European Affairs

In Russia’s long-running stand-off with an unexpectedly united West after his seizure of Crimea and support of separatists in eastern Ukraine, the ongoing meltdown of Russia’s currency -- and impending meltdown of its economy -- are game-changers.  What’s urgently important is whether Putin will change the game for better:  He ceases to support the separatists in eastern Ukraine, allows Kiev the economic breathing space it needs.  Or for worse: Putin decides to push militarily for what he can get before the Russian economy is blown away by hyper-inflation.

On the face of it, his choice should be obvious.   There is a real prospect that Russia will have to default on its international debts, unless it is bailed out by western banks and western-controlled financial institutions.  To access those, Putin needs to settle.  But will he?

He doesn’t have long to decide.  Russia’s banks had been closed for the traditional ten-day New Year celebration.  When they re-opened the day after Christmas in the Russian Orthodox calendar, the pressure on the ruble resumed   

Where can Putin turn?  Standard recourse is an appeal to the International Monetary Fund for emergency aid.  Expensive experience has turned the IMF into a tough banker.  It lends now in instalments, and only against measurable economic --- and usually political --- reforms in the debtor country.   The fact that Western sanctions block Putin from even approaching the IMF is fortunate.  The notion that Putin would implement reforms the IMF would certainly demand is fantastical.

Where else can Putin turn?  There are persistent rumors that Moscow has approached Beijing for assistance from China’s state banks.  Beijing has declined, the rumors run, pleading that its trade and banking ties with the West are too important to jeopardize by falling afoul of the sanctions imposed after Putin’s coup in Crimea.  Putin is stuck.   

The epic scale of Russia’s financial/economic debacle cannot be exaggerated.  For Putin, to adapt an old saying, the sky is black with chickens coming home to roost.  The crisis is bad news for Russia.  Bad news, certainly, for the urban Russian family elevated to precarious middle-class comfort by fifteen years of high oil prices.  Bad news for Putin.  He cannot sit out Russia’s economic crisis.  Russia’s foreign reserves are on course to run dry in two years or less.  Meanwhile, the Central Bank’s 17 percent interest rate will destroy a sizeable slice of Russia’s domestic economy.  Putin has to act.

That could be really bad news for Europe.  Why?  Because Putin is a man with a plan -- more precisely, a mission.  Putin’s ambitions run far wider than territorial adjustments to Ukraine.  His overriding goal is to regain for Russia the Soviet Union’s global standing during the nuclear-standoff of the Cold War. 

That’s not guesswork.  It’s been Putin’s theme in speeches to international gatherings since 2007. The urgent question is what risks Putin will run to assert Russia’s power in face of its deepening financial/economic crisis.

Putin's "Parallel Universe"

German Chancellor Angela Merkel observed earlier this year, after another of her prolonged weekly phone conversations with Putin since his seizure of Crimea, that the Russian president was “out of touch with reality” and “living in another world.”  She was echoing, wittingly or not, an Australian minister’s prescient verdict back in 2007, while Putin was riding high: “He’s living in a parallel universe, really, isn’t he?”

For Chancellor Merkel the turning point in her assessment of Putin and his ambition seems to have come at the G-20 summit in Australia in mid-October. 

Putin elected to leave that gathering a day early.  Presumably to pre-empt ‘walk out’ headlines after his frosty reception by, without exception, every other leader there, Putin pleaded pressure of work back in Moscow.  (As if everyone around the Brisbane table wasn’t burdened under a back-breaking agenda.)

So why did Putin cop out?  A stunning speech by Merkel two days later suggests the reason.  Speaking at a foreign policy institute in Sydney, Merkel’s message on Ukraine was one of outrage:  “Who would have thought that 25 years after the fall of the [Berlin] Wall, after the end of the division of Europe and the end of the world being divided into two, something like that can happen right in the heart of Europe?”

Alarm Impels Merkel to Eloquence

Merkel is no orator.  Her speeches in the Reichstag are business-like at best.  Not so in Sydney.  Alarm impelled her to eloquence.  Russia not merely regards “one of its neighbors, Ukraine, as part of its sphere of influence”.  Putin’s actions are a challenge to everything Europe has created since World War Two.  The annexation of Crimea “called the whole of the European peaceful order into question, and it has continued by Russia exporting its influence to destabilize eastern Ukraine.” 

