By Ben Aris, Intellinews, 3/01/22

Two years ago I wrote a piece entitled “A history of Russian crises”. Time to update it.

“Russia has crises regularly. They happen for a variety of reasons: poor regulations, the lack of institutional checks and balances, rank corruption, heavy debt, no money in reserve, shallow capital markets, weak banking sectors and external shocks. And they cause havoc when they happen,” the article opened.

Now we can add “invasion of other countries” to that list of causes. The attack on Ukraine on February 24 has caused the biggest crisis since the August 17, 1998 meltdown of the Russian financial sector. However, this crisis will do less damage than that one.

The ruble has lost a third of its value in just the last few days and the market capitalisation of the Russian stock market has been halved, with the RTS index falling from its peak of 1,900 in October just before the military posturing around Ukraine started to 935 now. In 1998 the ruble lost 75% of its value and the RTS index fell from circa 600 at its peak in October 1997 to a mere 38 a year later.

The Russian economy is much stronger today than then. Its gross international reserves (GIR) are an order of magnitude bigger. Russia is running a triple surplus of trade, current account and federal budget. Its bank sector has been cleaned up and is profitable and well capitalised. Unemployment is at post-Soviet lows and inflation, and while higher than comfortable, it is still in single digits (for now). Russia is in a much better state to weather this storm than at the end of the 1990s, when that crisis wiped out the entire top tier of the Russian banking system and plunged the country back into economic chaos. No wonder the Russians hate the 1990s so much.

However, the real pain on the Russian economy this time is the nature of the sanctions that have just been imposed. While the macroeconomic, banking sector and stock market indicators are not as bad as in 1998, the big difference is these sanctions are designed to permanently hobble Russia’s economic development.

Thanks to the fiscal fortress that Russian President Vladimir Putin has built in an attempt to sanction-proof the economy (the success of which is now in question after the EU unexpectedly imposed sanctions on the Central Bank of Russia’s gross international reserves (GIR) on February 27), Russia has been running an austerity budget that has kept its growth potential to only 2% when it should be more than double this amount.

Russia was condemned to underperform the global economic growth before the sanctions, but now it will fall even further behind as its growth potential has been even further reduced. Putin has doomed Russia to slowly end up as at best “a raw materials appendage to China,” for as long as this sanctions regime remains.

1998 crash and recovery

The 1998 crash was a disaster, especially for the normal people that once again saw their life savings evaporate overnight. But it also reset the economy and laid the groundwork for a rapid recovery.

Putin took over in 2000 and pushed through a radical set of reforms such as rewriting the labour code, setting realistic flat income tax rates that are still in place today (with a few tweaks such as those to VAT) and he began to raise public wages by 10% a year over the next decade.

Most importantly, what academics Barry Ickes and Clifford Gaddy had dubbed “the virtual economy” was destroyed – a system where business was done almost entirely on barter. The collapse in the value of the ruble forced a re-monetarisation of the economy that allowed the bank sector to work again, and tax revenues began to pour into the federal coffers.

As ruble-denominated labour wages were slashed by three quarters, oil companies that earned dollars on the international markets became cash cows overnight and primed the pump. The oil companies invested more in just 1999 than they had collectively over the previous decade. And their business only got better after the oil prices began their inexorable climb to a peak of $150 per barrel over the next five years.

Having cleared out the oligarch banks – the so-called “Financial Industrial Groups” – the banks that were left were mostly more commercially minded and flourished as they rushed to tap the international capital markets where they could “borrow long and cheap overseas, but lend short and expensive at home.” Banks like Russky Standart, a POS retail specialist that pioneered the unsecured lending business, boomed.

None of these conditions exist this time round, with the exception of more profitable oil companies. The collapse of the ruble this week will lead to high inflation. The CBR imposed an emergency 20% rate hike on February 28 that will take years to unwind and will stifle growth. The SWIFT sanctions and the US ban on US investors buying any new Russian Ministry of Finance ruble-denominated OFZ treasury bills will cut Russia off from the international capital markets.

