3 Mar 2014

A warmer war – Putin winning on the economic front

If in doubt hark back to Vladmir Putin’s PHd thesis; “The Strategic Planning of of Regional Resources Under the Formation of Market Relations,” was the title of his doctorate at the St Petersburg Mining Institute, and it formalised his two-decade long strategy to form national champions to deploy Russia’s hydrocarbon resources‚Äč.

That is what we are seeing now, a carefully calibrated judgement that Europe does not care sufficiently about a Black Sea peninsula to endanger German industry (with an energy embargo) or the UK City (with an asset freeze). It was however, very telling that US Secretary of State John Kerry yesterday pointed to the rouble falling.

Financial markets have punished Russia far quicker than Western governments – the rouble falling to an all time low against the Euro and the dollar. Russia’s central bank in the largest hike in interest rates since Russia defaulted on its debts in 1998, and spending 2 per cent of its half trillion dollar foreign exchange and gold war chest to check the rouble’s fall.

Share prices plummeted along with the currency – the main index on the Moscow stock exchange fell by more than 11 percent at one point, dragged down by the oil and gas giants that dominate this economy. But flowing through the pipes that cross from Siberia to the Caucuses is Russia’s main negotiating strategy: – gas and oil. Europe has allowed itself to become hugely dependent on russia’s hydrocarbon, and russia too is dependent on the money paid for it.

It is a version of Mutually Assured Destruction that prevents a full scale trade embargo, and President Putin has known and planned in this way for years. РEurope imports nearly a third of its gas (31.8 per cent) from Russia, more than a third (34/5 per cent) of its oil, and more than a quarter (27 per cent) of its coal.

For each energy source, Russia is Europe’s number one supplier, giving it enormous leverage. But the oil and gas cash that flow back to Russia make up more than half (52 per cent) of the government’s revenues. So any disruption of energy flows or sanctions could be devastating to both sides. Not a Cold War, but a battle, fundamentally, about Europe’s warmth. German industry in particular is hugely dependent on Russian gas – in November 2011, Russian leader Dmitry Medvedev and Chancellor Merkel open the Nordstream gas pipeline with a theatrical twist of a giant valve – bringing gas directly from Russia to Germany rather than through Ukraine.


Just maybe the combination of new supplies from Qatar and US shale, alongside the end of winter provides an opportunity to push Russia back from its calculations. But German industry and Russian energy are deeply entwined in a series of cross investments. Russia has successfully swapped Siberian gas fields raw resources, for parts of europe’s downstream energy infrastructure owned by Germans.

Ex-chancellor Gerhard Schroder is close to Putin. Schroeder’s protege is now German foreign minister. He just vetoed even the relatively inconsequential notion of kicking russia out of the G8. If economics not drones was the West’s answer to Putin’s assertiveness: then it would be very helpful to target the Russian oligarchy, the friends of Putin in the one place in the West where they gathered to keep their money safe and school their kids. that would be Londongrad, Moscow on the Thames, Chelski.

My judgement was that the UK government would, despite the rhetoric, do very little to scare the Russian elite in London. I did not expect that to be so robustly confirmed by the accidental leak of the UK negotiating position. And when Vladmir Putin glances upon that leak, he may well believe the Crimea is now Russian. Not even a discussion of military plans and opposition “for now” to trade and energy sanctions, and anything that might “close the UK financial system to Russians”.

Vladmir Putin has microplanned Russia’s hydrocarbon diplomacy over decades: The West would have to risk an energy and economic crisis in Europe to pressure Putin. Moscow’s calculation: this risk wont be taken over a Black Sea peninsula. Today’s news from Europe is that he is right. The question is: how far does he think he can push it? Further than we thought last week, and probably a bit more too.

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