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Is the West doomed to repeat its mistakes with Russia?

A decisive and ambitious sanctions policy may stop Vladimir Putin’s aggression. Yet, historical evidence shows that this strategy will not be easy to pursue mainly due to Western European fears of the unknown in the case of Russia’s potential disintegration.

Cheap oil will not make Russia change its behaviour. It could just push it to further tighten its belt. Russia under Vladimir Putin grabbed Crimea and Donbas and entered Syria (but decided to withdraw in March 2016, nominally at least). What the West fears is an unstable Russia with a huge nuclear arsenal and vast territory. This is why there are no real ongoing talks about support for democratic opposition in Russia. The opposition is not treated like a real power with the capacity to change the country. Simultaneously, Russia, unlike Iran, has not been subjected to strict sanctions which badly affected the arms industry, banking and energy sectors in the latter. However, key parts of the Russian economy like Gazprom and the international SWIFT banking system were excluded from sanctions (mostly because of Europe’s dependence on Russian gas).

 For Russia, relative peace in Donbas is a pretext to discussing the suspension of sanctions, in spite of the fact that Crimea is still under Russian occupation. The focus of international public opinion is shifting towards the Middle East, where Russia accelerated the conflict. It resulted in a massive wave of migration which has had a destabilising impact on Europe and seriously undermined the political position of Europe’s formerly most powerful leaders, such as Angela Merkel. Despite an official statement by Hans-Georg Maaßen, head of Germany’s internal intelligence agency, that “Russia is fuelling tension over migrants in Germany”, Berlin accepts Russia as a necessary partner in order to maintain global dialogue, despite all of its “disadvantages”.

Facing history

When the October Revolution of 1917 elevated Vladimir Lenin to power, the West broke off ties with Soviet Russia. There were attempts to overthrow the communist government by supporting the White Guard, the anti-communist forces that fought the Bolsheviks. However, the communists’ ambitions stretched beyond ruling Russia; they were working towards dominating all of Europe, starting with Germany. Their march westward was stopped by Poland during the Polish-Soviet War of 1919-1920. The expansion of communism stopped and the revolution seemingly ran out of fuel.

When the communist economic system turned out to be too radical and ineffective, it was corrected rather than replaced. In 1921 the Bolsheviks implemented the New Economic Policy, which combined elements of both capitalism and a centrally-planned economy in order to prevent the whole system from collapsing. Lenin invited western companies to invest in Russia and import their know-how and technology in exchange for lucrative contracts. Over the years, the Kremlin would redeploy similar tactics in times of economic strife.

The transformation of Soviet Russia into the Soviet Union under Joseph Stalin’s leadership was accompanied by the Great Purge. Anyone that Stalin considered a threat or disloyal was exiled and sometimes executed. Generals, commanders and specialists were executed while the Soviet Union prepared another attack against Europe. A temporary alliance with Nazi Germany helped remove the obstacle that had thwarted the Soviets’ previous attempt to carry out this plan: Poland. Stalin planned to join Hitler’s war against the Allies and bring the fires of the revolution as far into the West as he could.

However, the purges of the late 1930s negatively affected the Kremlin’s ability to think strategically. The German attack on the Soviet Union in May 1941 came as a surprise to the Kremlin. It temporarily paralysed the Union and, according to some historians, even created the risk of a coup d’etat to overthrow Stalin. In addition to defending itself against Nazi Germany by joining the Allies, which included the Lend-Lease programme (in which the United States provided weapons and other materials to the Soviet Union), Stalin managed to stay in power.

Struggling with crisis

In March 2016 the Russian government adopted an anti-crisis plan in response to the economic slowdown that Russia is experiencing. The documents contain several suggestions on how to support certain branches of the economy and regional budgets by providing its regions with loans, boosting the auto industry, introducing social benefits for local residents and other activities aimed at assisting the development of small and medium-sized enterprises. As Maria Domańska, an analyst with the Warsaw-based Centre for Eastern Studies (OSW), points out: “Despite these actions, which may to some extent soften the painful consequences of the economic crisis, the Russian authorities have not yet come up with a coherent strategy on how to fight its structural causes. Ongoing discussions about the plan in Russia show that the government is uncertain about the real perspectives of the plan’s implementation at a time of recession and deepening budget problems.”

The Russian economic recession (with a GDP drop of 3.5 per cent in 2015) is the result of both structural problems which have not been addressed for years and a drastic decrease in oil prices, from 115 US dollars per barrel in mid-2014 to around $30 per barrel at the beginning of 2016. The question of whether the Russian federal budget is realistic regarding this situation remains open, as it is based on oil prices from 2015, around $50 per barrel.

Russia remains confident that oil prices will soon rise. According to Viktor Zubkov, chairman of Gazprom’s Board of Directors, a price of between $50 and $60 per barrel is the best price that they can realistically hope for in 2016. Russia has already invested some effort into bringing this about. On February 16th 2016 at a meeting between Russian, Saudi, Qatari and Venezuelan representatives in Doha, the parties agreed to freeze the extraction of oil at the January 2016 level. The United States and Iran do not intend to join this deal. In fact, to freeze the extraction of oil at this level could require the signatories to actually increase their overall level of extraction in 2016. In spite of this, even negotiations on freezing can affect oil prices.

