KYIV: The sanctions against Russia and oil price cuts have finally worked. They are destroying the Russian economy: the value of the Ruble has collapsed, losing 60% of its value since the PutInvasions of Ukraine started (80R/$ on Dec 16. When I lived there last, in 2007, it was 26). But that’s little solace for Ukraine, whose economy has collapsed faster, the hryvnia also losing 60% of it’s value since Putin’s war started (their embargoes started with the Maidan Protests a year ago). The difference was Russia had an enormous cash reserve of $550 billion, now supposedly ~ $400 billion, to weather shocks that allowed them to cruise through the 2008 crisis, whereas Ukraine had a $40 billion deficit, incidentally the same amount kleptocrat mis-ruler Yanukovych is alleged to have stolen in 4 years ($27 million/day).
The Western decision to assess sanctions on Russia after Crimea rather than give direct military aid to Ukraine consigned it to losing the Donbas*, since economic sanctions would take 8 months to a year to have any significant effect. Every cautious step of Putin’s escalation went unopposed, despite the ’94 Budapest Memorandum pledging US, England, and Russia to defend Ukraine’s borders in exchange for giving up their nukes, no spine was shown by America or NATO: Obama considered it a peripheral issue in Russia’s sphere of influence. A much firmer initial response could have probably backed Putin away from the Eastern insurgency/Invasion; Russia already had Crimea to digest. Ukraine could endure the loss of Crimea, but losing the industrial heart of Donbas likely would be fatal to the economy (letter/response with Obama), no matter how much Western money was thrown at them.
The problem with sanctions, besides being way to slow to have any effect on the War, was that they were regressive, not stimulative (as arms sales would be), damaging many economies, and would have no effect on Putin’s lust to recreate a Soviet Union v.2 in the Eurasian Customs Union he bullied several FSU republics into. Sanctions, in fact, to Vladimir Vladimirovich, were a tool of the weak, and infuriated him far more than a US fleet in the Black Sea or squadrons of F-16’s sent to Ukraine. The PutInvasions plus Sanctions have provoked a new Cold War as Russia retreats into isolation and self-pitying paranoia. The fallout from Russia and Ukraine’s economic devastation could soon spread beyond the countries that trade with Russia.
Putin’s response was almost comically bad, damaging the Russian economy more. He put an embargo on Western foods, causing hardship to modern Russians, who’ve grown accustomed to eating exotic foods after decades of deprivation (foreign vacations are now out of reach); he jailed even friendly oligarchs to rob their companies (released Yevtushenko Dec. 17), provoking capital flight of perhaps $200 billion; he continued sending massive Russian military aid and troops into the Donbas (whose missiles downed MH17); he spit in the West’s eye with reckless military provocations, like kidnapping an Estonian criminal investigator from the border just after Obama spoke there.
The Crimea, now part of the imperial realm, will also need billions of support (pensions, food, infrastructure), construction of a huge bridge across the Kerch Strait to link it to Russia, replacement of the devastated tourist industry. Unprepared to fund the destroyed Donbas (although some pensions are now being paid!), Russia is furious that Kyiv has cut off payments to the lost region, though they still are providing free heat and electricity (also to Crimea); even thought the insipid Donetsk Peoples Rep. has denied Kyiv the coal to fuel those power plants. This could force Russia to spend billions or face charges of betraying NovaRossiya, when all they wanted was to bleed Ukraine and prevent their ascension to NATO. Having created deep hatreds and grandiose expectations with a year of toxic TV propaganda, Mr. Putin can’t just abandon Noorossiya to evil Kyiv.
The Saudi oil price collapse- 70% of Russia’s problem (losing Russia $110 billion revenue in its $57 slide since the summer, oil +gas are 70% of Russia’s exports)- was more an act to punish Iran and Russia than their putative claim to crush the American shale oil/gas producers who have created the worldwide glut. Oil is set to fall more, maybe down to $30/barrel, stay there a year or more, and gas will soon follow (price is keyed to oil price on a 6 month delay: oil collapse started in June), forcing the Russians to renegotiate prices. And the Sanctions have made refinancing the huge Russian foreign bond payments due, impossible.
