The Year Russia Flexed its Diplomatic Muscle
This was the year that Vladimir Putin bared his chest for the world. Pictures of the Russian president fishing shirtless in Siberia with his biceps bulging, were distributed by the Kremlin with a clear message: a tough leader for a tough country. In 2006, a resurgent Russia asserted itself principally through the energy markets by demanding higher prices for its oil and gas and threatening to cut off those refusing to pay. This year, Moscow has flexed its muscles over a much broader front, challenging the US and the European Union over issues ranging from missile defence and Kosovo to election observers.
This approach has generated growing criticism in the EU and the US. But within Russia, a dose of foreign policy nationalism has gone down very well, boosting Mr Putin's popularity, contributing to his party's triumph in this month's parliamentary elections. The Russian leader is now well placed to manage next year's presidential poll, after nominating Dmitry Medvedev as his successor and having Mr Medvedev name Mr Putin as his future prime minister. Mr Putin set the tone early in the year with a widely reported speech in Munich in which he attacked the US, saying: "The US has overstepped its borders in all spheres - economic, political and humanitarian, and has imposed itself on other states... Local and regional wars did not get fewer, the number of people who died did notget smaller but increased. We see no kind of restraint - a hyperinflated use of force." Given conditions in Iraq, his claims were not wholly unreasonable. But his tone reminded many observers of the rhetoric of the cold war. The Russian president was deliberately antagonising and provoking his western counterparts. His words have been accompanied by action, notably in the field of military security. The Kremlin is furious at Washington's plans to install anti-missile defence bases in Poland and the Czech Republic.
Russian officials reject American arguments that the missiles, an element in a global shield against "rogue" states, will not and could not be aimed at Russia or Russian missiles. In the Kremlin's view, the US claims are disingenuous, as any missile base could easily be expanded at a future date. Russian officials also see the plans as a political provocation - an extension of western power into Moscow's former sphere of influence. Officials argue that having failed to stand up to the west over Nato expansion and raised more effective questions about EU enlargement, Russia must not give any more ground. Under former president Boris Yeltsin, who died this year, an impoverished Russia robbed of its self-confidence often grumbled at the west but was too weak to respond. Under Mr Putin it is reacting by attacking some of the core east-west security agreements struck during the cold war. This month, Russia is pulling out of the Conventional Forces in Europe treaty - an agreement limiting troop deployments in Europe - on the ground that it was never ratified by western countries.
Moscow is also questioning the 1987 Intermediate-Range Nuclear Forces treaty, which restricts the stationing of medium-range missiles, on the grounds that ownership of such weapons is no longer the preserve of the US and Russia. The arguments are at an early stage but could complicate discussions over an even more significant agreement - the Start treaty, controlling long-range weapons, which expires next year. Russian officials argue that there is nothing unreasonable in their actions, adding that it was Washington that first abrogated an arms control treaty when, in 2001, it pulled out of the 1972 Anti- Ballistic Missile Treaty so that it could develop the missile shield. Russian analysts also point out that in practical terms, Moscow's military power is a fraction of the US's. Even after recent increases, Russia's defence budget is about 5 per cent of the US's and will struggle to finance even the renewal of ageing Soviet-era arsenals, let alone fund a significant expansion.
The missiles dispute has developed in line with other east-west, arguments, notably over Kosovo, where the diplomatic conflict is coming to a head. Moscow has stood by its traditional ally, Serbia, and backed Belgrade in its refusal to contemplate Kosovo's independence. Russia this summer prevented a US-led bid to secure United Nations approval for an independence plan and has promised to maintain its veto. The likely result is a unilateral declaration of independence by Kosovo, supported by the US and most EU members, though not the whole Union. Russia is responding by encouraging separatists in the Georgian territories of Abkhazia and South Ossetia, and in Moldova. But how far Moscow intends to go is still unclear. Russia has also been embroiled in arguments with its neighbours, notably Estonia where the clumsy dismantling of a Soviet-period war memorial provoked demonstrations by local ethnic Russians, a wave of protest from Moscow and cyberattacks on Estonian government websites. Georgia has accused Russia of interference in its affairs, including an alleged missile attack on an official outpost. In Ukraine, aides to Viktor Yushchenko, the pro-west president, have complained about Russian political backing for separatist parties.