Crucially, Merkel intimated that she believes Putin’s ambitions run wider:  “The Ukrainian crisis is most likely not a regional problem.  In that case, it affects us all.”

This was a decisive shift.  In the cool analytical fashion of the gifted scientist she once was, Merkel sought all last year to contain the Ukraine crisis.  She rejected Putin’s actions.  But Ukraine was a problem to be solved, not one to be hyped into a new Cold War.  (Fulminations of visiting U.S. politicians like Sen John McCain she found unhelpful.)  It was a stunning departure, therefore, when she told her Sydney audience:  “And it is not just a case of Ukraine.  It concerns Moldova, it concerns Georgia.  If things go on like this, one can ask:  Should we ask about Serbia?  Should we ask about the western Balkans?  That [i.e. Russian efforts to re-establish sway] is certainly incompatible with our values”. 

As she had done in her telephone dialog with Putin through the year, Merkel acknowledged Russia’s sensitivities about the prospect of Ukraine joining NATO.  Those sensitivities were unjustified, she argued, when Ukraine sought to join the European Union: the two organizations were “qualitatively different.”  She scolded Putin:  “It cannot be that you forbid a country to act, or that it cannot decide itself freely.   Otherwise we [in Europe] have to say:  ‘We’re so weak --- pay attention people --- we can’t take more members.  We’ll just ask in Moscow whether it’s possible’.” 

Merkel’s resounding climax:  “That was how it was for forty years or longer, and I really was not wanting to go back there.”

The Brisbane Meeting   

What provoked these impassioned warnings?  The likeliest cause is what Merkel had learned two evenings before in a four-hour session with Putin in his Brisbane hotel suite, mostly a deux without aides or interpreters -- each is at home in the other’s tongue. 

Next morning, Putin skipped that working breakfast with other G-20 leaders and flew home.  The day following, Merkel unleashed in Sydney her call to arms:  “And, suddenly, we are confronted with a conflict which goes to the center of our values, so to speak.   Now we can’t [merely] hold speeches at commemorations [i.e. the celebrations earlier this month of the 25th anniversary of the opening of the Berlin Wall].  Now we have to show what we have learned from all this.”

Two inferences seem plausible.  Throughout the Ukraine crisis, Putin tried to persuade Merkel to act as, at least, a friendly neutral -- specifically, to apply the brakes to European moves to sanction Russia.  (As Russia’s largest economic partner in Europe, Germany has the most to lose.)  All year, he failed.  It’s reasonable to think that their marathon Brisbane hotel session saw his most extended effort at persuasion.  He evidently failed again -- so completely that he saw no benefit in remaining at the summit. 

The other reasonable inference is that Merkel was alarmed by what Putin was driven to lay out to her at their meeting as justifications for his incursion into Ukraine.  Her Sydney speech signaled her fear that the rationale Putin asserted would justify, in his eyes, interventions in other fragile states around Russia’s border.

It’s surely significant that, while most attention has been paid to Russian skirmishings in the Baltic, Merkel at Sydney pointed south:  to Georgia, Moldova, Serbia, the “western Balkans.”  All are fragile states; none is a member of NATO.  Moves against any by Putin would risk far less than encroachments on the Balts. 

Truly alarming was that Merkel invoked 1914.  In European political discourse, that’s a codeword.  When a heavyweight Euro-leader characterizes a crisis by referring to 1914, it signals:  “Pay attention.  This is really dangerous.”

Why now?  Merkel answered the question.  Europe had stumbled into war in 1914, she told her rapt audience, through “no readiness to accept compromises” and “an arrogant belief in military superiority.” 

Merkel has been beating the drums ever since.  In early December, she selected the center-right daily Die Welt to expand her criticism of Putin’s interference in central Europe:  “Moldova, Georgia and Ukraine are three countries in our eastern neighborhood that have taken sovereign decisions to sign an association agreement with the EU.  Russia is creating problems for all three of those countries.”

Deploying that classic debating device, she warned of war while disavowing it:  “There is no reason to talk about a war in the Baltics.  But, regardless, Article Five of the NATO Treaty -- which sees an attack on one member as an attack on the alliance as a whole -- stands.”  Translation:  Putin, you have been warned.

