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Wednesday, December 17, 2014

Ruble Rabble: The Kremlin's Grand Strategy

by Paul E. Richardson
It's the Oil
The Russian economy is oil and gas.

World oil prices are plummeting, the ruble is in free fall, the Russian economy is on the brink of a recession, inflation is climbing, and the Russian Central Bank’s benchmark interest rate has jumped to 17 percent. Meanwhile, President Putin still has popularity ratings in the 80 percent range and there is, seemingly, no panic in the streets of Moscow.

What is going on? What is Putin’s game?

Time to put in a call to the Cynic. He’s been a Russia hand for over 30 years and always has an interesting take on what is going on. I hadn’t spoken to him for a while.

He picked up on the second ring.

“Yeah.”

“It’s me. Got a sec?” The Cynic hates small talk.

“Sure.”

“So, I’m trying to figure out what’s going on with Putin? With Russia?”

“Yeah? And you think I got the answers?”

“Well, you always have a fresh perspective.”

There was a long pause.

“Here’s the first thing you have to understand: Putin and the Kremlin Gang are playing chess, not checkers or football.”

“Which means?”

“Which means they see the world as a chessboard and try to think six, eight moves ahead, realizing that everything is connected, that everyone else only focuses on one move at a time, reacting.”

“Ok.”

“Now think back to 2000. Putin is meeting with then British Prime Minister Tony Blair. He praises Blair as a ‘wonderful partner.’ A few days before that, in an interview with the BBC, Putin was asked if Russia might consider joining NATO. And what did he say?”

“I don’t recall.”

“He said, ‘I don’t see why not. I would not rule out such a possibility... if, and when, Russia’s views are taken into account as those of an equal partner.’ Interesting, huh? Given where things are now with all the talk of a New Cold War.”

“Exactly. So how did we get from there to here?”

“Long story. But basically the tale Putin and the Kremlin Gang are telling themselves and everyone else that will listen is that they put themselves out there, tried shaking hands with the West, cooperated on anti-terrorism, WTO, nuke treaties, etc., but got burned. The US invades Iraq, reneges on the ABM treaty, and is adamantly luring Near Abroad former Soviet states into NATO and the EU. By 2008 you have the Georgia crisis, with the US supporting a lunatic who decides to pick a fight with the Bear. That’s when things really changed, when Russia decided that the US and the West were actively trying to lure Georgia and Ukraine – two longtime vassal states right on its borders – into NATO. So in 2013, when Ukraine started to implode, of course the Kremlin Gang blamed that revolution on the US. And it’s no stretch. The US was funding all these ‘pro-democracy’ movements; you had McCain and other grandstanders showing up in Kiev. What a circus.”

“That sort of makes sense. But how does that relate to the economic mess Russia is in right now?”

“Ok, here’s what you have to understand. Putin? The Kremlin Gang? They only respect brute force. They don’t believe in win-win. That’s liberal mumbo-jumbo you hear in places like Canada and the US, that we can all be tolerant, human rights respecting, prosperous bourgeois capitalists. These guys running Russia are good capitalists, and to them that means the world is a brutal, competitive, dog-eat-dog sort of place. And you don’t want to be the dog that gets eaten. A decade ago, they looked at the world and thought their best interest was in a peaceful, cooperative relationship with the West, a partnership that would allow them to sell oil and gas at a good price to Europe and Asia, slowly develop – maybe even diversify – their economy, get rich, and retain a tight grip on power for decades. But then they soured on that idea, because they concluded that the West was stabbing them in the back, ignoring them, not treating them as a Great Power. I won’t get into whether that’s a wrong or right interpretation. It’s just how they felt.”

“But then...”

“But then you have the Olympics.”

“The Olympics.”

“2014 Winter Olympics. Sochi.”

“I know, but?”

“You remember the build up to the games in the West? All the worries about terrorism, about facilities not being ready, about how Putin spent 60 billion on it and it was all going to be a disaster? And how did it turn out? Best run games ever. Beautiful. Everyone blown away. And Russia won more medals than anyone.”

