For the Sake of Russia Putin Must Go

by ALEX ALEXIEV October 25, 2014

On the same day this week, the Russian press published two seemingly unrelated bits of news. The first was a statement by the deputy head of Putin's administration, Vyacheslav Volodin, at an international gabfest in Sochi that "today, if there is no Putin, there is no Russia;" the second marked a new request by Igor Sechin, CEO of Rosneft and Putin's right-hand man, for 2 trillion rubles ($82 bln) of state aid to overcome the effects of Western sanctions. The former is a display of exemplary obsequiousness to the great leader even by Soviet standards and betrays, if anything, lack of confidence, while Sechin's request smacks of desperation. It will be recalled that when the sanctions were first imposed, Sechin dismissed them as a joke and added that Rosneft had sufficient reserves for 20 years of production. Taken together these news are far from uplifting.

None of this is particularly surprising for a sense of impending gloom has gripped the elites in Russia of late unlike any in the recent past. This is the case not only among regime opponents, such as Mikhail Khodorkovsky, who has compared the current crisis to the eve of the revolution in 1917, but also among pillars of the Kremlin establishment. Thus the economics minister, Alexey Yulukaev, speaks of the "explosive instability  of the economy," while the Russian Central Bank (CBR) conjurs up hopeless scenarios of what would happen to Russia, if the price of oil were to drop to $60/barrel. In his turn, the president of Russia's largest state bank, Sberbank, German Gref, compares the current period with the one just before the collapse of the Soviet Union, "when the laws of economics were disrespected and the country paid dearly for that."

The immediate reason for such dark forebodings bordering on panic is the growing realization that Putin's aggressive policies have led not to the vaunted geopolitical triumphs, but to the nearly complete political and economic isolation of Russia from the West, without which its economy has no chance of developing. The sudden awareness brought about by the sanctions, that Russia has always been strongly dependent on the West financially and technologically, as well as the meltdown of the oil price by some 25% since mid-June, served to convince sober-thinking people in Moscow that their country is becoming more economically vulnerable with every passing day. The next inevitable conclusion is that what we're witnessing at present is the complete failure of the Putin model of governance.

Here it is worthwhile to remind ourselves of what exactly this model entailed. As Putin himself has told us more than once, the model was based on the renationalization and government control of Russia's ample natural resources, especially oil and gas, as well as key sectors such as the armaments industry and the banks. This, according to Putin, was to guarantee a GDP growth between 4% and 6% per annum for years to come and underpin "the military might of the state." And so, from a 30%  state share in the economy during Yeltsin's tenure, this percentage doubled under Putin, led by Gazprom with 78% of the gas production and 56% of that of oil by Rosneft, following the illegal confiscation of Khodorkovsky's Yukos. Unfortunately, Putin's plans were deeply flawed from inception and the thoroughly corrupt and inefficient state economy ground to a halt already before the Kremlin's Crimean adventure with a GDP growth of 1.3% in 2013.  Putin's excessive focus on the oil and gas industry also resulted in neglect and deformation of most other sectors. Even in Putin's beloved military industry, a recent survey shows that only 20% of the enterprises could be described as ‘modern,' while industrial goods as percentage of Russian exports have declined from 9% in 2000 to 4% today.  It could be said without much exaggeration that Russia is in a state of progressive deindustrialization.

The greatest reason for pessimism for the future, however, lies in the fact that even in the oil and gas industry Putin failed to achieve any long-lasting progress. The problem is not that the country's carbon resources are being depleted, but that those cheap to extract are being depleted and rapidly at that. In the meantime, Russia was unable to master even one of the key technologies necessary for exploration and production of oil and gas in difficult conditions, such as the Arctic shelf, deep-sea drilling or shale oil and gas production. And when the sanctions hit and western companies helping Russia with technology departed, they left the country essentially helpless.

Here is what this means in practical terms. According to Vagit Alikperov, CEO of Lukoil, Russia's second largest oil producer, 25% of the country's oil is extracted with the help of fracking technics and machinery, which is manufactured almost exclusively in the United States, and are, therefore, subject to sanctions. Add to this the long-term forecasts of low prices in the oil and gas sector and the difficulties in securing Western finance and  it is not a surprise that Yulukaev considers his country's economy "explosively unstable."

And it is unlikely that this will change for the better as long as the interests of Vladimir Putin and his coterie, rather than those of Russia and the Russian people remain paramount. Sooner or later, it will become clear that for the good of Russia, Putin must go.

Alex Alexiev is IASC's Senior Fellow for Eurasia Affairs.  He has more than 35 years of analytical experience in U.S. national security as a senior analyst and project director with the Rand Corp's National Security Division, and several think tanks in Washington D.C.  He has directed numerous research projects for the Department of Defense, Office of Net Assessment, U.S. Army Intelligence, USAF intelligence, DIA, CIA, and other U.S. Government agencies, and has testified before Congress numerous times. He is the author of several books and myriad monographs and articles on national security issues.


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