Editors' note: With a change of guard in the White House coming in January, the new U.S. president will have a chance to commission a review of U.S. domestic and foreign policies. This primer is the third in a series designed to facilitate such a review by detailing the impact Russia does or can have on each of five vital U.S. national interests worth advancing in 2021-2024. They are:  (1) maintaining a balance of power in Europe and Asia; (2) ensuring energy security; (3) preventing the use and slowing the spread of nuclear weapons and other weapons of mass destruction, securing nuclear weapons and materials and preventing proliferation of intermediate and long-range delivery systems for nuclear weapons; (4) preventing large-scale or sustained terrorist attacks on the American homeland; and (5) assuring the stability of the international economy, which is addressed below.

Executive Summary

In 2011, a task force on U.S.-Russian relations, led by Graham Allison and Robert D. Blackwill, identified the preservation of international economic stability as one of five vital U.S. national interests. In recent years, the United States has certainly faced major challenges that threatened the stable functioning of the global economic system, such as the 2008 Great Recession or the ongoing COVID-19 pandemic. The goal of this primer is to assess how Russia and the various threats Washington sees emanating from Moscow impact this vital U.S. interest.

American policymakers rarely frame U.S.-Russian relations in economic terms. Both by the size of its economy and by its share in U.S. trade, Russia is not a major economic player. Nonetheless, Russia adeptly uses the limited resources at its disposal, whether in terms of diplomatic influence, military might, raw materials or geographic position, to assert itself globally. Because of its reliance on fossil fuels for budget revenue, Moscow has its own vested interest in a robust international economy. But U.S. policymakers should not ignore Russia’s role as a potential disrupter of global economic stability, which I define here as the basic functioning of economic activity across borders and resilience to major shocks or crises.

There are at least five areas in which Russia poses a challenge to this stability and to related, albeit less vital, U.S. interests: 

• Fossil fuels: Fossil fuels lie at the center of Russia’s political economy and its influence abroad. Its two largest energy exports, oil and natural gas, largely require international economic stability to continue filling Russian coffers, but each one poses challenges to discrete U.S. economic interests. First, Russia’s fiscal reliance on oil revenues incentivizes the Kremlin to keep prices high while preserving Russia’s global market share. The first of these competing objectives risks hurting American consumers by pushing up gasoline prices, while the second creates competition for U.S. oil exporters. Second, some experts fear that Russia’s preeminence in European gas markets gives it undue leverage over its customers, many of whom are U.S. NATO allies. Russia is diversifying into new Asian markets, which could strengthen this leverage while also competing with U.S. firms. None of these challenges threatens economic stability on a global scale. In the long term, a global transition away from fossil fuels may ultimately undermine these aspects of Russian statecraft.
• Cyber security: The 2017 malware attack known as NotPetya, which Western investigators attributed to the Russian military, gravely disrupted international commercial shipping and cost the global economy an estimated $10 billion or more in damages. This is the biggest Russia-related attack to have affected economic activity worldwide in recent years. While the precise economic toll of Russian cyber activities is difficult to measure, U.S. officials have attributed numerous other malicious cyber operations to the Russian state and Russian nationals, sometimes acting with the state’s tacit approval. One of the cyber threats most worrying to U.S. policymakers is the potential for damage to the United States’ critical infrastructure, whose incapacitation could destabilize both the U.S and global economy.  
• De-dollarization: In order to minimize the impact of recent Western economic sanctions, which rely on the importance of the U.S. dollar to international finance, the Russian government has embraced a policy of “de-dollarization”—both to lessen its own dependence on the currency and in pursuit of a broader mission to dislodge the dollar from its global role altogether. However, the relative insignificance of the Russian economy means it will likely be unable to succeed in this second pursuit without the cooperation of larger powers like China.
• International shipping in the Arctic: Among the economic consequences of climate change is the likely emergence of Russia as a more significant player in international trade. As the planet warms, ice along Russia’s Arctic coast will continue to melt, creating the conditions for its Northern Sea Route to become an increasingly viable alternative to existing intercontinental sea lanes. While this could benefit the global economy overall, it could also allow Moscow to exert greater control over shipping, potentially threatening U.S. freedom of navigation. However, in the long term, if enough ice melts, a more direct transpolar passage could eventually allow shipments to circumvent Russia’s jurisdiction altogether.
• Nuclear weapons: Arguably the most important dimension of the U.S.-Russian relationship is nuclear arms control. These two countries collectively possess roughly 90 percent of the world’s nuclear weapons, and each retains the ability to destroy the other within 30 minutes. Though this is not obviously an economic issue, nothing could be more destructive to global economic stability—to say nothing of human civilization as we know it—than an outbreak of nuclear war.

Introduction

American policymakers rarely frame U.S.-Russian relations, or the threats posed by Moscow, in economic terms. This is in stark contrast to Western discourse on the evolving competition with China, whose economic model and international influence is often explicitly described as a challenge to U.S. economic interests and the liberal economic order more broadly.

Indeed, the sources of Russian power do not lie primarily in its economic heft. In terms of nominal GDP, Russia was the 11th largest economy in the world in 2019, with a 2 percent share of the world’s total. By contrast, the United States accounts for almost a quarter of the world’s productive output (24.4 percent), with China in second place at 16.3 percent of global GDP. The picture looks better for Russia when you take purchasing power parity (PPP) into account, which brings Russia up to sixth place, though even by that measure the country represents only 3 percent of the global economy.

