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The ghosts of 1998 back to plague Russia?

Russia’s implosion 17 years ago led to Vladimir Putin taking power. Today, it faces similar turmoil, but don’t assume a change at the top will happen soon.
People braving heavy snow to receive free soup offered by the Salvation Army in central Moscow in 1998, a year in which a third of Russia’s population was below the poverty line. Oleg Nikishin / AP Photo
People braving heavy snow to receive free soup offered by the Salvation Army in central Moscow in 1998, a year in which a third of Russia’s population was below the poverty line. Oleg Nikishin / AP Photo

Russian tanks in the restive south, ­escalating tensions over fears of ­Nato’s Eastern expansion, and sticker prices in shops displaying “conditional currency units” rather than constantly plummeting roubles. For many in Russia, the start of 2015 looks increasingly like a throwback to 1998, when the economy imploded and the country seemed on the verge of ­collapse.

Over the 15 years since Vladimir Putin first assumed the Russian presidency, he has frequently invoked the spectre of the chaotic 1990s to justify an ever-growing concentration of political and economic power in the hands of the state. Then, rock-bottom oil prices and the aftershocks of the Asian economic crisis led to an eventual default. While people’s savings evaporated, the country was bogged down in a costly cycle of war and reconstruction in the separatist southern enclave of Chechnya.

More broadly, Nato’s air campaign against Moscow’s ally Yugoslavia had resulted in the severest transatlantic conflict since the end of the Cold War.

Putin’s authoritarian programme has not prevented the return of many of the ills for which his predecessor, Boris Yeltsin, continues to be vilified. Now, as then, Russia faces an economic and political crisis born of an over-reliance on raw-material exports, massive corruption, military adventurism and great power competition.

Nevertheless, Putin begins the year with his popularity and power almost entirely intact. He has seized on western sanctions to portray the country’s endogenous economic woes as the result of a nefarious plot. Polls show the people believe him. Whether they continue to do so will define his fate.

Despite some ominous similarities, there are important differences in degree between Russia’s current and previous crisis.

Last November, Russia’s GDP was 0.5 per cent lower than during the same period the previous year, and the Central Bank has forecast that the economy could shrink by nearly 5 per cent in 2015. The rouble, which has always closely followed the oil price, lost about half its value in six months, and Russia risks an “even deeper recession” without drastic intervention, in the words of the prime minister Dmitry Medvedev. In his annual televised Q&A session with the press in mid-December, Putin was forced to admit that it could take up to two years for the country to recover.

Over the past two weeks alone, the government spent around US$1 billion (Dh3.7bn) to shore up two state-owned banks, ­Gazprombank and VTB. More bailouts are set to come, with politically-connected oligarchs and senior officials suspected of lining up to skim millions from the state largesse. This has taken its toll on Russia’s international reserves, which shrunk to less than $400bn (Dh1.5 trillion) from over $500bn (Dh1.8 trillion) a year ago.

While troubling, the situation is much less acute than was the case in 1998. Then, companies were withholding salaries and about a third of the population was plunged below the poverty line. Russia today is much less likely to default on its debts and the country is in a much better economic condition, with significant reserves and no signs yet of an imminent social emergency.

However, the political dimensions of Russia’s experience of 1998 – increasing conservatism at home, antagonism towards the West, and an outreach to the developing world to counterbalance the global influence of Washington – are making a comeback.

As conservative and nationalist forces gained political capital in the late 1990s, Yeltsin, whose dismal approval rating had fallen to less than 10 per cent, replaced his liberal prime minister with Yevgeny Primakov in late 1998. During his tenure as foreign minister from 1996, Primakov had been a major critic of Nato and proponent of a multipolar world as an alternative to perceived American hegemony. In an attempt to reorientate Russia away from the West and revive Soviet era ties with Asia, he called for a “strategic triangle” involving Moscow, Beijing and Delhi.

Primakov’s promotion signalled Russia’s decisive abandonment of its previous policy of accommodation with the West. Yeltsin denounced Nato air strikes against Yugoslavia in March 1999 as “open aggression”. A subsequent standoff caused by the takeover of Pristina Airport in Kosovo by Russian commandos threatened to start a third world war, according to British general Mike Jackson. Meanwhile, the expansion of Nato into the former Soviet allies Poland, Hungary and the Czech Republic in 1999 led to outraged condemnation in Moscow.

During the present crisis, Russia has again taken a tough stance. At home, the most popular ­member of the liberal opposition, Alexei Navalny, received a three-year suspended sentence for fraud in connection with allegations of embezzlement. The judgement was widely interpreted as a political move to prevent Navalny from running for public office while stopping short of making him a martyr. Instead, it was his brother Oleg who was sentenced to a prison term, becoming a ­hostage of the government whose fate now depends on Navalny’s submission.

