Putin’s problems

A good piece from the Herald on Putin’s problems:

The world faces a moment of maximum danger in . has perhaps just a few days to decide whether to launch a full invasion of the Donbass, or accept defeat and let the Ukrainian military crush his proxy forces.

Nato officials say has massed 20,000 troops in battle-readiness near the border, backed by Spetsnaz commandos, tanks and aircraft. Vehicles have been marked with peace-keeper labels already. Nato sees every sign that the Kremlin intends to disguise an attack as a “humanitarian mission”.

So it will be an overt invasion.

He has been clear from the outset that he will deploy any means necessary to bring Ukraine back into Russia’s orbit. Only war can now achieve this, since all else has failed, and since he has turned a friendly Ukraine into an enemy by his actions. The awful implications of this are at last starting to hit the markets.

“People thought that Russia was just playing a game of brinkmanship, and that pragmatism would prevail in the end. There is real fear now that this will spin out of control,” said Chris Weafer, from Macro Advisory in Moscow.

Yields on 10-year rouble bonds have jumped to 9.7 per cent, up 130 basis points since June. A liquidity crunch is rapidly taking hold across the financial system.

“The market is shut. Not a single Russian entity has been able to borrow anything in dollars, euro or yen since early July,” Weafer said.

The invasion will make this worse. Putin’s popularity will drop at home, as the economy slumps. He will face possible defeat in elections, which may force him to reveal whether he will allow this to happen, or will he remove the democratic facade.

Putin now faces draconian sanctions from the US, EU, Japan, Canada and Australia together. He can strike back by asymmetric means – perhaps a cyberattack – but tit-for-tat retaliation can achieve nothing. There is no equivalence. Russia’s economy is no bigger than California’s. This is an economic showdown between a US$40 trillion power structure, and a US$2 trillion producer of raw materials that has hollowed out its industrial core. The new arsenal of sanctions refined by a cell at the US Treasury – already used with crisp effect against nine countries – is nothing like the blunt toolkit of the 1980s or 1990s. Nor can Russia retreat into Soviet self-sufficiency. It is locked into global finance. The International Energy Agency says Russia needs to invest US$100 billion ($118 billion) a year for two decades just to stop its oil and gas output declining.

This is one of the benefits of having countries in the global economy – it means that when they do bad things, the economic pressure can be the best elver against them.

European officials calculate that Putin will not dare to cut off energy supplies, since to do so would bring the Russian state to its knees within months. But even if he tried – as a shock tactic – it would not achieve much. Oil can be obtained anywhere.

Cutting off the gas would hurt Europe, but hurt Russia more.

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