Merkel believes she has understood Putin’s ambitions.  He aims at more than Ukraine. He isn’t minded to compromise. To achieve his ambitions, Putin will risk armed conflict.  (A senior German official acknowledged this subtext.)

Will Putin Listen? 

Will Putin heed Merkel’s warning?  Nothing suggests Putin foresaw anything remotely approaching the typhoon now engulfing him.  He stunned his economic team at a meeting in mid-October by instructing them to prepare for ten years of toughening sanctions.  (This according to a rare leak from the Kremlin.)   At roughly the same time, Putin acknowledged publicly the possibility of a collapse in the price of oil, but dismissed its impact on Russia.  “We’re considering all the scenarios, including the so-called catastrophic fall of prices for energy resources, which is entirely possible and we admit it,” he said.  Russia’s foreign currency reserves would soften the blow.

Well, no.  As his financial troubles have deepened, Putin’s rhetoric has become more apocalyptic.  Americans “don’t want to humiliate us; they want to subjugate us,” he told a Russian TV audience in mid-November.   Putin’s ministers assert -- and presumably believe -- the same.  Deputy foreign minister Sergai Ryabkov, told the Russian parliament in early December:  “It is hardly a secret that the goal of sanctions is to create social and economic conditions to carry out a change of power in Russia.

In a fiercely patriotic State of the Union address a few days later, Putin so interwove realpolitik with religion as to suggest that, under stress, his view of reality makes no distinction.

The importance of Crimea’s naval base at Sevastapol to Russia’s Black Sea Fleet is understandable strategically.  Putin went way further.  He cloaked his coup in Crimea in nationalist/religious fervor.  Restoring Crimea to Russia was an historic event.  As the Temple Mount in Jerusalem is sacred to Jews and Muslims, so Crimea is a “spiritual source” for Russia.  (The Russian Orthodox Church was supposedly born there, when Grand Prince Vladimir allegedly converted himself and the local tribes to Christianity a thousand years ago --- supposedly in the ancient city of Chersonesus, usefully close to what is now the Sevastapol naval base.)  Religious past and realpolitik present merge in Putin’s perceptions, each bolstering the other.

The Costs of Crimea

 Beyond serious debate, Putin’s annexation of Crimea and support of separatists in eastern Ukraine have been a disaster.  Aside from a financial cataclysm caused at least in part by Western sanctions, his incursions into Ukraine have brought Putin four foreign policy defeats.

First consequence: He has lost Ukraine.  The parliamentary elections in late October slammed the door in his face.  The two parties committed to Ukraine’s future with Europe --- parties led, respectively, by the current President and current Prime Minister --- won a thumping majority.  Ukraine’s Communist Party lost more than half its support.  Attracting less than four percent of the vote, it failed to hurdle the five percent bar for a seat in the Verkhuvna Rada, Ukraine’s parliament.  An historic rejection: For the first time since 1918, the Rada will have no Communist Party members. 

Post-election polling elucidated why.  A decisive majority of voters supported closer ties with Europe. Why? Crucial to this was Putin’s loss of the swing-vote:  those supporting Ukraine’s independence, while also placing great value on harmonious relations with Russia.  Putin’s hostilities through 2014 those voters perceived as confronting them with a choice:  Ukraine or Russia.  They chose Ukraine.  (Putin again under-estimated the power of nationalism --- ironic in one who demands international respect for the Russian nationalism he fans.) 

Compounding Putin’s loss, Ukrainian president Petro Poroshenko urged the new parliament to abrogate a 2010 declaration of Ukraine’s non-aligned status.  Parliament duly did so.  Poroshenko then talked of Ukraine joining NATO.  That was reckless. Valery Chalyi, a deputy chief of staff to Poroshenko, tried to repair the damage.  The vote did not signal an imminent bid to join NATO, he said, nor even that this was on the agenda --- well, not the immediate agenda.  Ukraine, he said, should focus on reforms to meet NATO membership criteria.  (A sensible judgment.  Given Ukraine’s political, economic and financial mess, that will likely take years.)  German chancellor Merkel has repeatedly made clear that she would veto any Ukrainian effort to join NATO.  At a NATO summit in 2008, she quietly scuppered an American move to put Ukraine and Georgia on track for NATO membership.  She dismisses the notion as absurdly provocative to Russia without any offsetting gain in European security.

