Russia’s leader may be living in a bubble, says Michael Wilson, but the situation is not without dangers for the west


Don’t dismiss Vladimir Putin yet, because he’s had a pretty good summer on the whole. Standing up proudly to Russia’s traditional enemies in the west; overseeing the humanitarian delivery of food, medicines (and maybe just the occasional tank column) to support the oppressed pro-Russians in eastern Ukraine; and enjoying the people’s well-orchestrated praise for his stalwart leadership in the face of a relentlessly hostile world. Ah, the things you can do when you control the media.


Meanwhile, the roll of the global geopolitical dice has also been good to Mr Putin. The emergence of the murderous Islamic State jihadists in Syria and Iraq has not merely diverted the world’s attention away from Russia’s support for the equally murderous King Assad in Syria – it has actually forced the West to abandon its military support for the Syrian rebels and to think about cosying up to the dreadful Assad himself. What a simply brilliant irony.

Slipping And Sliding

The upshot of all this is that the world has had too much on its mind to be spending very much time on the ruins of the Malaysian airliner MH17, which crashed over Ukraine on 17th July after being hit by what Mr Putin called a Ukrainian air-to-air missile, but which the rest of the world calls a Russian-built Buk surface to air missile – presumably fired by pro-Russian separatists. Not that anybody can ever be completely sure either way, mind you, because, by the time the pro-Russians had finally allowed western observers into the crash site, large parts of the original aircraft appeared to have mysteriously gone missing while assorted other bits of aircraft metal had reportedly been scattered in their place.

At the time of MH17, it was easy to imagine the Russian president stomping round the Kremlin and spitting teeth with fury at the incompetence of the Ukrainian rebels who he’d entrusted with the Buk missiles. But Putin’s ability to withstand all this has been impressive. Unmoved by Western trade sanctions against his country, he has lobbed a few retaliatory threats of his own into the war of words. And sadly we can’t afford to dismiss them as the impotent rantings of a sad dictator. Some of them will hurt us.


The Gas Issue

For starters, Putin’s men have doubled the price of Russia’s natural gas supplies to Ukraine and demanded payment in advance. With just a hint of a warning that they might shut the Ukraine pipeline altogether.

So what’s that got to do with us? Simple. Our problem is that we haven’t yet worked out what we’ll do if Russia really turns off the gas this winter. Western Europe gets 15% of its natural gas from the pipelines that cross Ukraine, and there isn’t going to be any easy way of substituting for it. We’re not going to get any assistance from Barack Obama, because America doesn’t have the physical capacity to feed us on LPG through the winter

At the moment, certainly, nobody is panicking. The oil and gas price has held steady throughout the summer and early autumn, and the optimistic assumption is that Russia’s trade losses from collapsing westward energy sales would be so disastrous that not even Mr Putin could contemplate the financial impact.


Fair comment. Oil and gas account for 55% of Russia’s exports, and the energy industry accounts for 20% of the value of the Moscow stock exchange. Without those export revenues, Russia’s ability to put food on the people’s tables might soon be in doubt.

The Rouble Plunges – Allegedly

Equally serious is the speculation that the Kremlin’s own coffers might start to suffer, perhaps to the extent where it became difficult to meet debt obligations. That’s still a very long shot, but surely there have got to be reasons why the rouble has plummeted in value in the last year? (From fifty-ish in September 2013 to sixtyish in mid-September 2014.)

It’s a good theory, but unfortunately the drop in the exchange rate doesn’t seem to have been related to the Western sanctions that were announced in late July, in early August and again in early September. Actually, all the damage was done in the six months to February – from then on, the rate has rumbled along at roughly 60 roubles to the pound.


