Tag: Putin

PUTIN IS TURNING OVER A NEW-OLD LEAF

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By Alex Shkurko
Staff Writer

Since Russia’s controversial annexation of Crimea last March, Western observers have debated issues ranging from the extent of Russia’s territorial ambitions to the question of arming Ukraine. Less ubiquitous, but equally concerning is the return of Soviet-style authoritarianism in the age of Putin. Though this is not a new development, the crisis in Ukraine has opened up a new chapter in Russia’s retreat from liberal democracy, unleashing a fresh torrent of media controls and political intimidation.

Under Putin, the media reshapes and redirects events in Ukraine, placing blame on the West for inciting regional conflict in an attempt to economically isolate the Russian people. Russian media is immensely powerful in the shaping of Russian public opinion. This is especially true for older generations, whom receive 90 percent of their news from state-controlled television stations. Anti-Western antagonism is hardly new, but its resurgence is notable both for its scope and effectiveness. While the impact of sanctions has been dubious from the perspective of the West, they have only fervently reinforced the disdain already present in Russian citizens for the United States and its Western allies

Redirecting blame for Russia’s economic woes to the United States has proven to be an effective course of action. The process takes place on the television sets of every citizen in the Russian Federation on channels such as Perviy Kanal. In between pop ballads by Soviet-era singers, Putin appears on screen standing tall and proud, declaring with his body language that Russia’s power has yet to be seen by the world. Putin is first and foremost a nationalist and a populist. However misdirected his criticisms of Obama are, the Russian people are listening and are standing tall with him.

The control of information by Putin and his allies is not limited to traditional media outlets. Restrictions on expression have been given a new life and form by the Internet. Though Twitter and Facebook are accessible, the Russian social media site VKontakte, which translates to “in touch”, eclipses them in popularity and usage. But with constant oversight and monitoring by the Russian government, users are dissuaded from organizing together and from sharing politically damaging news. In 2011, authorities pressured VKontakte to limit opposition posts over concerns about protest organization. After reports divulged that VKontakte shared user information with the government, two major shareholders sold nearly half of the company to suspected Kremlin allies.

In 2013, VKontakte founder Pavel Durov posted Federal Security Service (FSB) requests for information on Ukrainian activists who frequently criticized the Kremlin. Russian social media does not allow anonymous registration and requires users to provide phone numbers, which are linked to passports in Russia. To shield themselves from the eyes of the state, younger and more progressive activists have taken to Western social networks with false names to voice their critiques of Putin’s state. However, their impact at home is negligible given the aforementioned limited reach of Western social media.

For years, the liberal opposition in Russia has experienced a disturbing trend of murders and disappearances among its prominent figures. Victims such as former Federal Security Service (FSB) officer Alexander Litvinenko and noted journalists Anne Politkovskaya were known for their outspoken criticism of Putin’s regime. Now, the crisis in Ukraine has added yet another prominent opposition figure to the list of victims. The recent murder of former deputy prime minister and noted Putin critic Boris Nemtsov mere steps away from the Kremlin shook Russian society and served as a stark reminder that in today’s Russia, those who voice opposition to Putin do so at considerable risk. Nemstov was once a contender to succeed Boris Yeltsin as Russia’s president. That a Jew nearly ascended the highest echelons of Russian power is an incredible thought. However, it was not to be. Yeltsin eventually handpicked Putin to succeed him. Nemtsov instead became a passionate Putin critic and a symbol for human rights and democracy in a gradually authoritarian Russia. Some believe his murder, carried out shortly before he was slated to lead a pro-Maidan rally, was an attempt to conceal and suppress information pointing Russia’s involvement in the fighting in eastern Ukrainian. Though the links between Nemstov’s murderers and Putin is unsubstantiated, the slaying of such a prominent anti-Putin figure further squeezes a hard-pressed opposition.

Russia is heading, or has already arrived, at a point of no return as a result of the Ukraine crisis. The ever-tightening control of information and the murder of a prominent former deputy prime minister within walking distance of the Kremlin, poses an important question: what’s in store for Russia’s future? If current trends continue, little will remain of the hopes some in the country had at the collapse of the Soviet Union for a flourishing liberal democracy. This is no accident and is a progression of Putin’s policies and leadership. That is in itself troubling.

