The strange case of Dr. Vladimir and Mr. Putin

Economic warfare in the Baltic Sea and States is as old as the Vikings — and its long history is continuing as Finland’s and Sweden’s impending accession to NATO is reshaping the region. While many are concentrating on the not-insignificant military challenges a larger and stronger NATO will represent to the Kremlin, the immediate and lasting peril to Moscow will be economic. Not only is Russian President Vladimir Putin’s ill-advised invasion of Ukraine placing Moscow’s vital Baltic maritime trade under increased threat of a NATO blockade, but he is also seriously, if not permanently, destroying the development of the centerpiece of his ambitious vision for restoring Russia as a great power: the 3,500-mile Northern Sea Route (NSR).

Since Putin’s rise to power in August 1999, he has been very “Dr. Jekyll and Mr. Hyde” in his dictatorship and governance of Russia, swaying from grandiose economic visionary to petty dictator bent on territorial conquest and/or domination as evidenced by his forays into Ukraine, Syria, Crimea, Chechnya and Georgia. Seemingly, he is unable to reconcile the two and, whereas Russia’s economy, corrupt as it is, is needed to achieve the former, the latter is destroying Russia’s economy. Nowhere is this self-defeating conflict more evident than in Putin’s brutal and reckless decision-making in Ukraine — and the outsized corresponding economic disaster it is creating for Russia in the Baltic Sea and NSR.

Like nearly all petrostates, Russia depends heavily on energy exports as a percentage of its gross national product (GDP). Depending on fluctuations in commodity prices, energy exports account for 10 percent to 25 percent of Russia’s overall annual GDP. Prior to Putin’s “special military operation” in Ukraine and the ensuing Western sanctions, oil and gas exports accounted for 50 percent to 60 percent of all Russian exports — and 70 percent to 85 percent of those fossil fuels transited either through the Baltic Sea, Black Sea, or Arctic Ocean. 

All GDP is not equal — forex producing GDP is intrinsically exponentially more valuable. Russian oil and gas maritime trade and the hard foreign currency it generated was a critical factor in proactively shielding, if only temporarily, Russia’s commercial markets against U.S. and EU sanctions. It will be needed again to rebuild Russia’s shattered war economy. Moscow, at its prewar peak, is reported to have amassed $633 billion from oil and gas exports in forex reserves — fourth highest at the time globally.

Replacing lost oil and gas revenues will be difficult. As is, Moscow faces a severe disruption of shipping in the Black Sea and elsewhere because of its invasion of Ukraine — as much as a 55 percent drop in incoming freighter traffic. Putin can ill afford being drawn into a deeper conflict with NATO in the Baltic Sea over Finland and Sweden.

Despite Putin’s caustic assertion that Russia was no longer a “gas station” in December 2020, Putin (non-stop since 2007) has made capitalizing oil and gas reserves the cornerstone of his master plan to return Moscow to its great power status — including using a Russian Mir mini-sub in August 2007 to showily plant a “rust-proof titanium flag” on the seabed of the North Pole in support of his disputed United Nations claim to all of the pole’s oil and gas rights. Indeed, the entire foundation of Putin’s great power resurrection is predicated upon reviving former Soviet dictator Joseph Stalin’s “Red Arctic” dreams for dominating the Arctic polar region and exploiting the NSR.

In May 2018, Putin began to give heft and shape to his oil and gas mining and year-round shipping vision for the NSR — ordering “by 2024, cargo flows along the NSR should increase to 80 million tons.” In December 2019, then-Russian Prime Minister Dmitry Medvedev set in motion Putin’s master plan by passing legislation in the Duma for a “Comprehensive [15-year] Plan for the Modernization and Expansion of the Main Infrastructure developing the NSR.” Up until Ukraine, Russia continued to lobby heavily for foreign investment in NSR brick and mortar projects — including offering a $41 billion tax break for the Rosneft Vostok Oil Field and a $300 billion inducement package “to provide new incentives for new ports, factories, and oil and gas developments on the shores and in the waters of the Arctic ocean.”

Despite extreme fluctuations in oil and gas prices during the COVID-19 pandemic and a subsequent pronounced global shift to renewable energies, Russia also continued to invest steadily in its Baltic fossil fuels port systems, including in July 2021 earmarking $2.1 billion to substantially enlarge Primorsky, Russia’s largest Baltic seaport — expanding its oil and gas offloading terminal capacity by 20 percent.

Then came Ukraine — and everything in the Baltic and in the NSR unraveled for Putin. Finland and Sweden are rattled by the invasion and have applied for NATO membership. Russian oil and gas exports have declined precipitously in the Baltic and elsewhere — and oil and energy investors in the NSR fled in a mass exodus, including BP, which is taking a $25.5 billion pre-tax charge against earnings in connection to leaving its 19.75 percent stake in Rosneft, a Russian state-run company.

In Robert Louis Stevenson terms, the statesmen-like work of Dr. Vladimir in the Baltic Sea and NSR has been undermined and lost by Mr. Putin in Ukraine. Supply chain woes, sanctions, foreign divestitures, and lack of capital soon could turn NSR infrastructure projects into “ghost towns.” Yes, Mr. Putin has options. He could arm Iskander M Missiles with nuclear warheads in Kaliningrad and/or accumulate significant numbers of ground forces there to threaten the Suwałki Gap to potentially cut the Baltic States from reinforcing NATO forces — however, Dr. Vladimir no longer can afford the cost.

If this were a novella, Dr. Vladimir would come to his senses and realize Mr. Putin’s rashness is strengthening and growing NATO, and soon will cause NATO troops to be stationed along Finland’s 830-mile border with Russia — only 443 miles from Murmansk in the NSR — obliterating his dreams of restoring Russia as a great power by making the NSR a profitable commercial reality. But this is not fiction. Putin is at war with himself and cannot see it. Meanwhile, Russia’s GDP is projected to insanely contract between 8.8 percent and 12.4 percent in 2022. 

Mark Toth is an economist, historian and entrepreneur who has worked in banking, insurance, publishing and global commerce. He is a former board member of the World Trade Center, St. Louis, and has lived in U.S. diplomatic and military communities around the world, including London, Tel Aviv, Augsburg and Nagoya. Follow him on Twitter @MCTothSTL.