WHY A BAD RUSSIAN ECONOMY IS BAD NEWS FOR THE U.S.
A CHANGE IN COURSE
The Russian economy continues to struggle. Moscow had hopes that promoting consumer confidence and domestic spending within Russia would begin the process of rebuilding an economy that reached a near meltdown during 2014. This change in approach represents what Bloomberg calls “the most dramatic shift in economic policy during the Putin era.”
On July 15, 2015, reporter Anna Andrianova asserted, “Behind another month of near-record declines in Russian consumer wellbeing is an economic shift that may endure for years.” She continued: “For those still counting, a slump in real wages probably continued for an eighth month in June, falling off at a pace unseen until recently during President Vladimir Putin’s 15-year reign, a Bloomberg survey showed. Data due this week will also show retail sales fell 8.9 percent from a year earlier, near the worst showing in 2015, according to the median of 19 estimates.” [1]
Now that the focus on consumer spending has come to an unpredicted conclusion, the emphasis has shifted to the military and industrial complex, allowing consumers (aka the average Russian) to languish, being hit with the full impact of the Ruble’s decline. Those who grew up in the Cold War easily surmise this new approach is a return to “the old ways.”
Putin is prioritizing the defense industry and the “old-style industrial sector,” according to Kirill Rogov, a senior research fellow at the Gaidar Institute for Economic Policy who’s advised the government… [Quoting Rogov] ”Sacrificing private consumption may doom Russia to a “deterioration that gradually drags the economy deeper into a quagmire.” [2]
RUMINATING ON THE RUBLE
This new methodology may be akin to “death by a thousand cuts” (no pun intended). While the Ruble remains the most volatile currency in the world over the past 90 days, nonetheless, it seems to be stabilizing around 55 rubles to the dollar. “The ruble’s three-month implied volatility, a measure of exchange-rate swings, is at 20 percent, the highest globally, according to data compiled by Bloomberg.” In real numbers, it has ranged from 48 to 80 to the dollar. Drastic measures have been taken, however, by Russian bankers to keep the Ruble near this mark. So while the Ruble continues to float, it is not bobbing up and down as much as it did last November.[3] “The Bank of Russia is buying as much as $200 million daily to boost reserves to $500 billion, a process it estimates may take from five to seven years. Replenishing the stockpile doesn’t contradict the central bank’s consumer-price growth target of 4 percent in the medium term, according to Governor Elvira Nabiullina.” [4]
Despite these dramatic circumstances, Putin pushes for stronger defense capabilities believing it to be crucial to recapturing Russian prestige and regaining world power. And no matter what the economic challenges are, Putin expects his officials to make it happen.
“I will especially emphasize that those who are delaying production and supplies of military technologies, who are letting down related industries, must within a short term … correct the situation,” Putin reportedly said.
“And if that does not happen, the appropriate conclusions need to be made, including, if necessary, technological, organizational, and personnel [changes],” Putin added.
The extravagant plans for military spending were drawn up before the ruble crashed and oil prices bottomed out, back when the government was expecting 6% GDP growth annually.
Nevertheless, Russia has continued with their hike in military spending, which is estimated to reach $29.5 billion in 2015, with around $4.4 billion to $4.7 billion going towards research and development alone.[5]
WHERE THE MONEY MUST BE SPENT
The reality is simple: Russia has a bigger appetite for military weapons than its pocketbook can handle. When push comes to shove, Putin will have to purchase arms that literally give him “the biggest bang for the buck.” And that means that conventional weapons will likely take a back seat to nuclear armaments. The economic doldrums of Russia mean that the U.S. homeland is at greater risk from Russian attack. If all you have is a machine gun when engaging in a knife fight, you use the machine gun.
Therefore, the risk of war—nuclear war—is at its highest level since 1962. Helle Dale, a senior research fellow at Heritage Foundation wrote in The Daily Signal on July 13, 2015: “President Obama’s nominee for chairman of the Joint Chiefs of Staff, Gen. Joe Dunford, startled members of the Senate Armed Services Committee last week when he called Russia the gravest potential ‘existential threat to the United States.’”
According to the Wall Street Journal on July 9, 2015, General Dunford went on to say that the Ukraine couldn’t counter Russian moves without “lethal military assistance.” One wonders just how lethal “lethal” is.
Armin Rosen wrote in the Business Insider on July 10, 2015, how dangerous the situation is becoming. It goes well beyond the Ukraine—it is becoming the strategic issue of our day:
The Russia-NATO confrontation is becoming one of the defining aspects of the global strategic landscape. And according to the head of Goldman Sachs’s Office of Global Security, the situation is going to remain tense — or even intensify.
Robert Dannenberg, who is also a 24-year CIA veteran, believes that Russia is the top strategic threat from a US perspective.
“We are in an extraordinarily dangerous time right now because both Russia and NATO are starting to exercise substantial military activity in close proximity to each other in Eastern Europe and the Baltics,” Dannenberg said in an interview included in a July 9 Goldman Sachs analyst note.
