Four months ago, Vladimir Putin forcibly annexed Crimea, to the thunderous applause of most Russians. Russia, it was said at the time, was “rising” and “resurgent” and not to be denied its historical destiny as a great power. Moreover, the conventional wisdom held, this was just the beginning, with much greater expansion at the expense of Ukraine and perhaps other nations seemingly inevitable. Putin himself quickly confirmed this by dusting off a mythical “New Russia” (Novorossiya) construct, which held that nearly half of Ukraine was historically Russian land that needed to be reclaimed. “Ukraine had neither the moral nor the legal right,” said he, “to regions that belonged and belong to the Russian population.” And he continued, “It is not permissible that they will remain in a foreign state that is hostile to us.” Never mind that the population of this “Russian” land was never less than 70 percent Ukrainian until the end of the Russian empire. With large numbers of Russian troops massed at the border and a separatist rabble quickly formed in eastern Ukraine and supplied by Moscow, it did indeed look by late March as if Crimea was only a prelude to bigger and better things for Putin’s New Russia.
No longer. Rather, Putin’s grand vision of restoring the Russian empire is in retreat on all fronts. To start with Crimea, the conventional wisdom back in March was that, faced with a fait accompli, the West would quickly turn tail and go back to business as usual. This has proven wrong. Several days ago both the International Maritime Organization (IMO) and the International Civil Aviation Organization (ICAO) agreed with Ukraine that Crimea’s ports and airports are illegally occupied territories, meaning that international plane and ship traffic into, out of, and through Crimea has been essentially terminated. The European Union had already prohibited imports of Crimean-made goods; the European market was said to account for 35 percent of the peninsula’s exports. Furthermore, tourism has historically been the mainstay of Crimea’s economy, and the 2014 tourist season appears to be a complete washout. News reports now claim that even Crimean government officials are increasingly unwilling to exchange their Ukrainian passports for the mandatory new Russian ones.
If Crimea is thus well on its way to becoming a long-term bleeding sore for Moscow, other troubles are of more immediate concern. The Russian Central Bank just published the figures for the first half of 2014, and they are dismal. Foreign investment in Russia has all but dried up, with the non-banking sector receiving less than half as much as it did in 2013. Foreign portfolio investments of $9 billion are one-fifth what they were in the previous year, while capital flight of $74.6 billion — the money Russian oligarchs are sending abroad — is more than twice as high. All this comes against a background of zero GDP growth and inflation of 7.8 percent. There is little doubt that the Russian people have already paid and will continue to pay a heavy price for Putin’s charming little experiment in empire building.
More serious in the longer term are the glaring systemic weaknesses in Russia that the post-Crimea period has revealed. Russia is far from being a rising, resurgent, or even emerging power. If anything, it is a “submerging power,” as one sharp wit put it. It is often said that Russia is little more than a banana republic with oil and gas. This has never been more true than today. Currently, oil and gas account for some 70 percent of its exports, providing nearly 50 percent of Russia’s budget revenues. Indeed, raw materials, with little if any value added, now account for 83 percent of total exports, and this trend has become worse under Putin. This puts the country entirely at the mercy of market forces its rulers neither control nor understand, at a time when both the oil and gas markets are under pressure from technological innovations and the liquefied-natural-gas (LNG) and shale-oil and -gas revolutions, which Russia simply slept through. The inevitable result of these developments is a greater independence for Europe from Russian natural gas. In 2006, Russia supplied 39 percent of European consumption; today, with LNG supplies as an alternative, the figure is 25 percent and falling. Nor is the more important oil sector in better shape; it is officially forecast to shrink by 30 percent in the next 25 years.
Perhaps even more troubling for Russia’s rulers is the country’s unmistakable trend toward deindustrialization and especially the decline of its high-tech industry in the past decade. When Putin came to power in 2000, the share of industrial goods in his country’s exports was 9 percent; today it is 4 percent. Russia’s share of titles in top scientific journals has fallen to an abysmal 2 percent. A good illustration of Russia’s disappearance from the ranks of industrial countries is a recent interview with a Chinese trade attaché in Moscow. According to him, the share of industrial goods in Chinese exports to Russia last year was 47.7 percent; the share of industrial goods in Russia’s exports to China was 0.7 percent!
What all of this means is simply that Putin’s braggadocio notwithstanding, Russia is more vulnerable than we have assumed and knows it. While putting a brave face on the situation, the Kremlin is scared of additional sanctions, which is one reason it has avoided following up on its highly belligerent rhetoric in Ukraine, although it is continuing its destabilization activities. To take one example, just as was true for the Soviet Union in the late 1970s and 1980s, the Russian oil and gas sector of today is highly dependent on American technology for shelf, deep-sea, and shale exploration and production. The Kremlin is petrified that President Reagan’s embargo of the 1980s could be replayed and is unlikely to make moves that would trigger such sanctions.
Over all, Putin is holding a weak hand, and Kiev is slowly but surely winning the armed confrontation with his separatist henchmen in eastern Ukraine. Beyond that, it’s clear that his audacious Crimean land grab is coming back to haunt him. It could signal the beginning of the end of the redoubtable Mr. Putin.
— Alex Alexiev is senior fellow at the International Assessment and Strategy Center in Washington, D.C.