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No Audience Costs: Putin remains impervious to Russia’s worst economic crisis in decades

By Stephen Jaber Whether or not Vladimir Putin anticipated Russia’s crippling currency crisis is up to debate, but there is considerable evidence that his actions directly influenced its severity. Putin’s bold, and ultimately, shortsighted excursion into Crimea is one of the two major contributing factors to Russia’s current economic malaise; the other, historically low oil prices are not his fault. As of January 1st, 2015 Putin would need trade 60.54 Rubles for 1 US Dollar. If he wanted to convert his Rubles into Dollars on the eve of the Crimean referendum, the 16th of March 2014, he would have needed 36.68 Rubles for 1 Dollar – nearly half the amount needed today,[1] making Russia’s currency depreciation one of the worst of any country in history. Two major factors are responsible for this avoidable and staggering economic collapse: the rapid drop in world oil prices and sanctions imposed upon Russia following the annexation of Crimea. Together they have managed to cripple the Russian economy, sending it into recession. While the Russian economy flounders, any measurable affect of this economic catastrophe on Putin’s standing with the Russian people remains to be seen.

Russia, like its predecessor The Soviet Union, has over-relied on natural resources as the back-bone of its economy and government revenue. According to the US Energy Information Administration, 68% of Russia’s 2013 total export revenues were the product of oil and gas sales. [2] Russia is the 3rd largest oil producer in the world, after Saudi Arabia and the United States, producing 10,533.74 thousand barrels of oil per day.[3] When oil prices dropped from $100 a barrel to $60 from June to December 2014, it became evident that the Russian economy would take a massive hit. Coupled with economic sanctions imposed by the United States and Western Europe following the annexation of Crimea and the subsequent shooting down of Malaysian Airlines 17 by Moscow-backed Ukrainian separatists, the Russian economy is now with few options to deal with what would normally be a short-term shock.[4] Robert Khan of the Council on Foreign Relations argues, “sanctions are, if you will, a force multiplier in this environment, that they are making the oil price dislocations much more powerful than they would have been otherwise.”[5] [6] Had Putin not provoked the West into imposing sanctions through geopolitical aggression, the Russians might have been able to weather the fall in oil prices with their sovereign reserve funds, worth trillions of dollars.[7]

As a result of these duel challenges, the Russian economic outlook is bleak. The World Bank, on December 9th, 2014, revised its expectations for the Russian economy’s GDP for 2015 and 2016. According to the World Bank’s predictions if oil sticks to $78 a barrel, the Russian real GDP will contract by 0.7% in 2015 and will increase by a measly 0.3% in 2016.[8] If Oil prices fall even further, the outlook will be much worse. The World Bank’s estimates show Russia on a path of contraction and eventual recession – things will continue to get worse should the sanctions remain.

President Vladimir Putin and his inner circle are at the center of this disaster. Their economic mismanagement has precipitated this deep crisis. Russia ranks second on The Economist’s “crony-capitalism” index, an index that measures how much politically connected businessmen control a country’s economy. A mere 110 people own 35% of household wealth in Russia, amounting to nearly $420 billion.[9] While an initial crop of oligarchs arose right after the fall of the Soviet Union, Putin has replaced them with his own set of loyalist oligarchs. He jailed the head of Yukos Oil, Mikhail Khodorkovsky, a bitter political foe, and once the richest man in Russia, in 2003, and allowed for the transfer of the company’s assets to Igor Sechin’s company Rosneft. Sechin is a vocal Putin loyalist.[10] [11] [12] The sanctions initiated by the United States and Western Europe, have targeted this new class of oligarchs. Rosneft, Sechin’s oil titan, has been unable to refinance it’s $26 billion debt due by the end of 2015 due to their inability to court unwilling foreign investors.[13]

Nonetheless, as the crisis worsens, Putin has become “increasingly suspicious of men who owe their wealth to their ties to him and who are being hurt the most by U.S. and European sanctions,” said Sergei Markov, a political consultant who helped monitor the referendum in Crimea that led to Russia’s annexation of the peninsula in March. It should be mentioned that Putin is a fickle and untrustworthy man. As the crisis deepens he is now untrustworthy of those essentially tasked with managing the Russian economy – symbolic of Putin’s utter inability to account for his machinations. “Businessmen who have long been close to Putin are ‘on the periphery now,” Markov continued.[14] Uncertainty in all arenas has become a norm in Russia.

