Russian President Vladimir Putin is facing the high costs of war in Ukraine and a troubled economy. Photo: Wikimedia Commons

When leapfrogged and pushed to the wall, both business and political leaders often make bets with small chances of winning. But if they do win, the business avoids bankruptcy and the management is richly rewarded, and the political leader strengthens the country’s standing and his political legitimacy.

Observers label such a desperate strategy as the bet of a madman if it fails, and of genius entrepreneurial trait if it succeeds.    

Consider then these facts about the Russian-Ukrainian conflict: in pre-Covid 2019, 60% of Russian exports came from the energy sector, which constitutes 20% of its economy and also 40% of Russia’s federal budget. Russia is entirely dependent on selling gas and oil to the West, which, before the completion of the new – now stopped pipeline – went mainly through Ukraine.

What happens to Russia’s negotiating powers selling its gas and oil if, say, under some scenarios Europe threatens not to use the new pipeline, and Ukraine – either by joining the EU or NATO – blocks the selling of oil and gas through the older pipelines running through its territory and forces Russia to come to the negotiating table on certain issues?  

Russia’s negotiating powers would be significantly diminished even though in the foreseeable future Western Europe would have to import both oil and gas – as solar and wind are no substitutes, and it neglected reliance on nuclear energy, or “clean coal” technologies. 

What Putin has been trying to do since 2008, with its war on Georgia, is actually practicing the art of finance – which, in the best hands, is to be prepared for the worst. Only in contrast to companies’ management facing distress, Putin is scheming in a still centralized country with government as the main financial intermediary.

And it is not the first time that he is going to war on such an issue. Recall the 2008 eerily similar sequence of events leading to the war with Georgia. Then as now, Russia made similar accusations about Georgia discriminating against ethnic Russians and that areas of Georgia wanted to become part of Russia, claims that ended with Russia’s full-scale invasion of Georgia. 

Then-French president Nicolas Sarkozy negotiated the ceasefire agreement and by October Russia withdrew from the undisputed Georgian territory – and there have been no international repercussions against Russia then. But behind the veil of words, what was that war about? 

Look at the map of gas and oil pipelines again. They run through Georgia, which, if it came under Russian influence, would allow Moscow to gain more negotiating power about supplying gas and oil to Europe through Turkey if it managed to negotiate through a maze of conflicting interests involving Armenia, Azerbaijan and Iran, which, once international sanctions were lifted, proposed to let its energy flow through Georgia.  

Since these pipelines also have European markets in their sight, Putin’s bets do not appear that of an erratic dictator, but rather of a calculating leader interested in sustaining Russia’s finances and leverage.

A worker at the construction site of the Nord Stream 2 gas pipeline in Lubmin, northeastern Germany. Photo: AFP / Tobias Schwarz

But why now? A number of observers made the following analyses about the timing:

“It’s not so much high oil prices as Europe’s dependence on Russian gas that give Russia room for maneuver on the Ukraine crisis today,” said Thomas Graham, former White House adviser on Russian affairs and managing director of Kissinger Associates. “Russia can credibly threaten to cut off exports, confident that it can weather the downsides of a loss of revenue much more easily than Europe can weather the cut-off in heating fuel in the winter.”  

Though energy prices are now relatively high, a dictator’s practice of finance, one interested in sustaining the legitimacy of his regime in particular, is to recall the bad times that prevailed during Ronald Reagan’s presidency, and the last two years too. 

A financially centralized Russia – with the federal government its de facto sole financial intermediary – can survive such major “downsides” only if Europe’s ability to procure oil and gas through channels independent of Russia is limited, or at the very least Europe’s negotiating powers diminished in the present case with Ukraine as proxy. This is what Putin had been eager to prevent in 2008 in Georgia, and now in Ukraine.

Could negotiations have prevented the conflict? Henry Kissinger and Jack F Matlock Jr, the US’s last American ambassador to the USSR (1987-1991), both gave positive answers to this question, pointing to Western Europe’s diplomatic miscalculations since 2014. 

As to Putin’s words about Nazis, historical roots and so forth: Just as no good poker player reveals his weak hand, neither do politicians, desperate or in fear of being leapfrogged and the legitimacy of their model of society – communism with a sliver of business freedoms in this case – threatened.

Instead they use a veil of words to make it tougher to distinguish the real things from the noises they are making. This is what language has been used for since time immemorial: not only to illuminate but to disguise and confuse – appealing to historical roots in particular.

The article draws on Brenner’s books – Force of Finance, Labyrinths of Prosperity, History – the Human Gamble.    

Reuven Brenner

Reuven Brenner is a governor at IEDM (Institut Économique de Montréal). He is professor emeritus at McGill University. He was the recipient of a Fulbright Fellowship, was awarded the Canada Council's prestigious Killam Fellowship Award in 1991, and is a member of the Royal Society.