Russia: the Noose Tightens

It was not that long ago that Vladimir Putin was being widely praised for saving the Russian economy from disaster. Many even argued that one should overlook Putin’s repressive acts since his economic policies were so brilliant and so essential to the nation (the same argument, of course, was made in the early days of Hitler). Today, the Russian economy is a smoking ruin and Putin’s apologists have nowhere to hide.

Last week, the Vienna Institute for Economic Studies revealed that foreign direct investment in Russia will fall this year by a shocking 50% compared to 2013, whose level was already anemic. This will make Russia the least attractive economy in all of Eastern Europe by a wide margin. The VIES opined that Putin’s aggression in Ukraine was the major cause of these catastrophic losses, which would have dire impacts upon economic growth not just in Russia but throughout Eastern Europe, further alienating Russia’s neighbors.

Also last week, international banking giant HSBC disclosed that in May Russia's shrinking service sector reached its fastest rate of decline in five years. HSBC’s purchasing managers’ index fell to 46.1 in May from 46.8 in April. Values above 50 signify growth while values below 50 indicate contraction.

This intense economic pressure has forced the government to spend a ghastly chunk of foreign currency reserves defending its currency and stock market values. Already this year over $40 billion in precious reserves have hemorrhaged out of the Russian treasury, and the bloodletting is only going to get worse in the second half of the year. Between loss of foreign investment and loss of reserves, Russia may take a stunning $200 billion hit before the year is over.

But ruble and stock market defense are only the tip of the needy iceberg where state spending is concerned. The Putin regime has already openly acknowledged that both the banking and energy sectors of the economy need major recapitalization from the state in order to stave off collapse. Russia’s state-owned gas monopoly Gazprom, for instance, needs more than $50 billion in capitalization just to finance infrastructure necessary to comply with Russia’s recent deal to supply gas to China.

The plummeting ruble, stock market, and GDP growth figures remind many of the devastating losses Russia experienced during the global economic crisis six years ago. But a senior banker from a Russian state-owned bank told Reuters: “This crisis is much worse than in 2008. At that time, everyone was in the same boat. Now it’s only Russia, and everyone wants to sink it in addition to dealing with their own problems. It will be a very hard year.”

That’s because Putin’s aggression in Ukraine has caused Russia to incur massive worldwide economic sanctions that are already pummeling the Russian economy like a typhoon. Putin’s attempt to respond to the sanctions -- forming a trade group with the likes of Belarus and Kazakhstan -- would be outright hilarious if they did not signal a leader hopelessly adrift and isolated just as his Soviet ancestors used to be.

The Economist sums up the hopeless position that Putin has boxed Russia into:

The weakness in Mr Putin’s strategy is that, by allowing his visceral fears to drive his policy in Ukraine, he risks bringing about just what he hoped to avoid. He has lost Ukraine as an ally and a potential partner in the Eurasian union, while NATO is reasserting its military posture and bolstering its defences. The spectre of increased NATO forces on Russia’s borders in Poland and the Baltic states has become a reality thanks to Mr Putin’s actions in Ukraine. And having fought to preserve its sovereignty and economic leverage in relation to Europe and the West, Russia risks replacing them with a new dependence on China.

And that’s not all.  Putin has clearly established a precedent for separatism while leading a country rife with breakaway regions. The entire Caucasus area is roiling with separatist violence, and Russia’s isolated Kaliningrad region, surrounded by countries that Putin has now terrified and alienated, is going to start feeling intense pain that Putin can do little to soothe.

Dependence on China, a brutal partner that only a madman would prefer to Europe, isn’t as low as Putin is prepared to drag Russia down. He’s openly courting both pariah states like North Korea and fascist extremists in Europe, making Russia seem like a nuclear-fanged Iran prepared to engage in a wide variety of international terrorist acts in order to lash out at democratic nations that have spurned it.

A telling cartoon shows Putin marching shirtless into a gilded private club. In one hand he holds a large cudgel and in the other he drags a woman across the floor by her hair. The woman is Ukraine, and the club is the G-8. He’s stopped at the door and told that his appearance doesn’t conform with club rules.

The irony is palpable. Putin just spent over $50 billion to host the Winter Olympics for the sole purpose of proving to the world that Russia was an accomplished, civilized state whose voice should be heard and respected. As his tanks plunged into Ukraine, all those years of work went right up in flames. Now, Putin is a very lonely man relying upon state repression to try to hide his economic failure from his fellow citizens, the same failed tactic that brought down the USSR.

Follow Kim Zigfeld on Twitter @larussophobe.

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