The Invader's Weakness

Posted: Mar 27, 2014 12:01 AM
The Invader's Weakness

WASHINGTON -- In August of 2008 at the Beijing Summer Olympics President George W. Bush had a talk with President Vladimir Putin. Georgia's anti-Moscow president, Mikheil Saakashvili, had been uttering provocative sonorities about Russia, so Russian troops marched into Georgia much as they are doing today in Crimea. Bush reminded Putin, "I've been warning you Saakashvili is hot-blooded." To which Putin suavely responded, "I'm hot-blooded, too." Bush's rejoinder was "No, Vladimir. You're cold-blooded." Well, whether the president of Russia is hot-blooded or cold-blooded or bloodless, his troops are in Crimea now, and Russia still has the same problem it had at the end of the Cold War. Its economy is not quite modern. In fact it is sickly. Its growth rate last year was 1.3 percent, hardly capable of sustaining a modern military.

Back in the days when Moscow's generals and admirals commanded 4.3 million troops (now the figure is down to less than 1 million) they understood the weakness of their economy. In the late 1980s, after watching President Ronald Reagan's breathtaking military buildup, they prevailed on the Soviet Union's comrades to end the Cold War. They recognized that they could not keep up with the West. For one thing, they could not machine parts for a modern war machine.

There followed years of economic dislocation and uneven growth, but in the first part of this century Putin seemed to be minding the economy better than his predecessor Boris Yeltsin. He tamped down inflation and political turmoil. The budget became manageable. The world price of oil favored Russia. Per capita growth rose from $1,500 to $10,000 in the first decade of the 21st century. Putin and his protege, Dmitry Medvedev, were moving Russia towards an authoritarian system, which was worrisome, but the economy seemed healthier.

Yet it was heavily dependent on oil and gas, which should have fetched Putin's concern. In a vigorous economy such as Korea or the Czech Republic, manufacturing contributes at least 20 percent of GDP. In Russia that figure is 15 percent. According to the International Monetary Fund's figures, if you leave out oil and gas Russia's non-oil revenues are now in 11 percent deficit of GDP, and now Russia is taking on an economic basket case, Crimea. It will cost Moscow billions.

As for the Russian economy, it has slowed from an average growth rate of 7 percent throughout the last decade to the aforementioned 1.3 percent last year. Its expected growth rate in 2014 is zero. Ruchir Sharma of Morgan Stanley Investment Management, writing in the Wall Street Journal the other day, noted that "wealthy Russians have been moving money out of the country at one of the fastest rates in two decades." He notes that they have been moving their wealth out of Russia at $60 billion a year since 2012. Now foreign investors are pulling out. And Sharma adds that the value of the ruble has fallen 22 percent against the U.S. dollar since 2011. Ever since Putin began his kerfuffle in Crimea, the Central Bank of the Russian Federation has been in a panic to prevent the ruble's collapse.

Thinking back on Putin's conversation with Bush in Beijing in 2008, possibly Putin had it right. He is hot-blooded. His recent tirades to the press about how he has suffered at the hands of the West sound heartfelt. He did not have to invade Crimea. He could have worked out a very agreeable lease on his warm water naval base of Sebastopol. Yet he chose to invade out of genuine indignation, and no one knows where his invasions will end. With the klutz we now have in the White House, all we can count on is Russia's projected growth of zero this year, and if we are lucky even slower growth next year.