Putin’s Overstretch

The flower beds are made of concrete. Not for the flowers’ sake, but to prevent terrorist attacks, I suppose. The building looks the same; a block of concrete. A highly-securitized block of concrete.

414 steps from the American Embassy in Copenhagen lies the Russian Embassy. An elderly woman crosses me on my way. It must be hot in that black dress. Then I notice it: the Garnison cemetery. Placed between the two embassies as a reminder of the stone-cold feelings between the two powerful nations.

The Russian Embassy has resided on Kristianiagade 5 in Copenhagen since 1950. Back when Russia was the Soviet Union. Today, it seems Putin’s Russia reminisce of that time, with a military force that strikes fear in the heart of Europe. The war in Syria, the annexation of Crimea and aggressions towards the Baltics. With simulated attacks against Bornholm, Denmark has also become a central part of the tensions.

In contrast to its military, the Russian economy is highly unstable. Low oil prices, Western sanctions and a Soviet-style market make the economy unpredictable. Can the oil and gas dependent economy bear the military burden or is it stretched to the limit? If Putin asked the last leader of the Soviet Union, Mikhail Gorbachev, he would probably tell him to be careful.

The Russian economy: a small hard-hitter

After the global financial crisis in 2008, Russia’s economy seemed on the right track, with a steady growth of 4% GDP. But in 2014, the economy was caught in a downward spiral. The main problem: oil

From 2008 to 2013, oil prices were relatively high and steady, USD110 per barrel. But in 2014, oil prices began to drop, which heavily affected Russia’s economy. In 2015, oil prices dropped to USD 30 per barrel, which made Russia’s GDP decline by 3.7%.

Russia is the world’s largest exporter of oil and supplies 12% of the world’s oil. In 2015, oil and gas accounted for 43% of the Russian federal budget’s revenue. Therefore, Russia is highly dependent on oil prices and the country’s economy follows the oil price dynamics the last ten years.

On top of low oil prices have Western imposed sanctions also impacted Russia’s economy. In 2014, Russia annexed Crimea in Eastern Ukraine and Western nations, mainly the US and the EU, imposed several economic sanctions on Russia and Russian citizens. So far, the sanctions have made Russia’s GDP contract by 1.5-2%.

Today, the Russian economy is the world’s 12th largest economy. In terms of purchasing power parity, Russia advantages to the 6th largest economy: Russia doesn’t have massive amounts of money, but they can purchase a lot for the sum they have.

“The main factor in the Russian economic have been the oil prices – not the sanctions,” says Julian Cooper, Professor Emeritus of Russian Economics at Birmingham University.

Russia also has another resource, besides oil and gas: human brainpower. The problem is that Russia does not know how to translate high quality research into new products. The Russian market is dominated by large state companies that crush all competition and innovation. A problem inherited from the Soviet Union.

“Human capital is strong, but innovation is weak. That is one of the central issues discussed in Russia at the moment: how to boost innovation to increase competition,” says Julian Cooper.

“The middle-range enterprises will be very important to Russia in the future. An example is the Kaspersky Antivirus Software. It is not a huge company, but very dynamic and innovative,” he further argues.

Despite the many challenges, the IMF and World Bank projects that Russia’s economy will stabilize during 2017 and the GDP will even grow by 1-2%. Still, like the Russian economy, these figures depend on a rise in oil prices.

Russia is arming-up

“In 2014, two Ukrainian brigades, approximately 300 troops, gathered on a road in Eastern Ukraine. 14 kilometers from the Russian border. A huge mistake,” tells Jeppe Plenge Trautner, Major in the Danish Armed Forces and professor at the Danish Defense College.

“They were spotted by a Russian drone. 5 minutes later, massive artillery fire rained down on them. 70 died. Most of the rest severely injured.”

After the collapse of the Soviet Union, the Russian Armed forces were in a bad shape. Soldiers did not receive salaries and conscripts “got beat up instead of payed” as Jeppe Plenge Trautner puts it.

It all started after the Russian Armed Forces entered Georgia in 2008. Here, Russian officers had to use their civil mobile phones to communicate. This was a serious wake-up call for Putin and Moscow, who initiated major reforms of the armed forces. In 2011, the Russian state launched the GPV 2020 armament programme of USD425 billion – or DKK4000 billon. In a ten-year period, that is DKK400 billion a year spent on military resources. In comparison, the Denmark defense budget is DKK21 billion.

After reforms started to kick in from 2013 to 2016, the capabilities of the Russian Armed Forces escalated to the double. Today, the Russian military consists of 1.8 million troops distributed among three pillars: the Russian Border Security (100.000), Federal Security Service, including the National Guard of Russia (400,000) and the regular Armed Forces (1.3 million).

The Russian troops do not use AK-47s anymore. They are increasingly well equipped. This is mainly because of the Russian arms industry, which in the past twenty years has become more sophisticated. They produce more and more advanced missiles, aircrafts and tanks to 10 percent of the price of their Western counterparts.

