Thursday, July 02, 2009

The coming Russian implosion

The narrow cabal of four KGB officers that controls Russia under Vladimir Putin has a brutally Manichean view of power. They do not believe in mutually beneficial negotiations, but only in the effective wielding of control. Thus they are a dangerous factor in the international community since any success for the West, by definition, must imply a loss for Russia. Even worse, Putin has a grievance against the current world order: he explicitly laments the fall of the USSR and intends to reconstruct the old power relationships whether using the power of Russian resources and money or- as in Georgia and Moldova- using Russian military power.

Having acquired power by underhand means- planting bombs that killed 300 people- it was always clear how ruthless the Putin clique was. Yet, in the end this very ruthlessness was part of his attraction to the Russian people. Putin acquired respect, precisely because of his KGB heritage. He projected competence, in sharp contrast to the last years of the hapless Boris Yeltsin. Furthermore this image of competence was underpinned by the huge flow of money into Russia as the oil price surged and the prices of all commodities doubled in the last crazed year or two of the boom. Putin's decision to focuss his attention on oil and gas did not look risky- it looked inspired.

Yet over the last year the oil gusher has fizzled out and the clear risks of concentration on extractive industries are now obvious. National income has fallen dramatically, and the Rouble has faltered in the currency markets. Now, a report from Fitch underlines the dreadful state of health of the Russian banking system. At least $22 billion of new capital is needed, and with losses mounting by the month, that sum could end up becoming over $60 billion. Meanwhile, in a futile attempt to ease the decline of the Rouble, Russia has seen its once healthy reserves fall at a spectacular rate. In the face of multiple calls on the public purse, including a dramatic increase in military expenditure-even the $300 billion of reserves that Russia had last year could be quickly squandered.

Meanwhile unrest continues to grow. The sudden imposition of an import tax on second hand cars- more or less the sole profitable business in Vladivostok- caused riots in the Russian Far East . Meanwhile government decisions become more dramatic and arbitrary in the face of ever worsening economic predictions. Now, however, we begin to see the Putin regime in a new light. During a carefully staged trip to a local supermarket, Putin demanded that the price of sausage be cut. Such populist gesturing has become a hallmark of Putin's rule- but it underlines a growing feeling that Putin is- whisper it- incompetent. The ludicrous misunderstanding of economics serves to show that Vladimir Putin is not a populist in touch with the national mood, but a fool who retains his Soviet mindset in economics as he has in geopolitics. His increasingly arbitrary statements reflect a man who is losing touch with reality.

Meanwhile the slow smoulder of instability in the Caucasus, restrained in the short term, shows that Putin's claim of victory in Grozny is all too hollow.

The pressure on the regime is growing stronger. The outlook is increasingly unstable, with even the moderate increase in the oil price failing to ease the pressure. With the outlook growing bleaker in the financial markets that pressure is set to grow dramatically. The increasingly arbitrary and incompetent Mr. Putin is on the eve of his toughest test.

It may not be one that he survives.

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