It Was A Very Bad Year
by James Dunnigan
January 17, 2015

The combined impact of the declining oil prices and Western sanctions are pushing Russia into recession for the first time since 2009. This one may be worse than the massive financial crises of 1998. The Russian GDP contracted about one percent in 2014, the first time that has happened since 2009. In 2015 the already high (about 12 percent) inflation will move higher as will unemployment and the GDP will contract more than ten percent. It now costs nearly twice as much to buy dollars with rubles than it did a year ago and that means costs of imports are going up accordingly. That means prices for imported goods is going up (or some foreign items are no longer imported) and many Russian made goods that depend on some imported materials are also getting more expensive. The government blames this, and the stalemate in Ukraine on NATO aggression and insists that NATO has a secret plan for weakening Russia and the current economic mess in Russia is a direct result of that. Many, if not most, Russians believe this because the government controlled mass media insists that it is true and is regularly inventing new “facts” to prove it. Then there’s the traditional Russian paranoia about foreigners and foreign invasion. This paranoia goes back over a thousand years to the catastrophic Mongol invasion and before that centuries of Viking raids and conquest. The financial problems are compounded by the government determination to continue high spending on security and retirement benefits. Each of these is costing over $100 billion year and consume two-thirds of the government budget. While Russia can afford to cut defense spending (at the cost of lost jobs in Russian defense industries), pensions are another matter. Russia allows women to retire at 55 and men at 60. A low birth rate since the end of the Cold War in 1991 means fewer new workers to replace those retiring. The low birth rate also means the population is getting older and a higher percentage of Russian adults are living on a pension that the government will not be able to afford much longer. Russia has a reserve fund that can cover budget deficits for about two years, or less, depending on how low the oil price goes and for how long. Currently Russia is dealing with the lower oil prices by pumping as much oil as possible. Thus 2014 was a record year for production, which averaged 10.58 million barrels a day.

Russia continues to help its allies who are having similar cashflow problems. Iran still getting help from Russia in evading the banking sanctions. For example Russia has agreed to use Russian and Iranian currency for food imports and exports between the two nations. This gets around the banking sanctions and is, in effect barter between the two nations. China is adopting the same practice with Russia, which has become a major trading partner. Chinese businesses with Russian dealings are advised to use rubles they are paid for goods to buy Russian assets, which are finding far fewer foreign buyers because of the Russian economic crises. This Chinese aid comes with strings, mainly in terms of Russia agreeing to sell more military tech (design and manufacturing methods) to China. Many Russians are nervous about this because of Chinese claims on much of eastern Russia. At the moment Russian leaders are more concerned with the imaginary threat from the West rather than the very real one from the east.

Russia has gotten itself in a bad situation by trying to annex portions of neighboring Ukraine. Starting in March 2014 Russian commandos and paramilitaries went after and managed to soon take the Crimean peninsula. While the world protested, Russia promptly tried to repeat that process in the eastern Ukraine (the “Donbas”). This ran into problems when armed locals opposed the takeover and Ukraine mustered a military force to respond with unexpected force. By July Ukrainian security forces were pushing back pro-Russian rebels in eastern Ukraine. Faced with the possibility of a humiliating defeat Russia sent thousands of additional troops into the Donbas. Before this could cause too much of an international uproar the pro-Russian rebels agreed to an uneasy ceasefire in September. Since then nearly 1,400 have died in Donbas. Ukraine and the rest of the world are waiting to see if Russia will admit defeat or further escalate by sending heavily armed “peacekeepers” into Donbas “for humanitarian reasons” to “pacify” the area by expelling Ukrainian troops and annexing Donbas. Russia seems to realize that this would make them an international outcast, subject to lasting sanctions and a major long-term setback for the Russian economy.