Instead of booming during a bounce-back, Russia’s economy under this sanctions regime is doomed to sub-par growth for years to come. Putin’s fiscal fortress is probably strong enough to prevent a crisis in the short term, but the sanctions will stymie Russia’s long-term growth prospects and could condemn the country to a Latin America in the 1970s-style stagnation over the long term…

…In this crash the ruble has lost 30% of its value in just the last few days, putting this crisis on a par with earlier crises but not quite as bad as in 2014. That is due to the huge reserves the central bank has built up and also the much greater confidence in the regulator; in 2014 CBR Governor Elvira Nabiullina was seen as green and untested, but today she is seen as a titan amongst central bankers and the “most conservative governor in the world.”

The impact on unemployment is likely to be very small. Joblessness spiked in 2020 due to the lockdown as people literally couldn’t go to work, but it rapidly recovered as the coronavirus (COVID-19) restrictions came off in the autumn of that year. Currently unemployment is back at its post-Soviet lows of 4.3% as of December 2021. How far it rises from here will depend on the severity of the recession that will almost certainly begin now.

Inflation will also rise. Inflation is currently 8.7% as of January this year and was rising all last year, despite an aggressive string of rate hikes: March (25bp), April (50bp), June (50bp), July (100bp), September (25bp), October (75bp), December (100bp), January (100bp) and February (1,500bp).

The CBR’s emergency doubling of overnight rates on February 28 will curb the further rise but the 30% devaluation will feed through into more inflation over the next six-nine months. However, in the previous crisis the CBR said it was pleasantly surprised as the devaluation-driving inflationary effects were surprisingly mild and fed through more quickly than expected. However, in those crises the economic bounce-back was also better than anticipated. Again just how bad the inflation problem gets will depend on the depth and duration of the coming recession.

The banking sector has been largely undamaged, although not unaffected, in each crisis since the disaster in 1998, which wiped out the entire top tier, but there is moderate danger of a banking crisis this time round. As bne IntelliNews reported, there is a dangerous mismatch between the state-owned banks dollar liabilities and their dollar assets: in short, the big state-owned banks don’t have enough dollars on hand to meet demand if withdrawals soar – and demand is soaring after the US effectively cut both Sber and VTB Bank off from using dollars. On balance it seems the CBR has enough dollars to cover the shortfall if needed, but the story highlights how painful the SWIFT sanctions are proving to be.

From the macro-economic point of view this crisis is actually milder than the previous ones, or at least on a par, even slightly better than that of 2014. But there is one big difference: Putin’s decision condemns Russia to sub-par growth in the long term, as he has destroyed what little confidence domestic business has in the future of Russia.

The noughties boom was driven, and was gathering momentum, because Russian business was returning its flight capital to the Motherland, confident in the future. Russia’s development does not depend on foreign direct investment (FDI) or access to the capital markets. It depends on persuading its own businessmen to build and invest into the economy.

Those businessmen were nervous before. Now they will simply not invest in Russia any more, as it has no future. Russia cannot grow strongly unless its domestic businessmen participate, and following this crisis they will not. 

The previous crises of 1998, 2008 and 2014 were not Russia’s fault. They were due respectively to a currency crisis in Asia, the US failure to manage its mortgage markets and OPEC’s decision to flood the markets with crude. This crisis is entirely and exclusively of Putin’s own making. The biggest long-term consequence of this crisis is Putin will have destroyed what little confidence his own businessmen have in his leadership. Indeed, a few of Russia’s business elite have already come out and publicly criticised the invasion of Ukraine, including Rusal owner Oleg Deripaska, Alfa group founder Mikhail Fridman and Kremlin insider Anatoly Chubais.

Prominent businesses have told bne IntelliNews in the past that they built up big businesses that have made them rich, but they have stopped there. “Why risk borrowing when that could mean I could lose control of my business? I am already rich. I don’t see the point of risking what I already have,” one medium-sized successful businessman told bne IntelliNews.

