Could Putin’s easy victory in Crimea end up badly for the Russian people?

Posted by Shyam Moondra

Russia’s President Vladimir Putin silently watched the Winter Olympic Games in Sochi, Russia, while the Ukrainian Spring Revolution was in full swing in Kiev with dozens of unarmed protesters shot dead by the militia controlled by the former pro-Russia Ukrainian President Viktor Yanukovych, who abandoned his presidential palace and took refuge in Russia. As soon as the Olympic Games ended, Putin made his move and quickly took over the tiny piece of land at the southern tip of Ukraine, Crimea, where Russia operates a navy base leased from Ukraine. Russians were elated and Putin’s popularity soared because he managed to win Crimea without firing a shot. In 2008, Putin ordered the invasion of Georgia that was aspiring to become a member of NATO; even today, Russia still occupies two separatist territories of Georgia, in spite of the agreement that called for the withdrawal of Russian forces from there. Many Russians thought Putin outsmarted President Barack Obama and the EU leaders, restoring their pride which was lost after the collapse of the former Soviet Union. Defying loud condemnation of the West, Russia lost no time in annexing Ukraine's Crimean Peninsula after residents there voted overwhelmingly to join Russia. The move came despite warnings by the West that Crimea annexation violated international law and would be ignored by the world.

Now what? The West is talking about more punitive sanctions (military action has been ruled out by Obama and the EU) and Putin is promising reciprocal retaliation. Today, Obama announced the second round of sanctions of visa ban and asset freeze against more Russians (including Putin's personal banker) and one Russian bank. Within minutes, Putin announced entry bans on prominent American politicians including House Speaker John Boehner and Sen. John McCain (R-AZ), who often characterized Putin as a “thug” and “dictator.” Obama said that if Russia escalates the Crimean crisis any further, he would announce harsher economic sanctions that would harm the Russian economy. The Russian currency ruble and the stock market have already declined sharply since the conflict began two weeks ago. Russians now face a real possibility of recession, higher unemployment, and hyper-inflation in the near-future which would dash Putin’s hope of making Russia a modern technology hub and moving economy beyond just supplying oil and natural gas.

Below is a synopsis of how a series of issues could evolve in the absence of de-escalation of the crisis:

• Putin has announced that he might retaliate by freezing assets of the Western corporations doing business in Russia. It could mean substantial losses for companies like Exxon-Mobil and Pepsi, but those losses would be negligible compared to the size of the overall economies of the Western countries and thus strategically insignificant. Such asset freezes, however, could back-fire on Russia because many Russians would instantly lose their jobs and Russian government would be deprived of the tax revenues from these companies. Also, companies like Exxon-Mobil are providing much needed new technologies for the energy sector; if the Russian operations of these companies are shut down, Putin will lose access to these transformative new technologies.

• Deputy Foreign Minister of Russia announced that Russia might withdraw its support for an agreement with Iran on the nuclear issue. It’s just a bluster because in the end Russia wants this agreement more than any other country. Iran is an Islamic country and Russia wouldn't want nuclear weapon capability in the hands of Iran that could one day be transferred to Muslims in Chechnya or Tatars in Crimea, in the same vein as Russia didn't want Islamic Syria to keep its chemical weapons.

• Russia’s invasion and subsequent annexation of Crimea have already caused a capital outflow of $45 billion in just two weeks. As the biting economic sanctions start to take hold, more and more investors would exit the risky Russian markets, causing even bigger capital outflow. The economists are already projecting recession, job losses, and declining tax revenues for the government. A sharp decline in the value of ruble would cause hyper-inflation, which could lead to lower living standard for the Russian people. If the West’s threatened trade sanctions are carried out, they would further deepen Russia’s economic woes. The rating agencies Standard & Poor and Fitch announced that Russia's rating outlook is being changed to "negative," which will (i) increase the borrowing costs for the government, businesses, and consumers, (ii) hasten the capital outflow, and (iii) further sink the ruble.

• Damaged economy and reduced tax receipts would mean Putin would have to cut back on his lofty goals of expanding and modernizing Russia’s military. Over a period of just few years, Russia will face declining defense capabilities.

• The U.S. and EU are expected to accelerate investment in oil/gas exploration, which will reduce the EU's dependence on Russia for their energy needs; this, in turn, would erode the Russian energy sector. As a result, Russia's oil and natural gas revenues would decline, exacerbating Russia's economic problems.

• Next week, Obama has called an emergency meeting of G-7 in The Hague to discuss the Crimean crisis and it is expected that Russia would be formally dropped from G-8 and it would go back to G-7. Russia would lose clout around the world because of the justified perception that Putin is a bully/thug and he is not a reliable partner.

While Russians, for now, are enjoying euphoria over their Crimean victory achieved without any bloodshed, this may very well be the beginning of the decline of Russia. Within a few years, we could see Russia with lower living standard, deteriorating infrastructure, and reduced defense capabilities.