Ukraine, roiled by 6 months of protest, turmoil, revolution, invasion, and war; badly mishandled the initial subversion in the East. 60 loyal commandos and 500 troops could have easily taken back all Separatist occupied buildings in April-May (I begged ministers to do that- for weeks the rabble was drunk- every week delay meant hundreds would die), but Ukraine was crippled by 350 years of Russian domination (not a shot was fired against Russians in Crimea by the “fascist” Ukrainians despite being beaten, tortured, and 4 killed by the invading “Green Men”), the total penetration of the Ukrainian intelligence and military by Russian agents (admitted to me by the Dep. Defence Minister), a moribund military starved for 24 years and crippled by Yanukovych’s treachery (4 top ministers were ex-Russians), and the endemic Soviet corruption that was one of the prime reasons for the Maidan Revolution. After the breathtaking success of that Revolution, Ukraine had only 5 days to celebrate before Russian commandos invaded and amputated Crimea, paradisical vacation spot for the whole FSU.
With no real finances and a crippled military, the interim leaders chosen after Maidan just didn’t take the hard decisions needed to fight a war: declaring martial law in the Donbas, mobilizing the people, instituting a draft, tripling military funding, and cutting military exports to Russia. Faced with 3 wars by Russia: 1. an economic embargo, including lifeblood natural gas; 2. destruction and theft of hundreds of billions in wealth, 25% of the people, 20% of the economy, 30% of the industrial base in the takeover of Crimea and the Donbas; and 3. a blizzard of poisonous propaganda about alleged suppression of Russian speakers (utterly imaginary- Russian is spoken by 90% of Kyiv and Russians have historically been the master race here) and “Nazi” tendencies… Ukraine was effectively handcuffed from responding forcefully. Thousands of paid Russian trolls cluttered every news comment section, while fellow traveler journalists and old-line “liberals,” addled by Bush’s neocon crimes, repeated the Kremlin’s absurd lies.
It first provoked some of the previously content Donbasans to revolt, egged on by hundreds of paid protesters, many Russian “tourists:” $500 to storm a building, $50-70 per day to protest (though Donetsk got 42% of all of Ukraine’s development money from the previous government of Yanukovych), then Russian/Ukrainian mercenaries were sent in, then 80% of gullible Russians, who’ve lost their 80’s cynicism at Kremlin lies, turned against Ukraine (60% liked Ukrainians in January, by now only 10%).
Even the collapse of the Ruble is bad news for Ukraine- the economies are still so interlinked that it hurts the Hryvnia too (now 18-19 UAH/dollar; for 5 years till February, it was stable at 8 UAH/dollar). With $12 billion of foreign loans due in 2015, 40% bad bank loans, a 7% drop in GDP, company plus country bonds devalued by 33-50%, and under $9 billion of foreign reserves; at the now atrocious exchange rate, default is looming for Ukraine. That would also hurt Russia: Putin is getting an object lesson in the interdependency of the modern world. The EU is showing no desire to pop for the $15 billion Ukraine is begging for (on top of the $17 billion, though not much of that has been issued), risking a Lehman-like scenario of dominoes 5 years after the World’s economy almost collapsed. The same is true for Russia; they owe $700 billion, but it’s 92% private: overextended corporations or banks may default, though the Government won’t. The Kremlin just bailed out banks for $16 billion with more to come, the Russian interbank lending rate rocketed to 28%, and the Central Bank is allowing them to price “assets” at the old ruble rate.
The Ukrainian populace, however, is being hammered: product prices, even domestic, have doubled, but wages haven’t budged; and utilities have skyrocketed because of IMF pressure to stop the hemorrhaging of Naftogas, which loses $10 billion/year. There are reports of hunger and food riots in the East, where no banks are normally functioning. My hot water bill went up a breathless 8-fold in 1 month, and in telling fashion they estimate we use 1000L/day of cold water (maybe double reality): we have no meters, so there’s no motivation to save gas or water. With the coal shut off from Donbas, Ukraine is only three weeks from running out of it for power and heating (central hot water) plants. The high quality coal that Ukraine burns – anthracite, consisting of over 90% carbon, constitutes only 1% of all coal reserves and, after Ukrainian and Russian reserves, is far away, so shipping the bulky material is expensive. Ukraine bought 1 mn tons of coal from South Africa in November at twice the normal cost, and it’s all used now!
In a sign of unprecedented hardball, Ukraine shut off power and cancelled cargo trains to Crimea on 26 December (passenger trains and buses will follow), perhaps forcing Russia to make the DNR “leaders” send or sell Ukraine coal. Visa and MC also suspended operations in Crimea, all causing real misery for the innocent Ukrainians and Tatars stranded there. The long-term gas situation isn’t set to improve: all 3 shale gas projects have been cancelled in the East because of the war: in Sloviansk, which is Europe’s second largest reserve, in the Black Sea, due to Putin’s land grab of Crimea, and in Lviv, because useless lawmakers didn’t pass the tax changes required. And the one bright spot- agriculture in the rich black earth of Ukraine, was sullied by the news that a glowing success story: Mryia turned out bankrupt: the books were massively cooked.