The Kremlin has tried to force domestic businesses to invest into Russia with laws that penalise companies who don’t repatriate the ownership of their companies. It is also in the process of passing a law that will penalise unsanctioned companies from doing business with sanctioned ones that will end up infecting the whole economy. But the only way to get businessmen to invest into Russia is to create a conducive investment climate. But as long as Putin emphasises security over capitalism that will never happen. Inflows of the domestic capital belonging to “minigarch” and other successful businessmen from offshore havens to Russia remain miniscule.

There were reports this morning of an imminent attack in Kiev that would target the SBU, which is the Ukrainian intelligence service.  According to TASS news agency, the Russian Ministry of Defense stated:

“In order to thwart informational attacks against Russia, [Russian forces] will strike technological objects of the SBU and the 72nd Main PSO Center in Kiev. We urge Ukrainian citizens involved by Ukrainian nationalists in provocations against Russia, as well as Kiev residents living near relay stations, to leave their homes,” the Ministry said.

Increased attacks in Kiev would be consistent with RT reports from yesterday stating Russia had warned residents of the capital to evacuate and that a corridor for safe passage out of the city was open.  The Kiev mayor Vitaly Klitschko in recent days had said the city was encircled but later backtracked on that statement.  An Asia Times report, citing European intelligence officials, suggested that Russia has been making progress on its plan to encircle major cities, like Kiev, and then give an ultimatum of talks or an attack.

A TV tower in Kiev has also purportedly been bombed by Russian forces today leading to the end of local television channel broadcasting.

Lots of people had a scare with Clint Ehrlich’s Sitrep 5, but it was later reported that Poland will not be sending fighter jets to Ukraine and NATO Secretary Jens Stoltenberg reiterated NATO would not be participating in any fighting.

Sanctions

There are a slew of western companies divesting from and stopping business exchange with Russia.  These include Shell, following the example of BP, exiting its joint venture with Gazprom worth about $3 billion.  BMW is ending shipments of automobiles to Russia, and Apple will do the same for its electronics.

However, there are a significant number of countries that are declining to sanction Russia:  China and India (2 most populous countries of the world), Mexico and Brazil (I’m not aware yet of any Latin American country agreeing to sanctions so far, but feel free to correct me if there are), no countries in Africa or Middle East that I’m aware of either.  Additionally, the countries on/abutting the European continent that are declining are:  Georgia, Moldova and Turkey.

Media Suppression

Russia’s communications regulator has confirmed that independent radio station Echo Moskovy and independent television station TV Rain have been taken off  the air.  Interfax News is reporting that both will be appealing those decisions.

Russian Public Opinion

State-sponsored polling in recent days indicates that Russians generally support Putin’s military operation in Ukraine so far and support for the Russian president has increased:

VICOM:  “Most Russians (68%) have spoken in support of the Russian special military operation in Ukraine, while 22% said they do not support it, according to a poll conducted by the Russian Public Opinion Research Center (VCIOM) obtained by Interfax on Monday.”

FOM:    Putin’s approval rating has risen from 60% on 2/20 to 71% on 2/27 (survey by FOM)

Again, these polls are state sponsored so some skepticism may be warranted.  However, it’s not unusual to see a rally-around-the-flag jump in support for a wartime leader, especially at the beginning of military engagement. 

I will be trying to include an array of perspectives on this blog, in addition to my own, to try to understand the current crisis. I find this analysis to be interesting because one of the authors, Marlene Laruelle, has written extensively about fascism in Europe and had previously debunked assertions from the west that Russian society or the Putin government were fascistic. So she is a knowledgeable and fair-minded academic. I’m not familiar with her co-author. – Natylie

By Marlene Laruelle and Ivan Grek, Russia Matters, 2/25/22

Russia’s strategic concerns regarding the post-Cold War European security architecture, as expressed in the two treaty drafts published by Moscow in December 2021, may be seen as legitimate, or at least deserving to be heard and taken seriously. The new lines of argument expressed in Vladimir Putin’s Feb. 21 and Feb. 24 speeches, however, have irrevocably strayed from those initial concerns.

