Ukraine Crimea: Russia's economic fears

Russian President Vladimir Putin

So far Russia's actions in Ukraine have been assessed mainly in terms of its international relations.

From that perspective, Russia's actions do not look very rational and foreign commentators have explained them in terms of President Vladimir Putin's anger and feelings of humiliation after the overthrow of Ukrainian President Viktor Yanukovych. But I would focus on domestic political considerations as a driving force.

The famous Bill Clinton presidential campaign slogan, "It's the economy, stupid", comes to mind.

The Russian government's expectations of economic recovery by the end of 2013 went wrong.

According to different experts, Russia's economy is already in de facto recession with a drop in investment, a rapid decline in consumer demand and a real-terms decrease in incomes.

The economy has already shrunk for two consecutive quarters. The rouble is weakening, causing expectations of growth in inflation.

Russia's ministry for economic development has revised downwards its short-term forecasts on an almost monthly basis.

According to the most recent forecast by the independent Gaidar Institute for Economic Policy last month, the Russian economy will not grow faster than 2% per year until 2016, even with a best-case scenario of growing quasi-state investment, an improving investment climate and small business growth.

Economic stagnation
Currency exchange office in Moscow (3 March) The rouble fell and shares dived on what was dubbed Black Monday in Moscow

Now with all the events developing in Crimea, even this scenario looks too optimistic.

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The political-economic base of Vladimir Putin's 2004-2013 administration is coming to an end”

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On 3 March, dubbed Black Monday, Russia's RTS stock market index plummeted 12% and the rouble fell 1.9% against the dollar in spite of massive intervention by Russia's Central Bank. The stock market has since recovered its losses.

The Crimean parliament's decision to join Russia has only added to the economic instability.

The rouble had already fallen by 10% in two months, which due to the high dependence of the Russian economy on imported goods and commodities almost automatically translates into a fall in real incomes.

A lengthy economic stagnation, perhaps even a recession, caused by domestic problems rather than by the world market might not be so devastating if the government was not already facing accusations of a decline in legitimacy since the 2011-2012 political protests.

Soldiers outside Perevalnoye 6 March Reuters Soldiers loyal to Moscow are in control of Crimea

It should be taken very seriously because it means that the political-economic base of Vladimir Putin's 2004-2013 administration is coming to an end.

Turning the screw

The regime had to do something about these: either by improving the economy at the expense of weakening its control over it, or by focusing on the image of an external enemy and consolidating the nation around the leader.

Russia appears to have made its choice, passing a very important fork in the road, by choosing to tighten the screw and switching to a different model of relations between state and society rather than liberalising the economy and improving the investment climate.

This is by no means an immediate reaction. The events that culminated in the past week in Crimea had been developing for a while. Looking back, several developments over recent months fit this scenario.

There was the merger of Russia's two top courts - the merger of the Supreme Arbitration Court with the Supreme Court - along with tougher controls on the judiciary and the increasingly powerful role of Mr Putin's inner circle at the Kremlin, known as the Siloviki.

The final stage can be traced back to the start of last autumn, first with the Kremlin's appointment of Mr Putin's former deputy chief of staff Vladislav Surkov as his personal aide; then the very serious reshuffle at Russia's Ria Novosti news agency; and finally the intense pressure placed on two largely independent media outlets, Dozhd TV and Echo Moskvy Radio.

Facing the prospect of recession, Mr Putin now appears to be returning to the days of 1999-2000, when "a small victorious war" in Chechnya led to a major rise in his tremendous approval ratings.

Paradox of sanctions

Attacking Ukraine may promote mobilisation and the consolidation of the society around the leader, at least in the short term, with a tightening of the screws on his opponents and any potentially disloyal members of the elite.

The paradox is that sanctions placed on the elite could serve Mr Putin's goal of closing Russia and creating a siege mentality.

Serious economic sanctions, especially from Europe, seem unlikely for now. But Russia has already paid a high price for its aggression in terms of a fall in the stock market and a further decline in investment due to both the increased cost of borrowing and the further alienation of investors.

However, it doesn't look like this changes his calculations of costs and benefits.

It became evident last year that Russia's leadership was not put off by the high cost of keeping Ukraine on side - with an eagerness to pay almost $15bn (£9bn) a year in discounts on gas sales.

However, if more serious European sanctions were to be imposed such as an embargo on Russia's gas supply, by replacing it as some experts suggest with Norwegian gas and liquefied natural gas, then Russia would stand to lose some $100bn a year and face economic collapse.

Nikolay Petrov is professor of political science at the Higher School of Economics in Moscow.

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