Internationally, just as in the late 1990s, fears of Nato expansion into the former Soviet orbit have caused a breakdown of relations with the West. With days to go until the new year, Putin endorsed a new military doctrine that names Nato expansion as the number-one threat facing the country. This time, the conflict involves a violent tug of war over Ukraine’s geopolitical orientation.

The Ukraine crisis was precipitated by a decision taken by the country’s former president, Viktor Yanukovych, to reject an integration agreement with the EU in favour of the Russia-sponsored Eurasian Customs Union. There were legitimate fears that its next stage – the Eurasian Economic Union, and its prospect of a single currency – could signal Moscow’s intent to reconstitute the USSR.

Yet strong-arming Ukraine into the economic union turned out to be a pyrrhic victory, as ­Yanukovych was swiftly deposed in a wave of bloody protest. Russian forces then staged a stealth takeover of the country’s Crimean Peninsula.

Although Crimea was absorbed without a shot being fired, the quest by rebels in eastern Ukraine, backed by Russian aid and unofficial military support, to follow the Crimean example led to civil war. Ukrainian and western officials have accused Moscow of orchestrating the rebellion of the self-declared Donetsk and Lugansk People’s Republics and even providing the anti-aircraft battery suspected of having shot down the Malaysian Airlines flight MH17, killing about 300.

Inconclusive talks in Minsk, Belarus, led to frequent ceasefire breaches and the civil war, which has killed almost 5,000, continues to smoulder.

The world has not accepted Russia’s claim to the Crimea. In response to the events in Ukraine, the EU and the United States have imposed a series of punitive sanctions. These began by targeting the international investments and freedom to travel of key officials believed to be implicated in Russia’s Ukraine policy, as well as individual Putin loyalists. In recent months, the sanctions have broadened to include major Russian banks, energy giants and state corporations, making it difficult for Russian companies to access international credit.

Damage to the country’s banking and financial sectors has been severe. Moscow has retaliated by banning imports of western foodstuffs. While this has put pressure on European agricultural producers, it has also hit ordinary Russian consumers.

In response to western sanctions and falling oil prices, Putin appears to have applied elements of the Primakov doctrine to Russia’s trade relationships. The more robust economies of Brazil, India and China (the other three members of the so-called Bric countries) as well as Turkey and others hold the prospect of higher demand and the added benefit of being outside the western sphere of influence. Indeed, the developing world has largely stopped short of condemning Russia over the Ukraine conflict.

Perhaps nowhere is the link between the oil shock and Russia’s frayed relationship with the West more evident than in its recent energy policy. In May, Putin inked a $400bn (Dh1.5 trillion) deal to deliver gas to China. Just six months later, he cancelled the South Stream gas pipeline to western Europe, an ambitious project to deliver gas directly to Bulgaria over the Black Sea. The turnaround was widely interpreted as a defeat for Putin and a victory for western pressure over the plan. However, according to Fiona Hill of the Brookings Institution, Russia had been preparing for greater energy diversification since at least as far back as the financial crisis of 2008. Preparations for the Chinese deal go back a whole decade. Thus, rather than a desperate response to sanctions, Russia’s outreach to the East begins to resemble much more clearly the successful culmination of a long-term contingency strategy.

It would be a mistake, however, to see these shrewd moves as amounting to a decisive eastward turn. Despite his sincere efforts, Primakov’s prior overtures to China and India bore few diplomatic fruit. And for all its present quarrels with the West, Russia’s relationship with China is imbued with even greater mutual distrust. Instead, the redoubled outreach to the Bric countries and beyond is designed to send a signal to the West that attempts to isolate Russia politically and economically are doomed to fail.

By 1999, Russia was bankrupt, internationally isolated and riven by social strife; its president’s ­approval ratings stood in the single digits. Nevertheless, the government survived and Yeltsin was even able to successfully instal his successor – none other than Putin – ­before resigning in December of that year.

The Russia of today, stronger on every front, is ­unlikely to experience a cataclysmic political shock in 2015. Indeed, two clear trends suggest that Putin’s government will weather the twin crises of oil and Ukraine.

The first is that, while the country’s economy has remained woefully undiversified after 15 years of Putin’s reign, he has had significant success in diversifying its customer base. Thanks to a number of energy, mining and other trade deals with the Bric countries as well as with Turkey, Venezuela and Argentina, Vietnam and other former non-aligned states, Russia has insured itself against perceived western attempts at economic blackmail.

Neither has war derailed the Eurasian Economic Union. Despite the “loss” of Ukraine, the organisation came into force on January 1 with Russia, Belarus, Kazakhstan and Armenia as members. Kyrgyzstan is set to join in May. In the coming months, a free-trade agreement is expected between the economic bloc and Vietnam, which publicly aims to achieve $10bn (Dh36.7bn) worth of bilateral trade with Russia within five years.