In terms of global finance, Russia is also not a significant player. None of Russia’s banks made it into the first tier of The Banker’s 2020 rankings of top banks, nor were any included in the Financial Stability Board’s 2019 list of 30 global systemically important banks. Meanwhile, Moscow ranked only 62nd among the world’s most competitive financial centers, according to the 2020 Global Financial Centers Index.

Despite being the world’s largest country by territory, Russia has only the 9th largest population. Its 145 million residents account for under 2 percent of the world’s 7.8 billion inhabitants. And as the global population continues to rise, Russia’s is shrinking.

Furthermore, as far as the United States is concerned, Russia is simply not a major trading partner. In 2019, according to U.S. data provided to the IMF, the United States exported $5.8 billion worth of goods to Russia, accounting for less than 0.4 percent of all U.S. exports. That same year, the United States imported $22.3 billion worth of goods from Russia, representing 0.9 percent of all U.S. imports. Not only is U.S.-Russian bilateral trade small, but it has also been shrinking over time. Between 2013 and 2019, the value of U.S. exports to and imports from Russia declined by 48 percent and 17.7 percent, respectively.¹ As Chris Miller, a historian who has written two books on Russian and Soviet economy, puts it, “Russia supplies almost nothing to the U.S. that can’t be bought from other suppliers”; while there are a few minor exceptions, such as goods related to space, “in economic terms, the U.S. almost never thinks about Russia.”² 

Given the miniscule scale of trade between the two countries, it might be natural to assume that Russia plays a minimal role in U.S. economic interests. This is not entirely true. As many analysts have observed, Russia has consistently been able to “punch above its weight” in foreign affairs. Its economic influence is no different. Despite the size of its economy, Moscow has exploited the limited resources at its disposal, whether in terms of diplomatic influence, military might, raw materials or geographic position, to assert itself internationally and challenge the basic structures and terms of the U.S.-led economic order. 

The 2011 task force mentioned in the executive summary identified “assuring the stability of the international economy” as a vital U.S. interest, though it didn’t lay out a precise definition. For the purposes of this primer, I will define “global economy stability” as the basic functioning of economic activity across borders and resilience against major shocks or crises. The intention of this series is to explore Russia’s impact on vital U.S. national interests, so I will focus primarily on those aspects of the global economy that are most directly relevant to the United States.

Potential threats to global economic stability include, inter alia:

• Interruptions to the predictable flow of oil and natural gas in global and regional energy markets, respectively;
• Malicious cyber operations that lead to the disruption or destruction of critical infrastructure that facilitates economic activity;
• The loss of the U.S. dollar’s status as the preeminent reserve currency and preferred medium of exchange for international transactions; and
• The use of coercion to fray international norms, such as the freedom of navigation, that lie at the core of liberal trade relations.

So to what extent does Russia pose a threat to this stability? It has leveraged its abundant natural resources to exert influence on both global and regional energy markets; it is the alleged source of malign global cyber activity that risks disrupting the flow of economic activity worldwide; it has enacted various policies, both domestically and with its regional partners, to circumvent the dollar and potentially dislodge it as the world’s reserve currency; and it has begun exploiting the effects of climate change to position itself in a more central role in global shipping. Finally, as the only other nuclear superpower, Russia retains the capacity to unleash massive destruction on the global economy, to say nothing of human civilization and life as we know it.

With the crucial exception of nuclear weapons, these challenges don’t represent existential threats to the global economy. Russia’s limited resources can only stretch so far and, indeed, Russia’s economic influence often falls short of Moscow’s strategic ambitions. These shortcomings, discussed below, should qualify any analysis of Russia’s role on the global stage, but they do not merit discounting it altogether.

Energy

Fossil fuels lie at the center of Russia’s political economy and its influence abroad. Its two largest energy exports, oil and natural gas, largely require international economic stability to continue filling Russian coffers, but each one poses challenges to discrete U.S. economic interests. First, Russia’s fiscal reliance on oil revenues incentivizes the Kremlin to keep prices high while preserving Russia’s global market share. The first of these competing objectives risks hurting American consumers by pushing up gasoline prices, while the second creates competition for U.S. oil exporters. Second, some experts fear that Russia’s preeminence in European gas markets gives it undue leverage over its customers, many of whom are U.S. NATO allies. Russia is diversifying into new Asian markets, which could strengthen this leverage while also competing with U.S. firms. None of these challenges threatens economic stability on a global scale. In the long term, a global transition away from fossil fuels may ultimately undermine these aspects of Russian statecraft.

Oil

The global economy—and the United States specifically—continues to run largely on oil. In 2019, the entire world consumed approximately 100 million barrels of petroleum per day, one fifth of which was consumed by the United States, despite its population being only 4.3 percent of the world’s total.

Washington has long considered the stable functioning of international oil markets to be a vital national interest. This sentiment was made most explicit by President Jimmy Carter, who declared in his 1980 State of the Union address that the United States would repel “by any means necessary” any attempt to disrupt to the free flow of oil through the Persian Gulf.

