{"id":259,"date":"2014-03-16T17:36:28","date_gmt":"2014-03-16T16:36:28","guid":{"rendered":"http:\/\/www.noyardstick.com\/?p=259"},"modified":"2014-03-17T03:10:17","modified_gmt":"2014-03-17T02:10:17","slug":"time-machine","status":"publish","type":"post","link":"https:\/\/www.noyardstick.com\/?p=259","title":{"rendered":"Time machine"},"content":{"rendered":"

I have repeatedly blogged about the tremendous costs Russia would incur by annexing Crimea. As the referendum on the peninsula\u2019s joining Russia takes place<\/a> today, those costs are still there in the background: if the Russian government accepts the peninsula into the Russian Federation, and especially if it pushes forward with military interventions elsewhere, it will irreparably harm the Russian economy and reset Russia to 1990. The question is whether Vladimir Putin cares at all.<\/strong><\/p>\n

<\/p>\n

I have repeatedly blogged<\/a> about the primary, secondary and tertiary costs of the annexation of Crimea: budgetary support, the cost of the development of the peninsula\u2019s infrastructure as well as the breakdown of tourism and capital flight, respectively. These would already make Crimea the largest recipient of support from the Russian budget, according to Slon.ru<\/a>. A pretty large burden, especially considering the grim outlooks of the Russian economy and growing social tensions related to budgetary support for certain regions (typically with an ethnically mixed population, just like Crimea\u2019s). Further to this, Russian officials will face a new wave of increasingly strict sanctions from the EU and the US.<\/p>\n

Ivan the Terrible is back<\/strong><\/p>\n

But the largest damage the Crimean intervention does to Russia is restoring the perception of the country as the mad man of the international scene. Yesterday\u2019s vote <\/a>in the UN Security Council, which saw Russia remaining completely alone, forced to use its right to veto, clearly indicated this.<\/p>\n

We\u2019re getting back to an image that the majority of the Russian society has definitely left behind in the past twenty years, and that the Russian state seemed to have moved on from too. In the past two years the Russian government was careful to spread the perception that whatever happened in Russian politics did not entail any political risks for business. In order to tone down dismay caused by developments such as the Magnitsky case, the Russian government pushed forward projects like the appointment of a business ombudsman and adopting a white-collar amnesty. In order to create ground for further trust, Russia joined the World Trade Organisation: it seemed to be integrated into the global political and economic system. It is exactly this fragile illusion that the Crimean war will crush into pieces. Vladimir Putin couldn\u2019t possibly showcase the enormous political risks of doing business in or with Russia more than this even if he wanted to. Foreign investment will not evaporate because of sanctions. It will evaporate because Russia cannot offer high enough returns to offset these enormous risks.<\/p>\n

Further to the transformation of its growth model coming to a complete halt, Russia will find very difficult to rely on its energy exports too. Even if energy prices remain high in the coming years (which seems to be the less likely scenario), Russia would face falling demand in Europe and constant need of technical development, which seems to be inconceivable without foreign investment. Rosneft would already need further investments to honour its commitments towards China.<\/p>\n

Under a stone?<\/strong><\/p>\n

These risks are all there. It is impossible to think that the entourage of the Russian President, especially people like Putin\u2019s trusted friend, Alexey Kudrin, isn\u2019t aware of them.\u00a0 However, if we believe what Valery Solovei<\/a>, a MGIMO professor posted on Facebook about the way the decision to invade Crimea was taken \u2013 Putin apparently consulted five-six of his trusted aides, none of whom had assets in the West \u2013 the Russian President knowingly avoids criticism. It may be his personal bid to ensure a place in Russian history textbooks or it may be the first step towards a fourth presidential term, but he closed down the last channels of possibly negative feedback. This is the first and most important reason why Putin may, against all odds, move ahead with the annexation or further military campaigns.<\/p>\n

This shouldn\u2019t come as a surprise. Authoritarian leaders often act irrationally because arguments, which seem rational in a democratic political system, become less relevant under the circumstances of an authoritarian system. Pure logic works less. In their brilliant book<\/a> published last year, Bruce Bueno de Mesquita and Alastair Smith argued that because of this, authoritarian leaders are more prone to start wars and to lose them. Democracies, on the other hand will resort to this risky tool only if they are sure to win. It would still be politically costly for Putin to start an armed conflict that potentially claims Russian lives, but he faces considerably lower risks than his Western counterparts and, given that he consistently denies accepting feedback, probably underestimates even these.<\/p>\n

The underestimation is only partly the consequence of the lack of feedback. It is also the consequence of meticulous planning, which reflects that Putin hasn\u2019t gone completely mad, as some commentators suggested. He does try to minimise risks. First of all, by limiting the flow of information. It probably isn\u2019t just a coincidence that the Russian government started a crackdown on critical media exactly during the crisis in Ukraine: as a consequence, Dozhd TV is on the verge of bankruptcy and Radio Ekho Moskvy faces serious changes<\/a> in its editorial policy. Second, presenting Crimeans with a surreal ballot containing practically two \u201cyes\u201d options reflects that the Russian government hasn\u2019t lulled itself into the illusion that an overwhelming majority of the local population would favour joining Russia. Quite rightly: according to an opinion poll conducted shortly before the invasion, only 41% of Crimeans supported joining Russia (even though ethnic Russians constituted over 58% of the total population according to the last Ukrainian census): a considerable number but shy of a majority.<\/p>\n

Third, it is the consequence of the atmosphere that some of Putin\u2019s confidants created in the past years. Championed by people like Vladimir Yakunin, the head of Russian Railways, a perverted conservative ideology has slowly gained ground among the Russian elite. According to this approach, Russia\u2019s economic stability is based on Orthodox tradition; therefore it can only be guaranteed if Russia is able to resist threats from the outside. Threats, of course easily translate to any kind interference for a political and business elite eager to preserve its own playing field and to close out external players. Ideologies are usually created to back up certain practical goals. Problems start when their creators start to believe in them.<\/p>\n

Putin\u2019s caveat is that, in spite of all the above, Russia does ultimately exist in a world that works along the principles of rationality. A large chunk of the Russian elite and the Russian population lives in and makes good use of this outside world. If these opportunities suddenly vanish, they will protest even before the crisis brings Russia\u2019s economy to its knees. The best the EU and the US can do is to hurt the Russian elite and possibly the Russian population through sanctions as much as they can: that is, to reintroduce feedback into the system.<\/p>\n","protected":false},"excerpt":{"rendered":"

I have repeatedly blogged about the tremendous costs Russia would incur by annexing Crimea. As the referendum on the peninsula\u2019s joining Russia takes place today, those costs are still there in the background: if the Russian government accepts the peninsula … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6,49],"tags":[41,33,28,19,25,70],"class_list":["post-259","post","type-post","status-publish","format-standard","hentry","category-policies","category-society","tag-economy","tag-foreign_policy","tag-nationalism","tag-putin","tag-siloviki","tag-ukraine"],"yoast_head":"\nTime machine - No Yardstick<\/title>\n<meta name=\"description\" content=\"I have repeatedly blogged about the tremendous costs Russia would incur by annexing Crimea. 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