Yuri Kochetkov / Courtesy Reuters President Vladimir Putin speaks during a ceremony unveiling a World War I monument in Moscow, August 2014.

Putin's Wager

Why the Kremlin Is Betting on Escalation and Isolation

After Malaysia Airlines flight MH17 was shot down over eastern Ukraine on July 17, a catastrophe almost certainly the work of Russian-backed rebels, the United States and the EU implemented new, wider-reaching sanctions. Russian President Vladimir Putin responded by redoubling his Ukraine policy. Rather than distancing itself from the militia groups, Moscow has stepped up its support, transferring arms, providing diplomatic cover, and even ordering Russian forces to fire on Ukrainian military targets across the border. Given the opportunity to abandon an increasingly costly policy, Putin has chosen to escalate.

In so doing, he is steering his country toward a period of prolonged isolation and economic difficulty. U.S. President Barack Obama suggested last week that Putin is behaving irrationally. "Objectively speaking, President Putin should want to resolve this diplomatically, to get these sanctions lifted," Obama said. There is a limit to what the United States can achieve, he added, when Putin and those around him are “ignoring what should be their long-term interests.”

But those interests look very different from Moscow than they do from Washington. Putin and his close advisers may be cynical, but they are sincere in their cynicism. They see the West, and the United States in particular, as engaged in an unceasing effort to weaken and fracture Russia. For them, Ukraine represents a redline. Putin’s suspicions of Western motives, dissatisfaction with the post–Cold War global order, and fears of a pro-Western Ukraine are parts of the same potent cocktail of grievance and paranoia. The best, if not the only, prophylactic is what Putin understands as “sovereignty.” It is a concept that Putin warned his Security Council is “being washed out” by “ultimatums and sanctions.” It is also, as Putin sees it, what Soviet Premier Mikhail Gorbachev let slip out from under him, leading to the disintegration of state power -- and thus precisely what Putin is intent on preserving.

To Putin, sovereignty constitutes the essence of power. “Putin’s motivating idea is that Russia’s influence is preordained,” said Sergey Utkin, the head of the Department of Strategic Assessment, part of the Russian Academy of Sciences. “It’s a genuine conviction, a call, a challenge that must be answered in the country’s policies.” Were Putin to back down over Ukraine, even after the attack on MH17, it would mean not just losing face but also turning his back on what he sees as Russia’s historic birthright. It is worth remembering that under the presidency of Dmitry Medvedev, Moscow never embraced the prospect of a so-called reset of U.S.-Russian relations; it simply regarded Washington’s conciliatory pose as a long-overdue adjustment. The impulse to avenge past geopolitical humiliations has intensified in Putin’s current presidential term. And now, the crisis in Ukraine has elevated its champions. For the country’s hodgepodge of hard-liners and nationalists, Utkin said, “confrontation is a plus,” in that it “allows the acquisition of ever more sovereignty.”

Further confrontation with the West over Ukraine may look attractive to Putin, who drew a clear lesson from the denouement of the Cold War: to yield is to risk collapse. Faced with scrapping or intensifying his Ukraine adventure after the shooting down of MH17, Putin chose the latter course, even at the cost of global opprobrium. Russia is now preparing to hunker down for a prolonged period of isolation from the West, referred to in Moscow’s political circles as “mobilization,” “consolidation,” or “self-sufficiency.”

In practice, this will mean fetishizing Russia’s exclusion from such bodies as the G-8 while expanding efforts to replace foreign products and services with homegrown ones. On Wednesday, Putin announced a ban on food products from countries that have enacted sanctions against Russia -- a move that may hurt Russian consumers more than U.S. or European producers, given that imports make up about 30 percent of the retail food market. (Other proposals under discussion range from the probable, such as insourcing parts for the arms industry, to the problematic, such as building a national credit card payment system.) Russia will turn inward, tightening its domestic politics while embracing confrontation abroad. Changing Putin’s calculus, to the extent such a thing is even possible, could take years. “Sanctions aren’t a pill you swallow today that is going to work tomorrow,” said a U.S. official familiar with Ukraine, adding that the Obama administration hopes the long-term dangers for Putin affect his thinking today.

Putin has wagered his presidency on the idea that he can weather the costs of isolation without stoking the sort of social unrest that would challenge his authority. He may be right. Writing in the respected business daily Vedomosti last week, Vasily Kashin, a political analyst sympathetic to the Kremlin, described how “in the first years of this new cold war, we will heroically overcome difficulties, and then we will achieve victory, for which our grandchildren will have to foot the bill.”

In the short run, the very things that have harmed Russia economically may now protect Putin politically. In June, Clifford Gaddy and Barry Ickes of the Brookings Institution described Russia as “the cockroach of economies -- primitive and inelegant in many respects but possessing a remarkable ability to survive in the most adverse and varying conditions.” U.S. and EU sanctions will likely cause Russia’s GDP growth rate, which was already declining before the Ukraine crisis, to fall even more precipitously. But the latest sanctions do not block Russia’s oil and gas exports, which account for around half of the Kremlin’s budget. Those revenues will continue to flow into state coffers and from there into the pockets of the large contingent of Russians whose livelihoods depend on the government. (About 20 percent of Russians are pensioners, 20 percent work for the state, and 15 percent work for state-owned companies.) And so the sanctions will put little pressure on wages, which are central to political stability. As Vladislav Inozemtsev, an economist and the director of the Centre for Post-Industrial Studies, put it, “Sanctions will take a hit on growth, but they can’t keep Putin from raising salaries of bureaucrats and FSB officers.”