One way the squeeze is certainly being felt is that Russian companies can no longer simply raise cash on the western markets in the way they used to. The Economist magazine recently reported that the flow of international dollar loans from foreign banks had fallen to just $7.9 billion in the first half of 2014, from $25 billion in the same period of last year. That has forced them to approach the state-controlled Russian banks for money instead. And what tightens the screw still further is that Bloomberg reckons that Sberbank, Gazprombank, VTB,  and Vnesheconombank are going to need to refinance $15 billion worth of bonds denominated in dollars, euros and Swiss francs during the next three years. If they can’t raise that money, their creditworthiness may come into doubt.

The Name’s Bond, Dumped Bond

Speaking of which, I had suppress a giggle when the Moscow Times ran an article on 1st September entitled “New EU Sanctions Could Cut Off Access to Russian State Bonds”. Europe’s threatened measures against Russia might debar European investors from buying new Russian government bonds, it said. Sorry chaps, it hadn’t really crossed my mind to try. But, since we’re here, why don’t you tell us why I should?

Because, Moscow thunders, if we don’t feed more of our money into Russia’s treasury, its state institutions  might soon be forced to start selling off their sizeable holdings of Western bonds, which in turn might drive down our bond prices. And that would be just awful. Just at the moment when we want yields to stay tight. (Snigger.)


Mind you, the West is going to feel the pinch in other ways. The announcement of new EU sanctions in early September – which include restrictions on the sale of equipment for the oil and defence sectors, and the sale of dual-use technologies to military end-users – has already prompted Moscow into retaliating with its own sanctions – such as banning most agricultural imports from Europe and the U.S.

Downing Street has been robust in its insistence that any damage to the West’s financial economy would be worth putting up with. “As the Prime Minister and Chancellor have said,” a spokesman asserted in early September, “the costs of the sanctions fall much more greatly on Russia than they do on the rest of the world……Russia needs Europe and others more than the other way around.”

Ah, but the real issue, surely, is that Europe has no appetite for military action against Putin over the Ukraine issue. Nor does America, as Barack Obama squares up for his last mid-term election in the knowledge that he’s being sucked back into Iraq and Syria. Putin’s luck is holding.


So What of the Stock Market?

You might, of course, imagine that the steady slide in the rouble would have thumped the Moscow stock exchange, damaging the country’s domestic investors. But you might be wrong.

According to the chillingly hard-line Russia Beyond the Headlines website, foreign institutions still owned around 70% of the Russian stock market in the third quarter of 2013 – some $121 billion, out of a combined market capitalisation of $213 billion. Another $29 billion was owned by Russian banks, RBTH said, and only around 10% of the market was actually owned by bona fide Russian civilians. That was because ordinary Russians had been badly spooked by the 2008 crisis, it said, and there had been a general reluctance to get back in.

The awkward fact, for most of us, is that in mid-September the Russian stock market, as defined by Thomson Reuters’ country index, was trading at a price/earnings ratio of 5.9 and an attractive dividend yield of 4.7%. That wasn’t very different from China, which was on 6.1 and 4.9% respectively. And compared with India (18.1 and 1.6% respectively), Moscow looked like a screaming bargain. Double drat, it’s been rising in the last month and is back to last winter’s levels.

The Whispering Starts

All of which might seem to suggest that the Russian President has got the situation nicely stitched up. And if only the good Russian people didn’t have Twitter accounts he might have been able to sleep easily for much longer.

But recently the social-media mutterings have been surfacing even in the Russian press about how Putin is putting arms and men into eastern Ukraine. Oh, for sure, the official line is that this is for humanitarian objectives, but people aren’t stupid even if their national newspapers are. The lies are being found out.

And then there are the immutable facts. As you’ll know, Russia has been effectively removed from the G8 group of leading nations, which means that this autumn’s planned summit in the Sochi Winter Olympics city is also off. The rump G8 group will meet in Brussels instead. And the Russian people will notice that. You can rely on it.

Meanwhile, Brussels is now preparing the killer blow that ought to make Putin’s disgrace manifest. EU ambassadors are said to be working on a plan to strip Russia of the right to host the football World Cup in 2018. If that doesn’t show the man in the street that we’re serious, nothing will.

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