“As it is today, the Russian army can take most of the Baltics within 24-48 hours and NATO can do little about it,” tells Jørgen Meedom Staun.

But the ambitious armament programme also faces problems. Because of economic problems, many initiatives have been postponed. Especially initiatives within the Armed Forces and the Russian Aerospace Forces have been postponed, so a huge share of the equipment is still highly outdated. Russia have for instance been forced to restart the production of old Tu-160 ‘Blackjack’ aircrafts, that Boris Yeltsin stopped the production of in 1992.

Inflation is also a huge problem to the GPV-2020. Since 2011, Russia’s currency, the rubles, have inflated 8% in average. If that development continues, the GPV-2020 budget will be cut in half.

“The GPV-2020 goal was to modernize 70% of the Russian arms. But in reality, they will only reach about 50%” says Claus Mathiesen, professor at the Danish Defense College on Russia and security policies.

However, the main priority for the GPV-2020 is the modernization of Russia’s nuclear arms. Nuclear arms are a key component to the Russian military and will probably be 100% modernized by 2020.

“Russian military has come a long way since 2008. They are still far behind the US’ military, but Russia has build-up a substantial fighting force,” says Claus Mathiesen.

Defense: “a geopolitical task”

Despite a small and unstable economy, Russia has decided to shield its military expenditure from budgetary cuts. "Spending on defense is one of the priorities, the volume of purchases of arms and military equipment is not reduced despite all the difficulties," said the Anton Siluanov, Russia’s Minister of Finance, to the Russian State Duma last November.

The last ten years, Russia’s military expenditure had experienced rapid growth, while the country’s economy has been in decline. In 2015, when the country’s economy suffered severely, Russia spend USD91 billion on its military.

In 2016, the Russian military expenditure declined to USD 80 billion, which accounts for 4.7 % of the country’s GDP. This is a 25% share of the Russian state’s federal budget. However, these figures are derived from official estimates and extra funds can be hidden in the federal budget. According to Jeppe Plenge Trautner, 7-8% of Russia’s GDP is spent on the military.

The Russian federal budget 2017 to 2019 proposed last October includes a series of cuts to the federal budget in order to reduce a deficit of 3.7% of the GDP. The cuts include military expenditure as well, that will fall by 9.5% in 2017 and by 7.1% in 2018, and then by 1.7% in 2019.

However, while the proposed fall in military expenditure seems substantial, public healthcare has decreased by 22%. And despite the severe cuts, the new federal budget heavily relies on external borrowing and the hope that oil prices will stabilize within the next three years.

Russia’s Ministry of Finance has also proposed mechanisms that allows discretionary increases of up to 10% of total federal expenditure to the military expenditure.

Russia’s Minister of Finance, Anton Siluanov, has also stated that Russia would continue to upgrade its defense in 2017, as it is "a geopolitical task”.

Russia needs money to ensure stability

“Putin’s main objective is to maintain his rule. The alternatives are death or prison,” explains Jeppe Plenge Trautner, when asked about Putin.

But, Putin also has more imperial intentions: to restore Russia’s power. “Belief in the greatness of Russia. Russia was and will remain a great power.,” Vladimir Putin wrote in his millennium manifesto before he took office in 1999.

However, this time, the ambitions are more equilibrated to reality. Russia of today does not seek to become a global superpower, but a regional power with a comprehensive sphere of influence, especially in the old Soviet republics, such as Ukraine, Albania, Moldova, Georgia and the Baltics.

“Putin will probably win the elections in 2018 and extend his rule into 2024. At that point, if the regime changes or Putin wants to renew his, it may lead to unrest in Russia, if the social and economic conditions have not changed,” argues Jørgen Meedom Staun, professor at Danish Defense College. “But a war against a common enemy might change that. That is why I am not so concerned about the near future. It is more the long run that worries me,” he explains.

Soviet reminiscence

The unproportionable growth between the economy and the army is a familiar issue to Moscow.

The Soviet Union started off with rapid economic growth that at times reached double digits. But during the 1950’s growth stopped and the Soviet economy started to decline.

In the last decade of the Soviet Union, military expenditure was 7-8% of the GDP, according to official Soviet figures. Other estimates range from 12% up to 40%.

In the end, military expenditures spend from the arms race with the United States and low oil prices made the Soviet Union overstretch and, eventually, collapse – a scenario that can repeat itself.

“One cannot exclude a Soviet scenario of imperial overstretch and collapse. However, Russian rulers may have learned something from the Soviet economic disaster,” says Mette Skak, professor at Aarhus University’s Department of Political Science and specialized in Russian affairs.

“A scenario where Russia overstretches and, at some point, collapses, is a definitely a possibility. Especially if the current military expenditure continues to grow and the economy remains unstable,” explains Claus Mathiesen

When he took office, General Secretary Mikhail Gorbachev was aware of the Soviet Union’s economic problems. “We are encircled not by invincible armies, but superior economies,” he said in 1986. But it was already too late. The Soviet Union collapsed. Gorbachev might want to tell President Putin the same today.