For a long time, the Kremlin was able to strike a balance between Russia’s pragmatic strategic interests and its more ideologically-loaded constructs inspired by different brands of conservative and/or nationalist thinking. This balance now seems to have been lost, a sign of the ascent of an increasingly rigid ideology in the Kremlin. This week’s speeches have confirmed this dramatic turn, with the construction of a narrative legitimizing the military intervention in Ukraine along three key ideological lines: a historical one, an ethnic one and a political one.

The Historical Line: Ukraine as a Bolshevik Creation

The Russian president started his Feb. 21 speech with long statements on the historical unjustness behind the creation of the current Ukrainian state. Ukraine is presented as part of Russia’s longue durée imperial history, with no history of its own as a fully independent state. Putin argued that the Bolsheviks created the Ukrainian state at the expense of the Russian heartland. Not only did the Ukrainians have the Bolsheviks—and then Stalin and Khrushchev—to thank for having established their artificial statehood, Putin argues, but they also have post-Soviet Russia itself to thank for not claiming the territories that became Ukraine by Soviet decision. “And today the ‘grateful progeny’ has overturned monuments to Lenin in Ukraine. They call it decommunization. … We are ready to show what real decommunizations would mean for Ukraine,” concluded Putin, laying out the trope that recognition of the Donetsk People’s Republic (DNR) and the Luhansk People’s Republic (LNR) is an act aimed at fixing Soviet mistakes.

This narrative derives from conservative monarchist circles, represented by people such as media mogul Konstantin Malofeev and his Tsargrad TV. Its modus operandi is the idea that the Bolsheviks were anti-Russians at heart who created Ukraine in order to break up the Russian nation and gave power to the empire’s other ethnic minorities in order to weaken the Russian state. Such fundamentalist discourse not only interprets Soviet land management as Russophobia, but claims that all such actions were illegitimate because the Soviet regime was itself legally illegitimate.

This narrative has circulated for years among certain segments of the Russian Orthodox Church and the propagandists of rehabilitating the White movement and the tsarist monarchy. For a long time Putin and his government tried to keep both “red” (pro-Soviet) and “white” (anti-Soviet) narratives equal, following a classic balancing act that the regime had been building between different vested interest groups. But the anti-Bolshevik narrative has been elevated quite suddenly over the last two to three years, resulting in a rapid decommunization of the historical narrative at the higher level of the state apparatus.

This discrepancy in discourse is noticeable when comparing Putin’s July 2021 text on the unity of Russia and Ukraine and his Feb. 21, 2022, address. The 2021 text is already negative on the Bolsheviks: “One fact is crystal clear: Russia was robbed, indeed.” But the general tone was less critical of the Soviet Union and more respectful toward Ukraine, even if it was a clearly Russia-centric reading of Ukraine’s history. These nuances have totally disappeared in the 2022 storyline, which presents Ukraine as a stateless territory, governed by the illegitimate U.S. puppet administration. The anti-Bolshevik “white” narrative seems therefore in the process of winning out amid the upper echelons of the state.

The Ethnic Line: “The Genocide of Russians”

Then Putin moved to a second line of argument: the genocide of Russians in Ukraine. The argument is not a new one. It was already well developed in the 1990s, advanced by the ethno-nationalist opposition, such as Dmitri Rogozin’s movement, the Congress of Russian Communities, directly inspired by Alexander Solzhenitsyn’s discourse of a demographically dying Russia. “Genocide: Russia and the New World Order,” was even the title of the 1999 book by Sergey Glazyev, who was at that time in the national-patriotic opposition before occupying a series of government positions.

