States is willing to give up for its war in Afghanistan. Russia knows that, at the moment, the war in Afghanistan is a top priority for the Obama administration, but Moscow also knows that the U.S. attention span is short and that Russia's window of opportunity is correspondingly narrow.

Current negotiations will come to a head in April, when Obama sits down for the first time with Russian President Dmitri Medvedev and finally allows the Kremlin to gauge where this new administration is and where it is willing to go. Russia believes both countries are at a unique place in history: each could give a little to the other over the short term, before some future and unavoidable confrontation, or Obama could decide to take on this resurgent and stronger Russia, even if it meant sacrificing other U.S. priorities, such as Afghanistan and Iran.

Either way, the decisions facing the Kremlin and the Obama administration are ones that will shape a renewed global rivalry.