Sunday

4th Dec 2016

Column / Crude World

The Kremlin's money problems

  • Despite all of Putin’s bluster the Kremlin was very keen to avoid being hit by additional sanctions. (Photo: kremlin.ru)

At a summit of the BRICS nations in India on 17 October, Russian president Vladimir Putin defiantly stated that Western powers could “screw themselves” over the threat of more sanctions against his country.

Earlier the US and the UK had threatened to slap additional measures on Russia over its relentless bombardment of the Syrian city of Aleppo. Putin is eager to show to the world that sanctions have little impact on his country and that the West is primarily scoring an own goal by holding on to them.

The Kremlin’s most recent moves with regard to the so-called humanitarian pause in Aleppo however betray that Russia is keen to see sanctions lifted.

Russia’s economy is in recession. GDP shrank by 3.7 percent last year and real disposable income nosedived by as much as 10 percent. Faced with this poor performance, the Russian government has been forced to tap into its rainy-day fund, made of oil and gas revenues, to cover budget shortfalls.

Now going on two years since Russia’s attack on Ukraine, that fund has shrunk to only $32.2 billion. That may seem like a lot of money still. But if you think that in September 2014 the fund held as much as $91.7 billion, the withdrawal rate has been nothing short of breathtaking. And when it rains, it pours; expectations are that the fund will shrink even further to just about $15 billion by the end of the year and be completely empty shortly after that.

So what comes next? Once the reserves are depleted, the Russian government could always turn to its Welfare Fund, which according to the Kremlin holds over $70 billion. There is just one problem – the fund is designed to be used to finance future pensions and large-scale investment projects.

Be that as it may, if Putin’s decisions in the past two years are anything to go by, it should be expected that he will prefer ripping off pensioners over instigating much needed reforms.

If it’s broke, don’t expect Vlad to fix it

Many of the problems facing the Russian economy today are the result of the poor investment climate in Russia itself and a chronic lack of reform. Corruption is rife, property rights are violated arbitrarily and there is no independent judiciary.

When oil prices went through the roof throughout the 2000s, much of this was camouflaged. With oil hovering around $50, however, there is no hiding the fact that the Russian economy is not exactly on par with Silicon Valley.

One should not expect Putin to tackle these issues head-on. After all, doing so would mean breaking with a fundamental pillar of his rule.

Instead the Russian government prefers to tap into its reserves and stimulate the economy via investing in the military sector and through infrastructure projects.

Much of this money is unlikely to really do much good. Putin’s only hope may be a recovery of oil prices in light of the recent deal agreed by Opec to cut output.

However, with the details conveniently left out of that agreement it should not have come as a surprise that Opec members have resorted to their age-old squabbling about who should cut how much production.

Behind the bluster

If we believe Putin’s rhetoric that the sanctions are not harming Russia to a great extent, then neither should he be truly worried about the fact that he is burning money like there is no tomorrow.

Russia’s recent diplomatic moves, however, firmly undermine this line of reasoning.

On 17 October, Russia announced a humanitarian pause in its bombing of Aleppo would take effect three days later during which aerial operations would be halted for a total of eight hours.

Not coincidentally, on that same day European heads of state gathered in Brussels to discuss the current situation in Syria and Ukraine and whether or not to place additional sanctions on Russia over its conduct in Syria.

Germany, France and the UK were keen to punish Russia for its actions. EU leaders however ultimately failed to agree, with the Italian prime minister Matteo Renzi playing a key role in forcing a retreat from new sanctions.


Unsurprisingly, Russia is now back to bombing Aleppo. Its aircraft carrier Admiral Kuznetsov is on its way to the Mediterranean to join in on the operations.

What this episode tells us is that despite all of Putin’s bluster the Kremlin was very keen to avoid being hit by additional sanctions. With the Russian economy bleeding badly, European leaders would do wise to act more decisively next time sanctions come up for renewal.

The Crude World monthly column on Eurasian (energy) security and power politics in Europe’s eastern neighbourhood is written by Sijbren de Jong, a strategic analyst with The Hague Centre for Strategic Studies (HCSS), specialised in Eurasian (energy) security and the EU’s relations with Russia and the former Soviet Union.

Column / Crude World

Shinzo Abe's hot-tub diplomacy

Why European leaders should learn from Japanese prime minister's failing diplomacy with Russia and not make the same mistakes.

Opinion

The young didn’t choose Trump or Brexit

Young people have been sold down the river by this year's political events, but it's not too late for Europe to safeguard the future for the world's youth.

News in Brief

  1. Talks on wholesale roaming rules to start
  2. Lead MEP Dieselgate committee: Italy and Slovakia will cooperate
  3. Transparency NGO sues EU commission on Turkey deal
  4. Pro-EU liberal wins UK by-election
  5. Finnish support for Nato drops, Russia-scepticism grows
  6. Cyprus talks to resume in January
  7. Documents from German NSA inquiry released
  8. Transport commissioner 'not aware' of legal action on emissions

Stakeholders' Highlights

  1. CESIElects Leaders and Sets Safety & Health at Work and Gender Equality Among the Guidelines For Next Term
  2. European Gaming & Betting AssociationContinues to Grow its Membership and Welcomes its Newest Member Association
  3. ACCASupports the Women of Europe Awards, Celebrating the Women who are Building Europe
  4. European Heart NetworkWhat About our Kids? Protect Children From Unhealthy Food and Drink Marketing
  5. ECR GroupRestoring Trust and Confidence in the European Parliament
  6. UNICEFChild Rights Agencies Call on EU to put Refugee and Migrant Children First
  7. MIRAIA New Vision on Clean Tech: Balancing Energy Efficiency, Climate Change and Costs
  8. World VisionChildren Cannot Wait! 7 Priority Actions to Protect all Refugee and Migrant Children
  9. ANCI LazioRegio-Mob Project Delivers Analysis of Trasport and Mobility in Rome
  10. SDG Watch EuropeCivil Society Disappointed by the Commission's Plans for Sustainable Development Goals
  11. PLATO15 Fully-Funded PhD Positions Open – The Post-Crisis Legitimacy of the EU (PLATO)
  12. Access NowTell the EU Council: Protect our Rights to Privacy and Security

Stakeholders' Highlights

  1. ACCAThe Future of Audit Means Adaption to Today’s Global and Digital World
  2. Swedish EnterprisesNew Rules for EU Anti-dumping Measures
  3. European Jewish CongressTakes Part in Building Resilient Communities
  4. UNICEFUniversal Children’s Day: UNICEF Calls for Global Action on Child Rights Violations
  5. Counter BalanceThe EU Bank Cannot be a Key Player in Europe's Response to the Plight of Refugees
  6. International Partnership for Human RightsProvides Evidence of Human Rights Violations and International Crimes in Crimea
  7. Dialogue PlatformThe Failed Military Coup in Turkey & The Mass Purges
  8. Nordic Council of MinistersNew Nordic Climate Solutions at COP22 in Marrakech
  9. Counter BalanceNGOs Call on Development Finance Institutions to Act Against Tax Avoidance
  10. European Free AllianceTrump Victory and Brexit Show Urgent Need of Improving Democracy
  11. Martens CentreOur Transatlantic 9-11: Europe After Trump
  12. Dialogue PlatformTimmermans Points to Gülen Movement as Coup Plotter But Lacks Proof