Article / 22 December 2014 at 1:48 GMT

Russia can baulk but its economy is rotten to the core

Managing Partner / Spotlight Group
United Kingdom
  • The US and EU apply a new squeeze on Russia with additional sanctions
  • Once again France squeals as it shows limited resolve
  • Vladimir verbosely claims violation and victimisation; yet he is the problem

By Stephen Pope

As the Ruble has enjoyed a few days of calm after the meltdown it endured at the start of last week, the imposition of new sanctions on Russia by the US and EU have given President Putin another reason to play to the domestic audience whilst denying reality.
Putin said on Saturday that Russia would not be intimidated over its actions in Ukraine and Crimea. In response to US and EU adoption of more restrictive sanctions on investments in Crimea and with Canada implementing its own raft of sanctions, the Russian Foreign Ministry warned that it was preparing to retaliate.

Finance Minister Anton Siluanov is facing an uphill struggle to keep the national budget on track as the proposals for 2014/15 earlier this year were based on an oil price trading at $96 per barrel.

Mr Siluanov said on November 24 that the combined cost of western sanctions and the collapse in world oil prices to Russia’s economy this year would be in the region of $140 Billion. On that date crude oil closed at $75.97 per barrel. On December 19 the price had fallen to $57.13 per barrel, a decline of 24.8% since he made his November estimate. So the damage to the Russian state coffers is even more severe.

In November the current level of western sanctions were estimated by Russia's Finance Ministry to be costing the economy $40 billion a year. So with further oil price declines and deeper sanctions, it is hardly surprising that Russia’s President Vladimir Putin is feeling cornered and sees a need to pacify the population with jingoistic rhetoric.

 Source: Spotlight Ideas

Since June 4, when the USDRUB rate was at 34.983, the rate has fallen by 39.95% to 58.255 at the close on December 19th. The comments from the Foreign Ministry may need to be extended now given the weakening of the oil price, the Ruble and the increase in the size and scope of Western sanctions. However, what is clear is that the ministry has been speaking from a far more honest and transparent perspective than the Putin.

The Russian President and Foreign Minister Sergey Lavrov have repeatedly tried to play down the impact of Western sanctions following Russia’s annexation of Crimea and its sponsoring of an armed rebellion in the eastern provinces of Ukraine. Putin has chosen to retain a defiant air despite the obvious economic fetters. He has stayed on message by repeatedly defending the Russian action and its support for pro-Russian separatists battling Kiev forces in eastern Ukraine.

Speaking on Saturday, December 20th at a concert to honour past and present security service staff, Putin said: "Obviously, no one will succeed in intimidating us, to deter, to isolate Russia,"
 There's only one man who can get Russia out of its sanctions-based troubles, but Presdient Vladimir Putin appears not for turning. Photo: Thinsktock

Lavrov’s Foreign Ministry also said on Saturday that new Western sanctions against Ukraine's Crimea region were a "collective punishment" against residents who had voted overwhelmingly in a referendum last March to join Russia. "It is sad that the countries which call themselves democratic resort to such methods in the 21st century," the ministry said in a statement.

Alexander Lukashevich who serves as a spokesman for the Foreign Ministry, said the sanctions undermined political efforts to resolve the conflict in eastern Ukraine. He added via the ministry website: "We advise Washington and Ottawa to think about the consequences of such actions. Meanwhile, we will work on retaliatory measures."

Now, l accept that I am seeing the situation in Ukraine through a western prism, however, even if I try and filter the news I can receive in the UK, I have to say that the Foreign Ministry’s comments are laughable and disingenuous. I must say here in the West we will be quaking in our shoes over Russian reprisals. The last piece of retaliatory action Russia undertook was to limit food imports from a range of western countries. That course of action just restricted choice for Russian consumers and made the domestic population suffer as against inflict crippling pain on the west. In the west who is the first to complain? Why it’s France…of course! 

At a time when it would be desirable for the western nations to stand together and absorb the loss of business from the sanctions on Russia, especially as there is no amelioration in the totalitarian tenor of the Kremlin, a chink in the resolve was seen on Friday. President François Hollande of France told EU leaders to consider dismantling the sanctions regime. He said that if Russia “sends the signals we expect, then there is no need for new sanctions”.

