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Putin will beggar his country to feed it rancid nationalism


The headlines blaring the world around are on the subject of Russian strongman Vladimir Putin—I hesitate to call him "president", as he's been in office for twenty years due to fraud and stolen elections—getting ready to unleash the Russian army on Ukraine, either to annex it outright, or to install a puppet regime after the requisite "free and fair elections". The thinking is that the West and NATO have no stomach for a war, and Mr. Putin's actions are all that matter. His will-to-power will rebuild the Russian Empire of old. He is today's man, and the West, led by the United States, is decadent and weak.

Well, not quite.

There's a reason why the US beat the Soviet Union in the Cold War. The US could afford both guns and butter. The Soviets couldn't, and chose guns at the expense of butter. Its economy in freefall, it eventually couldn't foster an economy capable of generating enough wealth to keep up the superpower competition. And now California, with a fifth of Russia's population, dwarfs Russia's economy.

What kept the Soviets afloat, and now the Russians, is the country's abundant natural resources, especially gas and oil. Russia is no different than resource-rich countries in other parts of the world which depend on extracting and selling those resources to remain viable states. This, of course, leads to what's termed "the resource curse": while the world wants to buy what you have underground, all is dandy. But countries blessed with plentiful natural resources, like, say, Saudi Arabia, tend not to diversify their economies, and thus suffer when demand for their products fluctuates and prices see-saw. Russia is no different in this. Its economy is buoyed by its natural wealth. But market and geopolitical forces can see that wealth be without value.

Which brings us to the latest confrontation between Russia and the West over the fate of Ukraine.

Russia feels that it has Europe over a barrel. Europe, it thinks, depends on its gas and oil to keep homes warm in the winter and the lights on all year round. But it may be overstating its power.

This article from The Economist lays out quite clearly how Russia is overplaying its hand:
The good news is that Europe’s energy system is more resilient than it was during the crisis of 2009. Andreas Goldthau of the University of Erfurt in Potsdam points to some useful changes. Pro-competition measures (like a ban on “destination clauses” that forbid the resale of gas) have weakened Gazprom’s grip. A dense web of gas interconnectors now links previously isolated countries (see map).
Russia isn't the only game in town. The map in the article shows connections besides through Ukraine. And what if the "unthinkable" happens and Mr. Putin shuts off all gas exports to Europe in the event of a shooting war?
In sum, Europe will suffer if Russia cuts off the gas; but that price will be paid from the pocketbook rather than through physical suffering. That cost will be exacerbated, predicts Jonathan Elkind of Columbia University, because “Europe is not starting from calm, but from a market on edge.” The continent’s energy markets have only just been through an early-winter price shock, and the price outlook for all energy commodities is ugly. JPMorgan Chase predicts that, even without a Russian gas cut-off, Europe will spend some $1trn on energy this year, up from $500bn in 2019. If the region is forced to consume its gas stores to survive a Russian cut-off, it would then have to spend even more during summer frantically rebuilding its reserves to avoid an energy crisis next winter.
Europe will get hit in the pocketbook, but Europe is wealthy, and can shoulder the hit, unpleasant as it may be. Its economies won't collapse. Perhaps they will have slower growth, but there are other sources of energy they will tap.

But what about Russia and its state-owned (so capitalist, that) energy behemoth Gazprom? Well, Mr. Putin using energy blackmail can only last for so long. And then:
That is an unpleasant prospect. But a bigger price would be paid by Russia over the longer term. One industry source notes that Gazprom would be likely to face “massive” commercial fallout, ranging from penalties payable to customers to a halt in dollars flowing to Russia for contract payments. Gazprom would find it difficult to secure any long-term contracts in Europe after such a display of aggressive unreliability. And the Nord Stream 2 pipeline so cherished by Mr Putin would surely bite the dust. A shutdown might even persuade China, now cautiously importing more Russian gas, that its long-standing concerns about Russian reliability are well founded.

As Mr Victor argues, such a brazen use of the energy weapon would probably lead Europe to try much harder to cut its dependence on Russian exports of gas “less because they are insecure and more because the revenue…is what funds Russian bad behaviour.” Mr Gustafson puts it pithily: “If Putin wanted to destroy Gazprom’s business in Europe, he couldn’t go about it in better way.”
Notice the last sentence of that first paragraph. China, which stands to be Russia's biggest customer, would look twice at going through with such plans if, in a future disagreement, the Russians refuse to honor contracts. This tracks with another analysis from the Financial Times:
Russian troops massing on the Ukrainian border are pointing their weapons in the wrong direction. Jittery markets represent a greater threat to Russia than its neighbour’s mooted membership of Nato.

As an emerging economy, Russia is already exposed to disinvestment triggered by US rate rises. An invasion of Ukraine would accelerate that trend and trigger US and European sanctions.
Mr. Putin is an ex-KGB agent. A more unfit man to be Russia's leader in this time of capitalist dominance couldn't have been found. As a KGB officer, his skill-set doesn't induce him to the arts of diplomacy and gladhanding. The Chinese under Xi Jinping bluster militarily; countering China is a valid geostrategic goal. But, at the end of the day, China wants to do business. One billion Chinese won't be fed by their government getting into a war over the South China Sea. As Mr. Xi just said at the Davos gathering of the great and the good:
Chinese President Xi Jinping on Monday called for countries to move away from a “Cold War mentality,” saying history has repeatedly shown that confrontation only invites disastrous repercussions.

His comments come at a time of simmering tensions between China and the U.S. over Taiwan and as fears escalate over a possible Russian incursion into Ukraine.

Speaking via videoconference at The Davos Agenda virtual event, Xi said: “We need to discard Cold War mentality and seek peaceful co-existence and win-win outcomes.”
Is he being sincere? Perhaps, perhaps not. But contrast this language to Mr. Putin's. In diplomacy and foreign relations, language matters. While the Russian bear is flexing claws which will fall off, the Chinese dragon seems to be wanting to ratchet down tensions. 

Mr. Putin is fighting yesterday's war. Ukraine is a threat to Russia because a successful, prosperous, democratic Ukraine serves as an example to a sclerotic, corrupt Russia headed by an autocrat. Ukraine would expose Russia's inherent contradictions. This might be enough to get Russians to rise up and say "enough". This is why Mr. Putin supports dictators in Belarus and Kazakhstan. And that's even before mentioning that Russia's incursion into the eastern Donbass separatist region has reified Ukrainian national feeling. And the Ukrainian military has had almost a decade of combat experience under its belt. Combined with military aid from the US, it won't be a pushover for Russia.

Mr. Putin's Russia may feel it has the bull by the horns. That's usually when you get gored.

UPDATE


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