Seeking to Crack Western Unity, Putin Sinks Russian Economy

On the Donbas battlefields, Russian troops still strive to advance, but in the global arena of confrontation with the collective West, Russia keeps losing ground. A sequence of heavy blows breached Russian defensive geopolitical positions last week, and Moscow’s attempts at counterstrikes only aggravated the sustained damage. The first major setback for Russia was the commitment made by the G7 to support Ukraine in its struggle against aggression for as long as it takes; but it was still possible for some Russian pundits to argue that the gathering in Bavarian Alps was short on practical results (Rosbalt, June 28). Western leaders then proceeded to the North Atlantic Treaty Organization (NATO) summit in Madrid, however; and there was certainly no shortage of detailed, binding and material decisions there (Novaya Gazeta, July 1). Even mainstream commentaries from Moscow-based think tanks had to acknowledge an unprecedented level of Western solidarity fostered under the United States’ unwavering leadership (Valdaiclub.com, July 1).

The only hope for Russian grand strategy is that this unity proves short-lived and erodes as fatigue with the war of attrition in Ukraine deepens (Nezavisimaya Gazeta, June 30). These expectations are elaborated in several expert Russian assessments of intra-Western divisions, which are more visible inside the European Union than in the re-energized NATO (Russiancouncil.ru, July 1). Official Russian media outlets are eager to exaggerate the political quarrels in Bulgaria caused by that government’s decision to expel 70 Russian diplomats (Rossiyskaya Gazeta, July 1). Meanwhile, the Russian Ministry of Foreign Affairs delivered a sharp demarche against Norway’s decision to disallow the cross-border transit of supplies to and from the Russian-populated Barentsburg settlement on the Svalbard archipelago (Izvestia, June 30).

Moscow’s loudest demands and even threats were articulated to pressure Lithuania to lift restrictions on the rail transit of banned goods to Kaliningrad (Meduza, June 29; see EDM, June 21). The alleged “blockade” constitutes part of the implementation of a package of sanctions approved by the EU, but Russian officials accused Lithuania of executing the collective decision too rigidly (Kommersant, June 30). Speculation focused on the presumed concerns in Germany about this deliberately amplified crisis, but it is difficult to hide the plain fact that Russia has no effective levers to support the orchestrated noise (RIA Novosti, July 1).

All this maneuvering and posturing yields scant results, and even French President Emmanuel Macron apparently sees little sense in continuing his protracted telephone conversations with President Vladimir Putin (Meduza, July 1). In turn, the Russian leader presumably believes that escalating economic troubles can break EU solidarity, so he is targeting particular European consumers with reductions in natural gas supplies—for instance, punishing Italy with a 15 percent drop in delivered volumes (Kommersant, July 2). The EU previously approved a long-term plan to minimize its members’ dependency upon Russian energy imports (see EDM, March 28), but Putin has opted to move proactively ahead of this schedule in order to exploit every vulnerability before Russia’s western consumers are ready to diversify (Forbes.ru, June 24). This pre-emption causes drastic disruptions to the Russian energy industry, and Gazprom has surprised its shareholders by deciding not to pay any dividends this year, accepting the inevitable plunge in the company’s market valuation (The Bell, June 30).

This gas blackmail is not solely directed at Europe, it also targets Asian markets—particularly Japan—where Russia’s niche is generally narrower but still of importance (Nv.ua, July 2). Putin signed a decree at the end of June on effectively nationalizing the Sakhalin-2 project; while Shell was ready to withdraw from it, the Japanese shareholders Mitsui and Mitsubishi had actually planned to stay in (RBC, June 30). They may now have to accept the new terms dictated by the Kremlin, but their continued presence will hardly alter the implicit Russian decision to send the bulk of the liquefied natural gas (LNG) from this well-functioning project to China rather than Japan (Kommersant, July 1). Profits will suffer, but what matters for Moscow is a timely good-will gesture to its strategic partner, which had expressed irritation about NATO’s new Strategic Concept, where Chinese coercive policies are defined as a security challenge (Rosbalt, July 1).

Beijing provides measured but important political support for Russia’s confrontation with the West but nothing economically material; meanwhile, Chinese business giants, such as Huawei and Lenovo, are quietly curtailing their activities in Russia (The Insider, July 1). This departure is carefully camouflaged, and the publication of economic data is increasingly restricted. Still, one figure that impressed observers last week is the 96.7 percent decline in the production of cars, which means that the Russian automobile industry has effectively stopped functioning (Kommersant, June 29). Unemployment still remains hidden, but the breakdown of many supply chains disrupts key industries as well as retail, where the disappearance of numerous Western brands brings a revival of the “shuttle trade” resembling the “gray” economy of the 1990s (Moscow Times, July 1).

Seeking to ensure that disruptions do not paralyze the crucial enterprises of the defense-industrial complex, the government drafted a legislative package that makes it compulsory for all business entities to deliver on orders related to the execution of the Russian “special military operation” in Ukraine, with prices and schedules set by the state agencies (Vedomosti, July 1). The parliament is certain to approve this legislation without delay, but the effectiveness of this de facto economic mobilization remains dubious because strict commands from the ministries cannot be enforced when key technologies or spare parts for industrial equipment are unavailable (Novaya Gazeta, July 2). The financial situation in Russia has stabilized, perhaps temporarily, thanks to the swift measures taken by the Central Bank, led by the capable and loyal Elvira Nabiullina. Nonetheless, even her professional expertise cannot save Russia’s industrial policy, apparently guided by Soviet-style dirigisme (Meduza, June 27).

All attempts to exacerbate the economic difficulties that are supposed to erode Western unity inevitably backfire for Russia, cutting down its petro-revenues and further squeezing crucially needed imports. Putin can rely neither on business lobbies in Germany and France, since their investments in Russia are transferred to the “net losses” budget bracket, nor on the multiple trans-border channels for exporting corruption, which have been curtailed and are being investigated in the West with sudden keenness. His “messaging” to Western counterparts comes increasingly in the form of missile strikes on apartment buildings and shopping malls in Mykolaiv, Odesa or Kremenchuk—and the recurrent horrors of these war crimes only strengthen the conclusion within the transatlantic community that Russian aggression cannot be contained and must be defeated. The Russian war machine was degraded severely by hitting the wall of Ukrainian resistance, but it is up to the West to make sure that it is damaged beyond repair.