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TM, ®, Copyright © 2021 Piero Scaruffi All rights reserved.

TM, ®, Copyright © 2021 Piero Scaruffi All rights reserved.

Nations in Crisis: Russia
"Putin's Kleptocracy" (2014)
Articles on Russia before 2021

  • (july 2021) Nations in crisis: Russia

    Vladimir Putin has been in power since the year 2000 and has achieved everything he wanted: absolute power within Russia (the czar of Russia?), the destruction of Chechnya, the control of provinces of Georgia, Moldova and Eastern Ukraine, the annexation of Crimea, the control of Syria, the demise of his nemesis Hillary Clinton, and the destabilization of all Western alliances via his puppet Donald Trump. The Russian people correctly admire him as a genius. 2014: Annexation of Crimea and war by proxy against Ukraine
    2015: Invasion of Syria, resulting in the defeat of both ISIS and the pro-democracy rebels
    2016: Interference in Brexit referendum and US presidential elections that resulted in disintegration of EU and appointment of a Russian operative (Donald Trump) as president of the USA
    2018: Support of populist demagogues in Europe
    2020-21: Biggest cyber-attacks in history against the USA

    It is a common adage that economic strength is the foundation of military strength. Given that the GDPs of Germany, Britain, France and even Italy is higher than the GDP of Russia, one would expect that the Russian military power would pale compared with any of these small countries. Quite the opposite is true: nobody in Italy would think for a second that Italy's army can defeat the Russian army, let alone the Russian air force or navy.

