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Wednesday, December 17, 2014

The Kremlin's Next Step: Oil, the Rouble, and Ukraine



As Father Winter descends on the northern hemisphere, there are winds of change and uncertainty swirling around the proud steeples guarding the Kremlin. 

Russia’s economy is in trouble. Oil, the cornerstone of the Russian economy, has seen its prices free-fall in recent weeks. Sanctions bite at the economy because of Russia’s involvement in the Ukraine crisis, which the Kremlin continues to deny. Russia’s currency, the rouble, is rapidly losing value. Before the crisis in Ukraine, Russia’s rouble was stable, fluctuating modestly roughly between 28 and 35 per U.S. Dollar. Today, it takes more than 60 to receive a dollar in return. That number could continue to grow in the future. The stability that has gained President Putin so much popularity in the past may be starting to crack. 

Russia is under pressure from the United States and European Union to end its involvement in the crisis that has put Ukraine into a bind. An uneasy ceasefire seems to be holding, but a sliver of land in Ukraine’s Donets basin (often called the Donbass or Donbas) remains in pro-Russian separatist hands. 

The decisions the Kremlin decides to undertake in the next few months could have lasting ramifications for Russia’s future. If the Kremlin plays its cards right, it may be able to escape severe economic problems that could plague Russia in 2015 and beyond. 

Let’s examine some possibilities of choices the Kremlin can undertake in an attempt to restore stability. 

Scenario #1: Cooperate with the United States and European Union to end the crisis in Ukraine in exchange for a perceived return to economic stability

This is, understandably, the path that would sit the best with the west. Russia can agree to negotiations with Kiev, Brussels, and Washington to bring lasting peace to Eastern Ukraine. In a joint agreement, Russia, the European Union, and the United States can send resources to rebuild the Donbas from the damage it’s suffered in the war if it agrees to return to Ukrainian rule. In return, Russia’s economy would jolt back to life from the sanctions relief. The rouble would, in theory, regains some of its value and stability, and foreign investors may return to Russia. 

What about Crimea? 

Crimea is already integrated into Russia and it’s hard to dispute that many Crimeans are happy that Russia retook the peninsula earlier this year. Its economic situation, unfortunately, is not as rosy. Since Russia’s takeover, the transition from Ukraine to Russia has been rocky. Supermarkets and department stores have seen shortages, banks were woefully unprepared for the currency transition from hryvnia to rouble, and the tourism industry of the region has nosedived. 

A return to Kiev is not the fix-all solution to these problems. Ukraine is not exactly a golden example of economic development at the moment-the hryvnia is performing almost as bad as the rouble right now and the Ukrainian economy is in dire straits, perhaps even worse than Russia's. Ukraine may be able to convince Crimeans to consider returning if western powers promise economic investment, pension increase and stability, the assurance of broad autonomy and self-government for the mostly-Russian peninsula. That is indeed a daunting task for President Petro Poroshenko and Prime Minister Arseniy Yatsenyuk, but Ukraine can't be counted out yet. Like Russia, Ukraine and its people have endured far, far worse than a sinking economy. 

What would this mean for the Kremlin? 

Vladimir Putin’s popularity has been constant among Russians, barring a considerable lull between 2011 and 2013 when fraudulent legislative elections drove liberal opposition politicians into the streets of many Russian cities. The Kremlin’s response to the Euromaidan Revolution in Ukraine has seen President Putin’s popularity skyrocket, and despite fears over the economy, Putin’s approval rating is still over 80%. 

Despite the possible economic benefits that could come with concession, that avenue many not sit well with many Russians who were swept up in the patriotic fervor of Russia’s retaking Crimea and the possibility of the establishment of Novorossiya. Concession to the west could result in a large loss of popularity for President Putin and his government. This could energize liberal Russians (liberal in this case means “anti-Putin”) to start calling for further reforms and even Putin’s resignation. Russian nationalists could be angered by concession, feeling betrayed and angry after the promise of patriotic expansion. 

How long these feelings of dissatisfaction would linger would largely depend on the economic performance after concession. If the economy was to start growing again, frustration with the Kremlin could subside after some time, and Putin may yet weather the storm. 

Scenario #2: The Kremlin digs in its heels

On the other hand, the Kremlin could dig in its heels and try to weather the storm of sanctions and an unstable currency while saving its pride.  

The risks could be much more grave in this case. The United States just approved a broader sanctions bill, and it looks like the European Union is going to continue its own sanctions. If oil prices continue to fall, the rouble will further destabilize, and the Central Bank of Russia cannot realistically keep propping it up artificially. 

If the rouble continues to fall from its already low position, Russians will lose faith in their currency-as will foreign investors, further damaging Russia's already faltering economy. 

This could no doubt remind Russians of the chaotic 1990s, when a completely worthless rouble and a frozen economy forced Russians to barter for goods. 

The turbulence of the 1990s is commonly associated what some perceive as Russia's failed experiment with western-style democracy, and is a source for disdain towards both democracy and the west. Russians in general do not distrust democracy, but its initial experiment was one failure after another, and Putin's "sovereign democracy" did not come out of nowhere. 

If this is the conclusion Russians make, there are two roads to go, one liberal, one nationalist. 

If Russia's problems get severe enough, they could  turn against the Kremlin's recent policies in Ukraine and elsewhere, demanding reforms and a move towards the west. Or, if the negative perception of the west holds up, Russians may start to see Putin as a leader who caved under pressure and did not do enough to make Russia strong in the face of its adversaries. Both of these avenues are treacherous, but they may become inevitable if the Kremlin decides to stay the course. 


President Putin derives broad support for a few primary reasons-the economic stability under his time in politics, his patriotic method of governing, and his reigning in of the oligarch networks that ran rampant under Yeltsin. Now, his role in these three different things is up for debate. Some argue that Russia's economic upturn in the 2000s was more a result of oil prices than Kremlin, and that oligarchs still control more than they should in Russia. But if today's problems continue, then one of Putin's primary sources of popularity-economic stability-may severely diminish. 

It's true Russians have been through much, much worse than Vladimir Putin's government. Russians of nearly every generation have been to hell and back and lived to tell the tale, and there is merit in saying that Putin's regime is the most stable and open Russia has been for centuries. 

Is this the beginning of the end for Putin’s stay in power? It’s much too early to say, but it is clear that there will be consequences for the Kremlin's actions. And it's not entirely true that Russians are afraid to speak against Mr. Putin-they did, in massive numbers, between 2011 and 2012, and these problems may be the spark to ignite new protests against the Kremlin's course. Whether a credible leadership will rise to guide it is an entirely different story that only time can tell. In the meantime, Russia has some serious problems to address. 



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