Why Russia Can’t Afford Another Cold War
Russian troops pour over a border. An autocratic Russian leader blames the United States and unspecified “radicals and nationalists” for meddling. A puppet leader pledges fealty to Moscow.
It’s no wonder the crisis in Ukraine this week drew comparisons to Hungary in 1956 and Czechoslovakia in 1968 or that a chorus of pundits proclaimed the re-emergence of the Cold War.
But there’s at least one major difference between then and now: Moscow has a stock market.
Under the autocratic grip of President Vladimir Putin, Russia may be a democracy in name only, but the gyrations of the Moscow stock exchange provided a minute-by-minute referendum on his military and diplomatic actions. On Monday, the Russian stock market index, the RTSI, fell more than 12 percent, in what a Russian official called panic selling. The plunge wiped out nearly $60 billion in asset value — more than the exorbitant cost of the Sochi Olympics. The ruble plunged on currency markets, forcing the Russian central bank to raise interest rates by one and a half percentage points to defend the currency.
Mr. Putin “seems to have stopped a potential invasion of Eastern Ukraine because the RTS index slumped by 12 percent” on Monday, said Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington.
On Tuesday, as soon as Mr. Putin said he saw no need for further Russian military intervention, the Russian market rebounded by 6 percent. With tensions on the rise once more on Friday, the Russian market may again gyrate when it opens on Monday.
Mr. Putin seems to be “following the old Soviet playbook,” in Ukraine, Strobe Talbott, an expert on the history of the Cold War, told me this week. “But back then, there was no concern about what would happen to the Soviet stock market. If, in fact, Putin is cooling his jets and might even blink, it’s probably because of rising concern about the price Russia would have to pay.” Mr. Talbott is the president of the Brookings Institution, a former ambassador at large who oversaw the breakup of the former Soviet Union during the Clinton administration and the author of “The Russia Hand.”
Russia is far more exposed to market fluctuations than many countries, since it owns a majority stake in a number of the country’s largest companies. Gazprom, the energy concern that is Russia’s largest company by market capitalization, is majority-owned by the Russian Federation. At the same time, Gazprom’s shares are listed on the London stock exchange and are traded over the counter as American depositary receipts in the United States as well as on the Berlin and Paris exchanges. Over half of its shareholders are American, according to J. P. Morgan Securities. And the custodian bank for its depository receipts is the Bank of New York Mellon.
Many Russian companies and banks are fully integrated into the global financial system. This week, Glencore Xstrata, the mining giant based in Switzerland, was in the middle of a roughly $1 billion debt-to-equity refinancing deal with the Russian oil company Russneft. Glencore said it expected to complete the deal despite the crisis. Glencore’s revenue last year was substantially larger than the entire gross domestic product of Ukraine, which was $176 billion, according to the World Bank.
The old Soviet Union, in stark contrast, was all but impervious to foreign economic or business pressure, thanks in part to an ideological commitment to self-sufficiency. As recently as 1985, foreign trade amounted to just 4 percent of the country’s gross domestic product, and nearly all that was with the communist satellite countries of Eastern Europe. But the Soviet Union’s economic insularity and resulting economic stagnation was a major cause of the Soviet Union’s collapse. According to Mr. Talbott, the Soviet Union’s president at the time, Mikhail Gorbachev, was heavily influenced by Soviet economists and other academics who warned that by the turn of the century in 2000, the Soviet economy would be smaller than South Korea’s if it did not introduce major economic reforms and participate in the global economy.
To attract investment capital, Mr. Gorbachev created the Moscow stock exchange in 1990 and issued an order permitting Soviet citizens to own and trade stocks, bonds and other securities for the first time since the 1917 Bolshevik revolution. (Before then, Russia had a flourishing stock exchange in St. Petersburg, established by order of Peter the Great. It was housed in an elegant neoclassical building directly across the waterfront from the Winter Palace. As a symbol of wealth and capitalism, it was one of the earliest casualties of the revolution.)