He was immediately contradicted by UK Prime Minister David Cameron, who insisted that the EU had to “stand firm” on the sanctions and the German Chancellor, Angela Merkel, insisted that sanctions must remain in force until they achieved their aim.

Many years ago, in a different stage of my career, I questioned the chief executive of WPP, Sir Martin Sorrel, about his business dealings in Russia. He replied that he would not say that the way they did business was wrong, it was just different and what was agreed before lunch may be be changed afterwards. So when President Hollande complains about lost revenue as France has invested heavily in Russia (led by Renault, Danone and Societe Generale) he should realise that if one dances with bear, one is likely to get scratched.

What really irritates the French is their unfulfilled desire to deliver two large warships that have been built for Russia by French shipyards. The delivery of the first of the Mistral Class command and assault ships has been suspended because of Russia’s actions in Ukraine.

The contract to build the ships was signed by President Sarkozy in 2011 and Hollande covets the gain for France of the cash flow from the contract that is valued at EUR1.2 Billion or $1.5 Billion. It is clear that since the first export restriction, France has been eager to find a way to deliver the first vessel as when there was a partial ceasefire in Ukraine in mid-September, the French permitted the ship to begin its sea trials. That caused an outrage at NATO HQ in Brussels and in Washington President Barack Obama was also furious with the French.

Could there be economic contagion?

EU leaders have this week been considering the risk of contagion spreading from Russia’s economic turmoil. The West has to stay firm and realise that Russia needs the west as a trading partner far more than the west needs Russia.

Will this bring Russia round to act in a reasonable and responsible way? Federica Mogherini, who represents the European Union for Foreign Affairs and Security Policy said that President Putin and the Russian leadership should “reflect seriously about the need to introduce a radical change in attitude towards the rest of the world, and switch to a cooperative mode”.

That currently seems unlikely. On Saturday in a letter released by the Kremlin, President Putin called for Russia's secret services to be improved to tackle the threat of the west ie the "modern challenges and threats and the emergence of new destabilising factors". He has told the people during his public address messages that the West are seeking to rob Russia of its natural resources and even take away it arsenal of weapons.

Such hysterical hyperbole and hypocracy is unhelpful. The President claims that the essential business of Russia's secret operatives is to fight international terrorism and "any attempts of foreign special services to deal a blow to Russia and her political and economic interests". Maybe one should expect nothing less from a former KGB agent.

December has not been a good month for Russia as an echo of the worst of the Soviet Union was seen when the Ministry of Economic Development announced that Russia would be in recession through at least 2015 only to be aggressively criticised by the Kremlin who forced the ministry to remove such analysis from its website. Have they not realised that the facts cannot be simply airbrushed away?

Looking into next year it will be fascination to see how the President will continue to blame the West for all the ills that will stifle the Russian economy. Of course the decline in oil prices is a major problem that has undermined the economy and the currency. However, the real problem that confronts Russia is to be found at the very top; ie the doctrine that can be defined as “Putinism” (Not my original expression I must add).

In December last year there were warnings that despite firm oil prices, the Russian economy was becoming stagnant as it had no resemblance to a genuine free market, enterprise system. The economy was riddled with Kremlin cronyism and outdated policies of economic grace and favour.
Russia GDP under Putin
 Source: Federal State Statistics Service

Vast amounts of Russia’s “working capital” remain controlled by a small group of people closely allied to the Putin Presidency. The means by which construction or new enterprise is directed is sclerotic. There is no better example of this than
the 2014 Sochi Winter Olympics. Any company with the temerity run counter to the Putin administration’s wishes are locked out of the system and more often than not prosecuted for fraud and corruption.

Such economic protectionism has extended to the international stage as well for the leader who once bemoaned the collapse of the Soviet Union. He has long believed that Russia is entitled to exert its will over its near neighbours. They should be satellite or client states as Putin sought to create a rival to the EU … the Eurasian Customs Union with Moscow at its centre.

Why did he make a move on Crimea? Because he was angered by the EU leanings that were being made by Kiev and it is known he is similarly angered by that orientation from the Baltic states and Poland. In a fashion that is typical of the heavy-handed approach of the Soviet system, near neighbour nations have been bullied as they faced trade embargoes. Those nations did not really care as they had the West to trade with, whereas the flow of inward investment capital to Russia has slowly declined. Investors need to know their capital is secure, liquid and not affected by ill-designed economically illiterate policies.

