The Fate of the Russian Economy May Rest With One Man. Hint: it’s not Putin.

Recently, rumors surfaced of Alexei Kudrin’s potential return to the Russian government early in 2016. Kudrin served as finance minister from 2000 to 2011. Under his watch, the Russian economy grew at least 4% annually every year except 2009 – the year of the Great Financial Crisis.

Left axis is GDP right axis is oil price. Two-axis chart used for illustrative purposes.

Left axis is GDP right axis is oil price. Two-axis chart used for illustrative purposes.

During the first eight Kudrin years, GDP growth was not as closely connected to the price of oil –specifically, the growth of the price of oil – as it was before or after. The trend resumed after the economy rebounded from the 2009 Crisis, but then Kudrin left and the 90s began to return (and have now come back in full effect).

The question of course, is if Kudrin comes back, will he have the authority necessary to his job properly? If he is granted that authority, then expect military spending growth to get put on hold, some of the counter-productive self-imposed sanctions to be lifted or loosened, and there might even some real pro-business reforms. If not, well, he probably won’t stay around until the 2018 election. Then again, he probably won’t take the job unless he gets the authority he needs – although this is Russia and he might get an offer he can’t refuse.

Regardless of the outcome of the Kudrin situation, Putin is fast running out of time (read: money) to fix the economy. The Russian security state may be strong, but the loyalties of siloviki become increasingly fleeting once the paychecks start being inconsistent.

Oil price data from:

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Ukraine: Tensions Rise as the DNR’s End Grows Near

Not-So-Polite Individuals

Not-So-Polite Individuals

The last time I wrote words about Ukraine, Putin had just finished ganking Crimea under the cover of the smoke coming from the $51-billion dollar Sochi Winter Olympics money fire. In the intervening months, things have not only gone plaid, but flannel plaid. It is a minor miracle that the conflict has remained localized.

For those that haven’t been paying attention, a pro-Russian insurgency broke out in Eastern Ukraine, specifically the provinces of Donestk and Lugansk (or Luhansk, as you would say it in Ukrainian or Southern Russian), proclaiming the Donestk and Lugansk People’s Republics, respectively. Sometime later, the two combined to form Novorossiya, after the Imperial Russian name for the region.

Your average American could hardly be faulted for not being able to find these on a map (Google Maps doesn’t count, that’s cheating); then again, your average Russian probably find these on a map prior to the start of this conflict either.

Aleksander Borodai

Aleksander Borodai. Yeltsin would be proud.

Choice Individuals

For an insurgency that’s supposed to be a spontaneous people’s uprising against fascist tyranny, it sure is filled with all sorts of Russians. Take the political leader of the Donetsk People’s Republic, premier Aleksander Borodai. Besides the fact that the man is CLEARLY an absolute lush, he’s also a “political consultant” from Moscow. Then there’s one of the bigger characters of the Battle of Slovyansk (this town was the insurgents’ stronghold until it was taken by the Ukrainian military) – the Russian Cossack Alexander Mozhaev (circled in the top image). Under the funny hat and unkempt beard is a felon on the lam who, hilariously enough, fled with his crew when things started going bad and has not been heard from since.

Igor Strelkov

Igor Strelkov. Would you let this man give your children candy?

Of course, the biggest character of all is the military commander of the DNR, one Igor Strelkov slash Girkin. A GRU colonel with a hardon for war reenactment, the Russian Empire, a creepy mustache, and one hell of a pedosmile, Strelkov claims to have been involved in every Russian military conflict since it stopped being the USSR. A Bosnian newspaper found what it claims is a picture of him in, well, Bosnia, during the Yugoslav Wars in the early 90s. Popular uprising my ass.

To Strelkov’s credit go several summary executions carried out under a 1941 directive by Stalin that was since revoked by several governments (including the original “people’s mayor” of Slavyansk, Vyacheslav Ponomarev; incidentally, Ponomarev was actually a local), and increasingly insane orders such as a ban on profanity and the imposition of martial law in the city of Donestk, which is home to 1.5 million people. If a guy with a couple thousand men behind him at best tried to impose martial law on say, San Diego, everyone would just laugh (and then proceed to shoot back).

