If you can think of two things no one would like to do in Russia at the end of January, standing around in a line and fighting a war come to mind pretty easily. But that’s exactly what seems to be in the cards for far too many Russians as the Ukraine and economic crises continue howling like a bitter wind that never ceases.
The acceleration of both appears to be assured right now, especially if the West continues to link aggression in Ukraine with more economic sanctions – which at this point will have to be severe to be considered “new”. The new Cold War is definitely on, but there are no assurances that it will continue to be cold much after the freeze of midwinter.
The economic crisis in Russia has far more to do with internal structural problems (ie, corruption) and the low price of oil than the sanctions imposed by the West. The banking system has always been a cozy agreement between oligarchs as much as a legitimate front to the Mafia run kleptocracy that is the central government. It was papered over with plenty of Euros flowing in as long as the oil flowed outward at a decent price.
The Russian Central Bank was able to stabilize the Ruble briefly at 54 to the US Dollar with a dramatic rise in interest rates between banks last December. It stands now at 17.6%, with small business and consumer credit available to only a chosen few at over 30%. The Ruble has since crashed back to 68 to the US Dollar as a plan to print 1.6 trillion Rubles (currently: $23B) in order to recapitalize the banks and avoid a general panic. So far there are only a few reports of lines forming at banks, but the tightly controlled media hasn’t aired anything about a general panic.
A year ago, there were only 34 Rubles to the US Dollar.
The worst of this comes as Russia has dramatically stepped up the fighting in Eastern Ukraine – and been matched by the Ukrainian forces equally eager to ignore the cease-fire agreement technically in place. The fighting has intensified greatly in the last few weeks, accompanied by a Russian war of words blaming the whole crisis on the West. Even Mikhail Gorbachev, an internationalist and no friend of Putin, is blaming the US and Europe for accelerating the conflict and threatening to turn it into a hot war between Russia and the West. That could a sign that patience is thin and patriotism is thickening.
Enter into this a call to cut Russia off from the international banking system, known as SWIFT. Such a move has only been done once before, to Iran, and the net effect was to pull Iran back to the negotiating table amid a general depression. Iran was less connected to the West before that was done to them, so the effect on Russia will be devastating. It is the economic equivalent of a nuclear option, and Russia is responding with their own “mutually assured destruction” threats of cutting off oil and gas to Europe if that happens.
Such a threat sounds much worse in January, so time for cooler heads is the most likely result – especially from the bureaucratic minded EU.
No matter what, life for ordinary Russians has become harder than a typical midwinter, and there is little promise of a decent Spring, either. How much this will test their legendary fatalism and reserve remains to be seen, but for now we can see where Putin wants to take this – deeper into Ukraine. The challenge to the West is obvious, but the appropriate response is not. Poland wants more sanctions to save their brothers in Ukraine, and is ready to send more arms in. The rest of Europe is rightfully scared of a hot war, a potential World War III.
Looking at trends to predict the future gives us no reason for hope. Deeper economic troubles so far have been met only with greater and more open aggression in Ukraine. Additional sanctions are likely to continue that trend as Putin continues to back himself deeper into a tight corner. But the West feels a need to respond and not capitulate Ukraine to Russia.
We will likely know before Spring where this is going, but probably not well before. The financial crisis has to play out a bit more and the reserve of the tough people of Russia has to be tested before there is any internal pressure on Putin to give on Ukraine.
Until then, the steppes of eastern Ukraine remain the frozen center of a hot war that still swirls cold around them through Europe. How long this will remain the isolated center of a storm that could engulf the world is anyone’s guess. All that we know today is that the temperature is the only thing reliably cold in this part of the world today.