 Moscow, of course, went ballistic.  Defense Minister Anatoly Andropov thundered that NATO members (unidentified) had pushed Ukraine to make this move, so as to turn Ukraine into a “forward line for confronting Russia”.  He expanded the charge:  “Under the slogan of a ‘Russian threat’, NATO is expanding its military potential in the Baltics, Poland, Bulgaria and Romania.” 

Well, yes.  That’s what Russia’s neighbors have concluded they need.  The notion that Russia’s actions might have provoked this Andropov chose to ignore.

Second consequence:  Putin has lost South Stream, his mammoth $40 billion project to pipeline even more gas to Europe --- earning copious foreign currency (Europe is Gazprom’s cash-cow) while furthering his strategic goal of increasing Europe’s dependence on Russian energy. 

Bulgaria was a critical way-point on South Stream’s planned route into western Europe:  the colossal pipes were to make landfall there after passing under the Black Sea.  As a fine New York Times’ reconstruction laid out on 12/30, Moscow spared no effort or money to acquire Bulgaria’s acceptance of the project.  The efforts bought a vote in the Bulgarian parliament in early April -- just two weeks after Russia’s annexation of Crimea -- to accept the pipeline. 

But Bulgaria has been a member of the European Union since 2007; and the EU decided -- also in April, in response to the coup in Crimea -- to bar South Stream.  The EU intervened.  Brussels severed Bulgaria’s lifeline: millions of euros in EU regional development funds.  Bulgaria capitulated and banned South Stream.  Putin worked to reverse this.  He failed.  On a visit to Turkey at the start of December, he announced the abandoning of the project.  (Adding, according to Turkish press reports, that he was “fed up with Bulgarians”.)   

Damage to Putin's Dream

Third consequence: the reliable acquiescence of Belarus, lynch-pin of Putin’s efforts to create out of former Soviet possessions a political and economic bloc to rival the European Union appears to be weakening.  Belarus is so far, besides Russia, the only industrially sizeable member of Putin’s dreamed Eurasian Economic Union.  One reason Putin was so enraged by the overthrow last February of Ukraine’s pro-Russian President Viktor Yanukovych was that Ukraine -- after Russia the biggest economy in the old Soviet Union -- was set to be Putin’s triumphant recruit to his EEU.  Kazakhstan is his second adherent.  Kazakhstan, sitting on known oil reserves second in the region only to Russia’s, is the most influential country in central Asia.  So a useful recruit. The third is Armenia, which despite long negotiations with the EU on an Association agreement, a month before the Ukrainian about face, also announced it would forego EU association and join Russia’s EEU.  Armenia is 100 percent dependent on Russian gas and oil and is also dependent on Russia not to tilt to Azerbaijan in the frozen conflict in Nakorno Karabagh which is ethnically Armenian and claimed by Armenia although formally part of Azerbaijan.

But Belarus and Kazakhstan both extorted from Putin a high price in gas or cash to join his band.  Both also made clear that the EEU is for them a trading bloc, not a political union.  Which is not at all Putin’s dream.

No other states are plausible candidates for the EEU, as Benoit Vitkine, Russia expert on Le Monde, observed.  With the possible exception of Uzbekistan, most former Soviet states have developed stronger commercial links with either China or the EU than with Russia. 

In Belarus, Putin might, of course, try to buy at least their nominal adherence with the cheap gas he pipes to Belarus.  But the ruble crisis is sundering Belarus’ links to the EEU -- and likely presages circumspection in its future relations with Moscow.

Belarus has done well out of sanctions.  Unsanctioned itself, Belarus has been importing goods from Europe, re-packaging them as Belarussian and selling them on to Russia at extortionate mark-ups.  As the ruble collapsed, however, Belarus’s President Alexander Lukashenko decided to take precautions.  To fence the Belarussian ruble, he imposed currency controls, demanding a 30 percent premium on all hard-currency purchases.  On the lucrative entrepot trade with Russia, he demanded that Russian importers pay deposits before taking their goods.  As the ruble tanked, Lukashenko went further.  A week before Christmas, he demanded Russian importers pay in dollars or euros.

Lukashenko is Europe’s last old-style dictator.  He can order things like that.  But, since Russia is by far Belarus’ main export market -- and enjoys hefty Russian subsidies -- the edicts semaphored Lukashenko’s doubts about Russia’s financial future.