As history has taught us, when Russia was at its lowest points, the West was there to provide a helping hand. Yet despite this, the West’s generosity is rarely repaid with equal gestures of goodwill. After the Second World War, the Allies were faced with the Iron Curtain, which isolated half of Europe from the outside world, even though it was actually them who agreed to that arrangement in Yalta and Potsdam in 1945. The consequence of this was the Cold War, which lasted nearly 50 years.

When Francis Fukuyama declared the end of history to be 1991, the West was fooled again, this time by Boris Yeltsin’s “correction of Russian politics”. Nobody seemed overly interested in making Russia adopt democracy at a time of weakness. Co-operation with Yeltsin the “reformer” paved the way for Vladimir Putin, who was named Russia’s next ruler by Yeltsin. Putin fits into the long tradition of autocratic Russian rulers, as evidenced by his invasion of Georgia in 2008, his annexation of Crimea in 2014 and the hybrid warfare he is waging against the West. The West was again caught by surprise, while Russia has begun to weaken once more.

Oil price blues

Most economists agree that Russia can no longer build its budget solely on the stability of high oil prices. In the long-term, Russians are aware that petroleum revenues will shrink. Russia’s extraction of oil is expected to decrease 50 per cent by 2035 and the Russian ministry of energy has already adopted a general plan of development for the oil industry for the next two decades. This plan is set to replace the current one, which was adopted five years ago and will be valid until 2020. The assumed price of oil in the latter plan was $80 in 2020 and $97.50 in 2030. The ministry also concluded that the exploration of fields that are already in use can only meet half of the necessary demand. To meet it fully, Russia will need to exploit new oil fields, which will require further development of exploration projects.

In terms of utilising undeveloped oil fields, the new plan has several main scenarios. One is moderately profitable and based on a price that would secure the minimum cost-effectiveness of research and assumes the suspension of western sanctions no later than the end of 2016. Another scenario is based on forecasts of low oil prices and assumes that sanctions have not been lifted. The plan suggests that Russia should maintain its current level of extraction through 2022. However, this is a controversial claim, since companies like Rosneft and Gazprom Neft have frozen their exploration programmes due to the sanctions and the serious limitation of access to technologies. Thus far, Rosneft has failed to find a business partner who would join with them to carry out their new extraction activities, such as the exploitation of the Vankor field in eastern Siberia. Meanwhile, Gazprom Neft has developed ambitious extraction plans in the Arctic region, but its future is uncertain as well.

According to analysts at the Warsaw-based think tank OSW, Russian authorities have been aware of long-term oil price decreases and the persistence of Russia’s stagnation, but they do not have a well-thought-out strategy to strengthen the country’s development potential. This analysis argues that Russia requires a fundamental reconstruction of the current political and economic system. The Kremlin is certainly not interested in any deep, internal changes at the moment, although it may implement some temporary, remedial measures.

If oil prices remain low for more than two years and Russia is kept in international isolation, it could result in the collapse of the Putin regime. If not, Putin may yet emerge from the mire as a victor. Whatever happens, Russia cannot depend purely on oil. Therefore, its activity in Western Europe’s gas sector should be seen in these circumstances as a way to try and escape the crisis. Support that western companies give to initiatives like Nord Stream 2 is throwing a lifeline to Putin. If successful, Nord Stream 2 could eliminate Russia’s need for real reforms, which are necessary to modernise the country’s economy.

Gazprom’s income constitutes around one-fifth of the entire Russian state budget. Sberbank CIB predicts that gas prices in Europe will decrease in 2016 by 35 per cent. If this turns out to be true, Russia’s revenues from gas sales will shrink by an equal amount. In the first half of February 2016, Gazprom exported around 45 million cubic metres of gas per day to Germany via the Nord Stream pipeline. This amounts to about half of what was being exported to Germany during the same period in 2015.

Test for the future

The West might repeat the same mistakes it has made in the past and help a weak authoritarian regime recover. A pretext for this could be another virtual “correction” of Russian politics, purely for the consumption of western audiences. Evidence of first attempts at this can already be seen. There is widespread speculation about Putin’s successor, as well as about candidates for the post of finance minister, each of them increasingly liberal. Simultaneously, some western politicians have already begun changing their tune by arguing that Russia is an indispensable partner in international affairs. This narrative is slowly replacing any discussion on the role that Russia plays in creating problems (as opposed to solving them). At a time when Russia is weak, the West could be more demanding towards it. Instead of flooding Twitter with #FreeSavchenko tweets, it could undertake real, concrete efforts to free Ukrainian pilot Nadiya Savchenko and support change in Russia. Nord Stream 2 could be a test regarding which way the internally divided West will choose to deal with Russia in the future.

The current US and EU sanctions against Russia are more about banking, oil and the arms sectors. A hermetic isolation followed by the extension of sanctions would force Russia to adopt structural changes in its economy. The ultimate step would be to exclude Russia from the international SWIFT banking system. It is true that the worsening of relations with Russia risks further tensions with the West, but energy interdependence is not a way to lessen this risk.

Perhaps there is no way back from the current poor relations that exist with Russia. To bow to Russia’s demands in this situation would make little sense. So far, Europe has not decided to go beyond the current set of limited sanctions that should still be regarded as a relative success. Yet the West should look at its own history of relations with Russia to draw conclusions on how to deal with this big, eastern neighbour when it is struggling with a severe crisis.

Wojciech Jakóbik is an energy analyst at Jagiellonian Institute and editor-in-chief of economic portal biznesalert.pl.

1NEE_2012.jpg This article was published in New Eastern Europe Issue 3-4 2016: One for all, all for one?

19.07.2016