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 20th 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 20th 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 17th 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 18th 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.
January 2, 2015: France has told Russia that the first of two Mistral class amphibious ships will not be delivered until there is a peace deal between Ukraine and Russia. This is all about NATO opposition to Russian aggression in Ukraine. Back in June France was willing to defy its NATO allies and deliver the first Mistral, as promised, before the end of 2014. But continued Russian aggression in Ukraine, including the shooting down of an airliner in July, persuaded France to halt delivery. Russia threatened to sue in court, but backed off when it was explained that this could turn into a media circus about “Russian war crimes over Ukraine”. Russia has not bought foreign warships for a long time, but the Mistral purchase was largely because of an eagerness to acquire Western shipbuilding technology and construction skills. This has already paid off, although not exactly how the Russians had planned. This became evident when a Russian official announced that the first Mistral would be built entirely in France. It had earlier been decided to have Russian shipyards build some sections of the first Mistral. It was quickly discovered that the Russian shipyard was not capable of building to the French specifications or do it according to the French timetable. The Russians expected to learn some valuable lessons from the French and, while embarrassing, this was one very valuable lesson. Russian shipyard officials have had their faces rubbed in the embarrassment of not being able to compete while using their current practices. Russian experts on Western production methods and techniques have long complained of the antiquated and inefficient methods still favored by Russian shipbuilders. Navy leaders have been complaining for decades about the poor quality of work coming out of Russian shipyards. The Mistral purchase was to put this to the test because the second Mistral is to be built in Russia, with plenty of French supervision and technical assistance. That is also being withheld because of the Ukraine situation.
January 1, 2015: The Russian president made the usual New Year’s speech and said peace with the West was possible if Russia was treated with equality and respect.
Ukraine reported that pro-Russian rebels in the east fired on troops 23 times in the last 24 hours, wounding three soldiers. By the end of the first day of the year five Ukrainian soldiers were wounded and one dead. This was an attempt by the rebels to get Ukrainian troops to return fire heavily enough so the rebels could accuse Ukraine of breaking the ceasefire. Ukrainian troops did return fire a few times but never escalated. In a related incident Ukrainian special forces found and rescued a soldiers who had been kidnapped, apparently by gangsters working for the rebels, in eastern Ukraine.
In the Caucasus Russia continues to battle separatists and Islamic terrorists. In 2014 nearly all the 245 terrorism related deaths took place in the Caucasus. Most of the deaths (as well as nearly 700 arrests) were the result of over 70 counter-terrorism operations. Russia sees the continuing unrest in the Caucasus as normal for the region (and the historical record backs that up) and providing military and para-military forces with combat experience. Many units that served in the Caucasus have been sent to Donbas.
Lithuania joined the Eurozone. The other two Baltic States (Latvia and Estonia) have already done so. The Baltic States see closer military and economic connections to Western Europe as their best defense against Russian calls for the three countries to again be incorporated into Russia. About half the three million people in Lithuania fear that adopting the Euro will cause price increases, but fear of Russian invasion is a much larger issue.
December 30, 2014: In Moscow 250 anti-corruption protestors were arrested. The government sees, accurately, that anti-corruption protests are also directed at the current government and its growing use of police state tactics to do whatever it wants.
December 28, 2014: In the Caucasus (Ingushetia) three Islamic terrorists were stopped at a checkpoint, refused to surrender, opened fire and were killed. One of the dead was a known and much wanted leader.
December 27, 2014: In eastern Ukraine the army freed 222 prisoners in return for 145 from the rebels. This is the largest prisoner exchange so far. Several previous ones have freed over 500 prisoners.
December 26, 2014: The government officially changed its military doctrine. NATO is now the chief threat and the doctrine makes official earlier threats to use nuclear weapons if Russia is seriously (according to Russia) threatened. Since the NATO threat is an invention of the Russian leadership (to obtain popular support for the Ukraine aggression) it is unclear how far the government will take these dangerous fantasies.
December 25, 2014: Russia launched another Lotos S spy satellite. This is a six ton electronic surveillance satellite with an elliptical orbit that brings the satellite as low as 200 kilometers from earth.
For the first time Russian made Su-25s, flown by Iraqi pilots, were seen making attacks on Islamic terrorist targets in Iraq. In late June five Su-25s arrived from Russia. The Iraqis said they were using Iraqis to operate and maintain the Russian aircraft. But while Iraq had 66 Su-25s when Saddam was in power, only Sunnis flew and maintained those aircraft and those Su-25s last flew in the early 1990s when they were used to put down rebellious Shia. No Shia government today is going to let elderly Sunni pilots and maintainers anywhere near the newly acquired Su-25s. Thus it has taken six months to find personnel to maintain and operate these Russian ground attacks jets, which are roughly similar to the American A-10. The Su-25 has been used successfully for over a decade in the Caucasus against Islamic terrorists and local nationalist rebels.
December 24, 2014: Peace talks (in Belorussia) between Ukrainian officials and rebel leaders ended without any agreement. Another round of negotiations is planned.
December 23, 2014: In Ukraine the parliament approved a proposal to cancel the country’s’ official (“non-aligned”) diplomatic attitude towards NATO. Russia considers this a hostile move as Russia has already promised “retaliation” if Ukraine were to join NATO.
December 21, 2014: Over 180 Russian trucks, which the Russians claim only contain humanitarian supplies, illegally crossed into Ukraine. Russia allowed Ukrainian customs officials and observers from OSCE (Organization for Security and Cooperation in Europe) to witness the crossing. This is the tenth such convoy to enter rebel held territory in eastern Ukraine (Donbas) and this one carried about 1,400 tons of supplies.
December 19, 2014: After weeks of relative quiet in eastern Ukraine the pro-Russian rebels started shooting again, leaving five Ukrainian soldiers dead.
December 18, 2014: The U.S. and Canada have imposed new sanctions on Russia and Russia responded by insisting it would retaliate in some unspecified way. The new U.S. sanctions added four very wealthy Russians to the list of 34 who have their U.S. assets frozen and access to the United States blocked. Canadian sanctions are similar.
In the Caucasus (Kabardino-Balkaria) three Islamic terrorists were cornered and killed. One of the dead was a known and much wanted leader.
December 13, 2014: Two Russian Tu-95 bombers circled the American Pacific island of Guam. The Tu-95s stayed in international air space. This was the third time this year that Tu-95s have circled Guam. It happened twice in 2013. This sort of thing is partly to show the Russian population that the Russian armed forces are once again active globally and also to show the Americans that their Pacific bases can be reached by Tu-95s carrying supersonic cruise missiles.
December 12, 2014: In Ukraine there was, for the first time in seven months, a day in which there were no casualties in Donbas.
Despite the rapidly deteriorating economic situation a recent opinion poll showed 81 percent of Russians approved of their government and the government accusations that all these economic problems were part of a foreign conspiracy to harm Russia.
In Sweden a commercial aircraft taking off nearly collided with a Russian warplane flying in international airspace with its transponder turned off.