Russian GDP Continues to Contract at Double Digit Pace

The Russian Federal Statistics service reported Q2 GDP figures today, which aside from proving Joe Biden to be a prescient economic seer (he described Russia's economy as "wilting" just a couple of weeks ago) , showed the country's gross domestic product contracting at an annualized -10.9%. As illustrated by the chart above, Russia's international reserve position has stabilized over the course of the year as oil prices have hovered in the $70/bbl range. Furthermore, despite Russia's vocal assertions that it is in favor of special drawing rights (SDR's) as a way of diversifying away from USD exposure, gold seems to have been a primary beneficiary of reserve re-balancing. Russian gold holdings are still too small to make a significant visual chart impact, but they have increased the value of gold in reserve by $2.5B or ~17% since the start of the 2009.

We suspect that Russia has reached a critical point of sorts with regards to the contraction of it's domestic economy, and it's stated international reserve position. Unless these double digit annualized GDP contractions moderate substantially, Moscow may come under political pressure from an unruly populace to extend or create social benefit programs. Such a move would necessitate the use of the country's reserves for funding, as the price of oil is currently at a level which is barely sustainable to run the government's primary functions. Obviously, this all assumes that the global economy does not perform a double-dip; pushing oil prices further down, and compelling Moscow to deplete it's international reserves further. Sphere: Related Content

Chavez Seeks Russian Military Aid

Russian Prime Minister Vladimir Putin indicated yesterday that his country was ready to collaborate with Hugo Chavez and Venezuela on "military technical collaboration". The following was translated from Russian (Vladimir Putin) originally, so the syntax and vocabulary selection may be suspect, but the meaning shouldn't vary significantly:

"[We] Are prepared to examine proposals and claims of Venezuelan partners for this direction"

Chavez's latest grasp for an international ally comes as other South American leaders have grown increasingly concerned about the United States military and it's plans to expand it's presence on that continent in general, and in Colombia specifically. According to the Russian article cited above, Venezuela has a history of armament purchase arrangements with Russia; all of which it seems involved the Venezuelan acquisition of antiquated Soviet era Kalashnikovs and other rusty pieces of machinery. The latest plans devised by Chavez though involve the purchase of tanks; presumably to deter - or even instigate - some sort of ground incursion into Colombia.

In fact, Chavez has already claimed that Colombian forces have engaged in a "military incursion into Venezuela". This makes me wonder whether, in addition to discussing armament purchases with Vladimir Putin, Chavez solicited a bit of advice on how to tactfully start a war with a neighboring country. Likely impressed by the manner in which the Soviets dealt with the largely defenseless country of Georgia, Chavez may have requested a face to face with Russia's PM to go over some of the more detailed tactical and propaganda aspects inherent in any invasion of another country.

Most likely, Chavez wants to test President Obama by defiantly invading an outspoken US ally. If George Bush didn't do anything to rescue Georgia, then why should Chavez be concerned about how Obama might handle a conflict in Colombia? Sphere: Related Content

Cuba: Sphere of Influence?

The Obama Administration's recent engagement with Cuba has provoked outrage by those who, accurately so, portrary the Castro Regime as an authoritarian dictatorship that has accomplished little aside from keeping its citizens equally impoverished. Numerous motivations have been attributed to President Obama's "outreach" to Havana, however, from a geopolitical perspective, the move clearly underscores the strategic chess match between the United States and the Russian Federation.

The principal observation we will make about the Russian people is that they have a strong yearning to achieve global significance and eventual SuperPower status. In fact, Vladimir Putin has built an entire political career around his knowledge of this one fact alone! Although many independent nations emerged from the fall of the Soviet Union, the Russian Government considers itself to still have "special privileged interests" over these former Soviet-bloc countries. This mindset has manifested into Russian foreign policy that tends to become more aggressive as the Motherland becomes more wealthy. We have seen Russia lash out militarily at its small neighbor Georgia, shut down natural gas pipelines to the Ukraine in the middle of the winter, attempt to interfere with US plans to install missile defense systems in the Czech Republic and Poland, and extend "strings attached" foreign aid to Armenia in a time of desperate need for that country.

We would propose that, while this concept of a regional sphere of influence has historically been the forte of Russian foreign policy, its attractiveness insofar as crafting a pragmatic approach to American foreign affairs is gaining appreciation. The fact is, Cuba's geographical location is strategically attractive for a wide array of military operations. More importantly, improved US-Cuban relations will symbolically expel Russia from a position of influence over the island.

Although the US and Russia have publicly "hit the reset button", behind the scenes there is geopolitical chess match taking place. We await the next move.

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