The genocide narrative was revived in 2014 in order to justify Crimea’s annexation and support for the Donbass secessionist movements, with the deaths of 42 pro-Russian protestors in the Odessa Trade Unions House fire as its centerpiece. The concept has since been regularly mentioned (in 2015 and in 2018) by Putin himself or by Foreign Minister Sergei Lavrov, and has been revitalized in light of the current crisis. Putin stated that “what is happening in the Donbass today is genocide,” a discourse echoed by State Duma Speaker Vyacheslav Volodin and complemented by two measures: the opening of a criminal case by the Russian Investigative Committee over the discovery of supposed mass graves of civilians killed in the shelling of Donbass, and the release of documents to the U.N. Security Council accusing Ukraine of “exterminating the civilian population of the self-proclaimed People’s Republics of Donetsk and Luhansk,” thereby also referring to the idea of a genocide.

The use of the genocide argument allows Russia to play several cards at once: it echoes the demographic fears of Russians’ ethnic disappearance, presents itself as the mirror of the Ukrainian narrative on the Holodomor and seeks to guilt-trip Germany for its Nazi past. For instance, German Chancellor Olaf Scholz was mocked by Russian officials for not recognizing the supposed genocide. It also allows Russia to participate in the “search [for] lost genocide” (to borrow a phrase from political scientist and Holocaust scholar Evgeny Finkel) that is happening all over Central and Eastern Europe, using victimhood as a tool for political legitimacy.

The Political Line: “Denazification”

The third argument is a more political one: the “denazification” argument, put forward mostly in Putin’s Feb. 24 speech justifying his military intervention in Ukraine. Here too, it is far from a recent trend, as it has a long Soviet history and was revived in 2014. Obviously, Russia’s memory of the Great Patriotic War has become a central part of the nation building process and the symbolic politics built by the Putin regime in the last 20 years. But the obsession with presenting Russia as the antifascism power par excellence has now transformed from a nation building tool to a literal weapon.

Since the mid-2000s, memory wars with Central and Eastern European countries have been a permanent mutual otherization, with Russia accusing its western neighbors of becoming “fascist again.” Meanwhile, Central and Eastern European countries—mainly Poland, the Baltic states and Ukraine—along with some Western experts, politicians and media accuse Russia of being a fascist regime or a fascist country.

Since 2014, Russia has emphasized that Ukraine is supposedly run by a fascist regime and allows radical far-right movements to proliferate. This line constitutes the other side of the “genocide” coin, as it projects neo-Nazi Ukrainians committing genocide against Russians. Justifying Russia’s military intervention as a “denazification” strategy supposes some kind of punitive operations—already mentioned in the Feb. 21 speech—against targeted people, but also and mostly, tries to present Putin as a “Nazi hunter,” thereby confirming that the metaphor has now become literal.

The Russian Public’s Response

What is striking is that Russian audiences do not seem to respond the same way to the different ideological lines advanced by Putin. According to Google Trends and Yandex Stats, after Putin’s Feb. 21 address, searches for “Ukrainian history” increased sharply, while searches related to “genocide” did not register a spike. After his Feb. 24 speech, one of the key searches on the Russian net was “what is denazification,” a sign that people are trying to make sense of the official reasoning. However, tellingly, after both speeches, the top search was the ruble-dollar exchange rate, confirming that the Russian population is mostly interested in the impact of the current crisis on their everyday future.

Conclusion

The 2014 Crimean crisis saw the blossoming of a romanticized war narrative around the idea of Novorossiya. Now, gone are the romantic exaltations of a reunified Russian nation and of young men wanting to try their hand at war as a kind of self-fulfilling coming of age à la Byron. Today’s language is a darker, vernacularized mixture of negative messaging in which the strategic line of argument—that Russia feels insecure in the current European security architecture and needs to be given a say—is lost in profit of purely ideological arguments inspired by imperialist and nationalist thinking.

The decommunization of Russia’s official historiography as revealed by Putin’s speeches and the literal weaponization of the anti-fascism positioning are more than concerning. It seems suddenly that the key issue for Putin is not so much NATO and European security architecture as the simple existence of Ukraine. In Russian, the word “Ukraine” means a frontier. In his two speeches, Putin seems to have “decapitalized” Ukraine from its statehood and nationhood in order to transform it into a lowercase frontier territory in the American sense. Such an ideological shift can do nothing but cripple Moscow’s desire to have its strategic concerns heard on the international scene.

