MOSCOW BLOG: Russia needs Ukraine fix as its power hits post-Soviet peak

By bne IntelliNews March 23, 2015

Ben Aris in Moscow -


Russia needs a resolution to the conflict with the West over Ukraine now because its power has probably hit its post-Soviet peak. The US can afford to do nothing, and that is probably its best strategy – but it comes at the possible cost of the destruction of Ukraine.

Those were the conclusions from an extremely interesting blog in The Washington Post this week on March 15 written by Yuval Weber, an assistant professor in the Faculty of World Economy and International Affairs at the National Research University, Higher School of Economics in Moscow. 

The stakes for Russian President Vladimir Putin are extremely high. While Russia has the upper hand at the moment and has very effectively flummoxed the West with its hybrid war, the clock is ticking on Russia. And as the West is clearly not prepared to go to war with Russia to save Ukraine, it doesn’t have to. All it needs to do is wait.

Russia is powerful now because it has just come out of a decade-long boom and has money to burn on re-arming with modern weapons it is willing to use. However, the economy is stagnating (GDP was up only 0.6% in 2014) and as Herbert Moos, deputy president and chairman of VTB Bank Management Board, pointed out in a recent interview with bne IntelliNews, with commercial borrowing costs now over 20%, investment in Russian industry is currently moribund. Russia cannot grow again unless reforms restart and it is reconnected to the international capital markets.

On top of the immediate economic problems is the failure to make deep structural reforms, Russia's recent rise in the World Bank's “Doing Business” survey notwithstanding. And finally, the demographic nightmare of the 1990s is about to hit the working population, which will also pull Russia's economy down irrespective of any reform or oil price.

The bottom line is that Russia post-Soviet power is probably at its peak now, and if Putin fails to secure his goals in Ukraine, then this could scupper his grand vision for building a "Greater Europe" after first building his Eurasian Economic Union (EEU) and later integrating it with the European Union (EU) with some sort of trade deal.

"The potential loss of Ukraine directly threatens Russia’s ability to pursue Eurasian integration, which is central to the country’s larger strategic vision of developing a Eurasian bloc (through bolstering the Eurasian Economic Union and the Collective Security Treaty Organization) to resist the consequences of U.S. unipolarity and to compete in the multipolar world it expects to emerge," Weber wrote after interviewing many senior Kremlin advisors and policymakers.

Well aware of the pressure, Putin is digging in his heels, which makes this situation all the more dangerous. Not only does he not want to back down, but he can't do so without possibly condemning Russia to becoming nothing more than a raw materials appendage to China, which is on the rise and will overshadow Russia at sometime in the foreseeable future. The creation of a Greater Europe on Russia's terms is Putin's own defence, so he has to make it work.

The other side of this coin is the Russian leader’s deep-seated objections to being dictated to by the US, perceived as the self-appointed policeman of the world. Putin has repeatedly said he wants to create a multi-polar version of global management, and currently China is siding with Russia on this point, as it also doesn’t like being bossed about by Washington. "In terms set out by our interviewees, Russia seeks a ‘grand bargain’ that explicitly identifies the role of the United States in the international order and puts limits on U.S. behaviour to make America more predictable in its behaviour and to prevent it from overstepping its own authority," wrote Weber.

Russia has already proposed drawing up a pan-European security deal that looks increasingly likely to figure at the Kremlin’s insistence in any resolution to the Ukraine crisis. Some sort of "collective leadership" put forward by Putin would address his complaint about a "new game but no rules" – the theme of his speech at the last Valdai Club meeting where he made explicit many of the ideas echoed and discussed in the Weber blog. But Putin cannot insist on anything if Russia is demoted to a stagnant European economic backwater.

"These terms set out exactly why Russia is motivated to fight over the resolution of Ukraine now rather than later. By Russia’s own bloc-oriented view of the future of international relations, the failure to ‘get’ Ukraine means that the Eurasian bloc has roughly reached its apex," believes Weber.

And the effort to build the EEU was not going well even before Ukraine rejected Russia's invitation to join and hook up with Brussels instead. The other two leaders of the bloc – Kazakh President Nursultan Nazarbayev and Belarusian President Alexander Lukashenko – have publicly criticised the one-sided nature of the "free trade" deal, while other prospective members are either getting cold feet or have refused to join.

US inaction

Since the Minsk I summit last year to bring peace to Ukraine, Washington has more or less subordinated the work of dealing with the crisis to German Chancellor Angela Merkel. US President Barack Obama is currently resisting Republican pressure to arm Ukraine, and Weber argues that this is actually the best strategy.

"It is very likely that Obama can observe that Russia’s bloc-oriented strategy has led to the same apex, and that future decline by Russia’s own standards is approaching. Thus, to accommodate Russia in this bargaining framework would not only involve upsetting European allies and the Ukrainians, but would give a lifeline to an adversary by ameliorating the decline," writes Weber.

The US economy is ticking along nicely so it can afford to wait, since it remains unaffected. Time is not on Putin's side. However, doing nothing will also cause prolonged economic pain in Europe, but the EU will survive. The same is not true for Ukraine, which is in desperate straits.

"Obama in a different position relative to formulating strategy regarding a rising challenger like China that needs to be accommodated or challenged because the latter is dissatisfied with the international distribution of benefits. Russia is instead a declining challenger (by its own standards) that offers the United States a third policy course of maintaining the status quo and waiting to negotiate later from a position of greater strength," wrote Weber.

History repeats itself: this long game of waiting for Russia's economic failures to defeat itself is exactly the same strategy that won the Cold War. And like Dwight Eisenhower's failure to intervene in Hungary in 1956, which kicked off the Cold War of attrition, Obama is not intervening in Ukraine.

What could torpedo this plan are the Europeans. Putin said explicitly in his Valdai speech that he is banking on business to come to his rescue – and it is a good bet because Merkel is under extreme pressure by the German business lobby to normalise the situation. The Cold War was an ideological struggle, but Russia has joined the capitalist camp and businesses remain largely apolitical.

At the same time, Russia is not isolated but continues to integrate its economy with those of the other fast growing emerging markets. As Putin said, Russia was already following this policy well before the Ukraine crisis broke out, but it has been catalysed by the fracas.

And finally Russia may actually put some of those badly needed reforms in place. Indeed, its showdown with the West and lower oil prices could be precisely the spur it needs to knuckle down and get the job done. As Putin claims, Russia is a largely self-sufficient country, and it has enough hard currency reserves to buy itself about two years before it goes into obvious decline if nothing changes in the meantime.

But when all is said and done, this is Russia we are talking about. And its constant failure to do anything decisively at home means Putin will probably be able to muddle through this crisis for several more years after the money runs out, and that is in no one's interests. 

Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.