- 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: www.investing.com 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.
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.