The global economic landscape has changed dramatically since the 1970s and ’80s, when the United States was significantly more dependent on foreign energy sources. With the recent advent of the so-called shale revolution, domestic firms have dramatically increased production and are now major exporters on the global market. The United States’ transformation into an energy exporter has helped insulate domestic consumers from the sorts of external shocks that plagued the country under the Carter administration.

Nonetheless, the past year has demonstrated that the U.S. energy sector is not immune to outside forces. Most significantly, the ongoing COVID-19 pandemic has dramatically curtailed global economic activity and, consequently, demand for oil. While this may benefit domestic consumers, who benefit from lower prices, the collapsing demand hurts U.S. firms that depend on high prices to maintain a profit.

The pandemic represents a demand-side crisis, but the United States also remains at least somewhat vulnerable to supply-side shocks by foreign powers, which threaten to disrupt the predictable functioning of international economic activity, at least insofar as it benefits the United States. Russia is one country that retains an ability to exert major influence on international oil markets.

Russia is the world’s second largest exporter of oil, with a global market share of roughly 12 percent in 2019. The revenue from hydrocarbon sales accounts for almost two-thirds of export earnings and 40 percent of the Kremlin’s federal budget, which is designed to balance with an oil price of $42 per barrel. Given the direct relation between oil and the state, Moscow has a vested interest in both keeping prices high and maintaining its market share.

Russia has been able to exert influence on the global price of oil by cooperating with some of its main competitors. In 2016 Russia joined a pact with Saudi Arabia and other OPEC countries—known as OPEC+—to limit oil production and thus maintain high prices despite the downward pressure coming from the influx of U.S. shale exports. As Li-Chen Sim shows in an earlier Russia Matters primer on U.S. energy security, this coordination helped keep oil prices between $50 and $67 per barrel between 2017 and 2019.

This ability to drive up oil prices has potentially adverse implications for the U.S. economy, which remains at least somewhat vulnerable to energy price shocks. In that same primer, Sim writes that “a 10-percent increase in the global price of oil could trigger a decline in U.S. GDP between 0.06 percent and 0.29 percent,” although she notes that this is roughly half the impact that a similar shift would have caused between the early 1970s and early 2000s.

However, Russia’s desire for high oil prices conflicts with its other primary objective: preserving its market share. While high prices ensure steady revenue and stability for the Russian state budget, they also create the economic conditions for competitors, notably private American companies, to increase their own exports and erode Russia’s position in global markets. 

This tension between high prices and market share contributed to the eventual breakdown of the OPEC+ agreement. When Saudi Arabia proposed further production cuts in March 2020, Russia refused. As Russian oil giant Rosneft’s spokesperson explained, such a deal “made no sense from the standpoint of Russian interests” because it would “open up the way for expensive American shale oil.” Saudi Arabia responded to Russia’s refusal by flooding the market with cheap oil, causing prices worldwide to plunge, including one moment on April 20 when the U.S. benchmark West Texas Intermediate fell to a historic low of -$37.

U.S. producers were particularly vulnerable to collapsing prices. The fracking technology at the core of the shale revolution requires a higher breakeven price to remain commercially viable, and sustained low prices have hit the industry hard. According to Haynes and Boone, LLP, 102 North American firms in either oil and gas production or oilfield services filed for bankruptcy in the first eleven months of 2020, the large majority of them based in the United States.

Additionally, the American oil industry lacks several macroeconomic safeguards that have thus far helped Russia weather the economic fallout. Russia has been able to finance its budget shortfall through its state-run National Wealth Fund, filled with previous years’ surplus oil revenues. Furthermore, the ruble’s floating exchange rate acts as an additional shock absorber to mitigate the damage, as a depreciating currency lowers the cost of production relative to its foreign-denominated export revenues.

Of course, Russia’s ability to influence the global price of oil should not be overstated. It is only one of multiple critical players in the market. While the advent of OPEC+ in 2016 showed that the oil cartel needed Moscow’s participation to stabilize the market, that compact’s disintegration in March 2020 demonstrated the limits of Russia’s influence. It could certainly spoil a deal—with destabilizing consequences—but it could not unilaterally dictate prices. Notably, the eventual deal between OPEC and Russia to cut production and end the price war was partly the result of a diplomatic intervention by U.S. President Donald Trump. 

Natural Gas

The European market for natural gas is one arena where politics and economics clearly intersect. Russia has long been Europe’s largest gas provider, a dynamic that many analysts and officials worry gives Moscow undue leverage over its customers, many of which are U.S. NATO allies. Those countries that lack sufficient alternatives may feel compelled to acquiesce to Moscow’s political demands, lest they provoke a major disruption to the market. This fear is not baseless, but it ignores the economic factors behind Russian decision-making. Moscow, too, is dependent on its European customers and has its own vested interest in maintaining stability in the region’s gas market.

Indeed, Russia is the dominant player in the European natural gas market, supplying over 38 percent of all EU gas imports in 2019. This dependence on Russian gas, however, is not evenly distributed throughout the bloc; eleven countries (Bulgaria, Czechia, Estonia, Latvia, Hungary, Austria, Poland, Romania, Slovenia, Slovakia and Finland) rely on Russia for over 75 percent of their natural gas imports.