Despite Putin’s role in creating this crisis, it seems that he is impervious to the consequences. As of December 18th, 2014, Putin enjoys an 81% approval rating, “most Russians see Putin not as the cause, but as the solution,” writes The Associated Press.[15] Putin enjoys a thorough and dynamic cult of personality in Russia, a cult of personality that could be based on “nostalgia and consumption – it offers Russians, many of whom felt themselves deprived of both cultural and individual identity during the chaotic 1990s, the opportunity to articulate new modes of subjectivity.” As a politician with a perceived “soberness” that clashes with the often lampooned drunk characterization of his predecessor Yeltsin, Putin became the Russian “everyman,” and was thus symbolic of individual Russian desires and aspirations of what Russia could be. The Russian people were content with Putin’s centralized, no-nonsense leadership during the 2000s, and combined with the Kremlin’s unity and “take action” rhetoric, Putin is protected by his people’s faith in his judgment.

Supporting Putin’s cult of personality, the Kremlin has created a focused and pervasive propaganda network that has largely shielded Putin from domestic pressure. For example, while international media lambasted the Russian invasion and annexation of Crimea earlier this year, Russian state-run media portrayed this gross violation of international norms as a triumphant success.[16] The propaganda network has fashioned an image of reckless bankers clashing with well-mannered and sober minded government bureaucrats. Putin, in early December, claimed, “The authorities know who these speculators are and the instruments we can use to influence them.”[17] In essence, Putin is anticipating the effects of audience costs, the consequences that democratic leaders must account for should they fail their people.[18] [19] One should not make the error of conflating anticipating with worrying, however; as Putin’s power has been solidified for the past decade.

Regardless of the perception that Putin’s leadership is in jeopardy, the Kremlin’s rhetoric has not radically changed. Putin enjoys speaking in abstracts, this is a prime example of how he uses his vague rhetoric to appeal to the Russian people; he is promising the nation not to question his ability and to trust into his façade of infallible judgment and wisdom. The ability of the Kremlin to manipulate public opinion has largely shielded Putin from the political pressure that usually leads to contentious elections and votes of no confidence.

Since the currency crisis began, Putin has started to do something he is not usually prone to doing: talking to the public. Putin has so far urged Russians to be resilient. [20] [21] He has also promised to diversify the economy away from oil and natural gas, which the Russian economy has been too dependent upon, as exemplified by the devastating effects of falling oil prices on the Russian economy, although it remains to be seen if he will follow through on the promise.[22] [23]

At this stage in his presidency, Putin increasingly resembles a cartoon villain. His bellicose rhetoric, and aloofness to his aggressive foreign policy aims are at this point becoming an elaborate self-parody, one that is being made at the expense of the Russian people. While Putin and his cronies have certainly taken a financial hit due to sanctions and falling oil prices, these economic troubles have little effect on Putin’s political power because he is still able to exercise power without any oversight, as a result of series of electoral, constitutional, and other illiberal manipulations. This currency crisis presents the most recent questioning of Putin’s ability to govern – mostly from the outside –, and while some foreign observers have called for Putin to formulate an “exit strategy” should he not be able to weather the crisis, this is simply wishful thinking and categorically naïve.

The reality now is that the West, seeing that the sanctions are working, will continue to press for more stringent and effective penalties on Putin. As the price of oil continues to be unreliable, it seems that Putin is without option but to negotiate with the West and make serious re-adjustments to Russia’s reliance on certain sectors. Both of these will require concessions and tough-decision making skills, but most of all they will require time. Putin, for the moment, has time due to high approval ratings and a pervasive propaganda network that has convinced Russia that Putin is not the question but the answer. Putin might be able to evade any meaningful concessions for the time being, but if the economy retains its lackluster projections for 2015 and 2016 Putin might not be able to afford petty politics and vague threats. He might have to restructure the economy against the wishes of his conscious and his cronies.

