The Illusion of Russian Power

The slump in world oil prices, reinforced by the likely increases in alternative hydrocarbon fuel markets, leaves Russia seriously exposed economically. With the bulk of an  economy addicted to a narrow set of export products, namely oil, gas and metals, Russia is in serious systemic economic trouble. With an exchange rate that has grown by 130% over the past decade or more, the balance between Russia’s internal and external economy is severely out of sorts. In the first post Soviet decade, Russia’s non hydrocarbon export economy slowly fell to just 21%, as a consequence of the breakup of the Soviet trading system. Russian non energy exports to Eastern Europe fell significantly as former Warsaw Pact nations joined the EU. Since 2000 that steady decline in non hydrocarbon exports has fallen precipitously from 21% in 2000 to just 8% currently.

Historically it was the Reagan White House that broke the Soviets by forcing technological competition, in the era of the largely mythical StarWars initiative. The facts may be a little exotic, but the Soviets were effectively broken economically when the price of oil collapsed over a 2 years period in the 1980s. Thus the stage was set, during the mid to late 1980s, for Soviet industry to stagnate for a further 28 consecutive months, become grossly underfunded and increasingly ‘off the pace’ of industrial innovation. Brilliant Soviet engineers and scientists literally ran out of funds and the core industrial centre of the Soviet Union began to degenerate.

The swift disintegration of the Soviet Empire shocked everyone. An apparent fearsome superpower literally fell to pieces before the eyes of the world. Given its real economy however the fall should have shocked nobody. It was inevitable.

Putin’s Russia today, is in even more desperate straits economically, than  that of the Soviet’s  in 1989. The 15 Soviet Republics are no more and the captured markets now look to the EU and beyond for everything except a rump dependance, by a few states, for Russian energy. Demographically Russia is in serious if not terminal decline and this compounds its economic ‘Perfect Storm’. With the current  collapse in the oil price, Russia looks to its assumed 0.7 trillion dollar reserves. That can’t last for long, given the medium term economic forecast and its demographic decline. In a seemingly last hurrah Putin appears to be rearming as fast as he can afford to do so and is indulging in foreign adventures, in an attempt to hold the nation together for just a little more time.

The economic indicators are clear. The Russian wealthy are fleeing to hard currencies and liquid assets as fast as they can. Hong Kong is awash in Russian cash looking for a home anywhere but Russia. Capital flight has now reached 5% of Russian GDP per annum at the same time the current account surplus is falling and is no longer covering the flight of capital.Compounding these economic  portents, are Western sanctions over Russia’s Ukraine adventure. Truly a Russian economic ‘Perfect Storm’.

Russia’s best and brightest now work for Boeing or Israeli Aerospace. Russia’s famous trains are manufactured in Germany and the French build Russian Navy ships but then deny Russia delivery, because of their antics in Ukraine. Lubomir Mitov the Russian Chief of the Institute of International Finance worries that Russia’s economy has the potential to once more collapse, as it did in the late 1980s, heralding the end of the Soviet Union. The Russia of 2014 is in even worse shape that the Soviets were in in 1989. An economically  destabilised, rearming Russia, is a serious threat to international stability.