December 21, 2014
Time Is Not on His Side
To salvage the Russian economy, Putin should withdraw from Ukraine and accept a compromise.
By Robert A. Manning
Russian President Vladimir Putin's problem is that he was born on third base, but thinks he hit a triple. Putin's tenure in office has, until now, been lubricated by high oil prices that account for 60 percent of Russian exports and, along with natural gas, more than 50 percent of its budget.
Before Putin's economic system began to melt down, oil and gas exports fueled the growth of a Russian middle class. Putin showered petrodollars on them with pension increases, wage increases to government employees and other public spending.
At his annual press conference on Thursday he said the economy would be fixed in two years. But Putin's luck has run out. In recent weeks the combination of Western sanctions imposed on Russia for its Ukraine aggression, oil prices dropping to $60 a barrel and dubious Russian economic policies are threatening to implode the Russian economy.
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The ruble has tanked 50 percent since the beginning of the year, even after Moscow jacked up interest rates, inflation is in the range of 10 percent, and some $650 billion in corporate debt comes due in 2015, with little prospect of refinancing because of financial sanctions. Russians are frantically trying to sell rubles for dollars and euro and going on desperate shopping sprees as prices rise daily. Moscow's central bank forecasts the economy shrinking by 4.7 percent in 2015.
While Putin and his media machine blame a mythical U.S.-Saudi conspiracy to overthrow his government, in fact, it is a disaster largely of his own making. The current ruble slide was triggered before oil prices plummeted by a mysterious bailout of Rosneft, the state-owned oil giant and one of the pillars of Putin's rule. The Russian central bank produced two trillion rubles (about $50 billion) for Rosneft. This suggested to global finance markets that it was printing rubles and that further bailouts of Putin cronies would follow, regardless of the impact on the economy.
Worse still, Moscow has used most of the arrows in its policy quiver. Boosting interest rates to 17 percent did not stop the ruble's bleeding. In normal economies, cheaper currency spurs exports. But sanctions curb any investment to boost growth. And Congress has just passed even tougher sanctions legislation targeting Russian energy companies.
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But Putin has a get-out-of-jail-free pass. It is an obvious way out, but a very bitter pill, probably too bitter for him to swallow: Cut a deal with the European Union and the U.S. and withdraw from Ukraine. With Russian equities and currency now undervalued, a lifting of sanctions would likely result in money pouring in to shore up the Russian economy.
This should be a no-brainer. But that assumes a rational actor. Putin's enormous popularity at home (still at 70 percent according to polls) has been based on the twin pillars of prosperity and traditional Russian nationalism. He has defined himself as the defender of all Russians including those in former Soviet republics like Ukraine and Georgia. That was the rational for his seizure of Crimea and military intervention in support of pro-Russian nationalists in Eastern Ukraine.
To make a deal and abandon his goals of expanding Russian dominance in former Soviet space – his "sphere of influence" – would go against Putin's psychopathology of revenge and payback for the demise of the USSR. Indeed, many analysts think Putin is more likely to double-down and increase his efforts in Ukraine and perhaps expand them to neighboring Moldova than to make a deal and withdraw.
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Yet the Europeans, who get one-third of their natural gas and have deeper trade and investment with Russia than does the U.S., are also hurting from sanctions and are desperate to end the crisis in Ukraine. Indeed, the Europeans might well accept Putin's seizure of Crimea, a pledge that Ukraine would never join NATO, and would participate in Putin's Eurasian trade accord as well as that with the EU – 90 percent of what he wants.
In a sense, Putin's reluctance to end his "little green men" military game in the Ukraine and re-normalize relations with Europe speaks volumes about his intentions. He could salvage the Russian economy by withdrawing from Ukraine and accepting a compromise that would achieve most of his goals.
If Putin instead decides to tough it out and continues his efforts to undo the international order, we will know two things: First, he is bloody-minded about recovering Russian dominance in parts of the former Soviet Union at any cost; and, second, Russia's decline will accelerate over the coming decade – corruption, oil prices, bad economic policies and imperial overstretch, all factors that led to the Soviet Union's collapse are present now. In the interim, the West needs to sustain vigilance in confronting and isolating him. Time is not on his side