The Aftermath of "Russia's 9/11"


Was the Sept. 4 bloodbath in Beslan, North Ossetia, in which at least 334 people were killed and scores injured, the Russian equivalent of the September 11 attacks? Although Russian newspapers are already calling that, to many, the comparison may seem inappropriate. Unlike the U.S. strike, this wasn't an assault against Russia's main symbols of power. Moreover, the number of lives lost is significantly less.

However, the Beslan atrocity may have as profound an effect on Russia as the events of September 11, 2001, did on the U.S. Russian President Vladimir Putin himself made the allusion when he said international terrorism had declared a "full-scale war" on Russia, vowing to "mobilize the nation" to combat terrorism.

BOOMERANG? This could easily be taken as an emotional reaction to an appalling crime against children. But investors around the world would do well to remember that Putin came to power vowing to "waste [Chechen] terrorists in the outhouse," with a clear mandate to impose law and order.

The President's tough promises, however, may come back to haunt him. He made his name on his willingness to take tough measures against the "rebel province" of Chechnya. If terrorist attacks in Russia or against the country's interests make him look weak, his presidency could be damaged. This may well prove to be a pivotal point for Putin.

Already, the school raid was the fourth terrorist attack in Russia in a 10-day period, after the downing of two passenger aircraft that killed 99 people and the suicide bombing outside a north Moscow subway station, claiming 11 more lives. Moreover, the appalling loss of life in the school siege's end draws clear parallels with the October, 2002, storming of the Dubrovka Theater in Moscow, where Chechen rebels held hundreds hostage. That, in turn, was the successor of previous incidents in Russia, such as the large-scale hostage takings in Budyonnovsk in 1995 and at Kizlar and Pervomaiskoye in 1996. In the latter two cases, the terrorists were allowed to go free in exchange for releasing the hostages.

TOO CLOSE FOR PUTIN. Putin is facing the sternest test of his presidency. His rise to power from 1999 stemmed in large part from the public's frustration with an economy in chaos and a state that was powerless to act decisively in the face of a persistent Chechen terrorist threat. Overcoming that perception of weakness has been a hallmark of Putin's presidency. Yet the latest attack highlights persistent failures within the Russian security services. As a former member of the Soviet-era KGB , this is uncomfortably close to home for Putin, both on a personal and professional level.

The Russian government is doing all it can to label this as an attack on the "motherland" by "international terrorism," in which the response can only be all-out war. Here are some implications for the geopolitical arena -- and for global markets?

The U.S.-Russia alliance likely will tighten.

Putin gained much from his country's alliance with the U.S. following the September 11, 2001 attacks. Expect the Beslan event to strengthen the ties further. Indeed, this alliance may now extend into previously untouched areas, with resulting political consequences outside Russia:

The U.S. and Russia may deepen their relationship over the latter's oil exports to the U.S. (reducing American dependence on Arabian Gulf producers)

The two countries may seek greater cooperation in tackling Islamist fundamentalism in the Commonwealth of Independent States (CIS), which includes all the former Soviet republics except the Baltic states

Russia may even consider sending a contingent of troops to join the coalition in Iraq

The Beslan siege may bolster President George W. Bush's stance against "international terrorism" ahead of the U.S. elections

Russia will be given free reign to deal with its "backyard."

U.S.-Russian relations had been growing increasingly frosty over the U.S. presence in Central and Eastern Europe and some of the former CIS countries. Moreover, although the White House has kept quiet about the issue of massive Russian human rights abuses in Chechnya, Western advocacy groups continue to call attention to them. Nonetheless, the Bush Administration may give Moscow carte blanche to do what it will in the Caucasus to "eliminate the terrorist problem" in light of this latest atrocity.

Undoubtedly, some of these are positives for Putin. But the cycle of violence in Chechnya and Russia appears to be accelerating. And a leading Russian newspaper warned this week that public anger was bubbling up against Chechen terrorism. The implication is clear -- either Putin does something decisive about the terrorist (read Chechen) problem, or public anger may be directed against him and his administration.

Russian economic implications: Positives and negatives.

Around 70% of Russian exports are defined as energy and minerals, so its economy has benefited enormously from a near-quintupling in international oil prices since late 1998. But the Russian economy has also benefited enormously from U.S. policies adopted after 9/11. After all, because of the U.S. attacks, the U.S.-Russian alliance, which had been on shaky ground due to the U.S.'s scrapping of the Anti-Ballistic Missile and other international treaties, was strengthened anew.

As a direct result, Russia has been pumping record amounts of oil and exporting it to the U.S. to meet demand. An even closer alliance with the U.S. can only be a further positive for an economy that grew 7.4% in the first quarter. But as in the U.S., the terror threat clouds the outlook. Chechen and other groups grow bolder, so further attacks are likely and may target Russia's oil industry.

Other market impacts.

Russia may have significantly less oil reserves than the Middle East, but it's now the world's largest oil producer. Any potential threat to Putin is something global financial markets need to pay close attention to. Oil markets may be vulnerable if terrorist attacks occur against Russian pipelines, with European economies particularly vulnerable to any disruption in oil and gas exports. Instability in Russia may cause the euro to decline in value against other currencies. Volatility in Russian sovereign debt markets may increase further. By Action Economics in Europe


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