Russia’s self-destructive obsession with Uncle Sam

There has been a lot of talk about Russian influence and power over American politics and the alleged collusion between the President of the United States Donald Trump and Russian President Vladimir Putin. However, if President Putin has something on Mr Trump, it sure doesn’t appear to be very effective. The Russian economy hasn’t looked this frail since the country went bankrupt in 1998. And the political establishment has taken a serious hit in popularity in recent days. This could indicate that more difficult times are to come for Russia’s ruling elite.  

There’s not a lot you can buy these days if you’re holding Russian Roubles in your hands. If you’re still holding on to some of the Russian currency, then your next stop should be a currency exchange booth. In the aftermath of the latest rounds of American sanctions against Russia for its alleged responsibility in the attempted murder of two Russian citizens in Salisbury and for Russia’s on-going violation of Ukraine’s territorial integrity, the rouble has taken yet another painful hit.

Russians are very patriotic people. Therefore, coming out on top in foreign policy battles abroad is more important in the public eye than sustaining a strong economy. The annexation of the Crimean peninsula, the success of military operations in Syria, and the alleged meddling of Russia in the American elections are considered as political successes and eclipse the economic hardship experienced by Russians in their everyday lives. Russian citizens are rather stubborn politically. They generally refuse to see the link between the political choices made by their highest leadership and the effect that this has on the Russian economy. Hence, when the US imposes sanctions on Russia, and the Rouble collapses, people would rather blame America for the sanctions, than to target their leaders for failing to build credible economic alternatives at home.

The Russian’s love for country however ends right where their wallet starts. The Rouble is a notoriously unstable currency. For that reason, many Russians opt to conduct their business in US dollars, the more stable currency. Many mortgages and even rents in Russia are serviced in US Dollars. The country conducts its energy trade with the green bills. Ironically, the currency of Russia’s biggest foe remains the safety net for many Russians and has had them running to the exchange booths many times over the years, when they witnessed a significant drop in the value of their own currency. These hastily exchanges often depreciate the value of the national currency even further.

Russians however also opt to alternative measures to protect their savings. In times of significant currency devaluation, many Russians often opt to invest their remaining savings into products, hard objects, anything that has value. They shop for products that they will likely not be able to afford at a later stage. So in times of devaluation, Russians spend their money on IPhones, German household electronics, or computers made in Asia. But how does buying high-end foreign products actually improve the feeling of national self-worth amongst Russians? Most likely it does not: By buying foreign made goods, Russians more likely realise that their dependency on other nations has not been doing anything else but increasing. Except for oil and gas, the list of high quality exports made in Russia still remains rather short. By running to the stores Russians are again primarily paying into the vaults of foreign producers, many of which are the dreaded political foes from the West.

It looks like every time the Russian economy seems to have just only recovered, another biting blow is waiting just around the corner. The current depreciation of the Russian Rouble might not be as substantial as the one experienced as a result of low gas prices in 2016. Back then the price of oil had fallen just under $50 per barrel. At the time the currency had hit 84 Roubles as compared to the Dollar. Today, the Russian currency is hovering at almost 70 Roubles for one dollar. However, the current collapse of the Rouble shows that the Russian economy can be wounded even in a situation of relatively high prices for energy. This should worry Russia’s highest leadership.

The high dependency on the dollar is not only an economic problem for Russia; it is also truly humiliating for its citizens. Even tough until now the government has managed to bounce back from many crises, their attempts to remediate increasingly look like damage control, and their retaliatory measures seem to be all the more desperate. To counter the US’ latest round of sanctions, Russia has vowed to stop buying US government bonds. The Russian government decided to trade its US government bonds for Gold. If anything, betting everything on gold only makes Russia more vulnerable to attacks from the West. Should the price of that commodity also drop, it would definitely push Russia further towards a fully-fledged bankruptcy. So many countries have betted against the Dollar in the past; all of them have found themselves to be on the losing end so far.

Economic and social reforms

Russia’s political leadership has been very successful in keeping people’s attention on success stories such as the football world cup 2018, successful campaigns at the European Championships or it’s on-going military operation in Syria, fighting the Islamic State. What the leaders in the Kremlin haven’t been able to achieve in the mean time is to resolve the deep-rooted problems of economic dependency, diversification and structural reform. Russia’s share of the income from oil and gas is hardly diminishing. Even though the petrodollar dependency has been known for so long, Russia is unable to cure its addiction. It makes the country extremely vulnerable for the effects of economic sanctions.

There are examples for the frustratingly slow way in which Russia is gaining its independence from Uncle Sam. One of these examples is the country’s new payment system MIR: Russia has created its own national payment system, which was officially mandated by the Russian government. This system was created in order to overcome Russia’s dependency on international payments systems controlled by the US, such as VISA or Mastercard. But as with most government-led initiatives, banks complained about its functionalities and above all the price of the system, which is much higher than the one offered by established American alternatives.

The only sector that the country has been able to develop is its agriculture. Here, the amount of agricultural conglomerates, export volumes, and revenues are growing with every passing year. This year however, just like in the rest of Europe, Russia has experienced extreme droughts, strongly affecting the harvests and reducing profits. It seems that Russia’s export of fossil fuels and high carbon economy has led it to lose on yet another end. The effects of climate change caused by, amongst others, the high use of Russia’s fossil fuels will increase even more once the ice over Russia’s tundra melts. This will lead to more carbon dioxide being released into the atmosphere. As a result, Russia will most likely experience even more droughts in the near future, leading to important losses in revenues as a result.

