Russian Imperial Expansion or Economic Collapse?

By Walter Derzko

-----------------------

Putin is in a panic over NATO encroachment and encirclement of the Russian Federation. He also knows that the Russian Federation is quickly losing its geopolitical and energy influence. Putin admitted that Russia invaded /annexed Crimea out of shear necessity and outright survival. If it didn’t then NATO would eventually accept Ukraine, stationing troops in Sevastopil. In his annual TV phone in show, Putin conceded that Russia is no match for NATO. Putin explains: “If NATO troops walk in, they will immediately deploy these forces there. Such a move would be geopolitically sensitive for us because, Russia would be practically ousted from the Black Sea area. We’d be left with just a small coastline of 450 or 600km, and that’s it!” Putin adds: “If we don’t do anything, Ukraine will be drawn into NATO sometime in the future. We’ll be told: “This doesn’t concern you,” and NATO ships will dock in Sevastopil, the city of Russia’s naval glory.”

“Although some two-thirds of Russians currently support Putin, that number could drop precipitously if body bags arrive in Moscow and the stagnant Russian economy creaks under the burden of military adventurism.” concludes Alexander Motyl.

The collapse of the Russian Federation has been regularly predicted by numerous Russian analysts and ministers since 2008. This also includes westerners such Zbigniew Brzezinski and Edward Lucas from the Economist magazine. Zbigniew Brzezinski had a pivotal role in anticipating and helping bring about the economic downfall of the USSR. In 2011, former Russian Finance Minister Aleksei Kudrin said: “Russia cannot afford to run budget deficits on the current level of oil prices, which is certain to nose-dive with the inevitable bursting of the bubble.”  Further energy sanctions and the release of surplus American, Iranian or Saudi oil could see energy prices collapsing, threatening Russia’s very survival as a state entity.

Added to economic woes, wars and occupations are fairly expensive undertakings, especially for Russia with declining energy reserves and declining export-generated cash (with the EU diversifying its energy suppliers).

How much is all of this aggression costing Putin? There appears to be some 15,000 Russian troops along Ukraine’s borders and over 22,000 in Crimea out of 750,000 in total. Oleh Soskin recently stated on Espreso TV that Putin has spent a minimum of $700 Billion US dollars (an unbelievable and staggering amount) to launch the war against Ukraine, although he didn’t mention the source. No doubt, part of this war effort may have been financed by western banks, just like in World War II.

This leads to only 2 possible scenarios; either Putin succeeds and the Russian empire is enlarged (to include all or part of Ukraine, the Baltics and Eastern Europe as a buffer to NATO and resulting frozen conflict zones ) or the Russian Federation collapses from insolvency, into 21 independent nations and a “smaller, tiny” Russia.

What are the economic costs of Crimean annexation so far? Apart from almost universal global isolation and a growing list of economic sanctions, the Russian economy is quickly stagnating. According to Oleh Soskin, Russia has sold off $30 billion in gold reserves. In addition, in the last several months, the Russian stock market has lost over 20%, the Ruble has depreciated by over 15%; Russia can expect $150 Billion in net capital outflow; foreign direct investment (FDI) has dropped to almost zero; Russian exports have collapsed resulting a budget deficit of 400 billion Rubles for 2104. GDP growth will likely be zero if not negative in 2014 and inflation is growing. Added to Crimea, if Russia takes over South-Eastern Ukraine, the Russian budget deficit will increase by 45% if not more. Further credit agency rating downgrades will cost Russia billions in added borrowing costs. Russia’s total foreign debt is now around $732 billion.

So my takeaway from this is straightforward. If the Russian army is 10 time bigger then Ukraine’s armed forces, and it costs orders of magnitude more to run, supply and sustain the Russian army, the aggression, the bribes to locals and the provocateurs, then the only way to win is to force Russia to purposely burn money by delaying aggression, violence and needless deaths in a prolonged stalemate, since Russia is unlikely to back down soon. So far, this aggression has been relatively restrained and violence-free compared to other conflicts such as Afghanistan or Bosnia. Consequently, if Ukraine keeps the conflict to a “low simmer” like it is doing now and spends a minimum amount of military effort on encounters with little green men, (ie choosing its strategic battles wisely), then each passing week, Russia is forced to waste billions of dollars propping up the aggression. Theoretically, Putin’s megalomaniac military ambitions could collapse the Russian Federation, just like the we saw with the USSR after a decade of artificially low oil prices. The West could speed up the collapse scenario by immediately announcing more severe economic sanctions (banking, energy, arms, insurance, and other targeted industry sanctions, credit agency downgrades, export /trade embargoes etc.) against Russia for not de-escalating the conflict in Eastern Ukraine as concluded in the Geneva agreements.

In short, Russian can’t afford a war with Ukraine.