Meanwhile the Little Big Man’s star is falling in Moscow, economic disruption is ripping through the country as the daily nightmare of hyperinflation returns. After years of it in ’91-96, ’98-99, Russians thought their relative wealth had banished it forever. Like all Westerners, Russians now all have billions of $ of loans out, many denoted in dollars or Euros. Among oligarchs, Putin’s pals are being pummelled, Tymchenko, Sechin, Usmanov have lost 1/3 of their paper fortune; financier Ivan Shervashidze shot himself dead Dec 17 at the National Hotel by the Kremlin; Sechin got the Central Bank to issue his Rosneft oil monopoly billions in unsecured credit Tues., provoking the latest collapse, even as they jacked up the interest rate to 17%. The ruble bounced back Dec 17 to 59-64R / $ even strengthened to 53, after Russia bought $7 billion dollars of rubles, and Russians settled down.
Putin is a man from the past, the KGB of the 70’s, and has returned Russia to the party monoculture, astronomical corruption, overweaning central authority, 85% propaganda, military bullying and bluster, and fear of dissent of that era. After the Crimean invasion, I predicted that he had unleashed tidal forces that would sweep him away in 4-5 years, maybe sooner now. Docile Russian press have made unprecedented criticisms: “Vladimir Putin has lost the political initiative.” His great claim to fame after the wild 90’s was economic stability, now vaporized. That was his agreement with his people, you can’t have political freedom or less corruption, but you will live well. “I’m happy with him. I’m making 7 times more than 5 years ago!” said an IT guy to me in 2007 in Moscow.
The Donbas War has now caused perhaps 9000 deaths, every one on Putin’s head (all quotes are ridiculously low, not counting Ukrainian soldiers ~1300, Separatists ~2000-2500?, Russians ~1000?). More than 1200 people have been killed just since the porous “ceasefire” of 7 September. UNHRW counts 13 a day still being killed there. Australian journalist Demjin D., who’s spent 6 months in the Donbas, said he’s seen 1500 new Russian vehicles in the last 2 months there, including 400 tanks, 200 Grad trucks, 100 mobile artillery; he expects a massive offensive. DNR “Premier Minister” Zakharchenko has promised to retake Sloviansk, Artemivsk, and take over the large port of Mariupol, and he just declared the ceasefire was over on 25 December: the Minsk talks have been suspended. At a minimum, these reinforcements argue against withdrawal. The US Congress finally passed a bill to provide $350 million of military aid to Ukraine, 6 months too late, and Obama just promised to sign it. Including are more painful sanctions against international financing of large Russian state firms (who owe $100’s of billion of loans), which at this moment will be more salt in the wounds to Putin.
The PutInvasions, embargoes, and especially Eastern partition have been devastating to Ukraine; meanwhile the sanctions and especially oil price collapse are also trashing Russia. Both occurred because of the reckless rage of one autocrat, and the reluctant incremental actions by an outraged world to the first major European power invasion since World War II, both – Pyrrhic victories in a winner-less struggle. After all the pain and travail Ukraine has suffered in their year-long odyssey to escape their Soviet chains, it would be a tragedy to let them go down the tubes now, especially when the new 75% reformist Parliament and Government are finally undertaking brutal reforms and confronting corruption.
Putin seemed to be resigned to a long standoff in his opus yearly press conference: he expected 2 years of hardship. But seeing his realm and power shrinking or collapsing, he is still utterly unpredictable. He might react militarily and up the ante in standard Soviet training or back off like in the Cuban Missile Crisis. The Pearl Harbor attack was partially provoked by a US embargo. He was born in 1952 amidst the devastation of post-war Leningrad, but never saw the 28 million deaths in World War II; he doesn’t have that seminal experience of mass death that informed and moderated all Soviet leaders‡, or the visceral understanding of the realities of a nuclear apocalypse. He is also a small man of enormous self-regard, serious skills, and a steely will- a retreat now would be an almost inconceivable humiliation to the still vastly popular potentate.
That makes Vladimir Putin the most dangerous man in the world.* North DONets River BASin: Ukraine’s industrial coal and iron-rich Donetsk and Luhansk Regions (+ technically some of Russia’s Donetsk region)
‡ I lived by Piskarevskoye in St. Petersburg, a single mass grave that holds 600,000 victims, the nonstop ghostly dirge floating into my windows was testament to the fact that Russians never give up. I speculated in ’94 that the Soviets had nuke and missile-making factories inside mountains to keep building them after a nuclear war, ~5 years later 60 Minutes took a tour of one.