One way the United States has challenged Russia’s dominance over the European energy markets is by attempting to derail construction of the Nord Stream 2 pipeline, which would allow Russia to increase its natural gas exports to Europe and thus cement the latter’s dependence on Russian gas. Washington’s efforts have included sanctions against firms participating in the project as well as diplomatic pressure against European partners like Germany, which has been resistant to join the United States in opposing the pipeline. While U.S. pressure had been temporarily successful in holding up the project, which is over 90 percent complete, construction on the pipeline resumed this month.

Natural gas is a much less fungible commodity than crude petroleum. Whereas a decrease in one country’s oil supply can be substituted by another country filling the void, gas sales are more dependent on physical pipeline infrastructure. While liquified natural gas (LNG) technology does create the potential to make the market more fluid, Europe remains heavily dependent on pipelines. In the first quarter of 2020, 40 percent of the EU’s natural gas imports came from Russian pipelines, while only 28 percent came in the form of LNG.

As multiple analysts have written, this dependence leaves Europe vulnerable and beholden to Moscow. Without sufficient alternative sources for energy, European governments may refrain from acting too boldly against Russia’s interests—for instance, standing up to Russian aggression in the region or responding to human rights abuses—lest they provoke a major disruption to the energy market.

This fear is founded in recent history. In 2009, for instance, a contractual dispute between Ukraine and Russia—heightened by mounting political tensions—led Moscow to shut down the flow of gas in the middle of winter. While specifically targeting Ukraine, the disruption spread deep into Europe, as countries relying on Russian gas imports via Ukraine were cut off for two weeks. The gas shortage was felt as far west as France, though the impact was concentrated most heavily in southeastern Europe, where the lack of heating forced many schools and businesses to close.

The 2009 gas crisis only lasted 14 days, which limited the damage dealt to the European economy. Nonetheless, the shut-off highlighted Europe’s vulnerability were Russia ever to deploy its “energy weapon” in a more sustained and destructive manner.

Were Russia to shut down the flow of natural gas into Europe for a sustained period of time, what would the consequences be for European economic stability? Scholars have researched this very question, with varied results. One 2017 study found that a major disruption could cause European gas prices to rise by an average of 28 percent, with the Baltic countries and Finland experiencing increases of over 50 percent. It also found that electricity prices would rise by an average of 12 percent, with some countries like Germany and the United Kingdom facing a price hike of over 20 percent. In contrast, another study concluded that “at the aggregate level of the whole economy … the effects of Russian natural gas export bans are negligible for Europe.”

Of course, such a scenario would entail Russia willingly cutting off its own gas exports to Europe, something it is not inclined to do. While Europe may be dependent on Russia for energy imports, the reverse is also true: Europe is by far Russia’s largest export market for its natural gas industry. Of the 247.9 billion cubic meters of natural gas that Russia exported in 2018, 80 percent went to Europe.³ Russia and Europe are thus mutually interdependent, and a major disruption to the regional gas market would affect both sides.

True, Russia has sought to diversify its market by looking eastward. In 2019, Gazprom, Russia’s leading state-owned gas company, began operating its Power of Siberia pipeline to China. The project is not yet operating at full capacity, but it is projected to provide China with as much as 38 bcm per year for the next 30 years. Meanwhile, Gazprom has reportedly begun studying the feasibility of constructing a second pipeline to China, which could potentially handle as much as 50 bcm per year.

Additionally, Russia is seeking to expand its LNG industry, which would increase its market flexibility and allow it to more successfully compete in Asia. In October 2019, Putin optimistically predicted that Russian production of LNG could reach 120-140 million metric tons (roughly 165-193 bcm) per year by 2035, and production has indeed begun expanding. For example, Russia’s Novatek has partnered with France’s Total and China’s CNPC and Silk Road Fund to establish a major LNG project in Russia’s northern Yamal peninsula, whose energy exports will be largely oriented toward Asia. While these sales to Asia will not fully eliminate Russia’s dependence on the European market, Niklas H. Rossbach writes that “having two important markets increases Russia’s energy security as an exporter.”

Another important caveat to Russia’s energy dominance over Europe is the increasing diversity of supply and heightened competition. Lithuania and Poland have begun developing infrastructure to import LNG, a method of delivery that would free European markets from their dependence on pipelines, which would in turn make natural gas markets more flexible and fuel worldwide competition. While still a relatively minor player in the regional market, the U.S. LNG industry has quickly increased its presence on the continent, exporting 17.2 bcm to the EU in 2019, a more than fivefold increase over the previous year. Qatar and Nigeria have also increased their share in European gas markets. Indeed, Russia’s share of the market, while still dominant, is showing signs of slipping. As mentioned above, Russia provided 45.7 percent of all natural gas imports to the EU in 2019, a decrease of two percentage points from 2018. Gas prices, too, are down to a multi-year low—a result of both increased supply and a decrease in demand due to the pandemic-induced economic recession.

In attempting to secure its position within both oil and gas markets, Moscow recognizes that it needs to maintain a major role in these sectors to ensure its continued economic vitality and geopolitical influence. It therefore doesn’t seek to destabilize the global economy as such, for it relies on these markets for its own well-being. Nonetheless, its efforts at self-preservation, including a willingness to participate in price wars and to threaten gas shut-offs, have demonstrated the potential for destabilizing consequences. 