“But what does that have to do with geopolitics?”

“Everything. It was political theater. It was Russia showing it could muster its resources and perform like the Great Power that Putin and Gang said it was. Russia is back, baby! We don’t need to cooperate, because we can compete, and we can beat you all at your own games. And the success of the games has Russians feeling very proud of their nation, that they pulled this off, that they won the medal count. So Putin’s popularity starts climbing again.”

“Ok.”

“Meanwhile, just as Olympics is winding down, Ukraine really starts to heat up. Things getting really unstable. It’s time to put the Plan in place.”

“The Plan?”

“Right. Listen, here’s the key thing in all this. The key. The Russian economy is not just dependent upon oil and gas. The Russian economy is oil and gas. Fifty percent of the state budget is funded from oil and gas sales. Fifty percent. Without high oil prices, the economy tanks, hard currency and gold reserves start flying out the door, there’s a brain drain, and you got nothing to pay the workers left behind. It’s 1998 all over again, only devaluation is not an option.”

“Ok.”

“Now, if your economy is so dependent on one thing, on one thing that is a commodity, meaning prices fluctuate based on supply and demand factors well beyond your control, you can bet you are going to become pretty damn expert on watching that sector, right? So, long before March 2014, as the Russian experts are tracking developments in the world oil and gas markets, they are getting pretty concerned.”

“Why is that?”

“Well, you got Iraq coming back on line as a major oil supplier. But mainly you have this technology revolution, what with US shale oil, fracking, Canadian tar sands, etc. As early as 2012 experts were predicting that we were going to see a 20 percent increase in oil production output over the next several years. That’s huge. You can’t ignore a prediction like that... Add to that falling world demand because of conservation and the 2009 economic crisis, and these experts predicted a worldwide oil glut by 2015. That would be now.”

“Hm.”

“Ok, so you’re sitting in the Kremlin back in 2012, 2013, feeling upset and betrayed by the West. And you have all these really smart analysts of the world oil market, and they are saying basically that this commodity that Russia is the world’s largest producer of, that the Russian economy is completely dependent on, that the Finance Ministry says needs to be selling at $90-100 a barrel to keep the country solvent? They say, ‘Um, look, uh, Mr. President, our forecasts and those of foreign experts show that, come 2014, 2015, there’s going to be a worldwide oil glut. The bottom is going to fall out of the price of oil again, and we really can’t stop this train.’ So, faced with that, what are you going to do? How are you going to make sure your hold – your gang’s hold – on power and privilege does not slip?”

“Well...”

“Hold on a sec. Let’s not forget Russia has been here before, only a few years ago, in fact. Back in 2008-09, there was a similar drop in world oil prices, from around $145 a barrel to as low as $34 before the market righted itself, before OPEC members lowered production, and the price began to rise again. During that slump, Russian GDP shrank 8 percent. Back in 2012, that was a very recent, painful memory. It was the economic crisis that tainted Medvedev’s already weak presidency.”

“Right...”

“So what are you going to do? You’re sitting in the Kremlin, your power rests on a tripod of oil and gas, the security organs, and television. And you have a pretty good inkling that one of those legs is going to be getting very weak, and there is very little you can do to stop it.”

“What you are saying is that Putin and Co. knew an economic crisis was coming, they knew they couldn’t do anything about it, so to avoid getting blamed for it, they decided to preemptively provoke the West?”

“You tell me. But think back to February, March. There was this kind of post-Olympic glow. The world’s eyes were focused on Russia during the games and Russia came out looking good, really good to some. So why would the Kremlin Gang willfully destroy that by invading Crimea? Did they not care about it? Or did they maybe figure they could use it to their advantage? It’s easier to surprise people when their guard is down, after all. They needed a way to poke the West with a stick while winning points at home. Crimea is perfect. In fact, there may well have been a Crimean Plan in the playbook since Khrushchev’s ouster in ’64, certainly since the Union crumbled in 1991. The Black Sea Fleet is based there for gossake! You gonna leave that to chance? Plus, Russians have always resented Khrushchev’s giveaway, most of the locals have long wanted to be part of Russia, the West is not going to care enough about Crimea to start a shooting war, and it’s the ideal way to graphically demonstrate that Ukraine is your sphere of influence. Win-win-win.”

