Ana Maria Luca

The giant with feet of clay

Russia’s foreign policy of “no” cannot be sustained by its crumbling economy

President Vladimir Putin (L) and Saudi Arabia

“I guess I’ll shake your hand but I have only one thing to say to you: you need to get out of Ukraine,” Canadian Prime Minister Stephen Harper bluntly told Russian President Vladimir Putin at last week’s G20 summit in Brisbane, Australia. Not many leaders shook Putin’s hand at the international summit. He barely talked to anyone actually, and even had breakfast alone.


The solitary image begs a question: Is Russia ready to take on the rest of the world by itself? And if so, for how long? As early as the beginning of the Russian-Ukrainian crisis, Carnegie Moscow analyst Dr. Dmitri Trenin was warning that the scare that Russia is trying to regain its international hegemony by causing another cold war was an exaggeration. “Russia does not have the economic strength of the Soviet Union,” Trenin told NOW during a conference. The latest developments prove him right.


Russia’s business in the Middle East


Recent security incidents related to Russian military maneuvers only added to international hostility provoked by the Ukrainian crisis and Russia’s stances on the war in Syria and Iranian nuclear ambitions in the UN Security Council. On 21 October, NATO radar detected and tracked a Russian intelligence-collecting aircraft flying in the vicinity of allied airspace over the Baltic Sea. The G20 summit itself took place while Russian warships were stationed near Papua New Guinea.


For the past three-and-a-half years, Russia has been supporting the Bashar Assad government against the Syrian uprising and has killed all the UN Security Council resolution drafts aimed at condemning the Assad’s vicious crackdown. Last week Russia submitted a draft Security Council resolution on the use of chemical weapons in Syria — against the rebels, not the government. Syria’s government asked for loans and humanitarian aid from the Russian government, but its request got turned down.


Also last week, right before the meeting P5+1, Russia reached a deal with Tehran to build new nuclear reactors.


Russia has also been trying to get closer to Saudi Arabia, a long-time US ally resentful over Washington’s efforts to strike a nuclear deal with Iran. Moscow recently agreed to cooperate with Riyadh in order to avoid the impact of the fall in oil prices. The Saudi Kingdom has erstwhile been negotiating an arms deal with Moscow.


However, doing business in the Middle East does not help much in terms of economy. Russia stands to lose $140 billion a year as a result of lower oil prices and US and European sanctions over the Ukrainian crisis, Finance Minister Anton Siluanov said today. “We’ve seen a contraction of capital inflows into the country,” he said at a conference in Moscow. “We’re losing about $40 billion a year because of geopolitical sanctions, and we’re losing about $90 billion to $100 billion on the basis of a 30% decline in oil prices.”


On the brink of recession


The international sanctions and the oil price are just the tip of the iceberg, analysts say. “Mikhail Gorbachev said at the beginning of the 80s that the greatest enemies of Soviet agriculture were spring, summer, fall and winter,” says Marius Vacarelu, a Bucharest-based geopolitics expert. “[Jokes aside,] the cause of the Russian economy’s weakness is not to be found in the international sanctions imposed by the US, the EU and the other states, but in around 70 years of technological backwardness created during communism.”


 A World Bank report released in September shows a stagnating economy on the verge of recession due to increased uncertainty over economic policies, Russia-Ukraine tensions and sanctions, which have impacted investor and consumer behavior.


The report detailed the impact of the sanctions triggered by the Ukrainian crisis. Moscow has been subject to several rounds of sanctions, aimed at specific individuals, groups and companies and at Russia’s military, energy and financial sectors. In the financial sector, six major Russian state banks have seen their access to EU and US financial markets severely curtailed.


In the defense sector, the US and the EU cut access to financing exceeding 30 days maturity for Russia’s major companies and introduced an export ban for dual-use goods and technology for 14 mixed-defense companies. Sanctions on cooperation with Russia in the military sector were introduced by Great Britain, Israel, Switzerland, and Sweden. In the energy sector, the US and the EU limited access to finance for major Russian oil and gas companies. The EU and US have also prohibited export of goods, services (not including financial services) and technology in support of exploration or production for Russian deep-water, Arctic offshore, or shale projects. Many countries have joined these sanctions.


Sanctions and counter-sanctions hit the economy through three channels: increased volatility on the foreign exchange market and a significant depreciation of the national currency; limited Russia’s access to international financial markets; and already-low domestic business and consumer confidence in future growth prospects continued to diminish and reduce consumption and investment activities.


“We expect that these trends will worsen during the second half of 2014 and throughout 2015, when the impact of the additional sanctions will be felt, leading to a period of stagnation,” the World Bank report concluded.


If the World Bank focused on the impact of the sanctions, a report of the European Bank for Reconstruction and Development found that domestic economic decisions were affecting the Russian economy even more. International sanctions have not been the primary cause for the shape Russia’s economy finds itself in.


“If at the international level Russia was able to build the perception of a fairly functioning economy, it was because it had hidden some of its weaknesses,” Vacarelu said. “Now, the struggle of the currency makes life difficult not only for the economy, but also the people’s income. The results might be threatening in the long term for the leadership in the Kremlin.”  


A matter of political survival


Vacarelu says that Putin has played the force card excessively and that his refusal to admit that some of the sanctions threaten his country in the long run might hurt him politically, both on the domestically and internationally. “His idea of comparing different examples — Kosovo with Crimea, for instance — without any real basis irritated many people and the effects translated mainly in tensions with many countries. Russia has adopted the same position in relation to Syria and Iran, which makes most governments of G20 countries even angrier.”


Moreover, besides the fact that Russia has garnered support from very few states, the support is has comes from nations such as Venezuela and Cuba, countries not highly regarded for their quality of governance. “This aspect was even received badly by the Russian press,” Vacarelu said.


 “That is precisely why the Russian president — although he can see clearly the effects of his actions — is also aware that giving up publicly would mean loss of power in his circles. Giving up and losing power on the domestic level would be interpreted as lack of strength to efficiently govern and that would lead to more problems in finding a successor.”


“That’s why I think that there won’t be any big changes [in Russia’s foreign policy] in the coming months, only nuances. There is no antidote for the present tensions and I’m afraid there won’t be one very soon.”


Ana Maria Luca tweets @aml1609.

Moscow recently agreed with Saudi Arabia to fight “politicized oil prices,” although the move does not really help the Russian economy. (AFP Photo/Pool/Rob Griffith)

The cause of the Russian economy’s weakness is not to be found in the international sanctions imposed by the US, the EU and the other states, but in around 70 years of technological backwardness created during communism.”

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