Image by Vladimir Varfolomeev

BEAR MARKET FOR RUBLE REVEALS STRUCTURAL PROBLEMS FOR RUSSIAN ECONOMY

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By Evan Carlo
Staff Writer

What was considered a major economic and geopolitical threat to the United States just a few months ago is now on the verge of a financial crisis. Russia is facing severe economic repercussions due to the sudden decline in the value of its currency, the ruble.

The ruble rapidly collapsed in value from November 24 to December 16, as it soared from an exchange rate of 44.83 rubles for one U.S. dollar, to 67.91. The collapse in currency caused inflation to increase swiftly. Prices are up 10 percent at the time of this article. Russian citizens, unsure of the future value of their currency, are rushing to buy consumer goods now before inflation erases their purchasing power. The rapid changes in currency led foreign businesses, like Apple, to shut down operations completely in Russia.

Dealing with the crisis will require evaluating whether the depreciation in the ruble is caused simply by temporary factors that will dissipate soon, or if the currency crisis is a result of more structural flaws in the Russian economy.

In an attempt to reverse the fall in the ruble’s value, the Russian central bank hiked interest rates to 17 percent on December 16. Central banks raise higher interest rates in order to attract foreign capital, hoping to gain a higher return on investment in the country. More foreign capital raises demand for the domestic currency causing its value to rise. Raising interest rates is a common move by central banks facing a depreciating currency. It is only a temporary solution, as maintaining high interest rates indefinitely will hurt economic growth. Eventually interest rates must come down when enough capital has been accumulated to prevent a further fall in value for the currency.

However, raising interest rates was only temporarily successful as the ruble collapsed in value again from an exchange rate of 52.08 on December 25 to 63.14 on January 12. Forecasts by Goldman Sachs predict the ruble will continue to fall to an exchange rate of 70 in the next three months and remain at 60 in 12 months.

Raising interest rates is only a temporary and ineffective solution that does not address deeper economic problems in the Russian economy. While the falling value of the ruble can be partly blamed on economic sanctions placed on Russia by western countries, deeper economic issues are also responsible. These problems are structural and cannot be fixed through monetary policy. They must be addressed with political and economic reforms.

Russia’s Natural Resource Dependence Problem

One of the structural economic problems most responsible for the ruble depreciation is Russia’s over reliance on oil and natural resources for economic growth. Ever since Vladimir Putin strengthened state control over the energy sector, it has been a vital sector of both the overall economy and government. The state now controls a large share of the energy market and directly benefits from oil and gas production. Over half of Russia’s federal budget is funded by oil and gas rents.  Approximately 13.9 and 2.3 percent of Russia’s GDP consists of oil and natural gas rents respectively. This makes Russia more vulnerable to swings in commodity prices as falling oil prices will cause Russian businesses, and the Russian government, to lose money.

This is a big problem for Russia’s 2015 economic prospects since global oil prices have plummeted over the past year. Increased production in the United States combined with Saudi Arabia’s refusal to cut back on production has created a supply glut, forcing global oil prices to fall rapidly. The fall in oil prices has simultaneously caused the value of the ruble to fall.

The rapid fall in oil prices severely jeopardized an already flailing economy facing sanctions from western governments. It is estimated that Russia needs oil to stay at $105 a barrel in order for its government budget to break even. With prices at the time of this article at around $50, state-run Russian oil companies are facing tremendous losses that are impacting the government. Since the economy is highly dependent on oil, the price drops will affect the whole economy and will most likely send the country into recession.

As a result of the loss in revenue  and a lower valued ruble, Russia will have to cut back on its government expenditures, putting social and military programs in jeopardy. As oil prices go down, Russia receives fewer rents in the oil industry and therefore has less to spend on accomplishing its domestic and foreign political goals. This makes it less likely Russia will attempt an invasion of Eastern Europe if it cannot even fulfill its budget expectations. Russia is too dependent on oil to be a serious long-term geopolitical threat.

The Russian economy has long been oriented towards extracting and exporting natural resources, rather than developing a diversified modern economy. Without other developed economic sectors, Russia is vulnerable to price swings in the commodity market and to eventual natural resources depletion. If Russia wants to prepare for the day it will run out of natural resources, it must diversify its economy.

Without a diversified economy, Russia will also be unable to attract foreign investors. The loss in oil prices and sanctions are causing investors to pull money out of the economy at an alarming rate. With less capital in the country, the Russian ruble fell rapidly as demand for the currency fell. Therefore, the currency crises cannot be blamed solely on temporary western sanctions, but on deeper structural problems that will need to be addressed.