Although some of these new ties, particularly those with China and Turkey, risk emboldening traditional rival powers, they make economic sense at a time of declining growth rates and demand for energy in Europe and the US.

Perhaps most significantly, ­despite their economic toll, western sanctions against Russia are unlikely to change the country’s political behaviour. The reason lies in a fundamental disconnect between their intended message and its interpretation by the ­public.

To the West, the link between the sanctions and Russia’s arguably bad behaviour in Ukraine appears obvious.

However, this is not how the Russians see it. According to a December poll by the authoritative Levada Center in Moscow, two-thirds of respondents felt that the sanctions were caused by the West’s “belligerent stance towards Russia and desire to take advantage of an opportunity to put pressure on Russia”. Just 12 per cent believed the sanctions to be a “condemnation of Russia’s annexation of a foreign territory and violation of international norms”. As long as a majority of citizens continue to see the ­sanctions as an expression of inherent western hostility, they are unlikely to feel that a change of course would result in improved relations.

These responses appear to testify to the effectiveness of the government’s narrative, propagated in the media, that the current ­economic crisis was caused by the deliberate actions of the West to, in Putin’s words, “defang” and “declaw” Russia.

All this may sound like so much paranoia and fear-mongering. But in a recent paper, Dmitri Trenin of the Carnegie Moscow Center, a think tank, explained why such theories hold sway over the Russian imagination. It’s easy to forget that Putin began his rule as an Atlanticist with hopes of establishing good relations with the US. Particularly in the aftermath of the September 11 attacks, Russia offered Nato diplomatic and military support in the war against the Taliban. What Russia got in return was the Iraq War and further American unilateralism. For Putin and many of his countrymen, the lesson was simple: what is the point of accommodation with the West, if good behaviour brings no reward?

Yet despite the sabre-rattling and mutual recrimination, there are growing signs that behind the scenes, Russia and the West could be edging towards compromise. Although Putin has made clear that the status of the Crimea is non-negotiable, his government appears readier to compromise on eastern Ukraine.

In recent weeks, Russian television has begun to describe the self-proclaimed People’s Republics of Donetsk and Lugansk as Ukrainian. This has been interpreted as an apparent effort to prepare the public for the idea of the breakaway regions staying in Ukraine, albeit with more independence. That way, Russia could still exercise political sway without taking on the massive economic and political liabilities it can no longer afford. Most importantly, such an arrangement would allow Putin to trade Donetsk and Lugansk for western recognition of a Russian Crimea. For the West, it would allow Europe and the US to claim that they had successfully prevented the Russian dismemberment of Ukraine.

At present, it is not a compromise Washington is willing to entertain. In mid-December, President Barack Obama signed an executive order forbidding American companies from doing business with Crimea. “The United States will not accept Russia’s occupation and attempted annexation of Crimea,” he declared.

But America’s European allies, particularly those most affected by the economic fallout from the sanctions, may be more ready to talk. Last Sunday, the German vice chancellor Sigmar Gabriel criticised the escalation of sanctions, which should not be allowed “to force Russia to its knees”, he said in an interview with the Bild am Sonntag newspaper.

Days earlier, France stated that the controversial delivery of its high-tech Mistral warships to Russia, suspended because of the fighting, may go ahead pending a permanent ceasefire in eastern Ukraine.

Perhaps western powers would have been wiser to let Putin fall into the hole he had already dug, rather than try to push him into submission.

After all, his power and popularity were built on a tacit compact with the public: in exchange for rising prosperity and national pride, people would accept the democratic abuses and corruption carried out by the regime. The oil-price shock and high economic cost of the Crimean adventure might have been enough to derail the social contract without any outside interference. Ironically, however, the very sanctions designed to target and weaken Putin have allowed him to shift the blame onto external enemies and emerge stronger than ever.

It is impossible to predict how and when the Ukraine conflict will end, the oil price will recover, and Russia’s relations with the West will improve. But the experience of 1998 suggests that economic meltdown and political isolation will make Russia even more likely to reject political liberalism and diplomatic accommodation.

After all, Russia’s first major venture following the 1998 crisis was a second war in Chechnya. Already, the defence budget is projected to increase by $20bn (Dh73.5bn) this year, and its reported deployment of new cruise missiles threatens further rifts with Washington.

Russian warplanes have also been testing Nato defences in Europe by carrying out more missions.

If there is one positive lesson that can be drawn from history, however, it is that such tensions are unlikely to last. Less than two years after the US and Russia narrowly escaped war over Yugoslavia, then president George W Bush described Putin’s phone call on September 11 to offer the US Russia’s unconditional support as “a moment where it clearly said to me, [President Putin] understands the Cold War is over”. Unfortunately, as history also shows, such rapprochements tend to be equally short-lived.

Vadim Nikitin is a journalist and Russian analyst based in London.

thereview@thenational.ae

Updated: January 8, 2015 04:00 AM

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