LONDON - Russian President Vladimir Putin has not lost his impeccable sense of timing: He has scheduled his marathon annual press conference today, just as European Union (EU) leaders are gathering in Brussels to discuss, among other things, their policies towards Russia.
Notwithstanding Mr Putin's carefully nurtured macho image, chances are high that, faced with a full-blown currency crisis at home, the Russian leader will use today's press conference to make a conciliatory gesture towards the EU, in the hope that its leaders may consider relaxing the sanctions imposed in the wake of the crisis in Ukraine earlier this year.
But it is unlikely that the gestures will be deemed sufficient in Europe. Meanwhile, the US is planning to toughen its own sanctions on Moscow. Next year will be dominated by a bigger battle of wills between Russia and the West, a confrontation which President Putin is losing hands down.
When the Europeans imposed their first round of sanctions on Russia in March this year, Mr Putin and most international observers laughed them off. The sanctions were clumsily drafted, and were seen as an irrelevant response to Russian military intervention in Ukraine, a sign of the West's weakness - while the government in Moscow used its tanks, the EU relied on its accountants.
Nobody is dismissing Western sanctions as irrelevant now. One reason that they are biting harder than expected into the Russian economy is the US' involvement. This spooked the world's financial institutions into severing most of their business with Russia, in order to avoid penalties from US government regulators; the result is that the financial sanctions on Moscow turned out to be harsher than they needed to be.
More importantly, the sanctions coincided with the almost halving of the price of oil, which provides most of Russia's revenues. Its budget for the coming year was calculated on the basis of oil fetching US$95 per barrel; Moscow will now be lucky to get US$60 for the stuff during 2015.
Mr Putin, who like most Russian leaders doesn't understand finance and believes that politics should dictate economics rather than the other way round, initially believed that he could brazen out the sanctions by appeals to Russian nationalism. In his ceremonial annual address to the Russian Parliament last month, he invoked the national spirit of sacrifice of World War II to withstand Western economic pressures: "We have the strength, will and courage to protect our freedoms."
But his officials no longer believe that flag-waving is sufficient. Having denied the need for any market intervention against a falling rouble, central bank governor Elvira Nabiullina, a key Putin ally, suddenly hiked interest rates earlier this week to defend the currency. But the result was merely panic, as investors rushed to dump the Russian currency. The fall of the rouble has sparked off inflation and soaring food prices, decimating the savings of ordinary Russians. A capital flight is also in full swing: Official figures show a staggering US$120 billion (S$156 billion) may have left Russia by the year end.
Russia is not facing a meltdown like the one it experienced in 1998, when the country defaulted on its debts. But it is confronting a rapidly escalating economic crisis. State-owned Russian companies need to raise US$120 billion next year just to roll over their existing debt liabilities. Moscow's foreign currency reserves can cover that, but these are being depleted at a fast rate, and were nowhere near as high as initially assumed.
In his press conference today, Mr Putin may well try to persuade Western leaders that he is willing to compromise. The snag, however, is that he cannot offer serious concessions such as the total withdrawal of troops from Ukraine without losing nationalist credibility at home, yet much of what he can offer will be dismissed by a mistrustful West as irrelevant. "This conflict will come to an end only with the full respect of Ukrainian sovereignty and territorial integrity," Ms Federica Mogherini, the former Italian foreign minister now in charge of EU foreign policy coordination, vowed this week.
Europe's unbending line is reinforced by the US, where President Barack Obama appears ready to bow to congressional demands for tougher sanctions on Russia.
Calmer moods may prevail early next year, particularly if Russia honours its pledge to supply Ukraine with energy during the crucial winter months. But the onus is on Mr Putin to prove his conciliatory intent with deeds, rather than words.
Meanwhile, impoverished Russians who earlier this year enthusiastically applauded Mr Putin's nationalist policies are now confronted with the bill for his actions.
This article was first published on Dec 18, 2014.
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