Dannenberg believes that there’s a high risk of an unintended escalation, and notes that “many of the channels of rapid military and intelligence communications that were carefully constructed during the Cold War have been dismantled, lamentably, mostly from the US side.” [6]
CONCLUSION
Time may be running out for Putin. His maneuverability has been greatly reduced because of the decline in the value of his currency, declining consumer confidence in Russia, Western sanctions, and falling oil prices (which means decreasing revenues to his government). Plus, Putin likely perceives the U.S. an easier target today than it has been in the past 50 years. Furthermore, waiting for the next Administration before taking action might be akin to what Forest Gump said his mother taught him: “Life is like a box of chocolates. You never know what you are going to get.” What will a new U.S. President mean for Russia in 2017? Can he afford to find out?
For Putin, the U.S. seems weakened by a President he views as a pushover—a U.S. President who is consumed with other foreign policy issues (the Palestinian issue, trade deals with China, getting the Iranian Nuclear Deal approved by Congress)—and preoccupied with his legacy. While hard to measure, Obama seems resolute to achieve additional changes in the fabric of American society with not-so-hidden domestic program for achieving gun control as well as other matters typically associated with the liberal left. Then there is the public support for the respective Presidents. While Obama has approval ratings bouncing back and forth between 45 to 55%, Putin’s popularity continues at over 80%. Putin’s country is behind him at this point in time. Will it stay that way though if Russian consumers continue to feel the pinch?
Armin Rosin goes on to write:
Dannenberg sees Russia as the top current geopolitical risk from a US and NATO standpoint. In Dannenberg’s view, Putin believes the encroachment of NATO into Russia’s sphere of influence is an imminent threat, thus leading him to operate on an impulsive and short-term strategic timescale.
“Putin genuinely feels that if he doesn’t act, ten years from now what is left of Ukraine may well be in the EU or in the orbit of NATO,” says Dannenberg, according to the analyst note. “And if Ukraine goes, maybe southeastern Europe goes, then the Caucasus, and so on, ultimately resulting in a fracturing of Russia.”
Putin’s idea of the short-term stakes of Russia’s face-off with NATO, and sense of an immediate threat from the US and its allies, brings added unpredictability to the Kremlin’s calculus.
With no apparent long game in mind—and thus no long-term incentive to de-escalate—Putin could opt for a strategic escalation with the West that spins out of control.[7] [Emphasis mine]
The only ace in the hole that Putin has might be his partnership with China and the alliance among the five-nation BRICS consortium. Exactly how much help that partnership will prove to be stands more uncertain today than it did a few weeks ago, given China’s disastrous stock market crash during in recent days (mid-July 2015).
In another post, we will explore that possibility. Meanwhile, Americans should not wish Putin’s countrymen more economic hardship given that their worsening economic condition would likely come back to bite Americans much harder than it does the Russians.
* * * * * * *
S. Douglas Woodward is author of 10 books including his new “Quick Study Book”
IS RUSSIA DESTINED TO NUKE THE U.S.? which will be released in printed and eBook formats on August 1. Interested persons should be watching Amazon, iBooks, Nook, and LuLu for the book as well as other Christian organizations that support Doug’s writing ministry.
(Note it may be released a few days early to satisfy building demand).
ENDNOTES
[2] Ibid.
[3] From Bloomberg, May 14, 2015, “Putin Buying Dollars Again Shows Worst of Crisis Is Over”:
President Vladimir Putin is stockpiling dollars again, suggesting Russia’s first recession in six years can’t keep him from rebuilding his war chest.
The Bank of Russia said it plans to buy $100 million to $200 million a day to replenish its reserves after last year’s plunge. Sanctions over Ukraine and falling oil prices triggered a run on the ruble that forced the bank to spend about $90 billion before ending its defense of the currency in November.
Resuming foreign-currency purchases after an almost yearlong hiatus is economic pragmatism from a leader locked in the worst standoff with the U.S. in a generation, particularly one who’s decried the “dollar monopoly” that allows the U.S. to act like a “parasite” on the global economy.
“Putin was scarred by his early experience, when his freedom of movement was restricted by the need to repay debt,” said Tom Adshead of Adshead Consulting in Moscow. “He wants stability and maximum freedom and that’s what the monetary powers have been told to do.”
[4] See http://www.bloomberg.com/news/articles/2015-06-28/russia-free-float-skeptics-gather-as-ruble-seen-on-shorter-leash
[5] See http://finance.yahoo.com/news/russias-huge-military-upgrade-hit-032200036.html
[6] See http://www.businessinsider.com/goldman-analyst-and-ex-cia-agent-we-are-in-an-extraordinarily-dangerous-time-right-now-2015-7#ixzz3gGV8n8eG.
No Comments on WHY A BAD RUSSIAN ECONOMY IS BAD NEWS FOR THE U.S.