Putin could be finished

Russian President Vladimir Putin is so easy to dislike because he really is a bad guy and there are few things more pleasurable than contemplating his fall from power. It is reasonably clear that might just happen.

Even though he continues to be widely popular in his own country, there are several reasons why he could be brought down. The principle ones are the fall in oil prices and the financial crisis brought on by the sanctions imposed by the West. There are many others: a 40 percent decline in the value of Russian currency; an impending recession; the cost of defending his expansionist foreign policy; inflation rising by 9 percent; slowing or postponement of domestic goals of higher wages, better healthcare and cheaper housing (he has already closed 28 clinics and dismissed 10,000 medical staff in Moscow alone); and his personal failings. The last of these combines hubris with an inability to flexibly adapt to hardship.

{mosads}Putin’s machismo is probably the first sign that elicited enmity. The bare-chested horseman was a symbol that immediately resonated as he began attacking his fellow oligarchs and journalists and moved to consolidate both political and economic power while silencing opposition of any kind. While there is no direct proof linking him to a variety of suspicious deaths, it seems a reasonable proposition to assume that his KGB background made assassination a part of his program.

All the while this was proceeding, his popularity soared domestically as average salaries increased tenfold from 2000 to 2013 and oil production and oil prices kept rising in an economy where 60 percent of exports were oil and gas and these accounted for 50 percent of the burgeoning government’s revenues. The prosperity enabled the reconstruction of a credible military and more goods and services for citizens. The U.S. and European allies’ pugilistic approach to post-Cold War territorial issues allowed Putin to call upon the nationalistic fervor as both he and Russians felt increasingly embattled and surrounded by a vengeful Europe.

Putin has blasted the West for what he feels is a U.S.-Saudi alliance to depress oil prices and place pressure on him to step away from the expansionist stance he has taken in Ukraine; the implied threats to Finland, Latvia, Lithuania, Bulgaria and Estonia; and naval excursions into the North Sea, the Atlantic and the Caribbean. Whether or not there was such a conspiracy, it certainly advantages the West to encourage a prolonged depression of oil prices because Putin’s strategy is to tough it out, using part of the $429 billion currency reserve built up over the past 15 years to supplement a governmental budget that requires $96 a barrel pricing to function at its current level.

While his reserves may allow for some staying power for government budgets (the current estimate is two years), it will not protect vital industries. As noted in The New York Times: “Nearly $700 billion is owed to Western banks, economists said, much of it by the giant state-run companies that constitute the heart of the Russian economy. But sanctions imposed by the United States and Europe over Russia’s annexation of Crimea and adventurism in southeastern Ukraine have blocked access to Western financing.”

While these industries can default on debt in defiance of Western sanctions, the West will be able to garnish oil payments and disrupt virtually every type of financial transaction of Russian oligarchs if they attempt to interact with the West. The prospects of refinancing major Russian companies could and mostly likely will cause an international financial crisis, causing further declines in the ruble and disruptions in oil exports.

It is widely speculated that the financial elements of Putin’s problems will create the greatest difficulty as he does or doesn’t adapt to Russia’s shifting circumstances. Since 66 percent of Russian assets are owned by the 1 percent, it is only a matter of time before Putin’s allies begin questioning his leadership. The easiest move for Putin would be to step back from his aggressive foreign policy, step away from the support provided Ukrainian separatists, negotiate some sort of detente regarding Crimea and press for the financial sanctions to be removed.

The other adjustment would be to cut government spending by as much as 30 percent to address the reality of falling oil prices. While it is difficult to ascertain how such cuts would be achieved, it is clear that significantly cutting military budgets would be a starting point. He has already announced the abandonment of a $19 billion pipeline that would have allowed him to keep pressure on Ukraine.

To achieve either or both of those moves requires a certain level of humility as Russia adjusts to a period of hardship unlike any that Putin has had to face the in the 16 years of his control. The question is whether or not he will exhibit either humility or flexibility going forward. His current stance quite clearly indicates a reluctance to do so. In fact, his most recent announcement addressing the economic issues has been “more of the same,” a conventional effort of proposed tax and legal amnesty for those repatriating capital along with a four-year moratorium on tax increases. These measures, according to Moscow analysts, contain “a whiff of panic.”

Oil price declines were a principle contributor to the fall of the Soviet Union in 1991. There is gleeful speculation that falling prices will do the same for Putin. Where would threats to his control come from? Most likely it will be his oligarchic friends. It is estimated that Russian overseas wealth exceeds $1 trillion. Trade with the West has become a way of life. Combine sustained low oil prices with the pressure of financial sanctions and you have the proper stew for a coup.

There is no question that the combined forces of economics and financial sanctions have weakened the Russian leader. The White House can hasten his departure by consciously encouraging the continuation of the oil surpluses. It is probably a coincidence that OPEC’s decision to maintain oil production and protect its market share has driven oil prices below $70 per barrel. Given that the operating cost of U.S. and Canadian oil is between $40 and $42 per barrel, this war for market share will likely be extended for two years or more. The question is whether or not that is long enough to bring down the Russian leader.

Most people would bet against it. However, there is a good chance they are wrong.

Russell is managing director of Cove Hill Advisory Services.