    Then how is it that a relatively small economy can behave like a world power? That's the sort of miracle that Putin engineered. See Man of the Decade: Vladimir Putin.
    Nonetheless, Russia is a nation in crisis, and on multiple fronts. Putin's Russia is a state founded on corruption (see my review of "Putin's Kleptocracy" (2014)) and that comes with a price. The biggest one is inequality: Russia has plenty of billionaire oligarchs while the median salary is about $6,000 per year. Russian demographics is notoriously extreme: it was one of the first country that (in peacetime) registered an annual number of deaths that exceeded the number of births (already in 1992). Life expectancy is low, especially among working-age males, and one major cause is alcoholism. The Russian fertility rate is one of the world's lowest, while its abortion rate is the highest. The economy is suffering on two fronts: the fall in the price of oil and the economic sanctions imposed by the West. The result is that Russia's economy posted no growth between 2014 (when Obama slapped sanctions on Russia) and 2019 and then covid caused a decline (GDP shrunk from $2.3 trillion in 2013 to $1.5 trillion in 2020). Compared with former communist countries like Hungary, Poland, and Romania whose GDP, between 2014 and 2019, grew at an annual average rate of 3.9%, 4.1% and 4.7%. Russians used to look down on these satellite nations: now they are envious. Russia used to have a higher GDP per capita than Poland. Now it is lower. And it is even lower than Romania's. The Baltic republics (which used to be part of the Soviet Union) are very rich countries compared with Russia. Compared with its neighbors, the standard of living of Russians has been falling constantly for the last decade. In fact, the economic success of the Baltic republics of eastern Europe has become a major destabilizing factor for Putin: his people know that Russia has been falling behind countries that used to be satellites and poorer. But even worse than these numbers is the simple fact that there is no rule of law in Russia, and therefore foreign investors are discouraged (regardless of sanctions and oil prices) and domestic investors tend to store their money abroad. If the Russian state were more reliable and trustworthy, Russia would be a great destination for international capital: international currency reserves stand at $573 billion, government debt is only 18% of GDP, and its current account is constantly positive. And even worse than the absence of a rule of law is the fact that the Russian economy is underperforming even in sectors where the Soviet economy wasn't too bad, like manufacturing. Russia's economy is plagued by technological obsolescence, especially if compared with the rising superpower next door, China. In January 2020 Putin appointed the economist and technorat Mikhail Mishustin as prime minister, in a partial admission that the economy was deteriorating beyond repair. Russia's technology and science is not all dead: Russia is still a leader in space, weapons, nuclear technology and cyber-warfare; but it's hard to make money out of those activities. (Note: Russia has sold more nuclear technology abroad since Putin came to power in 1999 than the USA, France, China, South Korea and Japan combined ).
    A large percentage (possibly the vast majority) of young educated Russians want to emigrate to the West, notably to the USA: that is hardly a compliment for Putin's 20-year rule and for his hyper-nationalism.
    The problem is that Putin has viewed his rule as driven, first and foremost, by geopolitics. Putin has proven remarkably disinterested in economic matters, and almost paranoid in territorial geopolitics. This is not only a legacy of his past as a KGB bureaucrat: the Russian empire, which originally was a tiny kingdom in the middle of nowhere, has always been about expansion, expanding both north and south, and then east all the way to Alaska, and then expanding into Europe, the Caucasus and Central Asia when Russia constituted the bulk of the Soviet Union. Alas, all those conquests over the centuries have failed to create a network of allies. Russia is probably the only country in the world that does not have a single friend. China can at least count on North Korea. Russia cannot count on the former communist countries, all of which have a bad memory of de-facto Soviet occupation (and related poverty), and cannot count on any of the developing countries that it helped during the Cold Wars, all of which have a bad memory of the left-leaning dictatorships of the time. The few remaining communist countries, like Cuba, view Putin's Russia as a sort of traitor for not having remained faithful to communism. Belarus' dictator Alexander Lukashenko is a little Putin but that makes him precisely the kind of leader who fears, not loves, Putin. Russia used to exert influence in Central Asia but now China dominates the economy of the Central Asian republics that Russia's role as an economic and geopolitical partner is much reduced. Perhaps Venezuela's regime is the closest friend that Russia can name.
    Incidentally, the history of Russian foreign policy is consistent over the centuries: Russia never helped another country get rich, and in general its allies got poorer, not richer (unlike the USA that helped Israel, West Germany, Japan, Taiwan, South Korea, Saudi Arabia, etc get much richer). It is part of their thinking: Russia does not see the world as an economic opportunity whereas the USA (global capitalism) does. So Russia has no vested interest in making another country rich, it is not programmed to do that. The USA has a vested interest in creating business opportunities everywhere, and so it tends to make other countries rich (not out of good will, just out of financial interest). Russia's allies (from Cuba to East Germany) have generally remained poor, whereas the USA's allies have generally gotten richer.
    It is stunning how Putin managed to fuel hostility between Russia and Ukraine, two peoples that share historical, cultural, ethnic and linguistic ties. Over the years, Putin has repeatedly stated that Russians and Ukrainians are the same people, but Putin's actions have united Ukrainian public opinion against Russia. It is also stunning that suddenly one can perceive anti-Russian sentiment in Belarus, a consequence of Putin's endorsement of dictator Alexander Lukashenko during the mass protests of 2020. It is even more stunning that so many Serbs are eager to join the European Union despite the fact that the West bombed Serbia in 1999 and Russia was the only country to stand with the Serbs. The other European region where Russia has intervened is Moldova, where it helped a Moldova province (Trans-Dniester) break away and declare independence. In recent presidential election the pro-Western politician Maia Sandu defeated the pro-Russian incumbent Igor Dodon: supporting breakaway provinces is not a good strategy to win hearts and minds.
    Russia was doomed to lose territory and influence to NATO and the European Union. If the war in Chechnya highlighted the "red line" beyond which Putin was not willing to lose a centimeter of Russian territory, the wars against Georgia and Ukraine highlighted the "red line" beyond which Putin wasn't willing to let the West encroach Russia.
    In July 2021 Putin published a 5,000-word article titled "On the Historical Unity of Russians and Ukrainians" that, viewed from Ukraine, amounts to a declaration of war: Putin reiterates that Kiev is the "Mother of Russian cities" and "Kievan Russia" is the birthplace of the "Russian people", and argues that Russian territory was stolen when the Soviet Union collapsed. He argues that the seceding republics of the Soviet Union should have returned to the borders of 1922. That's a valid argument, except that Russia itself gained lands from Germany, Finland, Japan and Mongolia when the Soviet Union was created. Returning to the borders of 1922 would actually be fine for most of Russia's neighboring countries.