In the long term, the extent to which Russia is able to exert influence over energy markets relies on continued global demand for the fossil fuels it is able to provide in abundance. As the world transitions toward renewable energy sources, these elements of Russian statecraft will become increasingly irrelevant. In fact, as energy analyst Tatiana Mitrova has written, “It is highly likely that the coronavirus crisis will amplify and accelerate trends for decarbonization, decentralization and digitalization, especially in Europe.” It’s not yet clear how Russia will adapt to this changing economic landscape.

Cyber Security

The 2017 malware attack known as NotPetya, which Western investigators attributed to the Russian military, gravely disrupted international commercial shipping and cost the global economy an estimated $10 billion or more in damages. This is the biggest Russia-related attack to have affected economic activity worldwide in recent years. While the precise economic toll of Russian cyber activities is difficult to measure, U.S. officials have attributed numerous other malicious cyber operations to the Russian state and Russian nationals, sometimes acting with the state’s tacit approval. One of the cyber threats most worrying to U.S. policymakers is the potential for damage to the United States’ critical infrastructure, whose incapacitation could destabilize both the U.S and global economy.  

Malicious cyber activity takes on a variety of forms, from petty fraud to state-orchestrated operations against an adversary’s critical infrastructure, such as Russia’s July 2008 attacks against Georgia’s internet systems or the 2009 Stuxnet attack allegedly carried out by the United States and Israel against Iran’s nuclear weapons program.

Beyond these obviously geopolitical operations, states also deploy their cyber capabilities for various economic objectives. As Blackwill and Jennifer Harris wrote in their 2016 book on the economic dimensions of statecraft, “in addition to massive theft of commercial intellectual property, geoeconomically directed cyber capabilities provide governments the means to bring down individual companies, undermine entire national economic sectors and compromise basic infrastructure from electrical grids to banking systems.”⁴ These efforts complement traditional statecraft, as economic degradation leaves an adversary more susceptible to coercion.

The NotPetya attack is perhaps the most infamous example. On June 27, 2017, dozens of Ukrainian banks, government ministries, state-owned enterprises and private firms were all infected with malware that irreversibly disabled computers by encrypting their master boot records. British intelligence later assessed that the Russian military was “almost certainly” behind the attack, seeking to disrupt Ukraine’s financial, energy and government institutions. However, the attack’s “indiscriminate design” led the damage to quickly spread worldwide. The self-propagating virus soon infected roughly 12,500 computers across 65 countries, hitting a wide range of targets, from hospitals to large multinational corporations. All told, NotPetya caused more than $10 billion in damages, according to a White House estimate.

Spectacular shocks like NotPetya grab the world’s attention, but cyber threats vary greatly in scale, contributing to massive annual economic losses. Just how much damage is done, however, is difficult to measure. One challenge is that targeted firms often face an incentive not to report cyberattacks, lest they face the reputational repercussions of appearing insecure. Another problem is the lack of a consensus about what constitutes cybercrime and how the damage should be measured. As a result, estimates vary widely. For example, a 2018 joint report by McAfee and the Center for Strategic and International Studies estimates the global annual costs of cybercrime to be roughly $600 billion; by contrast, the Herjavec Group has reported that cumulative damages in 2015 amounted to $3 trillion and will grow to an annual cost of $6 trillion by 2021. 

Even more difficult than measuring the total costs of cybercrime is attributing attacks to specific actors. Sophisticated individuals and groups have developed a range of tools and techniques to hide their tracks, often making it nearly impossible to identify them—let alone a state sponsor. For example, in 2019 U.S. and British intelligence warned that a Russian group known as Turla had obscured its identity for years by hacking into Iranian servers and using them as the launching point for its cyber operations. As a result of these and other tactics, there are few if any reliable numbers for the precise impact of cyber operations coming out of Russia, either from private or state-affiliated actors.

Nonetheless, there have been important efforts to record cyber operations and identify state sponsors, when possible. The Council on Foreign Relations’ Cyber Operations Tracker, for example, has identified 92 operations sponsored by the Russian government since 2005, 17 of which have occurred in 2020 alone. These include an attack in May in which Russian hackers exploited IT supply chains to compromise the networks of German critical infrastructure sectors, as well as a worldwide phishing campaign in March to steal credentials from various government, private sector and civil society organizations.

Malign cyber activity poses a greater risk than just the financial burden it can inflict. As noted in the most recent National Security Strategy, cyberattacks allow adversaries to “seriously damage or disrupt critical infrastructure, cripple American businesses, weaken our federal networks and attack the tools and devices that Americans use every day to communicate and conduct business.” The U.S. government defines 16 economic sectors as critical infrastructure—including the healthcare industry, water systems, nuclear energy and transportation—whose “incapacitation or destruction would have a debilitating effect on security, national economic security, national public health or safety or any combination thereof.” These sectors thus represent the clearest way that cyberattacks could directly threaten U.S. economic stability, potentially reverberating worldwide. 

In April 2018, the Department of Homeland Security, the FBI and the British National Cyber Security Centre released a joint report warning of the threats posed by Russian cyber operations. The agencies detail how malign actors compromise the digital networks used by both public and private organizations, including providers of critical infrastructure. The report expresses “high confidence” that cyber actors linked to the Kremlin are conducting such “attacks to support espionage, extract intellectual property, maintain persistent access to victim networks and potentially lay a foundation for future offensive operations.”

