Putin builds war chest
In the latest display of deepening cracks in the West’s formerly unified economic campaign against Russia, France’s Foreign Minister Jean-Yves Le Drian told reporters Monday that “the time is right” for reconciliation in EU-Moscow relations.
The latest French overture comes as US lawmakers returned to work this week and at least two sanctions bills against Russia are making their way through Congress.
But policymakers and pundits question whether further unilateral sanctions are an effective response to Russian President Vladimir Putin’s adventurism, amid concerns that they could also damage relationships with American trading partners and allies.
The US and its allies first issued a package of economic sanctions in 2014, intended to punish Russia for annexing Crimea and supporting separatist militias in eastern Ukraine.
Since then, Moscow’s policymakers have built a monetary and fiscal fortress that prioritizes stability over growth and serves as a bulwark of Russian sovereignty, as well as helping the Kremlin weather economic sanctions better than many analysts expected.
With the help of skilled technocrats like Elvira Nabiullina, the head of Russia’s central bank, Putin has built a foundation designed to insulate the Kremlin from external pressures, such as sanctions, and bolster the Russian economy’s ability to weather future economic storms — whether they are falling oil prices or a global recession.
“Essentially Putin’s response to the sanctions has been: We invest less, we grow less, we consume less but we build up our reserves so I can continue my aggressive policy,” said Anders Åslund, a senior fellow at the Atlantic Council who specializes in Russian economic policy.
Despite friendly rhetoric between US President Donald Trump and Putin, tensions have continued to escalate as a new arms race heats up. Earlier this month, Putin said Russia will manufacture missiles previously banned under a Cold War-era treaty with the US, and in late August the Russian president promised a “symmetrical response” after the US conducted previously banned missile tests.
But Russia’s military build-up, and foreign adventures in Syria, Ukraine and Venezuela, are not the only signs that the Kremlin is digging in for the long haul.
Over the course of Putin’s lifetime, Russia has experienced a series of economic crises, starting with the fall of the Soviet Union in the early 1990s, then the financial meltdown of 1998, the global recession in 2008 and, most recently, the 2014 recession.
“When Putin looks at economic challenges, I think he looks much less at growth and much more at survival through crises,” said Christopher Miller, an assistant professor at Tufts University whose research focuses on the Russian economy.
Since 2014, Russia has increased foreign currency reserves to an eye-popping $500 billion (the fourth highest in the world), paid off its foreign debt, “floated” (or in other words devalued) the Russian ruble to boost the competitiveness of Russian exports, “de-dollarized” holdings to insulate Russia from the US financial system, and balanced the state’s expenditures and revenues.
Russia also has a low “break-even” oil price, set around $40-45 per barrel, which is the price the Russian state needs to balance its budget each year. Oil is by far the country’s largest export and the bedrock of its war chest.
“People exaggerate, particularly in Washington, the impact of gas over oil,” said Edward Chow, a senior associate at the Center for Strategic and International Studies. “For every dollar that Russia earns from oil and gas, 80 cents of that is oil and only 20 cents of it is gas.”
But the Kremlin’s policies have come at a cost, hitting the pocketbooks of everyday Russians. GDP has remained sluggish since 2014 — hovering between 1 and 2% annual growth — as real Russian wages have stagnated over the last five years and consumer debt has nearly doubled in the same period. The Kremlin plans to spend trillions of rubles on “national projects” to stimulate the economy, but it’s unlikely they will significantly boost economic growth.
“It all sounds wonderful, but very little actually happens,” said Angela Stent, a professor at Georgetown University and author of “Putin’s World: Russia Against the West and with the Rest.”
And if growth rates remain low then a shrinking economy will lessen Russia’s ability down the road to compete on the global stage with faster growing economies. Miller described its possible impact in this way: “You get foreign policy now, but you lose impact later.”
Some pundits in the West look to a summer of discontent in Moscow and poor domestic growth as signs of trouble for the Kremlin. But the Putin regime, while perhaps concerned about the long-term impacts, does not view it as an immediate crisis.
“Putin cares about macroeconomic stability because he’s focused on sovereignty and he wants to control the population by other means,” Åslund said. “He doesn’t care about growth rates.”
As the Russian President looks to alternatives to SWIFT — the West’s global banking payment system — and fosters closer ties with China, it is clear that being estranged from the Western global economic club matters little.
Policymakers and politicians in Europe and the US will continue to debate the best approach to addressing a revanchist Russia, but they cannot ignore the economic bulwarks Putin and the Kremlin’s policymakers have built up.
And if the US undertakes further sanctions on its own, without the consensus of its allies and trading partners, it could damage transatlantic relations that have already been rocked by Trump’s unpredictable presidency.
“I just don’t see where they’ve achieved many results, and what they have done is — to the extent that they’re extra-territorially applied — further alienate some of our allies,” Stent said.