At the same time, although economic isolation may aggrieve many inside the business elite, they will not necessarily find this reason enough to turn against Putin. As foreign banks stop lending, Russian firms will be forced to turn to the state for fresh financing and the cash to pay back debts. The larger Russian banks will need to refinance around $50 billion in debt by the end of next year; Russian firms have around $100 billion to pay down. Moscow’s businesspeople may resent Putin, but they will be more bound to him than ever. And as the state reinforces its primacy as the economy’s largest investor, it will put capital toward large, unwieldy projects, such as heavy industry or infrastructure construction. Putin’s most natural supporters stand to benefit. Their influence will grow at the expense of those whose livelihoods are tied to the global economy.

Russia may be able to insulate itself with hydrocarbon revenues at first, but several dangers will reveal themselves before long. The latest sanctions prohibit the transfer of high-tech equipment needed for the exploration of hard-to-reach oil fields in the Arctic and offshore. With the decline of Russia’s Siberian fields, which represent 80 percent of current production, the country needs to develop new oil sources. The Russian government has reserve funds in excess of $170 billion, but much of the money it will soon spend must go to propping up the ruble and bailing out state banks and companies. Thus, with private investment already near zero, Russia’s last remaining investor -- the state itself -- will be forced to spend less on investing in the economy and more on damage control.

At that point (perhaps even sooner), a cycle of sinking growth, if not outright recession, is all but guaranteed. The first to suffer will be regional budgets, which are financed by taxes and not energy profits. To fill the looming gap in social spending and salaries in the regions, Putin has floated the idea of introducing a three percent sales tax. Inozemtsev suggested that within two or three years, Russia could see a GDP drop of five percent and significantly higher taxes. Yet, that’s practically an eternity in the mentality of Russia’s political class. “Our leaders think September is so far away, you could think about it sometime later,” he said.

Moreover, any hardship that does appear will be blamed on the machinations of the West. Seeing as 90 percent of Russians get their information primarily from television, the most controlled of all media, Putin may be able to count on this narrative winning out. For a while, at least, a sense of shared mission against an external enemy should compensate for whatever discontent arises. “Society will be ready to forgive Putin for a decrease in living standards,” predicted a legislator from the pro-Kremlin political party United Russia. “What does success for a society mean, anyway?” he asked. “Quality of life? Or a historical role for the country, and citizens who feel connected, part of one large, collective unconscious?” The legislator acknowledged that the Kremlin will continue to control politics tightly, leaving little room to maneuver for the country’s small number of liberals. The system will become blunter. “I don’t like it, but I admit it may be necessary,” the legislator said.  

As Lev Gudkov, the director of the Levada Center, an independent polling agency, put it, Putin -- first through the annexation of Crimea, now through the proxy war in eastern Ukraine -- has managed to “colonize the diffuse sense of aggression” that had built up inside Russia over the years, itself the result of a lack of any “basis for positive self-affirmation.” But the euphoria has come at little cost. Returning Crimea to Russia was a benevolent gesture, the kind of trophy the tsar delivered to his subjects for free. Putin may enjoy an approval rating above 80 percent, but Russians regularly tell pollsters they think of the state as a distant, corrupt machine. That makes their enthusiasm potentially hollow, Gudkov said. A feeling of helplessness toward the state breeds what he called a sense of “irresponsibility,” whereby Russians “don’t want to suffer” for Putin’s adventurism in Ukraine, however much they appreciate it now.

Much will depend on what happens next in Ukraine. The Ukrainian military surrounds the rebel stronghold of Donetsk and may have managed to cut it off from supplies coming across the Russian border. If pro-Kiev forces wage siege to Donetsk, Putin might feel compelled to act for two reasons: the images of bloodshed among a population Putin claims to be protecting could be impossible to explain away, and the prospect of a battlefield defeat for the rebels would rob Putin of what he sees as his most powerful instrument in determining a future Ukrainian state to his liking. At the moment, Russian troops are engaged in live-fire exercises along the border, complete with 100 military aircraft. These could well presage an invasion under the pretext of a humanitarian operation. Yet Putin’s ultimate preference, if he thinks it still tenable, is to wait out Kiev and the West and support the rebels as a viable force for another several months. Over time, the Kremlin hopes, Ukrainian losses will mount, the country’s economy will suffer, and the possibility of a winter without Russian gas will sink in. “No one wants to put forces in Ukraine,” said Igor Korotchenko, the editor of National Defense magazine and a member of the public council of the Russian Ministry of Defense. “Who wants that hemorrhoid?”

The United States and Europe made their own bet with sanctions: that economic isolation will deter Putin from further meddling in Ukraine. And Putin could well prove them right. Although he has given voice to a revanchist ideology of late, he also knows how to play the role of pragmatic tactician. Yet, it is equally possible that he thinks he has less than ever to lose in defending his country’s interests, however differently he and Obama may define them. After the MH17 crash and the new sanctions, Korotchenko said, “the circumstances may have changed, but Russia’s strategic interests did not.” The only thing that may be different, he added, is that “now Putin can make decisions without worrying too much about the consequences -- his hands are untied.”

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