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Vol. 79/No. 5      February 16, 2015

Economic crisis in Russia
pierces myth of Putin genius

With oil prices around $50 a barrel and tighter U.S.-led sanctions taking effect, Moscow — whose economy is deeply dependent on oil sales on the world market — faces an accelerating crisis. As the vulnerability of Russia’s economy is revealed, with dire consequences for working people, the image cultivated by President Vladimir Putin for years of Moscow as a rising power capable of using its economic and military might to play a growing role in Europe and Asia is unraveling.

Putin is widely admired by many on the left as a brilliant strategic opponent of U.S. capital and by many on the right as a strong leader who upholds conservative social values.

Oil and gas make up some 68 percent of all Russian exports and provide more than half the government’s national budget. As prices have tanked, the European Bank for Reconstruction and Development estimates that the Russian economy will contract nearly 5 percent this year. The ruble has fallen to a historic low of 64 to the dollar in recent weeks, and interest rates soared to 17 percent. Going into 2015, inflation in Russia stood at 11.4 percent and rising. Standard and Poor’s dropped Russian government bonds to junk status Jan. 26. “People will become unemployed and they will need to adapt,” Igor Shuvalov, Russia’s deputy prime minister, told the World Economic Forum in Davos, Switzerland, Jan. 23.

The Colder War: How the Global Energy Trade Slipped from America’s Grasp, by Marin Katusa, a commodity trader and hedge fund operator, is a prime example of the “Putin is a genius” school of thought. Written last year, just before the tumble of oil prices, Katusa predicts the collapse of the U.S. dollar and rise of Moscow to world dominance, based on ever-growing control of oil, gas and uranium resources.

The Colder War gives a useful description of how Putin, a former low-level KGB operative and then head of the Federal Security Service (FSB), its successor secret police agency, has run the government since being appointed prime minister by then-President Boris Yeltsin in 1999. After the implosion of the former Soviet Union in 1991, Russia’s economy — and the living conditions and life expectancy of working people there — nose-dived.

A boom in the production and export of oil and gas was the main factor fueling economic growth between 1999 and the 2008 recession, and more slowly since 2010. A rising layer of capitalists — many former KGB agents with ties to Putin — won positions in increasingly lucrative state enterprises or took over newly privatized factories, profiting handsomely. Fortunes were built in blood and corruption.

“Our compass is profit,” Mikhail Khodorkovsky, a billionaire who opposed Putin and was imprisoned for 10 years on tax and fraud charges that most of his fellow capitalists were equally guilty of, put it in a 1993 manifesto Man with a Ruble. “Our idol is His Financial Majesty — Capital.”

Washington should “have seen that Putin has a long-range plan for Mother Russia,” Katusa said, “a map covering decades, not the four-year election cycles that dominate the attention of U.S. politicians — and both the vision and resources to make the plan work.”

The central Russian oil company, Rosneft, was set up in 1993 from the assets of the former Soviet Ministry of Oil and Gas. It expanded rapidly after 2004 when it took over the assets of Yukos, Khodorkovsky’s oil empire, after he was toppled and imprisoned.

“It’s the perfect cornerstone for the grand plan to consolidate power in the hands of Russia’s supreme ruler,” Katusa says. “Then Putin can play energy-needy countries against one another and squeeze Europeans to accept long-term, high-price contracts as the only way to secure reliable supplies.”

Far from being the grand strategist Katusa describes, Putin has moved pragmatically from one project to another, reacting to world pressures and overreliant on Moscow’s supplies of oil and gas.

After pro-Russian President Viktor Yanukovych was toppled in Ukraine by popular mobilizations in February 2014, Russian forces occupied the Crimean Peninsula, and organized its annexation to Russia in a sham referendum. Moscow aided and sent troops to reinforce separatist paramilitary forces in Ukraine’s eastern provinces.

The occupation of Crimea has been costly for Moscow, which has pledged $12 billion in development funds for the next five years. There is no land border between Russia and Crimea, so most goods now must enter by ferry. Inflation has soared to 42 percent.

Following Moscow’s invasion of Crimea, Washington and the European Union imposed economic sanctions against a number of Russian officials, banks and other companies, and has expanded them when the separatist war in the east has heated up.

One casualty of the imperialist sanctions was the South Stream pipeline, which was intended to carry natural gas from Russia to Bulgaria via the Black Sea, bypassing Ukraine. This was an important project for Moscow, which exports the big majority of its natural gas by pipeline to countries throughout Europe. In June the Bulgarian government put the project on hold, under pressure from U.S. and EU officials, who said proceeding could violate the sanctions and EU regulations. Putin announced the pipeline plan was dead Dec. 1.

Gazprom, the main Russian gas company, now says it’s considering a new pipeline to Turkey, but there’s no concrete plan. Meanwhile, a new terminal to receive liquefied natural gas is scheduled to open in Poland later this year, which can cut across Gazprom’s domination of natural gas sales in eastern Europe.

The worldwide decline in production and trade has translated into less demand for oil. At the same time there has been a boom in production from hydraulic fracking in the United States and tar sands in Canada. This is putting a squeeze on every oil-dependent economy, and Russia is particularly hard-hit.

The price drop and sanctions also put on hold plans to expand drilling in the Arctic Ocean, in collaboration with Exxon Mobil and other oil companies. Russia claims large oil reserves there, but it would take major capital investment to develop them.

Putin’s pragmatic response to developments in Ukraine and elsewhere have made Russia’s ruling oligarchs, to whom he is ultimately responsible, increasingly nervous.

The rulers biggest fear is an explosion by working people across Russia, like the Maidan in Ukraine that overthrew the Yanukovych regime last year. As the economic situation deteriorates, “the number of industrial protests is growing,” Boris Kravchenko, president of the Confederation of Labor of Russia, wrote in September.  
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