January 2015 Monthly Article – The Russian Conundrum

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By Jerry Pacheco

I am astounded by the train wreck that is Russia and its leader, Vladimir Putin. In the face of world opposition, it attacked its neighbor, Ukraine, and forcibly annexed the Crimea. War still rages in eastern Ukraine, promoting instability in that region. This war of aggression has badly damaged Russia’s image in the world.

In response, the U.S. and its western allies imposed a series of sanctions on Russia, targeted at industries, banks and influential Russian businessmen. Initially, Putin’s government thumbed its nose at the sanctions, but now they appear to be restricting the access to trade and badly needed finances for his government. On top of the sanctions, falling oil prices have put a squeeze on the government’s revenues. Russia relies heavily on its vast oil reserves to fund the national treasury. Less income from oil means less ability to replace badly crumbling infrastructure across the largest nation in the world, and to maintain basic services for its citizens.

The economic crisis has caused Russia’s national currency, the ruble, to lose half of its value during the past few months. Panic-stricken Russians have headed to the stores to unload their rubles before its value decreases even more. The increased spending in the economy has helped push the inflation rate to 10 percent.

If this wasn’t painful enough, Moody’s recently reduced Russia’s credit rating from Baa2 to Baa3, which in layman’s terms is only one level above junk bond status. With its action, Moody’s indicated that it would be monitoring Russia to review if an additional downgrade is warranted. It also stated, that, “Russia’s nominal foreign currency reserves could fall by at least as much this year as they did in 2014, when they declined by around $125 billion.” Foreign currency reserves are used by countries to defend the value of their currency in the world financial market. Falling foreign currency reserves means that Russia has fewer means to defend its currency.

With all of these problems, what does Russia do to right the listing ship? It bans transgender people from driving. Based on new Russian road safety regulations, people that the Russian government lists as having “sexual disorders”, such as transgenders and transvestites, will not be permitted to drive. The Russian government already has taken a hard stance against homosexuals, and was widely criticized when it hosted the Sochi Olympics. It is now ratcheting up its oppressive approach on its own citizens with this latest action.

What should we make of Russia’s situation? Many Americans might chuckle at the tailspin that Russia is in. Some may even say that it is well deserved and take satisfaction about what is happening. I don’t share these viewpoints, because I believe that a Russia in crisis is a danger to the world.

Igor Shuvalov, Russia’s First Deputy Prime Minister, recently made some ominous comments aimed at the West. He stated that if it is the West’s intention to remove Vladimir Putin from office by using sanctions, it will be sadly disappointed. Speaking at the World Economic Forum, he said, “Sanctions will never force President Putin to do anything differently. If Russia is told ‘Go to that corner, sit there quietly and we will teach you a lesson with our sanctions’, nothing will be solved and it will be a bleeding wound for decades.” He went on to comment, whether politically true or not, that the sanctions have encouraged Russians to rally around Putin. A “bleeding wound for decades?” Those are some serious words to be pondered carefully. A desperate Russia could react to the continuing economic crisis by increasing its aggression in the region, particularly with its neighbors. Its relationship with the West could become even more strained, leading to increased tensions in places such as the Middle East.

This is where the conundrum lies. Vladimir Putin has attempted to reverse the democratic strides that Russia has undertaken since the fall of the Soviet Union more than 20 years ago. He has used the threat of the West for political expediency in imposing his rule. Putin has proven to be no friend of the U.S. and appears to be apt not to change his stance in the future. On one hand, the sanctions and economic conditions are doing exactly what the West wanted – to put pressure on Putin and to curtail his aggression against Ukraine before it spreads to other countries. On the other hand, Russia is a historical adversary of the West with a powerful military, nuclear weapons and natural resources. Desperation could lead to irrationality and this is truly a concern to keep in mind.