The world is currently experiencing Vladimir Putin at the peak of his power. Just weeks after basking in the glory of the Sochi Winter Olympics, the autocratic Russian leader has successfully snatched Crimea from Ukraine and inserted it back into Russia, while the rest of the world has done little more than splutter and wag fingers for fear he will cut off energy supplies to Europe. Now there are growing concerns Putin may have designs on the rest of Ukraine, a chunk of Moldova or beyond.
So what can the West do to put the brakes on Russian expansionism? The same thing we did the last time Russia was a threat to world order: let the free market do its work. Putin may find short-term success flouting national sovereignty and international law, but he’ll never outrun the cold, hard reality of economics.
Amid all the frenzy over Putin’s resurrection of the Russian empire, the underlying reasons for the fall of the old Communist regime a generation ago seem largely forgotten.
As detailed in Yegor Gaidar’s insightful Collapse of an Empire: Lessons for Modern Russia, a book originally written in Russian for a domestic audience, the seeds of the Communist era’s demise were planted in the mid-1980s when world oil prices crashed to less than $10 a barrel. (All figures U.S. dollars.) Chronic low productivity across all sectors of the Russian economy, but especially in agriculture, combined with the fall in oil prices—one of Russia’s few sources of foreign exchange at the time—meant that by the end of the 1980s, Russia could no longer feed itself, import food from the rest of the world or support its client states in Eastern Europe. This financial straitjacket, and not Reagan-era military spending, is what ultimately shattered the Russian empire.
“The inefficiency of the socialist economic system made its dismantling strategically inevitable,” writes Gaidar. “However, this had no direct bearing on the short-term and acute problems created by the drop in oil prices.” The outlook is not that much different for Russia today.
It’s true that since coming to power in 2000, Putin has managed to balance the national budget and put Russia on a more modern footing; many of the country’s most important corporations are now traded on international stock exchanges. Yet it is still in many ways an inefficient, low-productivity, command economy. The $51 billion spent on Sochi came mostly from oligarchic firms following Putin’s orders. Natural gas monopoly Gazprom, for example, dutifully spent $3 billion building a ski resort, Olympic village and cross-country and biathlon centres, among other projects. That’s money not available for more productive uses.
Putin, like his commissar predecessors, is still dramatically beholden to world markets. Natural gas and oil revenues constitute more than half the Russian budget. Even a slight drop in prices could tip the country into deficit. With fracking technology unleashing massive new stores of natural gas around the world, it’s only a matter of time before Putin’s hold on Europe is weakened dramatically.
Economic growth in Russia has slowed precipitously, inflation is rising and major demographic problems loom on the horizon. As Ruchir Sharma, head of emerging markets for Morgan Stanley Investment Management, recently observed, “The Russian state has few new sources of income outside of oil and gas, at a time when it is taking on more dependents.” Not only are there not enough young Russians entering the workforce to pay for massive hikes in state pensions, but the population itself is shrinking due to out-migration, a birth dearth and the pernicious effects of widespread alcoholism. Life expectancy in Russia is 10 years less than in Canada.
In other words, the world is right back to where we were 30 years ago: Russian success is untenable over the long term. When its economy finally collapses due to market and demographic forces, so too will Putin’s global ambitions. Our best defence thus lies in maintaining the efficient, sustained achievements of the open market through free trade, migration, competition and limited government interference.
Of course, long-term confidence in the cycles of history or the benefits of capitalism will be of little comfort today to Ukrainians, Moldovans or anyone else currently in Putin’s sights. To this end, the array of sanctions and travel bans announced by Prime Minister Stephen Harper and the rest of the Western leaders, along with the removal of Russia from the G8, seem appropriate, if largely symbolic. It is also imperative to strengthen the military alliances with border countries that wish to align themselves with the West to deter further Russian predations. This is no time to show weakness. It’s a waiting game once more.