There’s a depressing familiarity about the tensions between Russia and the West at the moment. While it’s not yet up there with the very real fears that I had growing up in the seventies and eighties that bombs could start falling at any moment, I must admit to a certain growing disquiet. The situation in Ukraine was disturbing enough, but we seem to be coming to a flashpoint that I’m hoping won’t actually spark.
On the ground, Nato reports that 20,000 troops remain stationed near the Russian-Ukraine border, many marked with peace-keeper labels, suggesting to some minds that the excuse of a “humanitarian mission” will be used to disguise an open attack on the region. It invites parallels with the Russian invasion of Afghanistan, and Vladimir Putin has on many occasions made it clear that he intends to use any means at his disposal to bring Ukraine back into Russia’s sphere of control. The prospect of Ukraine joining Europe or Nato would be unacceptable to Russia’s security in any case, but as attempts to split, destabilise and federalise Ukraine have failed, it does look like the only remaining choice for the Kremlin would be either to use direct military force, or to climb back down. Ukraine may have started as being generally friendly to Russia, but recent events have soured those relations irrevocably.
What does seem clear is that the economic war has already begun and that Vladimir Putin has dug in for an extended siege. You might have expected that sanctions imposed by Europe and the US over Russia’s behaviour, compounded by the coincidental timing of judgements at the European Court of Human Rights and the Hague in the Yukos Affair, could give the Kremlin pause. If so, there are few signs of it. Instead, Russia has announced food import sanctions from a range of Western countries and appears to be entering into an oil deal with Iran that seems designed to skirt sanctions on both countries.
The Russian expansionist policies seem to have mostly gained traction since the beginning of the global financial crisis, and according to academic researchers Russia has introduced 38 measures this year that directly harm existing trading partners. Extensive use of subsidies, tariff increases and barriers to import seem similar to the Soviet-era import substitution policies. Russia seems intent on withdrawing from the global markets; and it is important to note that many of these protectionist policies began before the wide ranging sanctions by were introduced.
Banking restrictions have already affected Russia’s liquidity as banks have not been lending in dollars, euro or yen since the beginning of July. I do wonder if the sense of macho pride that Putin’s supporters have raised have ended up trapping him. The gamble in Ukraine has already failed to bring about a popular uprising in support of Russia despite support from Russian security forces. Attempts to split Europe (especially Germany) from cooperating with the US or cutting special deals seem to have been rebuffed or quietly moved onto back burners, and while the sanctions on the oil sector seem harsh, they’re actually quite light.
The current restrictions on Russian oil cover only the technologies needed to develop Arctic oil and gas fields and develop shale reserves – the far more profitable gas production revenue still remains unaffected, leaving a very serious card to play on both sides. The problem seems to be at the moment that Russia’s economy is no larger than that of California and is mostly reliant on the industrial core provided by its oil. With the banks not lending to Russia, things will get worse quickly.
The International Energy Agency says Russia will need to invest $100 billion a year over the next two decades just to maintain its output, while Russian companies and the state currently owe over $610 billion in assorted foreign currencies, with payment deadlines fast approaching. This isn’t an immediate problem due to Russia’s enormous reserves, but its a slow strangle hold that must be worrying. On the other side of the equation, the world seems to be moving away from a reliance on Russian oil and gas. The key for both sides seems to be China, which is aggressively expanding and breaking Russia’s monopoly on pipelines.
What does this mean for Ukraine? Well, it isn’t a member of Nato and hasn’t got protection. Russia may well move to invade and the choice may be made to allow it. I think Russia has tricked itself into fighting the wrong war with the wrong weapons, but that won’t help the people caught in the crossfire.