Even if the oil price and the Ruble had not collapsed, the Russian economy was on the slide as it is decaying from within, and that is the fault of one man - except he will be that last to see or admit it.

-- Edited by Adam Courtenay

Stephen Pope is managing partner at Spotlight Ideas. Follow Stephen or post your comment below to engage with Saxo Bank's social trading platform.

Veles Veles
Автор своими пассажами умиляет. Особенно понравилось про сократившийся выбор в продуктовых магазинах. Уже полгода как специально высматриваю опустевшие полки - не нахожу в упор! Про "не боимся ответных мер России" тоже сказано красиво... Вопрос: с чего же тогда вдруг Европа начала менять риторику в отношении России? Жалко стало? Угу, также жалко, как было жалко простых наших крестьян Наполеону, Тевтонским орденам, шведскому королю Карлу в Петровскую эпоху, Гитлеру (отдельные одаренные утверждают, что он всех от большевиков спасал), Бисмарку, ну и ещё много кому. Плавали, знаем. Прав В.В.: "Мы просто подождём..."
Veles Veles
И, кстати: почему то,. что можно США или Европе - нельзя, например, России? Значит, Косово - это правильно, а Крым - нет? Где Ваша демократия? В Афганистане? В Ираке? В Югославии? Во Вьетнаме? Может быть замучена в Гуантанамо? Или потеряна на одной из бесчисленных военных баз по всему миру? Заметьте - вовсе не российских! Страна отхапавшая у Мексики Техас, до сих пор не признавшая геноцид коренных Индейцев, не имеющая культуры и исторического самоопределения, насаждающая СВОЙ порядок по всему миру, открыто спонсируя цветные революции и ввергая страны в хаос войн, пытается РОССИИ указывать на что-то? Да кто они вообще?! Европа, очнись! С кем ты?!
Mansard Mansard
Vales, Хороший комментарий, от себя добавлю немного. Можно сколько угодно рассуждать о слабости экономики России, и о том чего не понимает Путин, но понимает он на много больше, чем любой наблюдающий со стороны. Все прекрасно понимают, что если крупнейшие экономики мира продолжат давить экономику России она загнется и все понимают кому это надо в первую очередь.
Stephen Pope Stephen Pope
Извините какие-либо ошибки, чтобы я мог сделать. Я печатаю это с помощью Google английского на русский программу перевода.

Vales, я пишу свои заметки с точки зрения того, как я это вижу. Конечно, Запад сделал ошибки в прошлом ... В большинстве стран есть. Конечно, если я смотрю на историю Британской империи было страшные злоупотребления императорской власти. Мы постарались ... и не всегда удавалось в руководстве старые колонии обратно к независимости.

Моя проблема с Россией и президентом Путиным на экономику, конечно, вы не спорят с тем, что слишком долго остается Россия зависит от энергетического сектора, многие из которых были распределены на милость и благоволение основе. Это, конечно, не свободное предпринимательство бизнес model.However, это форум для обсуждения, и я ценю вашу позицию и точку зрения. Я желаю вам хорошо.

