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Russia Is at War with the West, and It Will Be Prolonged

  • Its a new kind of war - using rhetoric and economic policy instead of military
  • Sanctions are a form of gunboat diplomacy which is war
  • Nonetheless Russia remains open for Western business
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We have today issued a special report looking at the political aspects – both geo-political and domestic – of the crisis.

Five important Thursdays in a row – which will serve to clarify the Kremlin's list of priorities and also what we may expect in terms of investment reforms and risks in 2015.

We address such questions such as “what are the political drivers of the crisis?”, “will Russia back down or continue to live with sanctions indefinitely?”  “Does the crisis risk altering the domestic political balance?”, “what are President Putin’s key geo-political and domestic priorities?”, “how does Russian legislation work?”

Today starts a sequence of important events – five important Thursdays in a row – which will serve to clarify the Kremlin's list of priorities and also what we may expect in terms of investment reforms and risks in 2015.

Today President Putin delivered his annual address to the Federal Assembly (State of the Nation address). Nothing new or exceptional.

Next Thursday (11 December) the Central Bank holds its last policy meeting of the year and is expected to clarify its ruble policy – if not forced to do so before then.

On Thursday 18 December Putin holds his annual televised press conference and will answer questions from the audience and the public. Here also we usually get greater clarity on priorities and policy.

That is the same day as the next EU Leaders Summit in Brussels, at which we should hear more comments about sanctions, etc.

The following Thursday is 25 December and the fifth Thursday is New Year's Day.

Rumors of Cabinet changes are already emerging in Moscow as the period between the Western Christmas and New Year is when such events tend to happen most often.

A Different Kind of War… political reset will remain but Russia wants to remain open to, and for, business

Russia is in a new kind of war… In the past, if countries disagreed with one another, they sent a gunboat or threatened war. Now they impose economic sanctions.

On this basis, Russia is already in some form of war with the West. In a way this is good news, because it makes it less likely there will be an actual physical conflict. All the posturing and aggression can be played out on the economic front.

… which will be prolonged The conflict is having an impact on Russia’s debt markets and on some industries in Europe. But the pressure is not yet costly enough on either side so there is little pressure for it to end. No side looks like backing down soon.

…oil and underlying economic weakness have caused greater damage. There has been very little push-back in Russia to the ban on food imports, although surveys show a growing public concern about rising inflation. The rapidly fall in the oil price and an already weakening ruble, from early 2013, are causing much greater damage to the economy.

Russia is relatively well prepared. Russia has a strong balance sheet – at least enough to cover the expected budget deficit and all foreign debt obligations until end-2015 without accessing new external capital or debt – and the weakening ruble provides a lot of protection to the budget. It also helps promote the policy of import substitution, although this can only have a limited impact.

The West cannot impose Iran or Iraq-style sanctions against Russia, because this would starve Europe of gas and it would reverse the recent oil price fall. Russia can switch some demand for manufactures to  which would have some negative impact on elective EU industries.

Putin’s goal. Putin has made very clear that he wants to change the whole international political system. His view is that the current one is rigged by the US, and he wants to level the playing field. This conflict offers the opportunity to cause some rift between the US and China and, if the EU drops sanctions but the US does not, with Europe. Putin prefers to shift global decision making towards the G20 and with the BRICS groups having a sizeable influence.

No pressure for change. Putin’s forceful external policy is based on rock-solid support at home from both the electorate and the elite. There is little chance of a Krushchev-style ouster, and even if Putin is removed by an accident, we expect that the system would elevate a similar individual to take his place.

Not a new Cold War. Putin is rejecting the West’s international system, but not its economic one. He wants access to their markets, he wants to import their goods, and he wants their companies to invest in his economy. None of that has changed. He will keep his capital account open (his elites demand it) and his government will not discriminate against foreign businesses.


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