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CHAPTER8 Putinomics under Pressure InSeptember2013,notablesfromacrossEuropeandtheworldgatheredinthe Livadia Palace, a vacation retreat built by the last emperor of Tsarist Russia just outside of Yalta, a resort town in the Crimean Peninsula. The Livadia Palace was where Stalin, Churchill, and Roosevelt met in February 1945 to carve up Europe at the end of World War II. The Yalta Conference, and the dealthatthe“BigThree”signedthere,isrememberedprimarilyforseparating Europe into two halves, one capitalist and the other communist, laying the ground for a decades-long Cold War. Most attendees of the 2013 conference in Yalta—including a former German chancellor, CIA director, and World Bank president—did not fully understand the historical irony at play. One person who did understand was Sergey Glazyev, President Putin’s leading adviser on Eurasian integration, who represented Russia at the conference. In late 2013, the European Union appeared ready to sign a free-trade deal with Ukraine, a move the Kremlin saw as Western intrusion on its sphere of influence. Speaking at the conference ,GlazyevwarnedtheaudiencethatforUkraine,thelong-discussedtrade agreement with the European Union would be “suicidal.” He urged Kyiv to sign a Russian trade pact instead. Petro Poroshenko, then Ukraine’s trade minister and now its president, struck back, telling Glazyev that thanks to punitiveRussiantradesanctionsonUkraine,“forthefirsttimeinourhistory more than 50 percent of people support European integration. Thank you very much for that, Mr. Glazyev.”1 The audience, mostly of Western officials and business leaders, applauded.2 At the sidelines of the conference, Glazyev spoke with journalists to make sure that his point got through. “Ukrainian authorities make a huge mistake if they think that the Russian reaction will become neutral. . . . This will not happen.” To the contrary, he promised that the trade deal with the European 138 | Putinomics under Pressure Union would lead to Ukraine’s default and an economic crisis. He predicted thatUkrainewouldsuffersocialdivisionifitsignedthetradeagreement,hinting that separatist movements in the Russian-speaking eastern and southern provinces of Ukraine might be one result. “We don’t want to use any kind of blackmail,”Glazyevclaimed.“ThisisaquestionfortheUkrainianpeople.But legally,signingthisagreementaboutassociationwith[the]EU,theUkrainian government violates the treaty on strategic partnership and friendship with Russia.”Therisk—orthreat—wasclear.“Signingthistreatywillleadtopolitical and social unrest,” Glazyev insisted. “There will be chaos.”3 On that score, Glazyev was right. Less than six months later, Russia seized CrimeaandfomentedarebellionineasternUkraine,promptinginternational financial sanctions and sending investors fleeing. At around the same time, the price of oil crashed, from over $100 per barrel in early 2014 to half that price by the middle of the year. Russia’s economy was already teetering on the brink of recession before it was hit by the combination of war and an oil shock. The years following 2014 were the most difficult Putinomics had faced. The Kremlin responded by betting that 2014 and 2015 were a repeat of 2008 and 2009, years that also saw recession, low oil prices, and foreign wars. As in 2008 and 2009, Putin’s mix of cautious fiscal and monetary policies proved sufficient to steer Russia through the crisis, but failed to restart rapid economic growth. No Time for a Crisis Even before the shocks of 2014, Russia’s economy was veering toward recession .InvestmentandGDPgrowthwereslidingdownward.Annualgrowthof around 4 percent in 2010 and 2011 fell to barely 1 percent by 2013. The causes of the slowdown were varied. Putin’s return to the presidency in 2012 had done little to improve things. An atmosphere of stagnation set in, and private investment slumped. During the 2008 crash, money fled the country, as foreigners and wealthy Russians alike moved capital to more secure markets. But though the country had seen strong levels of capital inflows in the years before the crisis, the end of the recession did not see capital return to Russia. Instead,moneycontinuedtoflowout,notatthedevastatingrateof2008,but leaving nonetheless. That meant less capital to fund investments in Russia. One reason for the investment slowdown was that Putin’s cronies were playing an ever-larger role in the economy. In 2012, for example, Rosneft, the state-owned firm run by long-time Putin associate Igor Sechin, announced it was buying TNK-BP, an oil company jointly owned by a group of Russian Putinomics under Pressure | 139 0 2005 2006 2007 2008 2009 Year 2010 2011 2012 2013 –140 –120 Billion USD –100 –80 –60 –40 –20 20 40 60 businessmen and BP, the British energy giant. It was not only in the energy sector that big, state-owned, crony-controlled firms expanded. By 2013, the three biggest state-owned banks controlled 60 percent of all banking...


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