Rising prices and stagnating wages may make hundreds more Russians think twice about the government’s price tag of between 800 billion and 1 trillion rubles ($23-30 billion) for Crimea, and may come to pose the first real threat to Putin.
The Russian leader for now looks unassailable, with popularity ratings running at over 80 percent and his critics reluctant to speak out against him for fear of being labelled a traitor against the popular cause of building a Greater Russia.
Russian markets have bounced back, recovering all their losses since the start of the year to trade slightly higher, and some bankers are encouraging their clients to dive back into a market they say is undervalued.
But Russia’s economy, riddled with corruption and nepotism, is still weak and, increasingly isolated by Western sanctions, is for now teetering on the edge of recession.
Fighting in eastern Ukraine, an influx of Ukrainian refugees and the threat of further sanctions all hang over an economy, which the International Monetary Fund sees growing by just 0.2 percent this year. Russia’s central bank hopes for 0.4 percent and the Economy Ministry 0.5 percent growth.
After weeks of saying visa bans and asset freezes imposed by the European Union and United States against a number of firms and officials close to Putin could not harm the economy, Russian leaders are increasingly testy over the damage wrought if not by the current sanctions, then by the threat of more.
“In fact, we are dealing with a new offensive type of weapon,” Russian Deputy Foreign Minister Sergei Ryabkov said of the U.S. sanctions in an interview with the Kommersant daily.
Investment has all but dried up, forcing the government to dip into reserves meant for pensions to finance projects, and the government says it will sell a stake in Russia’s state-controlled oil company, Rosneft, to cover some of the costs of developing Crimea.
Finance Minister Anton Siluanov had to backtrack after coming under fire for saying that all the funds accumulated in Russia’s personal pension plans in 2014 had been spent on “anti-crisis measures” and on Crimea.
The next day, he said Russians “would lose nothing”, but stopped short of saying whether the sum of $8 billion would be returned to the personal pension plans.
While such measures may take a while to hurt the population, Karen Vartapetov, an analyst at Standard & Poor’s rating agency, said a more immediate danger was the stagnation of real disposable incomes, which show only 0.2 percent real growth (adjusted for inflation) this year.
“Zero growth of real disposable incomes against continuing growth of public sector pay indicates that salaries in the private sector and non-salary incomes are shrinking,” he said.
“The economy outside the public sector has been stagnating.”
On top of this, the Finance Ministry’s efforts to try to meet Putin’s demands to increase public sector pay, including proposing a new regional sales tax, mean that prices could rise further, putting pressure on stretched salaries.
In the major cities such as the capital Moscow and Russia’s second city of St Petersburg – where Putin faced street protests in the winter of 2011-12 that at times drew tens of thousands – core inflation running at an annual rate of more than seven percent has had little impact on a population largely wealthy enough to cover higher prices.
Although we have recently heard many fearsome statements from President Obama and the E.U. leaders, the actual sanctions (issued two and half weeks after the beginning of Crimea adventure) leave much to be desired. The â€œunprecedented measuresâ€ against Russia turned out to be relatively feeble prohibitions against several random and not very influential Russian officialsâ€”definitely not the primary decision-makers in the Crimeaâ€™s story. The real heroes of the occasion stayed (even symbolically) unpunished. Moreover, not only has Russiaâ€™s maintained its G8 membership, but, recently, G8 representatives have been distancing themselves from earlier statements regarding suspension of Russiaâ€™s membership. Loud talk and a small stick, indeed.
Moreover, the â€œacceptanceâ€ of Putinâ€™s actions among the Western community appears to be on the rise. A Bloomberg View editorial, for example, announced that â€œthe U.S. and EU aren’t going to fight to defend what remains of Ukraine. They aren’t bound by treaty to do so, and their interests (not to mention their electorates) argue against it.â€ (In fact, the U.S. has at least moral obligations to defend Ukraine under 1994 Budapest Memorandum.) Analyst John Walcott went as far as to suggest that â€œthere is no question anymore, Ukraine (not Crimea, but Ukraine overall) is goneâ€ on Bloomberg News this past weekend. Even the Baltics states that are often viewed as the fiercest opponents of Russiaâ€™s policies in Ukraine have shown some restraint. Yesterday, the Latvian minister of finance asked the E.U. to provide compensation to the European Union countries that will suffer economically from sanctioning Russia.
Altogether, this means that Putin is reading the situation correctly: The monopoly on violence rules the international order. There is simply no one to stop Putin from taking what he wants.
Ukraineâ€™s initial losses are obvious: defeat in a land war, surrender of territories and populations, and the sacrifice to violence of thousands — perhaps tens of thousands — of Ukrainians. Once the war is over, however, Ukraine would emerge more compact, more homogeneous, and more unified in purpose: Along with its eastern territories would go much of the electorate that routinely votes for the Communist Party and for former President Viktor Yanukovychâ€™s Party of Regions. As a result, antiÂ-Ukrainian and anti-Western sentiments would decline. The new Ukraineâ€™s government could confidently proceed with a radical political and economic reform program (a more solidary population would be more likely to accept the belt-tightening that reform entails) and pursue rapid integration into European and international structures. Unburdened of some of its most unprofitable rust-belt industrial sectors, Ukraineâ€™s economy would be more open to foreign direct investment and could be poised for takeoff. Without Crimea and its southeastern provinces, Ukraine would be smaller, but it would survive and, in all likelihood, be much stronger.