Huffpost WorldPost
Michael Kay Headshot

Russia's Economy -- a Crevasse in Putin's Armor

Posted: Updated:

With every threat there's an opportunity, or so the saying goes. The poorly disguised Russian invasion of Crimea is born from the very notion of Europe offering Ukraine an alternative to Putin's simplistic warrior mindset that can only be described as pre-consensus, pre-modern and pre-democratic. In the short term, Ukraine losing its southern peninsular to Putin's advances is a likely outcome (although not a fait accompli). But for the long term, this crisis has presented the U.S. administration with a very real opportunity to undermine Putin's political future by crippling the long-term economic influence and stability of the Democratic Federative Republic.

Diplomatically, the options are limited. The West could bring the issue of Putin invading Ukraine's sovereign territory to the United Nations Security Council, but Russia is one of the Permanent 5, so an official resolution would be improbable. America and Britain would also have to somehow negotiate the inevitable accusation of hypocrisy from Putin given the illegal invasion of Iraq in 2003.

Militarily, NATO's raison d'être now seems secure beyond the non-state actor counter insurgency landscape, played out in Iraq and Afghanistan for over a decade. NATO could expedite the membership of Moldova, and commence discussions on a 'post Yanukovich' Ukraine joining the alliance -- a move, however, that is more likely to provoke and escalate, rather than diffuse.

The economic relationship between Russia (as the provider) and Europe and Ukraine as (the consumer) is a co-dependent arrangement. Granted, approximately 30 percent of Europe's natural gas is currently sourced from Russia, the larger users including Germany, The Netherlands and Italy. Targeting this reliance dynamic is critical to the West for two reasons. In the short term, sanctions will be as much use as an ashtray on a motorbike if the major economic powerhouses in Europe depend on Russia for energy continuity. In the long term, depleting Putin's already fragile economy, is highly likely to suffocate any expansionist tendencies, or at least force an option of bankruptcy as a trade off.

Putin sits atop an emerging market economy that has already been battered by the undesired effects of the Federal Reserve's loose monetary policy. Russia's GDP in 2012 was 3.4 percent; in 2013, the $2T economy decelerated by almost a third to 1.3 percent, with the ruble becoming one of the world's major currency casualties. The recent geo-political uncertainty is compounding Putin's headache. Russia's main stock index closed down 12 percent on March 3 -- the biggest single-day drop in five years, and 10-year bond yields are soaring making it more expensive for Russia to service its debt.

Moreover, in 2007, Gazprom, Russia's gas export monopoly, held the world's third largest market share valued at $360 Billion. In 2013, it was worth $77Bn and was expected to slide further as the supply of cheaper liquefied natural gas from the U.S.'s shale gas revolution caused Europe to balk at Gazprom contracts tied to more expensive oil.

Losing Europe as a customer would be disastrous for Russia. However, even more crippling would be the loss of Ukraine's demand, a country that sources over half its natural gas supply from Gazprom. The threat of energy independence from an alternative provider would have far reaching and dire consequences that Putin just cannot entertain -- socioeconomic tremors and instability rippling from Moscow outwards, would be just the foreshock.

Putin has marched himself into a corner with no alternatives to an economy that is entirely reliant on oil and gas. Russia's prospects for growth are severely constrained by a long-term decline in labor supply as a consequence of low fertility rates and high premature mortality rates. Innovation and entrepreneurship are suffocated by a lack of structural reform, inequality between private and state-owned enterprises, and access to credit.

Corruption is rife throughout the political and economic lines of development in Russia. Foreign investment will remain subdued as long as Putin continues to attempt to control civil society, restrict political opposition and marginalize minority groups. Soft power, a negotiating attribute that has become intrinsic to leadership within the contemporary security landscape, remains a dim and distant lever for Putin.

Sun Tzu, the ancient Chinese military strategist, said that: "The opportunity of defeating the enemy is provided by the enemy himself." Russia's reliance on Gazprom combined with a domestic economy that is in dire need of reform supports Sun Tzu's theory. It may be too late for the U.S. administration to salvage Crimea in the short term. But crafting an energy strategy that bolsters future geopolitical security for Europe and Ukraine would exploit the homemade crevasse in Putin's armor, could kibosh any expansionist long-term tendencies currently in Putin's pipeline, and support the transition of Eastern Europe into a modern, democratic and consensus based region.