Summary

(MIKHAIL METZEL/AFP/Getty Images) Then-Egyptian army chief Abdel Fattah al-Sisi (L) and Russian President Vladimir Putin shake hands during a meeting outside Moscow on Feb. 13.

In addition to Iran, Egypt has emerged as another potential partner for Russia in its attempts to undermine U.S. interests in the Middle East. Egyptian and Russian officials met March 23-26 to examine a proposal for Egypt to establish a free trade agreement with the Russia-dominated Customs Union, which also includes Kazakhstan and Belarus. An official decision will not be made until after Egypt's presidential election May 26-27.

With Egypt facing power shortages due to a looming natural gas deficit combined with a high wheat import bill and dwindling foreign currency reserves, Russia is working to position itself as a strategic partner. But although Cairo may have some interests in common with Moscow, Egypt's relationship with the United States will be difficult to overcome, and Russia's interest in competing for influence in Egypt may provide the new government in Cairo an opportunity to play the interests of the two great powers off one another.

Analysis

Russia is trying to forge relationships in key regions that will help not only promote it as a global player but also undermine the United States' position around the world. Iran has traditionally served this purpose in the Middle East, but as Tehran and Washington negotiate toward a detente, Moscow has been looking for new relationships. Russia has increased relations with Syria and is negotiating for investments and trade in Iraq, but there is also a large opportunity for Russia in Egypt, where economic problems have left the government scrambling for a variety of short- to long-term solutions to its serious financial, food security and energy challenges.

Central bank reserves dropped dangerously low during the administration of Egyptian President Mohammed Morsi, when political and social unrest continuing from the 2011 uprisings slashed foreign exchange inflows from tourism and foreign investment. Natural gas exports, another key source of foreign currency inflows, had also slowed due to rising domestic Egyptian demand, which is slated to outpace production by December. Russia, with its sizable wheat exports, experience in natural gas production and status as a leading global arms exporter, seems almost uniquely suited to augment the financial backing presented to Egypt by Saudi Arabia, Kuwait and the United Arab Emirates.

Key Opportunities for Assistance

A large wheat trade deficit in Egypt due to low domestic wheat production provides an opportunity for Russia to buy influence by supplying Egypt with subsidized wheat. Egypt has historically relied on Russian wheat exports, and from 2009 to 2012, Russia was Egypt's largest wheat supplier. Cairo has already bought a fifth of Russia's wheat exports in 2013-2014, but current wheat imports are only scheduled to last until June. Although Moscow has not formally announced any discounts on its wheat exports to Egypt, Russia has shown it is able to quickly impose subsidies on export goods it deems strategic. Russia has long linked trade to politics, using natural gas and arms discounts to form relationships, so Moscow could exercise its option to provide below-market rates on wheat exports in the same way.

Egypt is also in desperate need of natural gas to satisfy rapidly growing domestic demand, and the Egyptian minister for industry and investment has said the country is considering buying Russian liquefied natural gas. This is a longer-term plan, but it works well with Russia's plans to expand its LNG export terminals over the next few years; currently, Sakhalin hosts Russia's only LNG export terminal. Egypt has yet to secure an LNG import terminal because all of the firms with available terminals have rejected its tender on the belief that Egypt cannot pay the bill. As a result, Russian natural gas cannot address Egypt's growing domestic demand, but it could be re-exported by foreign energy firms operating in Egypt to satisfy existing contracts under a swap agreement similar to the one that Qatar facilitated in 2013. Russia could also directly compensate foreign firms in Egypt, enabling more natural gas to be directed for domestic consumption while motivating these firms to invest in new technology for Egypt's aging fields. This would ease Egypt's economic constraints and directly increase Egypt's level of indebtedness to Russia.

After the military removal of democratically elected Morsi strained relations with the United States, Egypt began to look for other strategic partners. This was evident when then-Defense Minister Abdel Fattah al-Sisi visited Moscow in February in search of Russian military assistance. The talks centered around a $2 billion deal that would deliver MiG-29M/M2 Fulcrum fighter jets, air defense missile complexes, Mi-35 helicopters, coastal anti-ship complexes, light weapons and ammunition to Egypt -- valuable tools in the government's fight against a growing jihadist threat.

As promising as these talks seemed at the time, Egypt can only moderately pivot away from the United States because its existing military is still heavily dependent on U.S. equipment and maintenance. In order to facilitate a long-term diversification away from U.S. military cooperation, Moscow would have to seriously weigh the financial costs associated with such an arms deal against what political benefits it might derive if a military-backed government is elected in May.

In addition to formal discussion on greater military assistance, Russia has discussed the construction of an industrial zone in Egypt to build agricultural equipment and grain silos for use in both Egypt and Russia. Russia also indicated it would carry out several key upgrades to Egypt's manufacturing sector and infrastructure constructed during Soviet times, namely the Helwan iron and steel factory, the Nag Hammadi aluminum plant and the Aswan Dam's electricity power plants. Egypt's economy would benefit greatly from such investments, but Russian investors are concerned about the financial risk of an industrial zone and the feasibility of such infrastructure projects amid the current level of insecurity.

Likely Outcomes

Although concrete terms have not yet been announced, a free trade agreement with the Customs Union would likely relax or remove tariff barriers and streamline nontariff trade barriers with members of the group. Since the talks have only covered Egypt integrating into the union with a free trade agreement, tariffs with Egypt's trading partners outside the union would not be as affected as they would if Egypt became an actual Customs Union member. In 2012, Egypt's top trading partners were relatively diversified, which makes external repercussions from a free trade agreement with the Customs Union less likely to dramatically hurt Egypt's economy.

Talks that began with Vietnam in 2012 could provide insight into the terms the Customs Union might offer to Egypt. Discussions with Vietnam revolved around reducing nontariff barriers on the payment of goods and technical regulations, as well as standardizing customs procedures. But concrete agreements with Vietnam have yet to materialize two years later, leaving doubts as to how quickly Russia intends to set up free trade agreements with states far outside its immediate periphery. The unstable environment in Egypt works in Russia's favor, however, since Russia can operate in less than desirable investment climates, such as Venezuela, Libya, Syria and Iran, because Russian firms and politicians do not abide by international standards on corruption and human rights.

Continued negotiations will take time to establish concrete terms, and as seen with Vietnam, it could take several years to reach an agreement. Still, it is possible that the changing situation in Ukraine may encourage Russia to speed up the process in order to put greater pressure on the United States. As Russia moves toward a greater Eurasia Union in 2015, Moscow will continue pushing for greater economic cooperation with countries outside its immediate periphery to expand its regional influence while directly drawing in serious membership candidates from the former Soviet Union and reorienting their economic systems to directly benefit Russia.

While a deal could provide mutual benefit, Moscow will have to seriously weigh the significant financial costs of subsidizing Egypt's ailing economy and military. Cairo will have to determine how much benefit Russia actually intends to provide in lieu of U.S. military and economic assistance and how reliable those benefits will be in conjunction with Russia's vested interests in Egypt. Even if wheat, natural gas and infrastructure deals do come to fruition in the coming years, Russian political gains through deeper economic integration with Egypt likely will not significantly alter the broad influence the United States has maintained in the region since the middle of the Cold War. Ultimately, Russia's reach into the Middle East will be constrained by its need to consolidate itself in the near abroad, and the United States will continue to orient its relationship with Egypt to focus on anti-terrorism initiatives, a secure border with Israel and an open Suez Canal, keeping U.S.-Egypt relations closely in line with the prerogatives of a military-backed Egyptian government.