Russia is a strategic petrostate in a double sense. It is too big a part of global energy markets to permit Iran-style sanctions against Russian energy sales. Russia accounts for about 40 percent of Europe’s gas imports. Comprehensive sanctions would be too destabilizing to global energy markets and that would blow back on the United States in a significant way. China could not stand by and allow it to happen.
Furthermore, Moscow, unlike some major oil and gas exporters, has proven capable of accumulating a substantial share of the fossil fuel proceeds. Since the struggles of the early 2000s, the Kremlin has asserted its control. In the alliance with the oligarchs it calls the shots and has brokered a deal that provides strategic resources for the state and stability and an acceptable standard of living for the bulk of the population…
Putin’s regime has managed this whilst operating a conservative fiscal and monetary policy. Currently, the Russian budget is set to balance at an oil price of only $44. That enables the accumulation of considerable reserves.
If you want a single variable that sums up Russia’s position as a strategic petrostate, it is Russia’s foreign exchange reserve… Hovering between $400 and $600 billion they are amongst the largest in the world, after those of China, Japan and Switzerland.
This is what gives Putin his freedom of strategic maneuver. Crucially, foreign exchange reserves give the regime the capacity to withstand sanctions on the rest of the economy. They can be used to slow a run on the rouble. They can also be used to offset any currency mismatch on private sector balance sheets.
That is Adam Tooze on the long run background to the current situation, in a week-old post I missed. One of the most persuasive pieces I’ve read.
What Tooze also points out (and I didn’t appreciate), is that while Russia has been rising, Ukraine has stagnated.
…What makes Ukraine into the object of Russian power is not just it geography, but the division of its politics, the factional quality of its elite and its economic failure.
…Ukraine’e elite have not come up with a formula for delivering the material basis of legitimacy, i.e. a minimum of stability and sustained economic growth. Economic frustration compounds the divisions between regions, language groups, factional interests. Since independence, the oligarchic super-rich have played a baneful and disruptive part in Ukraine’s politics.
In a long post on Ukraine’s economic malaise, Noah Smith puts it more bluntly:
- Billionaire oligarchs can claim a fifth of national income and most of the manufacturing center
- They’ve spent two decades living off checks and haven’t tried to grow their investment—meaning they resisted export led growth and block more competitive foreign investment and firms
- The better investment, it seems, has been capturing government and preventing economic change
Unfortunately, this is a pretty common feature of a lot countries. Elites can either embrace creative destruction, and take their chances on a growth strategy, or they can try to protect their privileges and try to milk their cow, even if it means that cow gets leaner and weaker with time.
As a result, Ukraine is unusual in Eastern Europe for being no richer than it was in 1990. Or (dare I say it) Ukraine is weak.
All this fits well into the political economy of the situation I outlined last week: Russian power has risen in relative terms in the last 30 years, and it expects its influence to rise in proportion (especially because it doesn’t have many allies or client states).
These reserves give Putin some of the insulation he needs if he invades. Still, invasion is so costly to him and to Russia, I still predict a nonviolent outcome—one that sees the West recognizing Russia’s strength in this situation and rolling back Western engagement with Ukraine.
This peaceful prediction will be wrong if Putin cares more about his relative status than his absolute position (something Tyler Cowen pointed out this week). This is possible, but I’m not persuaded. Tooze and Rob Lee both have takes that suggest Putin is more reasonable.
Thanks to Luis Martinez for the video tip.