The Airliner

The cherry on top of this clusterfuck is MH-17, which was shot down by some drunken insurgent after some genius in the Russian military command decided that it would be a good idea to give some barely-trained (two years as a conscript in the Red Army in 1988-1990 doesn’t count) drunks a surface-to-air missile system. I almost want to say that they were set up with bad intelligence on purpose, because they would have to be among the top 5 idiots in the history of the world to think that an airline at cruising altitude was a valid military target. At least the Soviets shot down Korean Air Flight 007 ON PURPOSE. Then again, Iran Air 655 was an epic cockup too, and that one was carried out by actually trained personnel. Never ascribe to malice that which can be ascribed to incompetence.

Neither the US or USSR desecrated the bodies of the victims either.

We May be About to Witness Sudetenland 2.0

Despite a shaky start and continuing heavy casualties, the Ukrainian military is slowly gaining the upper hand. Most recently, they were able to cut off Donetsk from the rest of the insurgent territory (and thus the Russian supplies and arms from across the border). The UAF is gearing up for a storm of Donestk; hopefully they carry it out without resorting to Grads, Smerches, and Tochkas. Lugansk will hold on for some time still, but then there’s the $64,000 question – will Putin do it? At this point, he’s already been hit with pretty heavy sanctions from anyone that matters this side of China, and he’s starting to look increasingly weak in the eyes of the nationalists that are propping up his precious approval rating. And it’s not like anyone will do anything about it besides more sanctions (which Russia hopes to manage by trading more with China).

In terms of cold-blooded realpolitik, invading is the sensible for Putin to do (especially given that he is that kind of a bastard). He’s already screwed when it comes to the West and he’ll be screwed internally if he doesn’t act. They’ve been halfway there for weeks anyway, as Russian artillrey has been shelling Ukrainian soldiers trapped near the border since mid-July or so. The Russian army will surely crush nearly-bankrupt Ukraine’s armed forces, but not without paying a decent price in blood. Though poorly equipped, the Ukrainians have some pretty solid combat experience to their name at this point. This is, of course, the worst-case scenario, but hey look over there guys – we’ve got a bond crisis coming!

Russia Invades Ukraine, Prays Nobody Gets Shot

UPDATE: The pretext for Russia to formally invade Ukraine happened overnight, with the newly-installed Crimean prime minister requesting aid to restore peace and order. Putin promptly asked the Russian parliament to allow him to send troops into Ukraine; it was approved unanimously. Good times.

To say that things have escalated quickly in the Ukraine would be a massive understatement. A week ago, the world was watching the Sochi Olympics go completely smoothly under the watchful fatherly eye of Vladimir Vladimirovich Putin and Viktor Yanukovich was the president of Ukraine. Less than seven days later, Yanukovich is unemployed and Russian VDV paratroopers are effectively invading the Crimea.

A number of other events have taken place in the meantime. These including the revelation that Ukraine is completely broke (in part because Team Yanukovich stole billions), the release of kleptocrat and former Prime Minister Yulia Tymoshenko from prison, and Yanukovich’s former residence being turned into a public park nicknamed “the museum of corruption.”

Pro-Russia Rally in Sevastopol

And then there’s the small issue of not everybody being ok with an incompetent and corrupt yet still democratically elected president being overthrown using the muscle of nationalists and fascists. Most of these people are ethnic Russians in the south and eastern parts of the country, particularly the Crimea. The Crimean Russians haven’t taken the government change well by any stretch of the imagination. First, massive pro-Russia rallies took place in several cities, with Russian flags being forcibly flown from some government buildings, most notably in Kerch on the far eastern side. Oh, and they formed “self-defense groups,” which is a fancy term for militias.

