Vladimir Putin was long considered to be a geopolitical genius and a master chess player in the world arena. In fact, some have even compared him to Peter the Great. Under his leadership, Russia’s economy bounced back from the disastrous Yeltsin years. During Putin’s first eight years as president, Russia’s GDP increased by 600 percent. Industry, production, construction, real income, credit, and the middle class also saw substantial growth, largely due to numerous economic reforms implemented by Putin, including a massive decrease in Russia’s tax burden and the creation of “national champion” companies. Putin’s energy policies, such as the construction of new pipelines, turned Russia into an energy powerhouse.
Putin seemed to be even more successful in foreign policy. Putin’s Eurasian Customs Union brought several former Soviet states into economic alliance with Russia. In the arctic region, where global warming will open up new trade routes and energy reserves, Putin has built up Russian strength considerably. In 2013, Russia was able to prevent an American military intervention in Syria, saving a key (and arguably only) ally in the Middle East. His most impressive achievement of all was his annexation of the strategically important Crimean Peninsula, which occurred without a shot fired. The annexation was followed up with a proxy war in eastern Ukraine, where Russian-backed rebels overran huge swathes of territory.
Meanwhile, the Western leaders particularly Obama, were considered to be weak, stupid, and naïve in comparison. The West was unable to do much to prevent the annexation of Crimea, or stop Russian support for Eastern Ukrainian separatists.
Eastern European countries felt that the United States and Western Europe had offered little support in the face of Russian aggression, with the Polish foreign minister allegedly saying that “the Polish-U.S. alliance isn’t worth anything.” Even Republican Mitt Romney said that “Putin has outperformed our president time and time again on the world stage.” A popular saying is that when Putin plays chess, Obama plays golf. It seemed that Putin had humbled the West, in spite of having an economy that is a small fraction of the EU or United States. Fast forward to 2015 and Putin doesn’t look so smart anymore. Rather than making Russia great again, Putin’s policies have decimated the country’s economy and international standing.
To put it lightly, Putin poorly miscalculated in Ukraine. In particular, he underestimated the response of the EU and the United States. When the West responded with economic sanctions, Putin and his supporters laughed at them. Many saw them as half-measures that would never have a serious effect. The oligarchs targeted by sanctions believed that they had nothing to worry about since they did little to no business in the United States or EU. Some even took the sanctions as a badge of honor, a sign that they resisted the encroaching west.
What they failed to realize was just how adept the U.S. Treasury Department has become at financial warfare. After 9/11, the Treasury was given a whole host of rules and regulations to target funding for terrorism. The new rules not only freeze assets in U.S. banks, they make it difficult for sanctioned individuals and entities to access the financial system in the first place. While many major financial institutions are not American, they cannot avoid doing business in the United States. Even if a bank is not located in the United States, if it violates sanctions, it will have to pay hefty fines if it wants to continue business in the American economy. For example, BNP Paribas paid $8.9 billion in fines for violating U.S. sanctions against Cuba, Iran, and Sudan, even though it is a French bank. Thus, anyone targeted by American sanctions will be cut off from the international financial system, an economic death sentence in an economy as globalized as ours. U.S. sanctions against Russia not only target individuals; they target whole corporations and banks.
While the sanctions are not the only factor in causing Russia’s economy to go into free-fall, they are adding fuel to the fire. For example, many Russian companies have large debts in dollars, debts they can’t roll over due to sanctions. Yacov Arnopolin, a portfolio manager at Goldman Sachs Asset Management, estimates that Russia has $60-70 billion in foreign currency debt, much of which is in dollars.
Putin has attempted to respond with sanctions of his own but they have hurt Russia more than the West. For example, Putin banned imports from the EU, U.S., Australia, Canada, and Norway, which caused prices for fruits and vegetables to go up 8.7 percent.
An even bigger cause of Russia’s current economic crisis is the dramatic decline in oil prices. In June 2014, the cost of oil was $115 per barrel. Since then, it has plummeted to less than $50. While Putin’s policies turned Russia into an energy superpower, it also turned Russia’s economy into a one-trick pony. Russia’s economy did well in the 2000s when oil prices were high. Now that oil prices are falling, Russia’s economy is falling with them.
The effects of the sanctions and low oil prices are already showing. When Obama announced that Russia’s economy was “in tatters” in the State of the Union, he wasn’t wrong. Over the last seven months, the ruble has declined by 51 percent. Russian reserves have gone down to $379 billion from $414 billion a few weeks ago. Interest rates have gone from 10.5 to 17 percent. On Monday, S&P cut Russia’s credit rating to junk. Since lower credit ratings means higher interest, the downgrade could cost Russia $20-30 billion.
While neither the sanctions nor falling oil prices could cause Russia to go into recession, the two of them combined represent a killer one-two punch. For example, the Russian government is heavily reliant on oil to provide tax revenue. Since oil revenue has halved, the Russian government is threatened with going from surplus to deficit. This wouldn’t be that much of a problem if it could borrow money to bail itself out, but this is impossible due to the sanctions. Russia’s government could go into bankruptcy, especially given the expenses of fighting a shadow war in Ukraine.
It looks like things are about to get even worse. Russia’s central bank estimates that if oil stays at $60 a barrel (its currently under $50), Russia’s economy will shrink 4.5-4.7 percent. There are no signs that the factors behind Russia’s economic nightmare will go away. The head of BP says that oil prices will “certainly [stay low] for a year,” and “probably two and maybe three years.” The sanctions show no sign of easing up either, and the U.S. and EU are already talking about slapping Putin with another round of sanctions.
Putin has also lost influence and prestige on the world stage. The Russian stealth invasion of Ukraine has turned him into an international pariah. Russia looks like a big bully picking on a much weaker country (which it is). The shooting down of MH17 has made Putin look even worse in the eyes of the world. The signs of Russia’s ostracism are already appearing; last March, Russia was suspended from G8 over the Ukraine crisis.
At this point, Putin is in a classic catch-22. If he stays the course in Ukraine, Russia’s economy and standing will continue to take a beating. If he pulls out of Ukraine, Putin will appear weak vis-à-vis the West. He has backed himself into a corner where there are no good options.
While many of the comparisons between Putin and Hitler are exaggerated, one key similarity is how they were both viewed as geniuses in the early stages of their career only for them to miscalculate later. Hitler turned Germany from a dysfunctional nation reeling from the effects of the Versailles Treaty and the Great Depression into a military superpower.
He annexed Austria and Czechoslovakia without a shot fired. When war broke out, Hitler’s legions overran most of Europe. Many marveled at his abilities, especially in contrast to Allied leaders like Chamberlain, who were seen as naïve and weak (even Stalin underestimated Hitler). However, just 12 years after Hitler came to power, the Third Reich had collapsed, allied troops were in Berlin, and Hitler was dead. Viewed with the benefit of hindsight, Hitler doesn’t look so smart. Likewise, Putin doesn’t look like such a genius now.
While Putin has played the game of nation-states well for a long time, he has begun to make mistakes. The game is unforgiving; all it takes to lose is one mistake.