CHAOS in Kiev must feel uncomfortably close to Russian President Vladimir Putin. The Ukrainian parliament yesterday annulled laws that sought to clear the streets of protesters against Ukraine’s increasingly authoritarian pro-Russian President Viktor Yanukovych. Ukraine’s prime minister and government have quit, and the country stands perilously on the edge of deeper conflict – prompted initially by a decision not to strengthen ties with the EU, but driven by a longer history of political, linguistic, and cultural splits.
This matters beyond Ukraine. In December, Russia attempted to keep its neighbour within its orbit with a deal to sell cheap gas and shore up Ukraine’s deteriorating public finances by buying $15bn in government bonds. Yet Yanukovych’s future remains doubtful. Yesterday, Putin met with EU leaders, determined not to be lectured to over his role in the crisis. But Ukraine should be the least of his concerns.
Next month’s Winter Olympics in Sochi is proving to be yet another unedifying spectacle of the Russian government’s incompetence and greed. First, by ignoring meteorological reality, Putin has remade Sochi into a Potemkin village, hosting the Winter Games in a sub-tropical Black Sea resort. Beyond this madness, the roads to Sochi must be paved with caviar, as huge amounts of money have been wasted. A senior International Olympic Committee has alleged that as much as a third of the $51bn price tag (more expensive than the last 21 Winter Games combined) has disappeared down the rabbit hole of endemic corruption. The final costs are coming in at quadruple Russia’s initial estimate.
So the political coming-out party for Russia’s supposed re-emergence is not off to a rip-roaring start. Putin, much as was true for the Chinese in 2008, sees the Olympics as a propaganda opportunity to show the world that it has re-ascended the heights of global great power status. The difference is that China has empirically done so, while Russia remains a busted flush. Pre-game jitters over Sochi – with discussions of rampant corruption, social intolerance, and terrorism worries – accurately point out Russia as it actually is, rather than how Putin wishes us to see it.
These problems make a mockery of the notion that Putin has brought Russia back (or indeed that it deserves to be included in the Brics grouping of emerging powers). Worse still, given Fed tapering and the impact of the US shale revolution, there are two graver storms ahead that call into question whether Putinism – like Yanukovych in Ukraine – can even survive for much longer.
As events in Argentina over the past week dramatically underline, we are about to find out which emerging markets have used the breathing space of US QE to do their economic homework, and which have merely ridden the hot money wave. Beyond the economic illiterates in Buenos Aires, first indications suggest that Turkey and Russia – and perhaps Brazil and South Africa – are in some peril as the Fed continues to taper, with their currencies under strain. While Mexico stands out as a well-governed emerging market, grasping the nettle of serious social and economic reform, Putin has done virtually nothing to initiate the structural reforms Russia desperately needs.
The shale revolution is even more of a silver bullet directed at the Kremlin. While Russia has a hefty $499bn in foreign reserves, it is useful to remember how quickly such a stockpile can be whittled away if markets definitively lose confidence in a badly-run country. At present, some estimate that the break-even price of oil needed to balance the Russian budget is $117 per barrel. Given the relentless downward pressure the shale revolution has put on the global price of oil (along with the prospect of Libya and Iran fully returning to oil markets) this would seem to be unachievable. The US is expected to add 1m barrels per day to global output this year.
In other words, shale may be the straw that politically breaks the camel’s back. Putin has abysmally failed to oversee Russia moving away from its current one-crop economy status; the country lives or dies based on the spot prices of oil and natural gas. Without largesse to hand to his sycophants (at home or abroad), it is an open question whether Putin can weather the coming storm.
Putin had better enjoy his gala in Sochi, because it is increasingly clear the economic party is over. There is no doubt Russia is not an emerging great political or economic power; there remains much doubt – given new global economic realities – as to whether Putinism will even survive.
Dr John C Hulsman is president and co-founder of John C. Hulsman Enterprises (www.john-hulsman.com), a global political risk consultancy. He is a life member of the Council on Foreign Relations, and author of Ethical Realism, The Godfather Doctrine, and most recently Lawrence of Arabia, To Begin the World Over Again.