“So they knew there would be sanctions?”

“Maybe, maybe not. But they certainly knew they would not get off scot-free. There would be a hue and cry, even more so if Russia ramped things up further by supporting separatists in Eastern Ukraine, same as they do in Moldova and Georgia. And they could use it all to their advantage.”

“By blaming the economic crisis on Western sanctions.”

“Yes, but more by just muddying the waters. Because of course everyone is going to know that falling world oil prices are a huge factor. Yet by having this anti-Russia factor in the mix, by spreading all the ridiculous lies on state-run media about fascists in Ukraine and growing external threats, you prime the pumps of patriotism and resentment, ensuring loyalty while making sure no one pays attention to the important question: why the Russian government has done nothing over the past decade to modernize and diversify the economy away from such a crippling dependence upon oil and gas.”

“But could they have done anything to diversify?”

“Not really. The problem with a dependency is that it makes you complacent, plus to diversify you need to have a business-friendly economy like the US or Singapore. Russia does not. But frankly, the worst problem on Russia’s horizon is not this world oil glut. That will probably straighten itself out. The market will eventually right itself like it did in 2009. That’s what the Kremlin is counting on. No, the real problem is that Russia’s oil and gas industry is rife with problems. They are the world’s largest exporter, but their inexpensive oil is running out, they are going to find it increasingly difficult to compete in Western gas markets, they are dependent upon western technology to get the more expensive oil out (like in the Arctic), and they don’t have what it takes to urge a boom in shale gas, say, like the US did. Oh, and there is rampant corruption.”

“Which all means?”

“Which means there is great incentive for the rift with the West to continue. They are going to need someone to blame things on for a very long time to come.”

“Really, so Putin’s Plan is what? More of the same anti-western belligerence?”

“Well, chances are they will try to relieve some pressure in coming months by pushing their Eastern Ukrainian lackeys into a ceasefire. They don’t need more conflict. And they got what they wanted – a fractious state that NATO and the EU won’t admit. You know, I remember a book from the Red Scare era, it was called something like You Can Trust the Communists... To Be Communists. It’s basically the same thing: you can trust Russia to be Russia. It is not going to develop overnight into a vibrant, democratic state. It is not going to be the Czech Republic. It is going to be authoritarian and suspicious, insular, self-righteous, and rather zealous about defending its borders, often proactively, as we see now with all these fighter jet sorties in Europe. But it won’t be stupid. The Prime Directive of Putin and the Kremlin Gang is to preserve its position as the ruling elite, to hold on to power and economic privilege, because they truly believe that they are doing the right thing by the Motherland. These are largely security organs guys, remember, so they believe they are uniquely gifted to lead a state that only they really understand, a state that needs to be led with a strong hand in a world that is dangerous and competitive. A world that history has shown wants to keep Russia in a box.”

“And what about the economy?”

“Even though I think Russian oil experts are a bit surprised how low things have gone this year, they figure things will right themselves in 2015, just like they did in 2009. Only this time not only can they blame it on Western sanctions against an act Russians overwhelmingly approve of, but they can also spin out conspiracy theories that the West is in bed with Saudi Arabia and purposely pushing down the price of oil to hurt Russia.”

“But do they have a plan?”

“Of course they do. Probably several. But only they know the details. In the broader sweep it is as I said before: the elite’s primary objective is maintaining power and privilege. I don’t think they truly fear some kind of Moscow Spring. They will continue to milk the country’s dependency on oil and gas, use it to continue supporting favored social groups with economic transfers, modernizing the military and organs of power, and spout lots of empty palaver about diversifying the economy.”

“So, mostly more of the same. That hardly sounds like a strategy for winning a game of chess.”

“Well, the thing about chess? Sometimes you can win the match with just a draw.”


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