Why A US-Russia Reset Will Help the Economy

By: AnyOption

Although the Democrats eagerly painted Russia as the enemy throughout the American election campaign, the budding dialogue between Russian President Vladimir Putin and US President-elect Donald Trump has some interesting implications.  In many ways, both represent the ongoing global shift in political dynamics towards more right-wing governments.  While historically these developments have created an environment ripe for conflict and war, the surprising election of Trump may sow the seeds of change to this classical narrative. 

The Russian economy is still reeling from sanctions combined with the tremendous decline in oil and gas prices over the last two years.  For the Russians, Trump’s rise presents a unique opportunity.  His rejection of globalization combined with the common ground he has established on terrorism and reducing America’s foreign military presence has won Trump no shortage of praise from certain foreign policy circles.  Furthermore, he paves the way for greater multilateralism and a new era of global leadership.  Instead of gunboat diplomacy, Trump is laying the groundwork for an era of economic peace.

Toning Down the Brinksmanship

The buildup of NATO troops on Russian borders, along with growing militarization on both sides, has raised the tensions between Russia and the West to levels not seen in decades.  Disagreements over the deployment of the US missile shield, Middle East policy, and the annexation of Crimea have seen relations rapidly disintegrate over the last two years.  Despite Secretary of State Clinton pushing for a thaw years back with her “reset button,” no such development ever materialized.

The saber rattling on the part of NATO has not helped build confidence between Russia and the West. However, Trump’s insistence on NATO members pulling their weight may change the calculus of its deterrence.  Without the US to foot the bill, NATO members will have to reconsider their own bravado when it comes to provoking the great eastern bear.  Nevertheless, even without a sanctions détente, Russia has proven more than capable of managing the economic climate and pivoting towards friendlier partners.

Changing Narrative

Now that Trump has come along and changed the narrative, the brinksmanship of the last few months has abated notably, with Russia’s Putin speaking favorably on the outlook for ties. The biggest benefactor of this thaw is the private sector.  Businesses are traditionally viewed as among the most rational actors when it comes to spending and investment.  Their commitment to these two activities changes depending on the political environment.  During periods of stability, business has a tendency to thrive whereas periods of uncertainty have the opposite impact. 

On the back of an improving political outlook, Russian business may be poised to reap the rewards of improved ties.  Already, there have been cracks in the façade of Europe’s resolve to punish Russia.  While its actions in Crimea may have proved reprehensible, Russia is not being shut out by Europe.  Italian Prime Minister Matteo Renzi recently visited St. Petersburg for a business forum while Francois Hollande has called for the gradual lifting of sanctions if a Ukraine truce is implemented.  The resumption of trade will get the Russian economy quickly back on track.

Economically Speaking

Ironically, Russia still holds all the “trump” cards with respect to its relationship with Europe.  At any point it in time, should it decide, Russia can plug the European gas taps.  Although this is highly unlikely, Russia has significant leverage considering its ability to shut off the heat.  However, reduced tensions are unlikely to lead to such a scenario.  In fact, a rapprochement between the two regions has only upside potential for the Russian economy.  Greater availability of imported products will help temper consumer price inflation further from its current 6.10%. 

The improvement in oil and gas prices over the last few months and increased prospect of a deal being arrived at during the Vienna OPEC meeting are positive signs for the Russian outlook.  Besides helping to repair the export economy, higher energy prices will also help the Ruble continue gaining back ground lost over the last two years, further tempering inflationary pressures.  Less inflation and a strengthening Ruble could give the Central Bank more leeway to reduce interest rates, helping the private sector bounce back from high borrowing costs which have hurt local businesses.

Looking Ahead

Even without a lifting of sanctions, Russia is increasingly poised to exit the current economic contraction stronger than before.  The expansion of ties with other regional power brokers, rebuilding of historical strategic partnerships alongside the forging of new relationships has built a solid foundation for the Russian economy to build upon.  Should ties warm with the United States, any economic rebound could turn from tepid to tremendous within a very short time.  While the downside of the latest political developments is rather limited, the upside potential proves that the risk-reward equation is firmly in the Russian’s favor over the medium-term.

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