Even before this week’s gyrations, the Russian stock market index had dropped near 8 percent last year, and it and the Russian economy have been suffering from low commodity prices and investor concerns about the Federal Reserve’s tapering of bond purchases — factors of little significance during the Cold War.
By contrast, today “Russia is too weak and vulnerable economically to go to war,” Mr. Aslund said. “The Kremlin’s fundamental mistake has been to ignore its economic weakness and dependence on Europe. Almost half of Russia’s exports go to Europe, and three-quarters of its total exports consist of oil and gas. The energy boom is over, and Europe can turn the tables on Russia after its prior gas supply cuts in 2006 and 2009. Europe can replace this gas with liquefied natural gas, gas from Norway and shale gas. If the European Union sanctioned Russia’s gas supply to Europe, Russia would lose $100 billion or one-fifth of its export revenues, and the Russian economy would be in rampant crisis.”
Mr. Putin may be “living in another world,” as the German chancellor, Angela Merkel, put it this week, but surely even he recognizes that the world has changed drastically since 1956 or 1968. He has no doubt been getting an earful from his wealthy oligarch friends, many of whom run Russia’s largest companies and have stashed their personal assets in places like London and New York. The oligarchs “would not dare to challenge him,” a prominent Russian economist told me. (He asked not to be named for fear of retribution.) “But they would say something like they would have to lay off workers and reduce tax payments.”
During the Cold War, there were few, if any, Russian billionaires. Today, there are 111, according to Forbes magazine’s latest rankings, and Russia ranks third in the number of billionaires, behind the United States and China. The economist noted that the billionaire Russian elite — who are pretty much synonymous with Mr. Putin’s friends and allies — are the ones who would be severely affected by visa bans, which were imposed by President Obama on Thursday. Other penalties might include asset freezes. Many Russian oligarchs have real estate and other assets in Europe and the United States, like the Central Park West penthouse a trust set up by the Russian tycoon Dmitry Rybolovlev bought for $88 million. “This is what may have already forced Putin to retreat,” the Russian economist said.
And while the Cold War was a global contest between Marxism and capitalism, there is today “no real ideological component to the conflict except that Putin has become the personification of rejecting the West as a model,” Mr. Talbott said. “He wants to promote a Eurasian community dominated by Moscow, but that’s not an ideology. Russia’s economy may be an example of crony capitalism, but it is capitalism. There’s not even a shadow of Marxism-Leninism now.”
What brought down the old Soviet Union and ended the Cold War “was the economic imperative to make Russia into a modern, efficient, normal state, a player in the international economy, not because of military power but because of a strong economy,” Mr. Talbott continued. But “to have a modern economy, you need the rule of law and a free press.” Mr. Putin, he said, “isn’t advancing Russia’s progress.”
The Russian economist agreed. “The pre-2008 social compact was that Putin would rule Russia while Russians would see growing incomes,” he said. “Now, the growth has stalled, and he needs ideology, coupled with propaganda and repressions. Apparently, the Soviet restoration is the only ideology he can come up with.”
Russia does have uniquely strong ties to Ukraine. “Of all the former provinces of the old Soviet Union, it’s the most painful to have lost and the one many Russians would most want to have back,” Mr. Talbott said. “The ties between Kiev and Moscow go back over 300 years. Ukraine is the heart of Russian culture.” With Russian troops entrenched in the Crimean peninsula and some Russian Ukrainians clamoring for annexation, there may be little the United States or its allies can do to restore the status quo. “Containment, in a muted and modified way, will once again be the strategy of the West and the mission of NATO,” Mr. Talbott predicted.
But not another Cold War, which is surely a good thing. “A propaganda war is completely feasible,” the Russian economist said. “The recent events were completely irrational, angering the West for no reason. This is what is most scary, especially for businesses. Instead of reforming the stagnating economy, Putin scared everybody for no reason and with no gain in sight. So it is hard to predict his next actions. But I think a real Cold War is unlikely.”
Correction: March 7, 2014
An earlier version of this column misstated the purchaser of a Central Park West penthouse. It was a trust set up by the Russian tycoon Dmitry Rybolovlev, not Mr. Rybolovlev himself.
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