    Putin's reaction to the perceived encroaching of Russia by the West was to disorient the West by undermining democracy wherever it thrives and weakening the liberal international order established by the West. For these missions Putin has found a ready partner: China. Both countries are eager to replace the West-dominated order with a multipolar one. (Russia and China have not been so close since 1959: Mao split from Russia, then Deng launched capitalism in China, then the Soviet Union collapsed, so Russia was forgotten by China until Xi became president).
    The difference between China and Russia is that China, despite having much more money and soldiers than Russia, has so far avoided involvement in wars, whereas Russia has been eager to intervene wherever an opportunity presented itself. One can argue that Russia is now stretched thin, which could explain the debacle in Armenia. The Armenian army, which was trained and armed by Russia, was defeated by an Azerbaijani army trained and armed by the Turks; and Russia agreed to military observers from Turkey (a NATO country) stationed in the Caucasus to monitor the ceasefire. If you know the century-old wars between the Russian and Ottoman empire for control of that region, it should strike you as shocking that Putin has been willing to sign away that region to Turkey.
    Russia's big success story is actually in the USA's backyard: Venezuela. For a while it looked like the mass protests and the consensus of Latin American countries were about to finish Maduro's regime with a little help from the USA, but when Putin told Trump that dictator Maduro was untouchable, the USA withdrew any plan to oust him, and Biden has been surprisingly silent about the whole affair. In April 2021 Russia and Venezuela signed a ten-year cooperation agreements in the areas of health, finance, education, energy, food and security.
    Russia's record in the Arab world is more mixed. On the surface, it can boast two strategic victories in Syria and Libya. In Libya's civil war Russia has backed renegade general Khalifa Haftar and his Libyan National Army (LNA), which is also backed by Egypt, Saudi Arabia and the United Arab Emirates. This pits Russia directly against Turkey, the only steadfast supporter of Libya's government of national accord (the one in theory recognized by the United Nations). In Syria's civil war Russia and Iran saved dictator Bashir Assad from the various rebel factions, notably the democratic forces (mostly Syrian Kurds) and the Sunni rebels (ISIS being their main emanation). While these ventures in the Arab world will leave Russia a military foothold (at least in Syria), it is not clear that Russia has gained any influence over the real protagonists: Turkey, Israel, Iran and Saudi Arabia. And, clearly, the economic return is not a top consideration in Putin's strategy: Russia will gain virtually nothing in trade from its military investment. In fact, it faces more hostility in its main market: Europe.
    However, Putin gets his return from his military adventures. If not many Russians are nostalgic of the Soviet Union, many do feel that the West has taken advantage of the fall of the Soviet Union. That event was a case of "the winner takes it all": the USA, NATO and the European Union won and took all that they could from Russia. There is a feeling within the Russian population that the West owes Russia because of the unfair settlement of the Cold War. One "provocation" after the other, Putin basically got everything that Russia wanted to get back. After NATO bombed Serbia in 1999, some Russian analysts sincerely feared that NATO may bomb even Russia. In 2003 Russia, that was well informed about Iraq, told the USA repeatedly that Saddam Hussein didn't have weapons of mass destruction, that he was bluffing. When the USA went ahead anyway, Russia got convinced that the weapons of mass destruction were just an excuse to remove an unwanted regime (Saddam Hussein). Then came the removal of Ghaddafi in Libya, and the attempted overthrow of Assad in Syria. Since the US invasion of Iraq, Russians are sincerely suspicious of every US-supported revolution. They are not necessarily rooting for the dictators of the world: they are suspicious of the real US motive in supporting the revolutionaries.
    Putin "markets" his military adventures to his Russian audience as restoring Russia's international prestige, but one could argue that Putin's Russia is simply a bigger and more dignified version of North Korea: a failed state with a failed economy, subject to sanctions, that threatens its neighbors, that funds cyber-terrorism (and cyber-theft), and that thrives by blackmailing the West with nuclear weapons.
    There is one major difference between Russia and North Korea: Russian money floods the European capitals, particularly London. The financial links between British politics and Russian mafia are as stunning as shameless, despite the brazen 2006 poisoning of Alexander Litvinenko and the 2018 poisoning of Sergei Skripal and his daughter, both carried out in London by Russian agents. One notable character is Ukrainian oligarch Dmitry Firtash, who has been repeatedly linked to Russian mobster Semion Mogilevich, one of FBI's most wanted people. Firtash himself has been indicted in the USA on bribery and racketeering charges and he is currently living in Austria to avoid extradition to the USA. Meanwhile, his foundation is based in London and he owns mansions in London. Roger Asquith, the third Lord Oxford, sits on the board of Firtash's Group DF. (Rudy Giuliani famously dealt with the Firtash organization to fabricate incriminating evidence against Joe Biden, and presumably Firtash would have been rewarded with the cancellation of the extradiction request). The USA has slapped sanctions on Russian oligarch Oleg Deripaska's En+ business empire, but En+ is perfectly legal in Britain where it has generated quite a bit of wealth, notably for Greg Barker, a former British energy minister and a Tory member of the House of Lords, the chairman of En+'s board of directors since 2017. Lord Robert Skidelsky joined in 2016 the board of directors of of Russian oil refining firm Russneft. Lord Frederick Ponsonby is the board chairman of Russia's oil and gas firm RNG. Lubov Chernukhin, the wife of a former Russian minister in Vladimir Putin's government, has contributed about $2 million to Boris Johnson's Conservative Party. In July 2020 Russian media magnate Yevgeny Lebedev, who owns Britain's Independent and Evening Standard newspapers, and is the son of Russian oligarch Alexander Lebedev, an ex-KGB agent turned business tycoon, was appointed to the House of Lords . In July 2020 a damning British report detailed Russia's interference in British elections, particularly in the Brexit referendum of 2016 and in the elections won by Boris Johnson's Conservative Party. It was later revealed that the report had been ready for nine months: Boris Johnson had deliberately delayed its publication. The government of Boris Johnson has basically refused to investigate Russia's interference in the 2016 Brexit referendum. Britain has benefited from Putin's kleptocracy so much that the British government has consistently tried to minimize negative impacts on business of Russia's repeated provocations; and so it is that London has become one of the main channels for Russian oligarchs to launder their money. De facto, Britain has been complicit in supporting Putin's kleptocratic regime.
    A closer look at Russia's economy. Russia's economy is primarily commodity-driven: in 2020 Russia was the world's second largest exporter of oil after Saudi Arabia. Russia also accounts for 18% of the exports of natural gas and 20% of nickel. Thus its economy is vulnerable to fluctuations in the price of oil. However, recently it has expanded exports of chemicals, weapons, pharmaceuticals and metals; and Russia has also become the world's top exporter of wheat.