The two Ukrainian provinces (Donetsk and Luhansk) which comprise the Donbas contain about nine percent of Ukrainian territory, 13 percent of the population and 15 percent of the GDP. Donbas is about 38 percent ethnic Russian. For Ukraine, the Donbas is worth fighting for where Crimea was not. The two provinces comprising the Donets Basin (or “Donbas”) were for a long time an economic powerhouse for Soviet Russia. But that began to decline in the 1980s and accelerated when the Soviet Union fell and Ukraine became independent in 1991. At this point Donbas is mainly about national pride and Russian politicians who face severe consequences if they cannot come out of this looking like a winner.

The prospect of defeat in Ukraine prompted senior Russian politicians to portray the Ukraine situation as all the fault of the West which was seeking to turn Ukraine into an enemy of Russia (which Ukrainians prefer) rather than a part of a Russian empire (which Russians prefer). Bad relations between Russia and Ukraine go back over a thousand years but Russians still claim Ukraine is theirs and consider any disagreement over that to be a hostile act towards the Russian people. The current Russian leadership is backing this myth but that support is becoming a lot more expensive than originally expected. The West sees the Russian efforts in Ukraine as a return to ancient forms of politics which began to die out in the 20^th century. This ancient “create a crises and send in troops to fix and annex it” has been used for thousands of years to justify acquiring more territory. Most current large nations used it to a greater or lesser extent to become large nations. This sort of thing had gone out of fashion by the late 20^th century and Russia is being widely and loudly criticized for trying to drag the world back to a savage past most people want to move away from.

Despite continued Russian denials that they have anything to do with the Donbas rebels more proof keeps showing up, including numerous instances where Russian soldiers serving with the rebels posted pictures and comments on social media sites. The U.S. has released satellite photos of Russian artillery firing into Ukraine and Russian armored vehicles and trucks loaded with weapons and ammo entering Donbas. Russia denounces all this as falsifications but most Russians seem to believe it, even if many would rather not. Unfortunately most Russians approve of this sort of misbehavior.

This war has been going on since April and has left nearly 5,000 dead so far. About 44 percent of those dead were Ukrainian troops and most of the rest were rebels. Civilian deaths have been low because both rebels and troops have avoided attacking civilians. The fighting has caused over half a million civilians in the Donbas to flee their homes.

Meanwhile Russia is demonstrating its displeasure with the rest of the world in other ways. Since the Malaysian airliner (MH17) was shot down on July 17^th by a Russian anti-aircraft missile Russia has moved aggressively against the Western nations it accuses of plotting against them. Killing a plane full of foreigners appalled many Russians until their government came up with accusations that the destroyed airliner was actually part of a Western and Ukrainian conspiracy to make Russia look bad. In response Russian ordered its armed forces to act accordingly. Thus Russian warplanes began acting more aggressively against the United States. That resulted in a spike in the number of incidents where Russian warplanes flew into the American air defense identification zone (where unidentified aircraft flying near American air space are called on to identify themselves). Russian warplanes also made threatening moves towards an American reconnaissance aircraft (an RC-135 Rivet Joint) in international air space over the Baltic on July 18^th and many other incidents followed. Russia also claims to have chased an American nuclear sub out of arctic waters. That last one was apparently made up but later a real Russian sub was caught snooping around in Swedish waters. In the last few months of 2014 these Russian aerial and naval probes increased and frequently involved West European nations Russia was accusing of conspiring against Russia. By the end of the year Russian propaganda was depicting Ukraine as in the thrall of neo-Nazis. It’s an article of faith among most Russians that the Ukrainians really want to be part of Russia. This despite numerous revolts against Russia in the last few centuries. At the end of World War I Germany, which occupied most of Ukraine, allowed an independent Ukrainian government to run the place. After the war Russia had to invade and conquer Ukraine again. During World War II the Germans again occupied most of Ukraine (and were sometimes openly greeted as liberators). As Russian troops pushed the Germans out in 1944 they found the Ukrainians forming armed nationalist guerilla groups. These continued to operate into the 1950s. Ever since then the Russians continued to blame all this bad behavior on evil foreign influences, not the will of the Ukrainian people. This is a mass delusion that has proved remarkably resistant to reality.

It Was A Very Bad Year by James DunniganJanuary 17, 2015

It Was A Very Bad Year
by James Dunnigan
January 17, 2015