Russia’s GDP was smaller than that of Texas even before the latest and most lethal sanctions imposed by Washington. It has diminished further to Benelux proportions after the rouble’s 10 per cent crash recently, the steepest fall since the late Nineties.
Upon this slender economic base, Vladimir Putin’s Russia is posing as a world-class superpower, the new master of the Middle East, insisting on its “droit de regard” over the old Tsarist realms as if by natural right. What is extraordinary is than anybody should believe in such posturing.
The harsher truth is that Putin squandered the windfall wealth of the commodity supercycle and hollowed out what remained of the Soviet industrial base, leaving Russia’s economy in a cul de sac.
He has succeeded (so far) in propping up his ally in Syria but this tells us little about the global balance of power. The Kremlin likes to dismiss Western sanctions as a flea bite. Not any longer. “The measures are turning into a tool of real economic war,” said Russian premier Dmitry Medvedev.
The US Treasury document announcing sanctions to punish “worldwide malign activity” is a comic read, but it is also mortal threat to the Putin oligarchy. It alleges that Oleg Deripaska, aluminium king and head of Rusal, “ordered the murder of a businessman”.
What is new about these sanctions is that they target the pre-existing securities, and not just new issuance. This turns the named companies into international pariah, as Rusal is discovering. It has been blackballed from the London Metal Exchange. Its listed share price on the Hong Kong exchange has fallen 58 per cent recently.
It is a foretaste of what lies in store for Russia’s corporate elite as the Mueller investigation uncovers the whole ghastly truth about Kremlin cyber-aggression against the US political system. Whatever the White House may or may not want to do, the policy is being pushed by a wrathful Congress intent on avenging what some call a Russian Pearl Harbor.
No Americans can deal with sanctioned entities, and no Europeans can do so lightly without provoking the US Treasury under “secondary sanctions” clauses, if they have any commercial dealings with the US. Belgium-based Euroclear said immediately that it would comply.
Investors must now contend with the prospect that almost any oligarch could be targeted and that any Russian asset — including sovereign bonds — could be tainted and plunge in value overnight. This risks a collective rush for the exits since nobody wants to be trapped in a fire sale. Sberbank shares are down 17 per cent even though it is not on the list.
Russian vice-premier Arkady Dvorkovich has promised to rescue sanctioned companies, implying that the state will cover the debts of private firms and state-owned companies if need be. Yet the Reserve Fund is exhausted and was shut down in December. Much of the residual $67 billion (£47.2 billion; Dh245.9 billion) Welfare Fund is committed. The Kremlin will have to tap the central bank’s $453 billion portfolio of foreign reserves. “If the sanctions go on long enough and the circle expands, the cushion may not be enough” warned Vedomosti.
To be clear, the country is not facing an imminent financial crisis. The floating rouble acted as a shock absorber through the oil and commodity crash. Russia survived the trauma. What it faces instead is “neo-stagnation”, to borrow from former British ambassador Sir Andrew Wood. It is caught in a self-feeding cycle of decline as infrastructure crumbles and young brains leave.
The deep recession of 2015 and 2016 may be over but per capita income is stuck at $8,800 and industrial wages are now lower than in eastern China — let alone Poland. The post-Soviet convergence with the West has stalled. There is no new growth model for the 21st century. The drastic plan of autarky and import substitution launched three years ago by President Putin to break dependence on commodities — 80 per cent of exports during the boom — has come to little. Reliance on foreign farm machinery was to be cut 56 per cent by 2020, and engineering equipment by 34 per cent. None of this is happening.
Russia is still hostage to oil and gas. Energy provides a tolerable living for now but US shale has entirely changed of global oil industry, capping each rise in prices with a surge of new drilling. It has become a structural headwind. Russia’s own production costs are rising as the old fields decline by 5 per cent a year in Western Siberia. The energy ministry warns that output could halve by 2035 unless there is a wave of investment.
The coming surge of US liquefied natural gas (LNG) has deprived Putin of his pricing power in Europe. He was able to charge $12 (MMBtu) in the glory days of 2012. Today his gas fetches around $5.
By the mid-2020s, other powerful forces will be at work. Electric vehicles will probably have reached take-off; battery costs will have come down far enough to give wind and solar an edge over gas. By then the fossil industry will be looking tired.
Putin wasted Russia’s oil bonanza from 2005 to 2014 on hubristic rearmament. The Stockholm International Peace Research Institute said the military budget rose 8.1 per cent in real terms in 2014 and another 15 per cent in 2015 when the economy was already contracting. Finance minister Alexei Kudrin resigned with a warning that it would ruin the country, and that is exactly what it did.
The Russian military added a fleet of new Su-34 long-range combat aircraft, and batteries S-400 surface-to-air missile systems, even as pauperisation spread. It coincided with the negligent disarmament of the West, made worse by Europe’s austerity overkill. This misalignment created a window that Putin has exploited. The window is about to close again. Russia can no longer afford the rent, and the West is rearming fast.
A nuclear-armed Sparta under a leader with propaganda tools can of course be very dangerous. But please don’t call Putinism a success.
— The Telegraph Group Limited, London 2018
Ambrose Evans-Pritchard is International Business Editor of The Daily Telegraph.