Understanding Putin

Motifs of the Crimean campaign

Recent conclusions made by two international rating agencies, which have adequately assessed the state of the Russian economy, confirm the conclusion made by Turan agency about the causes and motives of the Russian president Vladimir Putin"s actions against Ukraine. 

Turan agency noted that like in the case with the annexation of part of Georgia in 2008, this time, under the current aggressive attitude towards Ukraine, Putin used the information and military violence to distract Russians from growing domestic economic problems. The victory over the "enemy" with unequal weight category and incomparable military capabilities would provide the following tasks:

Increase confidence in the president and his entourage,

Justified the reasons for the economic crisis by the revenge of the West,

Disoriented Russian citizens,

Allows persecution of the opposition,

Brings fear into society,

Intensified manipulation of society which is in crisis allows avoiding internal destabilization due to a sharp deterioration of people"s welfare.

And he succeeds in it. Last summer his impersonation Sobyanin was losing the weak opposition at the elections the mayor of Moscow, and now Putin's rating is more than 70 percent.

Economic Decline

It would be wrong to connect the reports of the rating agencies Fitch and Standard & Poor's that downgraded the forecast for Russia's credit rating from "stable" to "negative" with the annexation of the Crimea. Recently published data on the state of the Russian economy in the first months of this year show a worst development of scenario, and the implementation of the worst forecasts that Russian experts made in early 2013.

"The situation in economy has a distinct character of the crisis," said on March 17 Sergey Belyakov, Deputy Minister of Economy of the Russian Federation. He called on the Russian government not to increase the fiscal burden on the company, according to Bloomberg, which wrote: "Even before the standoff with the West, the worst since the Cold War, the Russian economy faced the strongest weakening of growth since the recession in 2009: consumer demand could not offset the decline in investment."

Economists Vladimir Kolychev and Darya Isakova (VTB Capital) wrote in the report that in the second and third quarters of this year, Russia will face recession: "Internal demand has stalled because of the shock caused by uncertainty and tighter financial conditions." They lowered the growth forecast for 2014 from 1.3% to zero.

Economists Morgan Stanley, Jacob Nell, and Alina Slusarchuk also reduced the forecast the economic growth of Russia"s economy in 2014 from 2.5% to 0.8%. According to them, in the first half of 2014 Russia will be close to a recession.

According to the Capital Economics (London), the outflow of capital from Russia in the first quarter could reach $70 billion, and "there is a real risk that it will push Russia into recession, although this amount was called earlier as the total for the entire 2014 year.

In 2012 the outflow of capital from Russia amounted to $54.6 billion, last year - $ 62.7 billion, but the Ministry of Economic Development estimated the outflow of capital from Russia in January-February 2014 in the amount $35 billion. However, according to the economic policy of the Institute of Economic Policy named after Gaydar, in the first quarter outflow will reach $73-$75 billion, "VTB Capital" RBC noted the forecast $65- $70 billion.

According to Aleksey Vedev, the Director of the Center for Structural Studies (JRC) of the Institute named after Gaydar, investors tend to withdraw their capital "at any price", at any rate of the Central Bank.

Institute of Problems of Natural Monopolies noted temporary or permanent suspension of production in the country. In addition to aluminum plants in the European part of Russia, which are being closed due to high electricity prices, various automobile manufacturers and the largest fertilizer producers also have problems (sales crisis). This negatively impacts the result of industrial data. According to the Institute, in Russia in February 2014 production fell to 0.04 percent compared to February 2013, while demand fell by 1.9 percent. Over January-February 2014 production index fell by 1.8 percent compared to the same period last year, the demand has also declined, falling from the beginning of 2014 was 1.5 percent.

Analyst of the Russian company FINAM, Alexei Zakharov, also has come to the conclusion that under such circumstances the authorities may need a high rating adoption of unpopular decisions. "The economy and the financial system in Russia are upset. Under the wise leadership of the party (not the CPSU, but United Russia), and the government (again not the Cabinet of Ministers of the USSR) the state budget is coming to pieces. The state of regional budgets is also poor. As a consequence, the rate of ruble is unstable, and that caused the increase of prices, and the end of it is not visible yet. Under this situation the government has only one way out - the sharp devaluation of the ruble. This is a view of optimists, and pessimists even use the word "denomination." These actions can pass under the banner of the annexation of Crimea. I would like to note again: the Crimean events are not the cause of a possible devaluation/denomination of the Russian currency - it's just an excuse. Nevertheless, the authorities are trying to convince us that this is the payment for the expansion of Russia"s territory," the analyst said.

Another Russian economist, Director of the Center "Neoekonomics", Oleg Grigoryev, notes that

"High rate of dollar or the euro is good for the economy, when it has reached the bottom, but not in our case, when we are approaching it." Along with the inevitable increase in the outflow of capital from the country, declining oil prices and other restrictive measures, the increase of rate will exclusively negatively impact on economic life. Grigoryev noted that the rate of dollar is not high enough to stimulate the positive trends in the economy, but it is quite enough to cause the closure of various production units or enterprises aimed at international markets or depending on them. Due to the recent change in the refinancing rate, approximately two hundred Russian banks were in limbo. Enterprises have credit and payment problems. Those who are involved in foreign exchange transactions also have faced slight disorientation, but the rate of disasters yet to be assessed, just like the scope of the problems.

Alexei Bayer, the economic observer of the New York magazine "Research" reported that Russian officials have already warned everyone that, in response to Western sanctions Russia could announce default. This confirms the assumption that the Kremlin is preparing to justify the most extreme scenarios not by internal problems, but by external pressure and isolation from the U.S. and the EU.

If we take into account that Russia is entering a protracted crisis, we should expect from Putin new adventures against neighbors in the former Soviet space, as well as strengthening internal dictatorship, what will be justified by external threats to Russia. Vulnerable Belarus and Kazakhstan, the countries with large Russian-speaking population, have to accept Crimea"s annexation in order to protect Russian speaking population. Moldova and Armenia have begun to accelerate the process of European integration, and Azerbaijan is showing off its military power.

Western position - good and bad

Experience of post-Soviet years shows that the West is not going to aggravate internal crisis in Russia, in order not to bring the country, full of nuclear warheads, to a state of chaos with the prospect of collapse. Russia remained unpunished for rejection of Karabakh, Transnistria, the annexation of Abkhazia and Ossetia. After joining the peninsula to Russia, tough common position the USA and EU before the annexation of the Crimea has changed or divided to firm and soft. Although both sides have applied personal sanctions, "good" EU has already stated that contrary to "bad" America, it is not going to impose economic sanctions against Russia.

Like in previous crisis years, the start of active dialogue between Russia and the West should be expected by autumn, first of all with the EU, and providing substantial financial assistance, more active introduction of Western capital into the Russian economy. By this time, Ukraine will endure presidential and parliamentary elections will sign an association agreement, will begin with western support already approved a seven-year program of economic reforms amounting tens of billions of dollars. Russian gold and currency reserves in the range of $500 billion will allow the country to be afloat for six months till the arrival of Western rescuers.

Of course, Ukraine's relations with Russia, will not return to pre-crisis state, but the countries, distancing from each other, will look for common ground to implement some joint projects , as far as it is possible. This is evidenced by the cooling ardor of politicians in Moscow and Kiev, who are more concerned about internal stability, as well as the experience of Russia"s post-crisis relations with Moldova and Georgia after the rejection of Transnistria, Abkhazia and South Ossetia.