Friday, October 24, 2008

Russia: The Financial Storm becomes a Hurricane

For a long time this blog has warned of the dangers of the aggressive regime in place in the Moscow Kremlin. In common with commentators like my friend Edward Lucas, I have pointed out the consequences of the lack of property rights and the extraordinary level of corruption in modern Russia.

This prickly and aggressive approach has had an impact on any country that is the focus of Russian policy. As Vygaudas Uzackas- the Ambassador of Lithuania in London- observed in a conference last week, Russia still has trouble escaping the mindset that it must deal with other states either as enemies or as vassals. This zero-sum world view of the Kremlin looks not only old fashioned, but self defeating.

The Russian Federation , during the past five years, has built up an extraordinary war chest of liquid reserves. Indeed, although there is some uncertainty about the actual level of reserves, it seems clear that they are now around the third largest in the world. This gave confidence that the Russian economy had indeed stabilised after the dramatic collapse of 1998. However, as I have noted in the past, the Russian balance sheet may have been liquid, but it had failed to address the lack of investment of decades. Much of the Russian infrastructure is in a critical condition, and the investment level is below what is needed even for care and maintenance. Even the much vaunted naval exercises in the Bay of Biscay, far from demonstrating strength, showed the huge decline in Russian capabilities- in fact the flotilla comprised almost the entire serviceable fleet available to the Russian Federation- including unarmed spy-trawlers. The Jane's Weekly report on the Russian attack on Georgia, despite the quick victory, pointed out that the Russian army is no match for the more flexible and better armed forces of NATO.

Thus, as I have previously argued, despite the corruption and bellicosity of Putin's Kremlin, the problem the global community faces in Russia stems not from burgeoning Russian strength, but an almost catastrophic weakness.

I fear that this weakness will now be revealed in a spectacular financial collapse which could have incalculable consequences and even lead to an overtly fascist regime in Russia. The precipitate decline in global oil prices has left Russia facing a large and unforeseen deficit. The emerging Russian banking collapse is set to be more complete than any except Iceland, and rather than mergers to protect depositors, several banks will fail altogether, leaving thousands to be financially ruined. The Russian government has already been forced to spend around 20% of their reserves in such areas as currency support, and now they face the real prospect of being forced to make massive capital injections in order to secure the banking system and the teetering and sometimes debt laden empires of the Oligarchs.

It is exceptionally difficult to foresee how the Russian government can continue their longer term policies without having the oil and gas bonanza to finance them, and when those carefully built reserves will now have to be largely allocated to financial rescue.

Yet for the West, this is a major opportunity. After the overconfidence- indeed arrogance- of the Kremlin in the last five years, there is now the chance to create a genuine partnership. As such, the interests of the NATO states can be secured - as can the security position of Ukraine, and even Georgia. As the crisis is addressed in the West, there will be a window of opportunity to offer support to the Russian Financial system- partly repayable in Russian good behaviour.

It should certainly be an early priority for the in-tray of President Obama.

3 comments:

Anonymous said...

Cicero

A small caveat man for man equipment for equipment maybe but then the same appplied to the Wherhmacht and the old Red Army. But they won in the end didn't they. Quite simply the Russians on past form are willing to suffer casualties on a scale the West can't comprehend. Besides Nato struggles to raise a force for Afghanistan, and unless the Russians directly assault an existing Nato member no one will be queuing up to start a direct shooting war least of all the Russians.


Lepidus

Cicero said...

Except that NATO has absolutely no intention of attacking Russia, only of defending itself. That should be well within our capabilities. Estonia -with british support- beat the Red Army in 1918, and NATO has a capbility over the Russian Army rather similar to that of the Coalition over the Iraqi army - with was destroyed quite quickly.
The morale of invading troops is rather different to that of defending troops.

Anonymous said...

Cicero


The Red Army in 1918 was little more than an armed militia. It was not led by officers of the calibre of Zhukov and Chuikov. While the Russians now are not man for man match you are very silly to equate them with the Iraqi army. They have some very effective kit in certain parts.

But at any rate direct armed confrontation? Unlikely in the extreme. The West is overstretched as is Russia. The Balts or existing Nato members could possibly suffer a bit of harassment but that's it. The game is on the periphery.

Lepidus