Usually, nothing good happens when armed militias start being formed. This case isn’t one of the rare exemptions like the anti-cartel vigilante groups in Mexico. Within days of being formed, masked gunmen that presumably are part of one of these militias (operative word being presumably, they could have been Russian Spetsnaz Special Forces for all anyone knows) seized control of the Crimean parliament and several other government buildings. Then the Russian military just kind of showed up, with the only hint of a bullshit pretext being a statement that all armored vehicle movement has been agreed upon with the Ukrainian government, something the days-old administration denies. Except that still doesn’t explain the paratroopers or the shut down of Crimean airspace.

Now what? It’s not in anybody’s interest for anyone to get shot, despite the whole massive violation of sovereignty thing, because the second somebody gets shot, Shit Gets Real. And this is the kind of shit getting real that may make those Senators bitching about the army getting too small be right. Also, they literally can’t afford it. Ukraine, as I mentioned before, is completely broke to the point of imposing capital controls on foreign currency; the country is certain to default in a few months unless it gets a huge amount of aid, the latest estimate being $30 billion. Russia, meanwhile, is teetering on the edge of recession; a severe enough crash could produce unrest too big for even the well-drilled OMON to handle.

So, until the next escalation, the situation is analogous to an armed guy walking into your living room, sitting on the couch, and then daring you to do something without actually wanting you to do anything because then everyone is fucked. And the cops probably aren’t going to come.

Ukraine’s Crisis: Why did Yanuk Reneg?

Vladimir Putin, Viktor Yanukovych

Ukrainian president Viktor Yanukovich probably expected some anger when he decided to reneg on his word to sign an Association Agreement with the European Union, but there is no way he expected the reaction that he got. Or maybe he did, having already been on the receiving end of it nearly a decade ago during the Orange Revolution. Regardless, you know you’re dealing with a seriously pissed off people when they come out to public squares – and stay there – in late November and early December in a place like Kiev, which isn’t exactly famous for its mild winters.

Part of the reason for the anger is that President Yanukovich had promised to sign the EU AA before he didn’t. Reneging on a deal like that isn’t the sort of decision that’s made lightly.

Economic Hardball

It increasingly looks like Yanukovich changed his mind because his Russian krysha made him an offer his country couldn’t afford to refuse. Ukraine’s economy is in a sorry state, having been brutally battered during the Great Financial Crisis, and the government is danger close to running out of hard currency (something the EU is not in a position to offer) – thus staring at the abyss of devaluation. Ukraine also needs Russian gas, preferably at a discount rate – leverage Russia has shown no qualms towards using in the past — and Russia is also Ukraine’s top trading partner, accounting for just under a quarter of its exports and a fifth of its imports. In short, Ukraine is simply too dependent on Russia economically to break free of its orbit.

Given the importance of Ukraine to the success of his customs union, it’s hardly surprising that Putin decided to play some of the stiffest economic hardball despite Yanukovich being generally pro-Moscow. Without Ukraine, it’s a joke devoid of countries that matter other than Russia — Belarus brings nothing to the table, Kazakhstan has plenty of gas but no people, and Armenia is Armenia. Beyond the geopolitical implications of Ukraine falling out of Russia’s orbit, Putin simply has too much money on the line.

Eastern Provinces

Ukraine 2010 Presidential Election Map. Source: BBC (http://news.bbc.co.uk/2/hi/world/europe/8503177.stm)

Ukraine 2010 Presidential Election Map. Source: BBC (http://news.bbc.co.uk/2/hi/world/europe/8503177.stm)

Aside from the near-certain economic disaster that would have unfolded has Yanukovich tried to call Putin’s bluff, he would have also committed political suicide. His Party of Regions (Partyia Regionov) draws its power from pro-Russian provinces in the eastern and southern parts of the country (and is probably covertly supported by the Kremlin). There is no way he could survive politically if he lost the support of his base given the level of polarization in the country.

Given these two realities, it’s easy to see how Yanukovich’s hands were tied. From a politician’s point of view, he made the only choice he could.