Three other options also exist. Should the crisis worsen, and with the improbable situation of a coup looming over his head, Putin might concede power to Prime Minister Medvedev and the Duma, and relinquish the absurd amount of extra-constitutional power he has amassed over the years. Like the next option, this is a fantasy of the West. Putin could also refuse to seek another term as president, but given Putin’s history in office, this is a highly dubious, although wise move for Russia’s democratic future. The final option would be for the Russian people to simply revolt against Putin and his government. A civil war in the Russian Federation is all but impossible, given the complacency of the people towards Putin’s foreign policy objectives and the Russian people’s uncertainty of what would come next. Given the tumultuous economic history of Gorbachev’s and Yeltsin’s Russia, the people might just find it necessary to buckle up for the next few years and stick with Putin, rather than fight against a system they have casually supported for two decades.

Russia’s economic future is not bright. As the currency crisis remains unsolved and the economy retains its reliance on natural resources, a free market nightmare and an oligarch’s personal treasure, respectively, the long and short term political economic outlook is bleak. Where as citizens in a liberal democracy would be liable for a redress of their grievances in this situation, the Russian people cannot exercise this authority over Putin. In the two months since the currency crisis hit fever pitch, Putin has not conceded any of the power he has constitutionally amassed over the years, the oligarchs will not permit competition in the natural resource industry, national income is still dependent on oil, and Putin’s protection of Ukrainian separatists has not relinquished in the face of international pressure. Putin does not seem to care what the rest of the world thinks about him, and as international sanctions cripple Russia’s strength it remains to be seen if Putin can mitigate the possible dissipation of his people’s Stockholm syndrome.

[1] "XE Currency Charts." XE.com. January 3, 2015. Accessed January 3, 2015. http://www.xe.com/currencycharts/?from=USD&to=RUB&view=1M.

[2] US Energy Information Administration. "U.S. Energy Information Administration - EIA - Independent Statistics and Analysis." Oil and Natural Gas Sales Accounted for 68% of Russia's Total Export Revenues in 2013. December 22, 2014. Accessed January 3, 2015. http://www.eia.gov/todayinenergy/detail.cfm?id=19291.

[3] US Energy Information Administration. "U.S. Energy Information Administration - EIA - Independent Statistics and Analysis." Russia, Overview and Data. November 26, 2013. Accessed January 3, 2015. http://www.eia.gov/countries/country-data.cfm?fips=RS.

[4] Dorning, Mike, and Ian Katz. "U.S. Won't Ease Sanctions to Stem Russia's Economic Crisis." Bloomberg. December 16, 2014. Accessed January 3, 2015. http://www.bloomberg.com/news/2014-12-16/u-s-won-t-ease-sanctions-to-prevent-economic-meltdown-in-russia.html.

[5] The CFR. "About CFR." Council on Foreign Relations. January 1, 2014. Accessed January 3, 2015. http://www.cfr.org/about/.

[6] Zarroli, Jim. "Sanctions Intensify Russia's Free Fall Into Economic Crisis." NPR. December 31, 2014. Accessed January 3, 2015. http://www.npr.org/blogs/parallels/2014/12/31/373982116/sanctions-intensify-russia-s-freefall-into-economic-crisis.

[7] Zarroli, Jim. "Sanctions Intensify Russia's Free Fall Into Economic Crisis." NPR. December 31, 2014. Accessed January 3, 2015. http://www.npr.org/blogs/parallels/2014/12/31/373982116/sanctions-intensify-russia-s-freefall-into-economic-crisis.

[8] Vasilieva, Marina, and Elena Karaban. "World Bank Revises Its Growth Projections for Russia for 2015 and 2016." The World Bank. December 9, 2014. Accessed January 3, 2015. http://www.worldbank.org/en/news/press-release/2014/12/08/world-bank-revises-its-growth-projections-for-russia-for-2015-and-2016.

[9] Gordts, Eline. "Russia's Wealth Inequality One Of Highest In The World." The Huffington Post. October 9, 2013. Accessed January 3, 2015. http://www.huffingtonpost.com/2013/10/09/russia-wealth-inequality_n_4070455.html.