The role of the economy is generally far less important in Russia than in the US and Europe. However the Russian’s frustration with the economic stagnation has taken its toll on the popularity of the country’s ruling elite in recent months. The economy and internal matters are often seen as being in the responsibility of Prime Minister Dmitri Medvedev. Therefore, Mr Medvedev’s popularity has taken a serious dent in recent months, falling to 31,2% approval in July. President Vladimir Putin has largely been able to escape a too sharp dip in his popularity.

This is mostly because Mr Putin is perceived as fencing for Russia’s interests on the world stage, rather than dealing with “petty” domestic issues. But with people’s savings taking such a strong hit, even the President has seen his popularity take a rare dip to 63,4% of overall approval. This fall must have had an effect on the moral of Russia’s ruling President, who is used to having approval ratings well in excess of 70%.

Foreign policy, Russia’s only strength

The international political arena still seems to be Russia’s only forte. In contrast to its domestic policy, Russia has managed to diversify its foreign policy. It has crafted many new alliances in recent years. From the customs union over BRICS to deep relations with China and Turkey: Russia has created a coalition of countries that want nothing more than to weaken the US’ position on the world stage.

The problem with this approach is that Russia’s allies often have their own history of interdependence with/ or dependence on the US. Turkey’s currency has collapsed after taking its chance at a confrontation with the US over the arrest of a US cleric. And China is currently busy fighting its very own trade war with the United States, that it all wants but to escalate. It seems that although all countries would like nothing more than to see the US fall from its high horses, everyone realises that this fight can’t be won economically, at least not this time.

Vladimir Putin’s disdain for Barack Obama was very much on show publically. With the election of Trump, the Kremlin most likely thought that this relationship could take a turn to the better. And analysts expected that by (allegedly) helping Donald Trump get into the oval office, the relationship between the two countries could normalise. As President Trump stated himself: “I think it’s a good thing not a bad thing to get along with Russia.”

However, the more Trump sang Putin’s praises, the more eager House Republican became to show that the President was alone on this one. Republicans in DC are embarrassed by the President’s cosiness with Russia, as it is in stark contrast with what they have been preaching over the past years if not decades. If Russia actually effectively managed to tip the balance for Donald Trump in the Presidential elections, they may have discounted the US congress in their plans. Even though Donald Trump would like to have a better relationship with the Kremlin, the conservative congress is pushing him to adopt always-tougher positions on the Russian Federation. And Trump will remain intensely scrutinized over his actions towards Russia until the end of his one, possibly two terms.

Surprisingly enough for Russia, the European Union currently seems to be the country’s best hope in terms of undermining US foreign policy. As a result of its aversion to the current administration in Washington, the EU seems to have softened its tone in its relations with the Kremlin. For instance, the EU has decided not to impose additional sanctions against Russia, as a result of the Salisbury attack in the UK. Furthermore, French President Emmanuel Macron struck a friendlier tone towards Russia in recent times, stating that the EU should disengage from its dependency on the US and reach out to countries such as Russia and Turkey on matters of international cooperation. A recent guest appearance of the Russian President at the wedding of Austrian Foreign Minister Karin Kneissl has been part of many indications that Putin is more likely to find friends in Europe than across the Bering Straight.

With transatlantic relations between most European leaders and Donald Trump being at they’re lowest in post World War II history, cooperating with Vladimir Putin no longer looks like such a political stretch. But cooperation with Russia remains and will remain controversial amongst the Member States of the European Union. Therefore, there will always be limits to the level of support that Russia can expect from the EU.

Draining resources to preserve foreign policy prestige      

The ways in which the US can hurt Russia seem to be infinite. Conversely, the ways with which the Russian government can hit back at Uncle Sam seem to be very limited. It looks like the obsession to beat the West has not decreased since the fall of the Soviet Union. However, not only is Russia being ridiculed for trying to apply sanctions on the US, but at the same time Russians are shooting themselves in the foot. The Russian Federation has nothing that the US needs or longs for, whereas, and albeit their despise for America, Russians quite ironically crave for American products, culture and lifestyle. When the US imposes sanctions on Russia, the rouble collapses. Conversely, when Russia sells American obligations, there’s no blip to be found in the value curve of the US dollar. Russians are hitting a stone wall. A first step to remediate to this situation would be to accept this state as a reality.

Russia’s foreign policy continues to be very influential and strong. But this will only remain so in the long term if its people continue to have the Kremlin’s back. The problem is that after repeated economic setbacks, Russians are frustrated of having to click the economic reset button every three years or so. Russia’s leadership needs a plan. One that is truly sustainable. Because even though Russians are hardened patriots, the repeated promises over decades that more economic prosperity is to come has started to sound like sarcasm in the light of the everyday reality of Russian citizens.

Russia is the country with the largest territory in the World. It has an abundance of raw materials like almost no other nation. A country like the Russian Federation could be doing much better economically, considering the resources it has at hand. Russia’s management and distribution of resources however is dismal. Its lack of lust for real reform and its absurd pretence of a fight against corruption are hampering any form of social progress. Most importantly however, Russia is underperforming economically because its resources are not spent on building/rebuilding the nation. Just like in past, the country’s search for culprits is outward looking only. The income from taxes is spent to fight foreign wars, on high-level diplomacy, and on edging out the alleged threat from the western alliance and in particular the United States. Russians deflect domestic problems by shifting the focus of national attention to the world stage. In doing so, they will likely never make any significant progress in areas such as democratisation, social cohesion, or real economic and structural improvements.

 

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