The Russian government denies its involvement in these and other cyberattacks. Nonetheless, the country cannot be ignored as the United States builds its cyber security systems’ resiliency against malicious interference.

De-Dollarization

In order to minimize the impact of recent Western economic sanctions, which rely on the importance of the U.S. dollar to international finance, the Russian government has embraced a policy of “de-dollarization”—both to lessen its own dependence on the currency and in pursuit of a broader mission to dislodge the dollar from its global role altogether. However, the relative insignificance of the Russian economy means it will likely be unable to succeed in this second pursuit without the cooperation of larger powers like China.

Since the Russian annexation of Crimea and Moscow’s instigation of a proxy war in eastern Ukraine, U.S.-Russian relations have been largely shaped by economic sanctions. Levied by the United States and its partners in retaliation against Russia’s aggression, the sanctions cut off Russian individuals and firms from access to Western capital and markets. Experts vary on how much damage these sanctions have done. While the IMF estimates that sanctions have suppressed Russian economic growth by an average of 0.2 percent per year since 2014, economists at Bloomberg have suggested that by 2018 the Russian economy was 10 percent smaller than it would have been had sanctions never been levied.

The current U.S. sanctions regime exists in tandem with a series of similar sanctions from the European Union, which has much deeper trading ties with Russia. The EU, as a bloc, is Russia’s largest trading partner, while Russia ranks fifth among the EU’s, with bilateral trade in goods amounting to €232 billion ($271 billion) in 2019—over nine times the $28 billion in bilateral trade between Russia and the United States in 2019.  This cooperation promotes the image of a unified Western front against Russian behavior.

Were the United States to operate unilaterally, however, it would still have the means to economically isolate Russia despite the two countries’ relatively limited bilateral trade. This is in large part because of the power of the U.S. dollar.

The establishment of the post-World War II economic order at the Bretton Woods conference in 1944 codified, among other things, the preeminence of the dollar in international finance. The delegates agreed to maintain stability in foreign exchange rates—critical to ensuring smooth international trade relations—by pegging international currencies to the dollar, which would itself be fully convertible to gold. Although President Richard Nixon upended this arrangement when he unilaterally ended the dollar’s convertibility to gold in the 1970s, the dollar has retained its place at the center of international finance and trade. 

The dollar’s dominance manifests in various ways. It is the preeminent global reserve currency, making up a little over 60 percent of worldwide foreign reserves. It is also the accounting unit for many cross-border transactions, including major commodities like oil. Furthermore, according to a 2019 estimate by the Bank for International Settlements, 88 percent of foreign currency exchanges included the dollar on one side of the transactions. Finally, approximately 40 percent of all debt is denominated in dollars.

Alongside its various economic benefits—such as the ability to cheaply borrow money internationally—the dollar’s enduring role as the world’s preeminent currency provides the United States with a powerful diplomatic tool. Global dependence on the dollar gives Washington diplomatic leverage in the form of sanctions that cut off adversaries from U.S. financial institutions and, as a result, their access to the dollar. At least in theory, the financial strain of being isolated from the dollar should prove more unbearable than the political costs of reversing whatever behavior triggered the sanctions.

As a result, the Russian government has pursued a policy of “de-dollarization” to lessen its dependence on the currency and build the capacity to conduct business without it. Since 2013, it has significantly decreased the share of dollars in its foreign currency reserve, from 40 percent in 2013 to only 23 percent today. It has also begun issuing more of its debt in rubles and euros. Furthermore, Rosneft, Russia’s state-owned oil conglomerate—and one of the entities under U.S. sanctions—now denominates its contracts in euros, rather than dollars. It also sought to expand currency swap agreements with various trading partners including India, Iran, Turkey and China—Russia’s largest individual trading partner—which would allow it to conduct bilateral trade in national currencies and thus avoid the need for dollar transactions. 

While these efforts could plausibly enhance the Russian economy’s resilience and flexibility to circumvent the dollar-based system of global finance, they do not on their own constitute a threat to the dollar’s place as the globally preeminent reserve currency. Given the relatively small scale of the Russian economy and its foreign reserves, the Kremlin’s political decision to move away from the dollar will be unlikely to tip the scales unless and until more powerful countries do the same.

As of November 2020, Russia held $580 billion in international reserves, roughly $130 billion of that in dollars (based on the 23 percent figure cited above). This represents $100 billion fewer dollars than would presumably be held had the Kremlin maintained its 40 percent dollar share, all else being equal. In a global system where dollar reserves amount to $6.9 trillion, that $100 billion amounts to approximately 1.5 percent of all dollars held in reserves. While not negligible, the influence Russian macroeconomic policy can have on the dollar pales in comparison with China, which is estimated to hold approximately $2 trillion in dollars in its foreign reserves.

In fact, Russia has long sought to cultivate an international movement to transition away from the dollar. One of the first items discussed in 2009 at the inaugural BRIC summit—a multilateral forum consisting of Brazil, Russia, India and China, which expanded to BRICS in 2010 with the addition of South Africa—was the need to influence the international monetary system to make it more “diversified, stable and predictable.” While not saying so explicitly in the group’s press release, Russia at least understood this pursuit to mean ending the global dominance of the U.S. dollar as the preeminent reserve currency.

