U.S. May Face Tougher Russian Relationship After Putin Returns to Kremlin

The U.S. may find it more difficult to work with Russia on issues from Iran’s nuclear program to missile defense when President Dmitry Medvedev leaves office next year, according to policy makers and strategists including Ariel Cohen, a senior fellow at the Heritage Foundation.

U.S. President Barack Obama tomorrow meets Medvedev, who championed the policy of a “reset” in relations, during the APEC summit in Honolulu -- probably for the last time as his Russian counterpart. Obama, who six months ago praised Medvedev for having improved relations, may have to deal with Prime Minister Vladimir Putin from next May.

If Obama is re-elected next year, “he will face a tougher counterpart in the Kremlin, by the name of Mr. Putin, who is often reflexively critical of the U.S. and doesn’t trust the U.S.,” said Cohen, who has consulted for the U.S. government and Senate. “With a possible Republican presidency, there would be a serious re-evaluation.”

Strained ties with the West may hinder Russian efforts to attract foreign investment after entering the World Trade Organization this year. Investors, locals and companies pulled more than $300 billion Russia from its five-day war with U.S.- ally Georgia in August 2008 until the middle of February 2009, according to BNP Paribas SA.

Capital flight may reach $70 billion this year, compared with a previous forecast for $36 billion of outflows, the central bank said Nov. 1.

Ruble, Stocks Gain

The ruble is the best-performer among 31 major currencies tracked by Bloomberg since Putin announced his intention to return to the presidency on Sept. 24, having gained 5.2 percent against the dollar. The benchmark RTS stock index has gained about 16 percent, the world’s biggest jump. Urals crude, Russia’s chief export blend, which contributes about 40 percent to budget revenue, surged about 7 percent in the same period.

Putin has called the U.S. “parasitic” for taking advantage of the dollar’s position as the world’s main reserve currency. He wants developing nations to have an increased weight in global financial institutions such as the International Monetary Fund. Russia is demanding increased voting rights in the Washington-based lender in return for helping bail out the euro area.

‘Our Status’

“We expect that if such countries as Russia and China participate in global efforts, that this will in turn reflect on our status in international organizations like the IMF,” Putin said Nov. 7.

Russia is resisting sanctions against Iran even after United Nations inspectors concluded the Persian Gulf nation has pursued a nuclear weapons program until at least last year. The government in Moscow this week criticized a UN report on Iran’s nuclear program that the country had sought to make a nuclear warhead small enough to fit on its ballistic missiles, saying it suspects “political dishonesty” by the authors.

Disagreements, including over a U.S. plan for a missile- defense system in Europe that Russia says will blunt its strategic forces, may come to a head at a NATO summit in May, two months after Russia’s presidential election that Putin is favored to win.

‘Non-Negotiable Condition’

“Our non-negotiable condition is a legally binding guarantee that this system won’t be aimed against our deterrent potential,” Foreign Minister Sergei Lavrov said in an interview published today in the official Russian government newspaper, Rossiiskaya Gazeta.

Putin, who has called the collapse of the Soviet Union the greatest geopolitical catastrophe of the 20th century, is working on forging an economic alliance of former Soviet states in the Eurasian Union from next year. The U.S. is set to ramp up its military presence on Russia’s borders with missile-defense facilities in former Soviet allies Poland and Romania, as well as Turkey.

Russia has failed to reach an agreement with the U.S. on its planned missile-defense system and the shield represents a “serious challenge,” Medvedev’s economic aide, Arkady Dvorkovich, said Nov. 9. Still, Dvorkovich said he is optimistic that relations with the U.S. won’t deteriorate.

‘Reset’ Launch

Russia and the U.S. launched a “reset” of their relationship in 2009 after Obama came to office, yielding an agreement on a strategic arms-reduction treaty that took effect in 2011. Russia also agreed to the transit of NATO supplies through its territory to Afghanistan and backed sanctions against Iran.

The two countries have had a mutual interest in improving ties, with Russia securing U.S. support for its WTO accession and U.S. strategic investment in its technology sector, said Lauren Goodrich, an analyst from Stratfor, a U.S.-based risk advisory group.

“This was successful for the short term,” she said. “The problem is that the underlying issues are not only still there, but relations look to become much worse in the next few years.”

U.S. House of Representatives Speaker John Boehner last month urged Obama to stop “downplaying Russia’s disregard” for democracy and human rights. The House stands ready to give “teeth” to a more forceful U.S. assertion of a human rights agenda with Russia, the Ohio Republican said.

Medvedev, who avoids the anti-U.S. rhetoric used by Putin and abstained from the UN Security Council vote on Libya that authorized NATO military action against Muammar Qaddafi, is no longer relevant, said Lilit Gevorgyan , a London-based analyst at IHS Global Insight.

Putin, president between 2000 and 2008, announced in September that he will seek to return to the Kremlin next year, pushing aside his protege, Medvedev.

“The ‘reset’ with all its faults has been an important diplomatic success, something that Medvedev could have used had he decided to run against Putin,” she said. “But his decision to concede to Putin has lessened his political weight in the upcoming elections and with it the importance of his achievements in relations with the U.S.”

To contact the reporters on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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