Russian State Capitalist Structure

To address structural problems in the Russian economy, economic and political reforms will be necessary. Unfortunately the state capitalist system of Russia stands in the way of reform. The political institutions of Russia ensure Putin and the Russian elite capture the main benefits of oil profits for their respective agendas. The profits are used by the government for a variety of programs such as the oil stabilization fund, fuel subsidies and building the military.

Since the business elite and government benefit from this arrangement, this system creates incentives to develop an extractive economic system that focuses more on utilizing natural resources than developing the whole economy. The oil profits have not been used to try to diversify the economy and prevent Russia from being exposed to price swings. [1]

The oligarchic nature of Russia’s political system also directly affects investor confidence in the economy. Given the close nature of the state and private business, many investors are fearful that the state will favor selected businesses at the expense of the rest of the economy. Russia has already directly bailed out Gazprombank by injecting more than $700 million into the bank. The government further showed its commitment to helping out select businesses by allowing companies looking for loans to use the bonds of state-owned energy giant Rosneft, as collateral.

This move essentially  finances Rosneft with an influx of rubles. Such a move made investors worry that Russia will continue to bail out favored businesses during economic troubles,  jeopardizing the whole country. Such crony capitalism poses a huge threat to Russia,  as it not only guarantees Russia will remain an extraction economy, but it also makes investors fearful of competing against favored state businesses.

Future Energy Prospects

If oil prices rebound quickly, such as they did in 1998 and 2008, then Russia will recover. Russia will still be open to price swings in the future but, for the moment, will be able to continue to grow its economy.

However, it is unlikely that prices will be able to rebound enough. Since oil wells are difficult and costly to shut off, even with price decreases it is unlikely that production will stop and bring up prices. Crude Oil Brent Futures trades currently indicate that prices will not reach $60 a barrel until October 2016 and will not even reach $70 until as far out as 2023.

These prices are well below what the Russian government needs to break even on its budget. This will prompt budget cuts and reevaluations of what Russia hopes to accomplish in foreign relations. While this situation could change, the market predicts Russia is facing a bleak future. Without structural changes to the economy, the Russian bear will be vulnerable to future oil bear markets.

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Notes

[1] Ebel, Robert E. The Geopolitics of Russian Energy: Looking Back, Looking Forward A Report of the CSIS Energy and National Security Program. Center for Strategic and International Studies. July 2009.

THE BEAR POKES BACK: RUSSIA, ABKHAZIA, AND NATO HEADACHES

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Abkhazian People Wave the Flag of Abkhazia

By Matthew Brown
Staff Writer

On Nov. 24, 2014, Russia and Abkhazia signed a historic cooperation treaty, accomplishing yet another fait accompli that NATO and its allies seem unable to answer. The “Agreement Between the Russian Federation and the Republic of Abkhazia on Alliance and Integration” formalizes Russia’s security and economic partnership with the breakaway region of Abkhazia. It is set to run for 10 years with the hopes to extend it for a further five years after that. The most significant aspects of this treaty include: Russian and Abkhaz military assets in the region will merge into a joint security force led by a Russian commander; a common security agreement between Russia and Abkhazia (i.e. an attack on one will be considered an attack on the other); a substantial increase in Russian economic aid to Abkhazia to the tune of 12 billion rubles ($222 million); a commitment on Russia’s part to acquire international recognition for Abkhazia; and a streamlined process towards Russian citizenship for Abkhazian residents. It should be clear from the depth of these commitments that Russia is committed to the continued security and development of the Abkhazian state and pays little regard to Georgian and Western objections. The Balkanization of Georgia is a key part of Russia’s foreign policy in the region and Abkhazia is likely only the first step in this process; the breakaway region of South Ossetia is rumored to be in talks to sign a similar treaty with Russia in the near future. Western interests will now have a much more difficult time reconstituting the former borders of Georgia.