Both Moscow and Beijing have also developed and begun linking alternative systems to the Society for Worldwide Interbank Financial Telecommunications (SWIFT), the Belgium-based network that facilitates international financial transactions between banks. Russia’s System for Transfer of Financial Messages (SPFS) and the China International Payment System (CIPS) both provide the potential for the two countries to circumvent the existing infrastructure, which in the past has acquiesced to Western pressure to cut off access to certain sanctioned entities (most notably, Iranian banks in 2012 and again in 2018).

Most recently, at their 11th annual summit in November 2019, the BRICS countries’ leaders reportedly discussed plans to develop a common payment system for intra-bloc trade. Kirill Dmitriev, head of the Russian Direct Investment Fund (RDIF) and a member of the BRICS Business Council, explained that such a system could “encourage payments in national currencies and ensure sustainable payments and investments among our countries, which make up over 20 percent of the global inflow of foreign direct investment.” This plan could also entail the creation of a BRICS-specific cryptocurrency, although there have been no major developments with regards to these plans since 2019.

Despite these efforts by the Russian government and its partners to lessen dependence on the dollar and ultimately dislodge it from its role as reserve currency, the dollar’s role in the global economy remains strong for now. As of the second quarter of 2020, $6.9 trillion USD was held worldwide in foreign currency reserves, constituting 61.26 percent of the total. The absolute number of dollars held in reserve has grown by over $2 trillion since the fourth quarter of 2015.  While the number of dollars being held has increased, however, the currency’s proportional share of all foreign reserves has fallen—down from 65.75 percent in Q4 of 2015.

Economics journalist Sebastian Mallaby argues that the dollar’s position as global currency will likely endure for some time because of its network effects: “Savers all over the world want dollars for the same reason that schoolchildren all over the world learn English: a currency or a language is useful to the extent that others choose it ... So long as global capital markets operate mainly in dollars, the dollar will be at the center of financial crises—failing banks and businesses will have to be rescued with dollars, since that will be the currency in which they have borrowed. As a result, prudent central banks will hold large dollar reserves. These network effects are likely to protect the status of the dollar for the foreseeable future.”

International Shipping in the Arctic

Among the economic consequences of climate change is the likely emergence of Russia as a more significant player in international trade. As the planet warms, ice along Russia’s Arctic coast will continue to melt, creating the conditions for its Northern Sea Route to become an increasingly viable alternative to existing intercontinental sea lanes. While this could benefit the global economy overall, it could also allow Moscow to exert greater control over shipping, potentially threatening U.S. freedom of navigation. However, in the long term, if enough ice melts, a more direct transpolar passage could eventually allow shipments to circumvent Russia’s jurisdiction altogether.

The Northern Sea Route (NSR) is a passage along 2,600 nautical miles of Russia’s Arctic coast, from Murmansk in the northwest to Provedeniya in the northeast extremes of the country. Currently, the route does not represent a viable large-scale option for shipping, given the hazardous icy passage, which is only accessible three months a year. Major shipping firms have expressed their reluctance to use the NSR, including Denmark’s Maersk, France’s CMA CGM and Germany’s Hapag-Lloyd. There is a litany of reasons to be hesitant, from concerns over damaging the fragile Arctic ecosystem to the various costs that keep the NSR commercially unviable, such as high insurance premia and the need for expensive specialized vessels that stand idle for most of the year.

Some of this will likely change as temperatures increase. A 2015 study by the CPB Netherlands Bureau for Economic Policy Analysis found that the melting of the ice caps could open up the NSR for an increased flow of international trade, diverting ships from established southern routes through the Suez Canal. The NSR can cut down travel between Europe and Asia by as much as a third; according to The Economist, ships moving between South Korea and Germany would take 34 days to travel through the Suez Canal and only 23 days via the NSR. Roughly 8 percent of world trade currently travels through the Suez, and the CPB study suggests that up to two-thirds of this volume could be re-routed through the Arctic, including as much as 15 percent of Chinese trade. Indeed, an upward trend can already be observed: Whereas only 37 transits occurred through the route in 2019, that number grew to at least 62 in 2020, representing a one-year increase of 67 percent.

As the NSR becomes more commercially viable, it will likely become the focus of a growing dispute over maritime jurisdiction. An increasingly large proportion of global economic activity will soon fall within areas that Russia claims as its territorial or “historic” waters. As a result, Moscow will likely feel within its rights to subject passing ships to various domestic laws and regulations, such as a 2019 policy requiring all foreign-flagged ships to seek advance permission before passing through the route. The legitimacy of these policies, however, is widely disputed, as both scholars and foreign officials have challenged Russia’s legal jurisdiction over the route. Rather, they have argued that the NSR falls within international waters, which provides ships with various legal protections under international law.

Specifically, Russia’s practices in the NSR deny foreign vessels the freedoms of innocent passage and transit passage, laid out explicitly in the U.N. Convention on the Law of the Sea (UNCLOS)—a treaty the United States has not ratified. As Sean Fahey of the U.S. Coast Guard explains, these legal developments “raise renewed concerns over the extent to which Russia may use domestic law to control access to the Northern Sea Route in a manner inconsistent with the law of the sea.” Outgoing Secretary of State Mike Pompeo has publicly condemned Russia for these policies and other “provocative actions” in the region, which he considers “part of a pattern of aggressive Russian behavior in the Arctic.”

