The Pandemic Depression
The Global Economy Will Never Be the Same
By the end of this month, it is likely that Vladimir Putin’s Russia will fully control Ukraine’s Crimean peninsula. And it is clear that he aspires to much more. Although a tense calm has settled over Crimea since thousands of Russian troops poured in a week ago, the chance for a Russian military push deeper into Ukraine increased markedly on March 4, when Putin declared at a press conference that he was “not worried” by the prospect of war with Ukraine. In a line that shook Ukrainians to their core, he continued that, if Russia decided to fight, it would be to “to protect Ukrainian citizens.” And it would be impossible, he hinted, for Ukrainian troops to do anything about that: “Let’s see those troops try to shoot their own people with us behind them -- not in the front but behind. Let them just try to shoot at women and children!” In one fell swoop, Putin had broadened his intentions in Ukraine from “protecting” Russian citizens (his rationale for invading and occupying Crimea) to “protecting” all of Ukraine and made clear that he would use Ukrainian civilians -- women and children -- as a shield for invading Russian forces.
It is time to imagine what once seemed impossible: Putin attacks and partitions Ukraine and, in addition to Crimea, annexes the southeastern Ukrainian provinces that are generally regarded as most susceptible to conquest -- Donetsk, Kherson, Luhansk, Mykolaiv, and Zaporizhzhya, which contain much of Ukraine’s ethnic Russian population and form an arc along the Black Sea and Sea of Azov from Mykolaiv, just northwest of Crimea, to Luhansk, which is farther northeast. (On March 8, there were already some reports that Russian troops had advanced from Crimea into a narrow isthmus that is part of Kherson province.) In such a scenario, Russia would be the immediate winner and Ukraine the immediate loser. But in the medium to long term, Ukraine would end up ahead.
Ukraine’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 Yanukovych’s Party of Regions. As a result, anti-Ukrainian and anti-Western sentiments would decline. The new Ukraine’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, Ukraine’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.
Russia’s gains are also obvious: victory in a “grand and glorious” war and the annexation of territory. But the hypernationalism generated by the war and the enthusiasm over territorial expansion would soon fade as the sobering reality in these provinces sinks in and Russians realize just whom and what they have annexed.
For starters, Russia is fooling itself if it believes that Ukraine’s southeastern population will gladly go along with annexation. According to a mid-February 2014 public opinion survey conducted by the respected Kyiv International Institute of Sociology, the vast majority of Ukrainians -- even in the southeast -- reject “unification” with Russia. Crimea was least opposed, with 59 percent against. In Donetsk, the number was 66.8 percent. In Luhansk, it was 75.9 percent. In Kherson and Mykolaiv, more than 95 percent of respondents were opposed. And a full 83.3 percent of those in Zaporizhzhya said no. In short, annexation will bring an extremely disaffected population into Russia’s fold. The people could passively resist Russian rule. They could also take up arms.
Popular disaffection will make it difficult for Putin to walk away. Tens of thousands of Russian troops will have to remain as occupiers for a long time to come -- an expensive proposition that could run into billions of dollars annually. And Russia will not be able to neglect the region’s economy, since doing so would only increase disaffection and resistance.
In their search to maintain control, Russians would quickly discover that they are in possession of economically unviable provinces that cannot survive without massive infusions of rubles. According to a detailed Ukrainian study of how much Ukraine’s provinces paid into and received from the central budget in the first half of 2013, Crimea, Donetsk, Kherson, Luhansk, Mykolaiv, and Zaporizhzhya represented an enormous drain on Kyiv’s resources: 22.82 billion hryvnia (around $2.5 billion, or 90 billion rubles). And that is only for the first six months of the year. Multiplied by two, the deficit amounts to 45.64 billion hryvnia (about $5 billion, or 180 billion rubles).
In 2014, Russia expects its budget revenues to be around 13.6 trillion rubles (around $375 billion); its expenditures are supposed to total 14 trillion rubles ($380 billion). That amounts to a deficit of 400 billion rubles ($11 billion). Even without extra development funds or the costs of an occupation, annexing Ukraine’s southeast will raise Russia’s deficit by 45 percent.
The bad news gets worse for Russia. Luhansk and Donetsk provinces are home to Ukraine’s loss-making coal industry. Kyiv spends between 12 and 14 billion hryvnia (around $1 billion–$1.5 billion, or 47 billion–55 billion rubles) annually to support these mines. Will Russia back these enterprises even as they compete with more economically produced coal from Russia’s Kuzbass? It will have to: As Kyiv knows from experience, firing thousands of coal miners could spark massive civil unrest. Moscow will also have to pay them their wages on time. In 2013, wage arrears reached a total of 135 million hryvnia (about $15 million, or 530 million rubles) in Donetsk and Luhansk.
Prospects for Crimea are even worse. In 2013, the region hosted 5.9 million tourists, 25 percent of whom were from Russia and 70 percent of whom were from Ukraine. Ukrainians will likely avoid, or be prohibited from traveling to, an annexed Crimea. And Russians will probably prefer less restive playgrounds, such as Sochi or Turkey. Very quickly, Crimea’s famed beaches could go into steep decline. And since tourism accounts for the largest chunk of the peninsula’s economy, living standards there would plummet. Crimeans could also face disruptions in electricity, gas, and water supplies, for which they are completely dependent on mainland Ukraine.
These depressing numbers might not matter were it not for the fact that the Russian economy is expected to see subpar performance in the decades ahead. After almost a decade of strong GDP growth, the Russian economy is expected to expand by only 2.5 percent in 2014 and 2.8 percent in 2015. (Previous estimates were around 3 percent and 3.1 percent respectively.) Even worse, Russia’s Economic Ministry has revised its long-term growth forecasts for Russia, predicting only a 2.5 percent growth in GDP annually through 2030. The global rate is expected to be roughly 3.5 percent. Imperial “overreach” can quickly turn into imperial collapse if the money to sustain occupation is missing.
Putin was lucky. When he came to power some 14 years ago, energy prices rose and money was abundant. The boom enabled him to flex his muscles and build a fascistoid state, in which he and his cronies could acquire fabulous wealth and still have enough left over for raising his people’s living standards. The next decade will be especially difficult economically for Russia. Although the easy money has vanished, elite corruption and popular expectations remain high. And now there could be the added expense of occupying and ruling Ukraine’s money-draining southeast. All these rubles will ultimately have to come from the Russian people and the corrupt elites. It is unlikely that they will accept a significant decline in living standards in exchange for the fleeting glory in Ukraine’s rust belt.
Ukraine and Ukrainians will be fine. But Russians should be very worried.