    Russia has a form of state capitalism. Putin is not a communist at all, in fact he can be described as anti-communist, but he does believe firmly in state control over the economy. Hence he has created a system of large corporations that enjoy privileges as long as they accept to be under the control of the state. More recently, Russia seems to have adopted a Chinese-like strategy for those large corporations. Russia seems eager to develop "national champions" that are both profitable, expand their business internationally and remain instruments of Russian power. Prime examples are natural-gas giant Gazprom (created in 1989 by the Soviet Union by converting the Ministry of Gas Industry into a state-run corporation), petroleum giant Rosneft (established in 1993 as the successor to the Soviet-era Ministry of Oil and Gas), and nuclear-energy giant Rosatom (formed in 2007 from the remnants of the Soviet-era Ministry of Atomic Energy).
    What drives Putin? He is assumed to be very rich but doesn't do much with his wealth, other than enjoy a solitary life in his fantastic palaces. In the old days dictator could retire in many nice places, from Paris to Beirut, but now they get arrested the moment they relent power. Retirement is not an option anymore. He certainly seems himself as a savior of Russia and a historical figure worthy of being remembered next to the great czars of previous centuries, but, ultimately, he must be aware that he doesn't have a lot of time to live and the time will come when he dies. It sounds like Stalin before him never acknowledged that moment. Maybe Putin too doesn't want to.
    If Putin ever wakes up to the fact that we all have to die, including him, he will realize that he is not leaving behind a stable and resilient nation. There's a good chance that Russia will break up because of all the corrupt governors that control the various states/regions. It can even plunge into a Syrian-style civil war between rivals (armed with nuclear weapons). There is noone who can exert the same central power that Putin does, be accepted by everybody. Whoever the successor is, he will not be able to control the mayor of Moscow (Sergey Sobyanin) or the governor of Chechnya (Ramzan Kadyrov) or Alexander Bortnikov (Russia's top spymaster, director of Federal Security Service, the successor of the Soviet KGB) or Nikolai Patrushev (Bortnikov's predecessor, now secretary of the Security Council) or Igor Sechin (CEO of Rosneft, whom western governments consider the second most powerful man in Russia), all people who can create their own armed militia. Whoever replaces Putin when he dies will need the charisma and power to preside over influential people like prime minister Mikhail Mishustin (whom Putin picked to replace the weak Dmitry Medvedev), defense minister Sergei Shoigu (a former general), veteran foreign minister Sergei Lavrov, central bank chief Elvira Nabiullina, Herman Gref (CEO of Russia's leading financial institution, Sberbank), Vagit Alekperov, president of Lukoil (the second-largest oil and gas company in Russia and the largest non-state entity), etc.
    When Stalin died, the Soviet Union didn't collapse and there was no civil war because Stalin actually left behind a very powerful and organized entity: the communist party. Now Russia doesn't have anything resembling the old communist party: a giant efficient (and brutal) bureaucracy that can keep the country together no matter what. Putin's Russia is a fragile paper tiger compared to Stalin's Soviet Union.

    TM, ®, Copyright © 2021 Piero Scaruffi All rights reserved.
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