С наилучшими пожеланиями, Стив
Oleg Chernyshev Oleg Chernyshev
Здесь, на Западе, мы, можно подумать, просто будем трястись от страха перед российскими ответными ударами. // Еще как будете. И уже трясетесь. Напечатанные миллиарды - это не то же самое, что реальные. За "Мистрали" или куриные окорочка прилетят на поклон и Оланд, и Обама. По поводу окорочков уже Буш прилетал, забыли историю?
Mansard Mansard
Олег, не стоит преувеличивать место России в глобальной экономике, ни кто не трясется на западе на перед нами, мы рынок сбыта для Европы и других развитых стран, и не только.
Alex Balus Alex Balus
В статье все слишком черно-белое, словно возврат к реалиям холодной войны - коварный тиран против классного парня Скайвокера, последние несколько предложений особо неудачны. Хотя, безусловно, экномически Россия и США с ЕС в разных весовых категориях, но нельзя сказать, что последствия конфронтации бесследны для ЕС... Например такой вопрос: Кто возместит потерю транзитных денег от южного потока бюджету Болгарии, к слову, так же находящейся в сложном экономическом положении? ЕС вроде не собирается... В таком случае возникает серьезный вопрос: правительство Болгарии принимает решения в интересах своей страны или население одной из самых бедных стран ЕС должно оплачивать авантюры Вашингтона и Брюсселя из своего кармана? Так легко, конечно, с острова или вообще из-за океана кричать "надо наказать Путина", особенно когда ясно, что платить за это будут другие.
Andrei14 Andrei14
За несколько лет сколько грандиозных проектов в России реализовано! Франция,Англия,Испания,Германия,Италия про остальные страны с их бюджетами в 3 копейки-цента и не снилось !Как бы то ни было Российская валюта опирается на ресурсы . А накачивать мир зелёными бумажками уж точно ни к чему хорошему не приведёт.Посмотрим через 2-3 года кто на чём будет стоять. "Санкции..наказать Россию.." Самим то не смешно,вроде в здравом уме люди.
kmm77 kmm77
По поводу продуктов - прошу к нам на Сахалин, перец японский по 950 руб. кг., помидоры корейские и пр. дороже мяса. Бензин 95й больше 40 р. (добытый на шельфе Сахалина, по трубе поданный через пролив на завод в Комсомольск-на-Амуре и поездом РЖД приехавший назад на Сахалин, монополия практически полная Роснефти). А по поводу поступков - мне учительница в советской школе говорила: нельзя кивать на других, если хорошо учишься (читай досталась от предков сильная держава) с тебя и спрос больше. А если вы делаете гадость, приговаривая, что кругом воры, то бог вам судья... Только великая держава так себя не ведёт (сначала выходим из договора 1994го года, а потом действуем). Так было бы честнее, что ли.
kmm77 kmm77
И, как говорил Салтыков-Щедрин: Ваше Благородие и Отечество - это разные понятия, их не следует путать.
Artie Artie
Such treatment to Russia is a typical for western people. They think if candy and money flows to Russia will be restricted and russians will go out to the street and show democratic waves. But russians think another way: kicks from the West usually increase huge waves of patriots (its more important then iphones, BMWs, shrimps and etc. - russian will find substitutes))). Higher borders just improve Russia (because world is interested just in minerals from Russia-they will be kept for russian children future; decreased import and sanctions make economy finally healthy, of course after some bank and corporate big bankruptcies-we saw that three times in our lives and we alive!))). Its very simple view)). and by the way)) - it will help to restrict western promotion about geys, unisexual marriages and so on.
D. Grishin D. Grishin
Hello Mr Pope, my name is Dmitry. It is really nice to talk to you because i respect your analitical skills and trading experience. I would like to draw your attention to one interesting fact that i tried to find in western mass media without any success, like it is just a trifle. This fact calls "Russian Black Sea fleet" which is historically located in Crimea. I understand that you most certainly know it but it becomes obviously that Putin doesn't have another choice but to protect Russia's interests in Crimea. In addition i really don't understand what do USA and Europe want from Putin? What concretely do they demand? To stop supporting the rebels - but its russian people support them even fighting on their side, Putin doesn't support anyone. To withdraw Russians army from Ukraine - what army? :) Army of two my friends - a bookkeeper and a miner who fight in Donetsk against guys with nazi symbols on their helmets?
D. Grishin D. Grishin
I do not want to protect whoever, but it seems to me that USA and Europe (to my regret) do much more for escalation the conflict than Putin does. Anyway thank you for a good job.
Stephen Pope Stephen Pope

Thank you for your kind words. At the end of the day I am just a man of the markets. I am not a politician and I see my role to write, freely, about what I see and how I believe one can make money from trading any asset: debt, equity, currency, commodity and given I believe in FREE ENTERPRISE and FREE MARKETS I am happy and want the right to go long or short in cash or derivative of anything where I can seek a profit. I want to trade US, UK, European, Australian, Canadian, Chinese, Japanese and yes Russian assets.

It is my prerogative to write about Russia and its economy as I see fit...and at the moment I sense it is too monoline and not extremely efficient. Of course there are issues in the west, we are far from perfect, but everyone should be free to express their opinion as to how Obama, Cameron, Merkel, Hollande, Abe and President Putin are running their respective economies.

I will continue to write about things as I see them...I try not to offend anyone. Steve
D. Grishin D. Grishin
Steve, im sure you didnt offend anyone. I understood your point and im going to take it as advice, thank you.


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail