Putin Enjoys His Moment Of Glory – But Russia’s Economic Future Is Bleak

WASHINGTON – As I predicted, the Crimea invasion failed to trigger serious actions against Russia. Sure, Western governments have protested and have enacted a few, largely symbolic, sanctions targeting a few people close to Putin and a bank in Russia. But the fact is that there is no intention whatsoever to force Russia to give Crimea back to Ukraine.

Putin keeps Crimea

In Washington and in Europe all leaders and military experts have tacitly agreed that “there is nothing we can do” to reverse Russia’s annexation of Crimea. Ukraine is not a NATO member. And, in any event, NATO has no military assets close to the theatre, and no ability to deploy any credible force in the Black Sea region. Besides, who wants a serious confrontation or may be even a war with Russia over Crimea, a mostly Russian speaking region that used to be part of Russia in the first place?

So, we lost. President Barack Obama lost again, showing one more time that his indignant rhetoric about this invasion is essentially harmless. Once again the world looks at America and sees a country essentially disengaged from world affairs.

Russia: from conquest to conquest?

That said, the idea that Putin now is in command and can do as he pleases when it comes to Russia’s “near abroad” is false. There is no question that the conquest of Crimea is a major tactical victory. And the totally clueless Russians applaud, as if a (small) territorial gain were a real indicator of Russia’s fundamental strength.

Bleak economic future

Still, even if Putin now enjoys fantastic levels of popular approval (80%), Russia’s future is bleak because of its rotten economy. Economist Sergei Guriev, in an op-ed piece in The Financial Times, (Corruption has laid waste to the Russian economy, April, 3, 2014), explains how Putin’s political base will shrink, on account of the shrinking Russian economy. Putin bought votes with lavish social spending financed by substantial oil and gas revenue. Until Russia’s economy was growing at a robust 7% a year clip, all was well. Pensioners got more money, other categories got subsidies.

But now the party is over. The economy grows at 1.5% a year, while the chances of diversifying it are small. Extremely high levels of corruption make Russia unappealing to foreign investors, while Russia’s wealthy elites seek opportunities to park their money abroad.

Which is to say that Russia’s economic future looks bad, while, going forward, it is no longer a sure thing that Putin’s popularity, until yesterday made possible by lavish subsidies, will remain intact.

Increased energy supplies bad news for Russia

Further down the line, there will be significant increases of global energy supply that will seriously undermine whatever leverage Russia still retains today as a major producer and exporter of oil and gas.

The United States will soon start exporting its own Liquefied Natural Gas, (LNG). The quantities are not going to be huge; but they will augment total supply. In the meantime, China, the country that has the largest proven shale gas reserves in the world, just started to produce some gas from these unconventional sources. Expect more as the Chinese learn how to use fracking to extract shale gas. And there is plenty more shale gas in Argentina, Mexico, South Africa and elsewhere. Europe, while still prisoner of anti-carbon fuel ideological biases, at some point will wake up and start producing the shale gas it has.

This means that Russia’s traditional captive markets will develop alternatives and therefore more bargaining power. Today some European countries have no choice. They have to buy their gas from Russia.

New producers

But just a few years from now, the picture will be radically different. Imagine a new world in which China develops its own shale gas, while in Europe The UK and Poland, at some point followed by France and others, will also start producing their shale gas, while America will add to global LNG supplies. As a minimum, Russia will have to lower its natural gas prices in order to stay competitive. Worse case scenario, Russia will lose at least some of its export markets.

This means less revenue from one of the few valuable resources Russia has. Assuming Russia’s persistent inability to attract new investments in high-tech in order to engineer higher growth rates, its economic future looks pretty bad.

Putin unable to create sustainable growth

All this will take a few years; but we are certainly headed that way. There will be more gas available worldwide, and this will hurt those who believe they have a lock on the markets and who count on gas revenue as a major economic pillar.

Maybe by that time Putin will be gone from the scene. But the Russian people who now acclaim the conquest of Crimea as a great national achievement will be impoverished, and they will be forced to re-examine their love affair with Putin –an unimaginative despot who could not create the foundations for sustainable economic growth.


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