Meanwhile, Kremlin officials have ruthlessly pursued their main domestic aim - to remain in power after next March's presidential election. Russia has brushed off international criticisms of the parliamentary election and its failure to grant early access to monitors from the Organisation for Security and Co-operation in Europe. Last week, Mr Putin named Mr Medvedev, chairman of Gazprom and a first deputy prime minister, as his chosen successor. Mr Medvedev, a relatively pro-western liberal who owes most of his career to Mr Putin, is viewed favourably by investors. But the endorsement of the taciturn lawyer is also seen as proof of Mr Putin's determination to maintain a hold of the levers of power after he steps down. Mr Medvedev more or less confirmed this by declaring that he would appoint Mr Putin as prime minister if, as seems certain, he is elected president, to ensure political and economic continuity. Elsewhere in the region, parliamentary elections in Ukraine resulted in a strong showing for Yulia Tymoshenko, the maverick former prime minister. But prolonged in-fighting involving Ms Tymoshenko, Mr Yushchenko, and Viktor Yanukovich, the prime minister, have delayed the formation of a government. In Georgia, president Mikheil Saakashvili responded to demonstrations and calls for his resignation with a state of emergency and the announcement of a snap presidential election on January 5.
Further west, Polish voters unexpectedly ended two years of rule by its combative prime minister, Jaroslaw Kaczynski, head of the conservative Law and Justice party. The country rejected his divisive tactics and his clumsy handling of foreign affairs in favour of the conciliatory policies offered by Donald Tusk, leader of the liberal Civic Platform and the new prime minister. In south-east Europe, Romania and Bulgaria rejoiced at joining the EU in January but have since been beset by criticisms from Brussels about their shortcomings in running the public administration and the courts and in fighting corruption. But their difficulties pale in comparison with the challenges facing most of the former Yugoslavia, where there are renewed fears of violence in Kosovo and in Bosnia. The EU is trying to ease tensions by engaging governments in talks on association agreements that are designed to lead to future membership.
Almost everywhere in the region, energy remains high on the agenda. With oil prices hovering below $100 a barrel, energy-importing countries are concerned about securing supplies - and reducing their reliance on Russia, the largest oil and gas supplier. The year has seen increased competition for hydrocarbon resources and government moves to strengthen control. In Russia, Gazprom, the state-controlled energy group, started the year by wresting control of the big Sakhalin-2 gas project from Shell, the Anglo-Dutch group, and its Japanese partners and paying $7.5bn for a 50 per cent-plusone- share stake. In Kazakhstan, the administration is now embroiled in talks with Italy's Eni over the future of the huge Kashagan oilfield. Elsewhere, Chinese investors are competing for access to central Asian resources with Russian and western companies. The unexpected death of Turkmenistan's leader, Saparmurat Niyazov, has led to a flurry of interest in hiscountry, with foreign companies seeking investment projects.
Meanwhile, among the consuming nations of the EU, there are efforts to reduce dependence on Russian-supplied fuels by developing alternative routes, including the Nabucco gas pipeline, which would run from the Caspian region to central Europe via Turkey. But Gazprom has responded with its own plans, notably South Stream, a pipeline that would run from Russia under the Black Sea via the Balkans to central Europe, and Nord Stream, the controversial Baltic Sea pipeline. Financing will be an issue for all these projects. Across the region, economies have grown at unprecedented rates in the past few years, generating rising living standards in most countries, even if tens of millions still struggle with poverty. In a recent annual economic survey, the European Bank for Reconstruction and Development forecast an average increase in gross domestic product for the region in 2007 of 7 per cent - the highest ever. It predicts a slow down next year to about 6 per cent. Officials are watching the impact of the global financial turmoil and decelerating growth in the US but so far do not see any significant overall effects. Others are less sanguine, including the International Monetary Fund, which has warned of the risks to countries with high current account deficits, such as the Baltic states, Romania and Bulgaria.
Foreign investment is running at record levels, with the EBRD forecasting an inflow of $76bn for 2007. The lion's share is going to central and south-east Europe, with the republics of the former Soviet Union attracting far less. While investors are increasingly willing to assume the risks involved in putting money deep into Russia and other ex-Soviet states, they still feel more comfortable in present and prospective EU member states. However, the region has a long way to go before achieving living standards comparable to those in western Europe. It was only last year that average incomes finally exceeded 1989 levels. And some countries have still to pass that statistical milestone, including Russia (which should do so this year), Ukraine and Georgia. Within countries there are sharp differences between wealthy cities, such as Prague, Kiev and Moscow, and the impoverished provinces. Similar gaps exist between resource-rich regions, such as western Siberia, and poor ones such as the troubled northern Caucasus.