Tuesday, 9 December 2014


Putin Pushes Back: Beware The Wounded Russian Bear
December 08, 2014 |

Contrary to what he would like us to believe, things are going very poorly for Vladimir Putin these days. Having found the West more united than he expected on the issue of sanctions against Russia, he now discovers that the bottom has fallen out of the international oil market. As if that were not enough, he also finds Europe nixing his pet Southstream gas pipeline, supposed to run under the Black Sea, which he had hoped would increase Russia’s energy stranglehold over Ukraine and the rest of Europe.

But before we indulge in too much glee over Putin’s discomfort, we should consider the all-too-real risk that when cornered, he is apt to become even more dangerous.

Russia has a long history of rulers who start armed adventures abroad to deflect attention from economic and social troubles at home. When he annexed Crimea last March, Putin appeared to be continuing in that tradition.

A real danger is that a Russian economy in tatters will only increase the incentives for aggressive moves abroad.
The aggression came about in order to defuse growing domestic opposition to his increasingly corrupt handling of the Russian economy, and increase his authoritarian grip over the country. It worked. Encouraged by the highly favorable domestic response, Putin kept the foreign pot boiling by blatantly backing separatism in Eastern Ukraine.

When he launched his Ukrainian adventure around a year ago, Putin was counting on a divided Europe inability to join the U.S. in imposing meaningful economic sanctions as a response. He must now feel deeply disappointed. Despite considerable business pressure on German Chancellor Angela Merkel to duck sanctions, Europe did join in strengthening penalties on the Russian energy and financial sectors. This forced Putin to strike a long-term energy supply arrangement with China at prices generally viewed as unfavorable to Russia.

Since then, Europe has managed to thwart Russia’s further attempts to undermine Ukraine and increase its stranglehold on the European energy market. Effectively blocking the construction of Southstream was an important step in the process. Russia intended to use the pipeline to supply Europe with gas without having to go through Ukraine—a move that would have drastically increased his ability to squeeze that country without putting Europe’s energy supply in play.

The Southstream setback has caused Putin to make another hasty and questionable move: an alternative pipeline deal with Turkey. In order to seal the deal, Russia had to offer a 6 per cent discount on its gas prices. At the same time, supplying Europe through Turkey rather than through Ukraine will add considerably to Gazprom’s transportation costs and it is still not clear whether Europe will allow that gas to enter Europe through Greece.

In addition, Putin appears to have been caught totally flatfooted by developments in the international oil market. He especially seems to have misjudged the major shifts caused by the U.S. shale oil revolution, along with increased offshore oil and gas production in a variety of other countries, and the slowing in the overall global economy. Those changes have seen benchmark global oil prices decline from $115 per bbl. to around $75 over the past six months.

All this, in turn, has blown a hole in the Russian budget, which depends on oil for around 45 per cent of its tax revenues. Over the past six months, the Russian ruble has also lost around half its value, contributing to an inflation rate now at 9 per cent.

Coupled with sanctions, the dismal oil picture has caused a collapse in investor and household confidence in the economy, and forced Moscow to acknowledge that the country is headed for a recession next year.

A real danger, however, is that a Russian economy in tatters will only increase the incentives for aggressive moves abroad. This is, after all, how Putin’s era got started: with a lethal campaign against Chechnya to consolidate his regime at home.

Among other things, the bad news for Putin could be equally bad news for early resolution of the Ukraine crisis. Worse yet, as Senator John McCain has recently warned, it could spell trouble for countries like Moldova and the Baltic states, which Russia has long considered to be part of its “near abroad.”

It could also be the prelude for Russia using its energy leverage over countries even further afield, such Bulgaria, Finland and Slovakia. Like the Baltics, all are totally dependent on Russia for their natural gas supplies.

Thwarting a bear does not turn the beast into a lamb. It mostly creates an angrier and more unpredictable bear.

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