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Walker's World: Putin's gamble

By MARTIN WALKER, UPI Editor Emeritus   |   March 5, 2014 at 10:25 AM
WASHINGTON, March 5 (UPI) -- Russian President Vladimir Putin may think he's won the current battle of Ukraine but he's likely to lose the war.

The Kremlin's own opinion pollster finds fewer than a quarter of Russians approving military intervention in Crimea, despite the blanket propaganda over the Russian media of Ukrainian neo-Nazis launching an illegal coup in Kyiv menacing ethnic Russians.

Across Europe, government officials and energy executives are urgently seeking ways to reduce their reliance on Russian oil and gas by turning to alternative pipeline routes and liquefied natural gas. Central Asian countries like Kazakhstan, long thought be locked within a Russian sphere of influence, have expressed official concern at Putin's move, knowing that this precedent of intervention in the name of protecting Russian nationals could in future apply to them, too.

Nearly 2,000 years ago, the Roman Emperor Caligula said, "Let them hate me, so long as they fear me." That seems to be Putin's policy as well. He has thrown away whatever soft power benefits came from the lavish Winter Olympics at Sochi and he's probably losing the planned Group of Eight summit at Sochi this summer. He may even lose Russia's status as a member of the G8, which now seems likely to return to its traditional G7 structure.

The most profound mistake that Putin seems to be making is that he is seeking to elevate Russia to great power status when neither its economy nor its demographics are capable of sustaining such an ambition. With a shrinking population of 140 million, (and male life expectancy of less than 60 years) Russia has a GDP (gross domestic product) of about the size of Italy, which has less than 40 percent of Russia's population.

The Russian economy is desperately dependent on its exports of oil, gas and other raw materials. It has not yet succeeded in developing a broadly-based modern economy. According to the U.S. Energy Information Administration, 70 percent of Russia's annual $515 billion in exports, and 52 percent of the national budget, come from exports of oil and gas.

Putin has frittered away the energy bonanza that came from high oil prices. In 2007, the Russian finance ministry reckoned the country needed an oil price of $37 a barrel to avoid borrowing money. This year, that budget break-even price for oil is more than $100 a barrel. Putin has thrown money at pensions, the police and military, public employment and glittering showcase projects like the $50 billion spent on the Winter Olympics.

Gazprom has already been forced to renegotiate its prices down for its European clients. Last June, Gazprom announced it was cutting its gas price for European clients from an average $402 per thousand cubic metres to $370-380. Europe is already switching suppliers, importing more gas from Norway's Staoil than it does from Russia.

Russians themselves appear unconvinced that Putin has made their country a good place to invest their savings. Capital flight has averaged around $60 billion in each of the last two years, and hit a startling $17 billion in January. Economic growth last year was an anaemic 1.2 percent, and most of that came from the lavish public spending on Sochi.

Foreign investment had been improving, but could now face difficulties as international corporations wonder how safe their investments might be in a country where the rule of law and the tax system are capricious and corrupt. Last year, Russia crept into third place after the U.S. and China as a recipient of FDI (foreign direct investment), but most of the growth came from the extraordinary one-off deal under which BP (British Petroleum) took an 18.5 percent stake in Rosneft, after Rosneft acquired the TNK-BP oil group.

The key question is what has Putin gained, except for a reputation as an unreliable international partner and a bully? He has secured the Crimean peninsula, but Russia already enjoyed naval-basing rights at Sevastopol so this hardly increases Russia's power in the Black Sea. He has shown his determination to maintain Russian influence over Ukraine, despite the diplomatic price he is paying in relations with Europe and the United States.

But Putin has done so in a manner which is likely to fuel Ukrainian resentment of its elephantine neighbor, and remind them of the difference between being a part of a free and still-prosperous Europe, and being a client state of an authoritarian and saber-rattling Russia.

Putin may be gambling that Western will is feeble and memories are short, and that British and German hesitance over imposing sanctions proves that he will not pay much of a long-term price for his actions, just as he paid little price for the invasion of Georgia in 2008. Putin probably suspects that the Europeans need Russia's energy and markets more than he needs their goodwill and respect.

The Western democracies may be slow to react and wary of military complications, but they remember another authoritarian leader who operated under the motto, 'Let them hate me, so long as they fear me.' And they are not thinking of Caligula.

End

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