The 'soft containment' of Russia

The 'soft containment' of Russia
Russian President Vladimir Putin.

LONDON - There is nothing Russian President Vladimir Putin cherishes more than his image as the only leader capable of defying the West: As he celebrated his 62nd birthday last week, an exhibition in Moscow portrayed Mr Putin as the mythical god Hercules, battling Western nations depicted as snakes or demons.

Yet notwithstanding the bravado of their boss, President Putin's aides are deeply worried. They know that the Russian economy is already hurting badly as a result of the sanctions imposed by the West.

And they worry that, unless Moscow manages to have these sanctions lifted soon, Russia will be condemning itself to many years of confrontation; the integration of their country into the global economy could be reversed, with catastrophic effects on its people.

The fate of the rouble, the country's currency, says it all. Its value has dropped by a quarter this year, and it is now in freefall: "The dollar is 40 rouble, the euro is 50 rouble, and Putin is 62", as the joke now making the rounds in Moscow succinctly puts it.

"Without a doubt, this and the next year, we will have to try very hard to ensure the planned economic growth rates," Finance Minister Anton Siluanov admitted recently as he presented the country's budgetary projections. But that's an understatement, since Russia will have to perform economic miracles just to stand still.

At least US$100 billion (S$127.6 billion) worth of investment capital has already fled Russia since March, when the West imposed sanctions in the wake of Russia's involvement in the Ukraine crisis.

Very little money is coming in, while the Russian state budget needs to refinance its chronic deficits, as well as pay for Mr Putin's plans to buy new weapons for his military, which, according to official figures, will cost an astonishing US$700 billion over the next four years.

Officials in Moscow claim that, if they cannot borrow the money they need from Western banks, they will turn to Asia for cash. But that's just bluster.

For, even if significant Asian banks are willing to risk US or European punitive measures by doing business with Russia, they may not have the volume of cash that the Russians need to borrow, nor are they likely to offer this at competitive rates. So, at least for now, the Russian government has resorted to its old technique of raiding the country's pension funds in search of "easy" money.

Declining oil advantage

But the most ominous development for Russia is the drop in energy prices on which its economy largely relies. All the current Russian spending plans are based on the assumption of a price of US$105 per oil barrel. Yet prices today are hovering around the middle of the US$90 range, and are likely to go down further.

With their penchant for conspiracy theories, Russian officials assume that the United States has, in consort with Saudi Arabia, conspired to drive prices down. But the reality is both more prosaic and more ominous: The US has no interest in manipulating energy prices but oil is fetching less because there is a glut on the market, and because growth in the global economy is sputtering.

And if this were not enough, prices of natural gas, another lucrative Russian export, are also tumbling. The US shale revolution made possible by advances in production techniques is likely to result in flooding the gas market: As early as 2016, Russia's Gazprom giant energy company could lose up to 18 per cent of its revenues, predicts Mr Jason Bordoff, a former White House energy official now running the Centre on Global Energy Policy at Columbia University.

The Russians have done their sums: They know that they cannot afford a lengthy showdown with the West.

Indeed, as Finance Minister Siluanov openly admitted last week, his entire economic forecasting is now predicated on the assumption that sanctions will be lifted by the end of this year.

In theory, that is perfectly possible. The fighting in Ukraine has died down and the Malaysian airliner disaster is now largely forgotten. Just like the Russian invasion of Georgia in 2008 had no long-term consequences, so the Ukraine crisis can simply be shelved. Putin's likely gambits

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