Power projection, economic resilience, domestic discontent

As 2018 drew to a close, Russia was yet again in the news. But while there were plentiful negative stories coming out of the world’s largest country over the year, and while much uncertainty lies ahead, it’s not all gloom.

Politics dominated the news – with the re-election of Vladimir Putin as president for an unprecedented fourth term, with continued tensions with the US and Europe and with the expulsion of Russian diplomats over the Sergei Skripal poisoning incident in the United Kingdom.

On a more positive note, Russia successfully hosted the World Cup – an achievement acknowledged by millions of global fans, and also by an often-hostile international media.

Several 2018 issues roll over into 2019. Tensions with the Ukraine, especially following the seizure of Ukrainian vessels in the Kerch Strait, remain ongoing, while Moscow’s military presence in Syria is increasingly challenged by the opposition in Russia.

Moscow finds itself increasingly aligning with Beijing and facing off against the West on key global issues. The housing- and pension-related domestic problems facing Putin are also not going to go away.

Ukraine and Syria

The Russian-Ukrainian conflict over Crimea’s annexation and the Black Sea waterway is far from resolved, with the Ukrainian sailors and vessels captured in November still in Russian custody. That infuriates Kiev and irks its Western friends, as does the new 19-kilometer bridge over the Kerch Strait inaugurated last year.

The Kremlin looks likely to keep building up its military presence in the region and Moscow has made clear it’s determined to charge the Ukrainian sailors. That will provoke further outrage in Kiev. Due to this, the chances of a pro-Russian candidate winning Ukraine’s March election look precisely zero.

However, from Moscow’s perspective, these are not bad outcomes, for two reasons. Firstly, these actions show very clearly who’s in control. Secondly, it remains in Russian interests to keep Ukraine destabilized.

Another thorny issue is Syria. While Putin has hailed US President Donald Trump’s pullout from Syria, Russia’s generals are not fighting on home turf; for them, memories of bloody disasters in Afghanistan and Chechnya remain fresh.

This makes Moscow extremely casualty-sensitive – explaining its lack of ground forces in the conflict, and its reliance, in some cases, upon private military contractors to do the dirty work. However, as long as Putin can keep casualties low – the story so far – he can easily keep the tiny opposition groups and factions he faces at home in check.

Despite Putin’s considerable diplomatic skill in bringing together an Iranian-Russian-Syrian coalition that is willing to pursue this game to the end, there is little appetite among ordinary Russians for getting bogged down in a far-off Muslim quagmire.

Nevertheless, with the West sidelined, Turkey making clear its own interests, Syrian forces positioning themselves to overrun the last rebel enclaves and Israel ready and willing to kinetically intervene, Russia is in no position to withdraw from this complex and devastating conflict.

Aligning with Beijing

With Western nations attempting to isolate Russia with economic sanctions, Moscow is being driven ever further into the arms of Beijing. A huge – if underpopulated and under-industrialized – chunk of Russian territory lies in Asia, and China is Russia’s largest neighbor, with the longest common border among all its neighbors.

Sino-Russian relations endured multiple ups and downs in the past, but now are warming as both countries attempt to assert themselves in the face of an uneasy West.

Bilateral investment and trade is on the rise. In 2017, bilateral trade turnover was US$87 billion and in 2018 those figures are expected to climb to an unprecedented $100 billion when data is calculated after year’s end.

The forecast looks feasible: Putin announced in September that for the first nine months of 2018, turnover had exceeded $77 billion – a 26% increase, year-on-year.

The year 2019 will see the gigantic “Power of Siberia” oil and gas pipeline carrying Russian energy resources across Siberia to China come online. Construction of this huge project – hailed by Putin as the “largest development project on Earth” – started in September 2014.

It entails the construction of 4,000 kilometers of pipelines, plus several processing plants, in Russia and China. The section from Yakutia in eastern Siberia to the Chinese border is already 93% ready. Chinese firm CNPC is busy constructing the Chinese sections.

Estimates are that the pipeline will be inaugurated and the first Russian gas will be pumped to China in October this year. At the heart of the project is a $400-billion, 30-year gas contract between Moscow and Beijing – welcome cash for Putin’s coffers.

There’s also talk in Moscow and Beijing of bypassing the international dollar-based financial system altogether and trading in ruble and yuan. An official date is not yet set, but at least some officials believe that a switch to ruble-yuan trade could take place by the end of 2019.

Keeping Russians onside

Large-scale projects and “bold” initiatives taken in Ukraine, Syria and elsewhere are at least partly aimed at boosting Putin’s popularity after his ratings fell sharply in 2018. While Putin has to show a strong hand abroad, especially on former “home turf” – the former Soviet States – he also needs to show will and commitment to resolve domestic problems.

Putin’s popularity nose-dived in 2018 for reasons that had nothing to do with the Black Sea Fleet or Syria. They were much more prosaic: pension reforms – notably, raising the pension age – ignited wide-spread protests across the country, despite being introduced under the radar, during the jollity of the World Cup.

A planned rise of communal housing charges has also added to a strong sense of domestic discontent.

With Putin’s massive spending on defense straining his budget, these issues are likely to keep stirring up resentment. But with the current political system in place and the opposition having virtually no voice, Putin and his powerful military are unlikely to feel any serious impact, at least in the near term.

Modest growth expected

On the economic front, the picture is not entirely bleak.

The US-led sanctions give Putin plenty of opportunities to remind Russians of the enemies supposedly arrayed against them, and he and other politicians delight in promoting self-sufficiency. Russia appears to be withstanding the sanctions surprisingly well and even expanding its economy.

According to the IMF, the Russian economy, thanks to a recovery of domestic demand and higher fuel prices, will grow faster than anticipated.

Russia’s growth will reach 1.5 to 1.8% in 2019, while inflation is projected to rise to 5.1%, according to the IMF’s World Economic Outlook report. IMF chief Christine Lagarde praised Russia’s economy at the St Petersburg International Economic Forum in May, saying: “Russia has put in place an admirable macroeconomic framework –saving for a rainy day, letting the exchange rate float and shoring up the banking system.”

Even so, these positive economic trends are closely linked to an uptick in gas and oil prices, which are vulnerable to fluctuations beyond Moscow’s control.

One cloud hanging over the economy is the unhealthiness of the banking sector. A number of mid-sized private banks collapsed recently, and the sector, in general, is facing problems with credit quality and profitability.

So there’s still a certain credit and lending risk that investors and businesses are wary of. Moscow is trying to address these issues, often by bailing out weak players.

What is helping to keep the Russian finance sector afloat are high foreign currency reserves, large net external assets and, in general, solid fiscal positions.