The Moon of Alabama blog also has a daily sitrep. Here is their report for Day 5 of the war, with an emphasis on potential economic blowback for US and EU from the sanctions it has imposed. – Natylie

Historian Anne Morelli has summarized Arthur Ponsonby’s classic book Falsehood in War-Time as this:

1. We do not want war.
2. The opposite party alone is guilty of war.
3. The enemy is inherently evil and resembles the devil.
4. We defend a noble cause, not our own interests.
5. The enemy commits atrocities on purpose; our mishaps are involuntary.
6. The enemy uses forbidden weapons.
7. We suffer small losses, those of the enemy are enormous.
8. Recognized artists and intellectuals back our cause.
9. Our cause is sacred.
10. All who doubt our propaganda are traitors.

h/t Bernd Neuner

As an example I offer you yesterday’s Policy statement by Olaf Scholz, Chancellor of the Federal Republic of Germany

The above are what you hear and see in current ‘western’ news. It is not reality.

The U.S. and its proxies in the EU and elsewhere have put up very harsh sanctions on Russia to damage its economy.

The final intent of this economic war is regime change in Russia.

The likely consequence will be regime change in many other countries.

This war is waged at a financial size that is unprecedented. The consequences in all markets will be very significant to extreme. But experience from Iran shows that such financial wars have their limits as the targeted country learns to survive. Moreover Russia is in a much stronger position than Iran ever was and is better prepared for the consequences.

The rubel fell some 30% today but Russia’s central bank immediately more than doubled its interest rate to 20%. It is willing to fight inflation before it is really sets in. How much of Russia’s investment and consumption depends on imports from the ‘west’? Can’t most of it not be replaced by imports from China?

All energy consumption in the U.S. and EU will now come at a premium price. This will push the EU and the U.S. into a recession. As Russia will increase the prices for exports of goods in which it has market power – gas, oil, wheat, potassium, titanium, aluminum, palladium, neon etc – the rise in inflation all around the world will become significant.

‘Western’ central banks are still at practical 0% interest rates and will be reluctant to increase those as that will cause a deeper recession. This makes it likely that inflation in the ‘western’ world will increase at a higher rate than Russia’s.

Germany’s crazy move to add $120 billion to defense spending (up from some $40 billion p.a.) will within a few years create a strong military imbalance in Europe as Germany will then dominate all its neighbors. This is unnecessary and historically very dangerous. The shunning of economic relations with Russia and China means that Germany and its newbie chancellor Olaf Scholz have fallen for the U.S. scheme of creating a new Cold War. Germany’s economy will now become one of its victims.

On February 4 Russia and China declared a multipolar world in which they are two partnering poles that will counter the American one. Russia’s move into the Ukraine is a demonstration of that.

It also shows that the U.S. is unwilling to give up its supremacist urges without a large fight. But while the U.S. over the last 20 years has spent its money to mess up the Middle East, Russia and China have used the time to prepare for the larger conflict. They have spent more brain time on the issue than the U.S. has.

The Europeans should have acknowledged that instead of helping the U.S. to keep up its self-image of a unipolar power.

It will take some time for the new economic realities to settle in. They will likely change the current view of Europe’s real strategic interests. 

—

Some tactical observations:

This map shows the ground taken by Russian military over the first days.
Source – bigger

This map shows the likely current intent of the Russian forces.
Source – bigger

• There are 12 to 15 brigades of Ukrainian forces (blue) at the Donbas front. If the Russian’s (red) move fast enough they can cut those off from the rest of the country or bomb them while they try to escape on the only big road between those two pincer arrows.
• After a lull Russia has reintroduced Su-34 fighters to Ukraine. They will attack Ukrainian troop concentrations.
• The Russian elements north of Crimea have taken two important bridges and crossed the Dnieper towards the west. This opens the way to Odessa further west as well as for a march northward towards Kiev on the western side of the Dnieper.