Putin was angry, of course. But Lukashenko brooked no opposition.  On a hastily-arranged visit to Moscow, Lukashenko announced that he had fired his prime minister, Central Bank chief and ministers of Economics and Industry -- all known advocates of the supreme importance of ties to Russia.  “We should have demanded long ago that Russians pay us also in hard currency,” Lukashenko was quoted as saying. His timing sent a message.

It’s close to unthinkable that Lukashenko would take Belarus out of the EEU.  Belarus’ economy is too interlocked with Russia’s and relations with the European Union remain cool, at best.  Lukashenko might reasonably fear the consequences if word of any intention to exit reached Putin’s ears.  But more subtle consequences are likely.  Sources close to him day that Lukashenko was shocked by Putin’s actions against Ukraine.  They drove home how short a Russian leash Belarus too was on.  He offered his capital, Minsk, as a venue for Russians, Ukrainians, separatists and EU officials to meet in efforts to thrash out some deal to end the crisis.  (One EU official commented privately how constructive Lukashenko had been.  “A dictator he may be,” the official said, “but he’s a very smart dictator.”)   Come New Year, Lukashenko made a point of sending Ukraine’s Poroshenko his best wishes, along with the hope that “Ukraine returns to peaceful life as soon as possible.” A certain circumspection in Lukashenko’s future dealings with Moscow seems a reasonable prediction.

Losing Europe

Fourth consequence:  Putin’s fourth and, arguably, most significant defeat has been to galvanize western Europe. After the collapse of the Soviet Union a generation ago, Europe coasted along in an Aquarian ‘end of history’ haze.  Defense spending plummeted.  NATO was “out of area or out of business,” a U.S. Congressman famously warned in urging Europe to focus its forces on conflicts in the developing world.  NATO acquiesced -- neglecting prudent modernizations in Europe for expeditions overseas, none especially well-judged.

Europe’s political space was occupied, meanwhile, by theological debates about Europe’s future, given substance by back-room horse-trading on the development of the European Union and the future of its Euro common currency.  Fifteen years of warnings about the strategic risks in Europe’s growing dependence on Russian energy were brushed aside.  (When Merkel’s predecessor, Gerhard Schroeder, left the chancellery, he was offered -- and accepted -- the lucrative chairmanship of a company owned by Gazprom, the Russian supplier of gas to Europe.)

Why worry?  Russia was a strategic partner. The Cold War was over --with two treaties to prove it.

Putin has at last brought cold reality.  He not merely ignores those treaties.  He denies their existence.  “The Cold War…did not end with the signing of a peace treaty, with clear and transparent agreements on respecting existing rules or creating new rules and standards,” he told an audience of foreign-policy types at a Russian-organized international conference late last October.

Actually, that was precisely how the Cold War ended.  Two treaties -- the ‘Charter of Paris for a New Europe’ in November 1990, and the ‘NATO-Russian Founding Act’ of 1997 -- were signed by Western and Russian leaders of the time.  Each pledged that both sides would, to quote the 1990 treaty, “refrain from the use of force against the territorial integrity or political independence of any state…”  A third agreement, the Budapest Memorandum of 1994, specifically assured Ukraine’s territorial integrity and political independence, in exchange for Ukraine giving up the nuclear weapons stockpile  -- the world’s third largest -- that it had inherited on the collapse of the Soviet Union.

A shrewd cynic once labeled patriotism the last refuge of a scoundrel.  Putin, channeling so many overlords in Europe’s blood-soaked history, demonstrates yet again that nationalism is the first recourse of an authoritarian leader.


Europe’s leaders are finally getting the message.  Donald Tusk, longtime prime minister of post-Soviet Poland and now the new president of the European Council, observed over a November seafood lunch on the Baltic shore with the Financial Times’ central Europe correspondent Henry Foy:  “For Putin and Russia today, the EU is a problem.  And we have to understand -- and I think we are close to this moment -- that Russia is not our strategic partner.  Russia is our strategic problem.”    Rational analysis insists that, with Russia’s finances and economy ravaged by the week, Putin has to find a way to extract himself and his people from the quagmire he has led them into.  What’s truly alarming is that nothing suggests he is likely to accept any outcome other than one he can present -- and believe -- is victory.  He has too much emotionally invested in what he sees as his titanic struggle against the power of the West.