Dispatch January 2009

Russia and Ukraine: Cold Snap

Much more than just a disagreement over prices is pushing Moscow to take a hard line in its gas dispute with Kiev

Putin also has pressing domestic incentives for cutting Gazprom-dependent nations like Ukraine no slack. With the global economic crisis starting to bite, Russia’s once-booming economy may slip into recession this year, and the country needs every dollar it can collect from its hydrocarbon contracts. The dramatic fall in oil and gas revenues, which account for half of Russia’s budgetary receipts and 65 percent of its exports, poses potentially grave problems for the autocratic petro-state. Moreover, since coming to power in 2000, Putin has enjoyed high approval ratings, based in part on his hard-line stance against the West, and in part, or perhaps mostly, on his perceived return of Russia to solvency after years of impoverishment under Yeltsin. High oil prices actually deserve much of the credit. “You can take away our liberties, as long as we have steady jobs and a decent income,” many Russians would say. But now, unemployment is spreading and the ruble is losing value by the day, notwithstanding expensive government efforts to prop it up. According to official reports, Russia’s hard currency reserves have dropped from almost $600 billion in August to $435 billion in December.

Given its autocratic proclivities, what would the Russian leadership do if currency reserves were to dry up and the ruble collapse, as it did in 1998? (Let us first dispense with the baseless fatuity, beloved of some American newspaper columnists, that soaring oil revenues foster aggressive behavior by petro-dictators, whereas low oil receipts help promote democracy. What petro-state has begun democratizing since oil prices fell last year? Saudi Arabia? Venezuela? Iran?...) The Russian government, showing clear signs that it is worried about how economic hardship might affect its popularity (and thus its political survival), has already rammed a constitutional amendment through parliament that increases presidential terms from four years to six. With the two-consecutive-term limit still in place, this amendment could help ensure twelve straight years of the next Putin presidency. The government has also abolished jury trials for crimes against the state, and is planning to broaden the legal definition of treason, which would make it easier for the Kremlin to deter or imprison potential dissidents. Thus, as the economic crisis cuts into energy revenues, Putin’s regime looks set to tighten the screws domestically to stay in power.

There are darker reasons still for Putin to maximize Gazprom’s profitability. Gas- and oil-derived graft greases the cogs of the petro-state, and easy money has softened the infighting among Russian elite clans that raged most notably up until the elections of last year that installed Dmitry Medvedev as Putin’s (nominal) successor. If the easy money starts to disappear, the clans will undoubtedly fight one another tooth and nail for dwindling petro-cash. So far, it has only been Putin’s powerful Chekist state and the flow of revenues from the energy sector that has kept them in line.

None of this is much consolation to Europeans now shivering in their homes downstream from Ukraine. They may take even less solace in knowing that more trouble may be on the way unless one of the following developments occurs: Russia and Ukraine find a way to amicably resolve their energy disputes (unlikely, as long as Ukraine aspires to join NATO); Ukraine revives production in its own paralyzed energy sector (improbable, if Yushchenko’s record in office is any indication); or Russia comes up with another source of bountiful rent (no sign of this).

In sum, even if the two countries manage to patch things up for now, as they appear to have done in their compromise accord, another gas crisis may be in the cards. Just wait until next Christmas.

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Jeffrey Tayler is an Atlantic correspondent living in Moscow.

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