[10] Weiss, Andrew. "Russia’s Oligarchy, Alive and Well." The New York Times. December 30, 2013. Accessed January 3, 2015. http://www.nytimes.com/2013/12/31/opinion/russias-oligarchy-alive-and-well.html?_r=0.

[11] Amnesty International. "Russian Businessmen Declared Prisoners of Conscience after Convictions Are Upheld." Amnesty International. May 24, 2011. Accessed January 3, 2015. http://www.amnesty.org/en/for-media/press-releases/russian-businessmen-declared-prisoners-conscience-after-convictions-are-uph.

[12] "Yukos 2.0?" The Economist. September 20, 2014. Accessed January 23, 2015. http://www.economist.com/news/europe/21618848-arrest-vladimir-yevtushenkov-recalls-mikhail-khodorkovsky-yukos-20.

[13] "Yukos 2.0?" The Economist. September 20, 2014. Accessed January 23, 2015. http://www.economist.com/news/europe/21618848-arrest-vladimir-yevtushenkov-recalls-mikhail-khodorkovsky-yukos-20.

[14] Meyer, Henry, Reznik, Irina. "The Chilly Fallout Between Putin and His Old Oligarch Pals." Bloomberg.com. January 23, 2015. Accessed January 23, 2015. http://www.bloomberg.com/news/2015-01-22/putin-said-to-shrink-inner-circle-as-ukraine-hawks-trump-tycoons.html.

[15] The Associated Press. "Poll: 81 Percent Back Putin Even as Ruble Falls." The New York Times. December 18, 2014. Accessed January 3, 2015. http://www.nytimes.com/aponline/2014/12/18/world/europe/ap-eu-russia-putins-people.html?_r=0.

[16] The Associated Press. "Poll: 81 Percent Back Putin Even as Ruble Falls." The New York Times. December 18, 2014. Accessed January 3, 2015. http://www.nytimes.com/aponline/2014/12/18/world/europe/ap-eu-russia-putins-people.html?_r=0.

[17] Meyer, Henry, Illya Arkhipov, and Olga Tanas. "Putin Vows to Punish Speculators Pushing Down Ruble's Value." Bloomberg. December 4, 2014. Accessed January 3, 2015. https://www.bloomberg.com/news/2014-12-04/putin-says-crimea-is-russia-s-temple-mount-sacred-for-country.html.

[18] Russian Times. "'Remember Lessons We Taught Hitler': Top 10 Quotes from Putin's State of Nation Address." RT News. December 4, 2014. Accessed January 3, 2015. http://rt.com/news/211411-putin-state-address-top10/.

[19] Heritage, Timothy, and Alexei Anishchuk. "Putin Says Russia Economy Will Be Cured, Offers No Remedy." Reuters. December 18, 2014. Accessed January 3, 2015. http://www.reuters.com/article/2014/12/18/us-russia-crisis-putin-idUSKBN0JV2R120141218.

[20] Isachenkov, Vladimir. "Putin Calls Annexation of Crimea a Historic Landmark." TWS Central. December 31, 2014. Accessed January 3, 2015. http://www.twcc.com/articles/2014/12/31/p/putin-calls-annexation-of-crimea-a-historic-landmark?cid=cm_ptnlnd_nw_cdn_dt_ag_860902.

[21] Reuters. "Russia's New Military Doctrine Names NATO as Key Risk." The Globe and Mail. December 26, 2014. Accessed January 3, 2015. http://www.theglobeandmail.com/news/world/russias-putin-signs-new-military-doctrine/article22211103/.

[22] Heritage, Timothy, and Alexei Anishchuk. "Putin Says Russia Economy Will Be Cured, Offers No Remedy." Reuters. December 18, 2014. Accessed January 3, 2015. http://www.reuters.com/article/2014/12/18/us-russia-crisis-putin-idUSKBN0JV2R120141218.

[23] W, C. "What Dutch Disease Is, and Why It's Bad." The Economist. November 5, 2014. Accessed January 3, 2015. http://www.economist.com/blogs/economist-explains/2014/11/economist-explains-2.

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