Despite condemnations from U.S. officials, commercial firms from other countries, including U.S. allies like Canada, have repeatedly complied with Russia’s Arctic policy. While not necessarily recognizing the validity of these regulations, they have made the business decision to abide by them nonetheless. This, Fahey warns, could have adverse long-term effects, as widespread acquiescence evolves into customary norms that eventually shape international law to the detriment of the freedom of navigation.

The violation of these freedoms in the Arctic would directly challenge a central tenet of U.S. foreign policy dating back to the nation’s founding: protecting the freedom of the seas. This has frequently been evoked as a guiding force for U.S. policy, including in both world wars. More recently, the 2017 National Security Strategy makes explicit that “free access to the seas remains a central principle of national security and economic prosperity.”

However, as the ice continues to melt and the Arctic circle begins experiencing regular periods completely without ice, commercial vessels may gain access to a new and more direct route over the North Pole itself. Such a transpolar passage, which could emerge as soon as 2050, would allow China and other Asian countries to circumvent established shipping lanes along either the Russian or Canadian coasts. This could risk depriving Russia of some of the benefits that it is otherwise slated to accrue as a result of global warming.

Nuclear Arms Control

Arguably the most important dimension of the U.S.-Russian relationship is nuclear arms control. These two countries collectively possess roughly 90 percent of the world’s nuclear weapons, and each retains the ability to destroy the other within thirty minutes. Though this is not obviously an economic issue, nothing could be more destructive to global economic stability—to say nothing of human civilization as we know it—than an outbreak of nuclear war.

The United States and Russia remain the only two countries on the planet that have the capability of destroying life as we know it. A 2019 study explored the worst-case scenario of how a breakdown in strategic stability could bring about a “nuclear winter.” In short, an all-out nuclear conflagration would likely release enough soot and smoke into the atmosphere to dramatically reduce surface solar radiation, engulfing most of the northern hemisphere in sub-zero temperatures for a sustained period of time. Agricultural growing seasons would diminish—in some areas by as much as 90 percent. The result would be an unimaginable disruption to the planet’s ability to grow food and sustain life. As the Federation of American Scientists has put it, “a nuclear winter would cause most humans and large animals to die from nuclear famine in a mass extinction event similar to the one that wiped out the dinosaurs.”

Even a limited nuclear conflict would be catastrophic. A separate 2019 study simulated a regional war between India and Pakistan to map out the economic destruction that less than 1 percent of the world’s nuclear arsenal could unleash. Specifically, food production would be severely disrupted: Staple crop yields would fall by an annual average of 11 percent for at least five years, with areas above 30°N experiencing losses of 20-50 percent. While existing food reserves and global trade may withstand that shock for the first year, persistent multi-year losses would soon spread worldwide, causing “adverse consequences for global food security unmatched in modern history.” That, of course, would all be in addition to the immense suffering and destruction of the communities directly impacted by the conflict.

Even a single detonation of a low-yield nuclear weapon can have drastic economic consequences. A 2006 report by the RAND Corporation analyzes one scenario involving a hypothetical terrorist attack in Long Beach, California. (While a terrorist attack is obviously different from a state-orchestrated military strike, it is nonetheless valuable as a demonstration of these weapons’ destructive potential). That report found that a single 10-kiloton nuclear bomb in the Port of Long Beach—a critical global shipping center—could kill 60,000 people, cause as much as $1 trillion in immediate damage, and send massive disruptive shocks across the global economy.

As the existing pillars of the nuclear arms control regime continue to collapse—from the 2019 U.S. withdrawal from the Intermediate-Range Nuclear Forces Treaty to the pending lapse of New START in February 2021—it is important to have a full picture of what is at stake. The economic consequences are not the only—or the most important—factor to consider. Nonetheless, a necessary precondition for a stable global economy is a world in which nuclear weapons are secure and the opportunities to use them are restrained.

Conclusion

The sections above have detailed the various ways in which Russia either does or could potentially disrupt the global economy. Granted that Russia’s impact on economic stability worldwide is nothing like that of the 2008 financial crisis or the current COVID-19 pandemic, there are several impacts worth noting. Russia has exploited its rich abundance in natural resources to become a major energy exporter, though its ability to influence global markets is limited. Whether directing them at the governmental level or not, Russia is a major source of globally disruptive cyber activity that threatens the flow of economic activity and the critical infrastructure that societies rely on. It has shifted its own macroeconomic policies and the manner in which it conducts bilateral trade to circumvent the dollar, while trying, perhaps unrealistically, to dislodge the currency from its central role altogether. It is positioning itself to take advantage of the ecological consequences of climate change, which would allow it to capitalize on a new northern shipping route as an opportunity to exert political influence. Finally, Russia’s role as a global nuclear superpower endows it with a unique ability (along with the United States) to end all aspects of human society as we know it.

This report was made possible with support from Carnegie Corporation of New York.

Edited by Natasha Yefimova-Trilling and Simon Saradzhyan.

Photo shared under a Pixabay license.

The opinions expressed herein are solely those of the author.