Abkhazia has existed in an unacknowledged, twilight state of affairs since its violent beginning. Formally recognized only by Russia and under pressure from NATO to rejoin the nation of Georgia, uncertainty has been the defining theme for the decades-old nation of Abkhazia. The roots of this limbo grow from the chaotic dissolution of the Soviet Union in 1991. It was with the final collapse of the Soviet Union that allowed for the ethnic Georgians to create their own nation, but in the years leading up to the collapse, the ethnic Abkhaz people began agitating against the state of Georgia’s calls for independence, correctly fearing that a Georgian state would seek to absorb the weaker Abkhazian region. The key port city of Sukhumi and valuable transit routes to Turkey and beyond would be a great boon for the fledgling Georgian nation. The ethnic Abkhazian and Ossetian populations, along with their territory, were ultimately ceded to the Georgian nation by the Soviet Union, creating an uneasy coexistence. The establishment of a joint power sharing agreement with the Abkhaz people temporarily defused tensions. Unfortunately, hardline ethnic Georgian politicians eroded Abkhazian representation and the situation deteriorated, ultimately culminating with the Georgian invasion of Sukhumi and subsequent ethnically motivated pillaging, rape, and murder. The 1992-93 War in Abkhazia followed, and, with Russian support, Abkhazia achieved de facto independence from Georgia but failed to gain widespread international recognition. Russian troops have been stationed along the borders ever since and Russian economic aid has become essential for the nation’s continued existence. Indeed, the closeness of the ties between these regions is demonstrated by the fact that 90 percent of all Abkhazian citizens hold a Russian passport. In more recent times, Georgia has been dissuaded from uniting these regions by force. The disastrous outcome of the Russo-Georgian War of 2008 proved that Georgia does not have the military capacity to reconquer its lost territory, and that it cannot expect NATO forces to come to their aid.

Returning to the recent strategic partnership, Georgian opinions on the new treaty are, as to be expected, negative. For Georgia this treaty is hardly unexpected, yet a catastrophe all the same. The terms of the treaty greatly strengthen Abkhazia’s security position vis-á-vis Georgia and will give Abkhazia little reason to return to negotiations on reunification with Georgia. The economic and political benefits Russian extends in this treaty provide boons that Georgia cannot hope to match at the negotiation table. For now, Georgia will have to accept a Russian victory. While not a formal annexation, as with Crimea earlier this year, Russia now has de facto control of the Abkhaz territory, along with Abkhazia’s warm water port on the Black Sea in Sukhumi. A cursory glance at a map of the region will show that Russia is now in the enviable position of exerting control over a good third of the Black Sea coastline. In addition to this territorial gain, Russia makes further headway in solidifying transit routes for goods traded through the Eurasian Economic Union. None of these gains will play out in favor of NATO or the EU; this treaty can represent nothing other than a strategic defeat in both the political and economic arenas of the South Caucasus.

In the West, news of these developments has been largely ignored. After all, one does not enjoy relaying news of their defeat. Hesitant steps towards rebalancing the situation have been taken though. The official U.S. response has been twofold. On the political front, the U.S. State Department has issued press releases reiterating their position that the U.S. does not recognize Abkhazia as a sovereign state and therefore does not recognize any treaties between it and Russia. Beyond reinforcing the historic position of the U.S. in relation to Abkhazia’s situation, these communiqués accomplish little else. The military response has been more discreet, yet potentially more substantial. It has been reported that U.S. military officials are engaging in talks with the Georgian Defense Ministry with the aim to procure greater numbers of weapons and advanced capabilities for the Georgian Army. Georgia has long sought to obtain lethal anti-air and anti-tank capabilities from the U.S., while the U.S. has been reluctant to encourage further military conflict in the region at the risk of provoking a forceful response from the Kremlin. However, the deterioration of Georgia’s strategic position in the region may just be the event needed to make the U.S. relent.

What does the future hold for the region as a consequence of this treaty? The most immediate and likely development will be the signing of a similar treaty between Russia and South Ossetia. Russia cannot help but notice the lack of a significant response from the U.S. or Europe and will be emboldened to press their advantage. Further down the line, treaties such as this one will possibly pave the way for greater economic development in the Eurasian Economic Union. Russia is determined to connect Iranian energy and industrial exports to Eurasian and European markets. One of Russia’s most important projects in this regard involves the construction of railways linking the Caucasus and Iran with Turkey. Routes going through Iran, Azerbaijan, Russia, Armenia, and Turkey are all in various stages of planning. Yet many of these routes face a common obstacle; Georgia’s refusal to finalize approval for projects crossing through its territory. If Russia can succeed in forcing Georgia to capitulate on this position, either through utilizing the threats of losing Abkhazia and South Ossetia or through further Balkanization, Russia will achieve a significant economic objective in the greater Central Asian region.

Image by Apsuwara