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posted on 14 June 2016

Putin's Choice

from STRATFOR

-- this post authored by Lauren Goodrich

Russian President Vladimir Putin stands at a fork in the road. The crises and responsibilities the country faces hang in a precarious balance. As Russia's economic recession drags on, prolonged by Western sanctions and dreary oil prices, inflation has skyrocketed, wages are tumbling and the poverty rate is growing at a pace not seen since the 1998 financial crisis. Limited military campaigns in eastern Ukraine and Syria have stirred up nationalism, enabling the government to maintain its popularity.

Meanwhile, NATO forces are building up near Russia's borders, mounting pressure on the Russian military.

For much of his more than 16 years in power, Putin has remained a centrist, by Russian standards. He sits neither in the radically liberal reformist camp nor among the rabid security hawks, but somewhere in between, cherry-picking policies from each side to suit the situation. Over the years, Putin has employed a variety of strategies that run the political gamut. But in the years to come, this centrist approach - vacillating between strategies while attempting to maintain a balance - will no longer be effective. Polarized camps in the Kremlin, and among the Russian public, are urging the Russian leader to change tack.

A Country, Polarized

Typically, high-ranking officials and advisers do not publicly criticize Putin, nor do they demand overhauls of state strategy. But as Russia's situation grows more precarious, even the Kremlin's elite are expressing concern. In May, one of Putin's longtime financial advisers and two senior officials in the Ministry of Finance published a scathing article in The National Interest. The piece criticized Russia's continued reliance on oil revenue, blasting the government for its failure to implement economic reforms. Although the authors' view is nothing new, the public condemnation from one of Putin's most trusted advisers reveals that dissent in the country has reached the heights of government decision-making. Later that month, Russian daily Vedomosti published a leaked conversation between Putin and former Finance Minister Alexei Kudrin, who told Putin that he could choose either political ambitions and stagnation or political modesty and economic growth.

Putin's economic policies are not the only cause for consternation at the Kremlin. In mid-April, the head of Russia's Investigative Committee wrote an editorial claiming that Russia is militarily ill-prepared to face a new war. The open indictment of Putin's national security policies by a prominent defense figure set off a firestorm among politicians and military officials, many of whom shared in the censure, calling for a more aggressive security policy. Another hawkish faction in the Kremlin has released reports in recent months proposing to all but abolish Russia's financial and economic ties to the West and to crack down on the use of foreign currencies, loans and business contacts.

Among the public, opinions are equally divided. February polls from the Levada Center indicate a disagreement over what style of economy Moscow should implement. While 52 percent of Russians surveyed favored a government-controlled economy, 26 percent advocated a Western-style economy, and 22 percent opted to keep the current economic model. And although the recession is the primary concern among Russians, nearly 75 percent support the government's resistance to concessions over Ukraine that would cause the West to ease sanctions. However strong their desire for economic relief, the Russian people appear unwilling to sacrifice foreign policy for it. Even so, public demand for economic change is growing: The number of economic protests has increased by 40 percent in the past year.

A Familiar Problem

For Russian leaders throughout history, these problems would seem familiar. When Leonid Brezhnev first came to power in 1964, the Soviet Union was in a tailspin. Industrial output had plummeted, and the centralized planning system in place revealed that it could not manage the complexities of the Soviet Union's large economy. In response, economic theorists and Soviet elites flirted with the idea of decentralizing and liberalizing the country's economic and judicial systems. Brezhnev, however, rejected the proposed reforms and instead turned the Soviet economy toward a single focus: oil production. Between 1960 and 1980, the Soviet Union quadrupled its oil production to 12 million barrels per day, and standards of living grew commensurately. High oil prices transformed the Soviet pocketbook. Defense spending increased by 40 percent between 1965 and 1970 and continued to grow in the following years, accounting for 15 percent of gross national product during Brezhnev's last year in office in 1982. Though investments in machinery and agriculture were also made, they paled in comparison with national security spending.

By the time Brezhnev died in office, the economy had stagnated, and the arms race with the United States was dangerously hot. After two more leaders died in office, Mikhail Gorbachev, comparatively young and spry at 54, was named the Communist Party's general secretary in 1985. Gorbachev then began to lead a group of geriatric elites who embodied nepotism, corruption and vanity. Given their advanced ages, they did not want their comfortable ways of life threatened. And, initially, Gorbachev tried to honor their wishes, making no attempt at reform.

But at the time, the Soviet Union faced a series of crises large enough to endanger the entire system. The global oil glut of the 1970s sent oil prices crashing from $38 a barrel (about $117 today) to below $10 a barrel (less than $22 today). Three consecutive poor harvests in the early 1980s created food shortages in the Soviet Union, then the world's second-largest agricultural producer, as the country's lengthy war in Afghanistan - as well as smaller campaigns in Nicaragua and the Caribbean - ground on. Nationalist and pro-Western movements in Poland and Czechoslovakia threatened the Soviet bloc's stability, and Soviet relations with the United States were tenser than usual.

Gorbachev began to see the deep cracks in the system. He publicly denounced his predecessor, dubbing Brezhnev's rule the "Era of Stagnation." Many Soviet citizens considered Brezhnev's administration a time of prosperity and military might that put the Soviet Union on equal footing with the United States. Nonetheless, Brezhnev had set up a structure that could not be sustained in the absence of enormously high oil prices. As a result, the Soviet government was forced to start running a budget deficit and to borrow on international markets - unheard of in previous Soviet eras. In short, the Soviet Union was going bankrupt. Meanwhile, between the brutal and fruitless war in Afghanistan, the Soviet military's downing of a civilian Korean Air Lines flight and the Chernobyl nuclear disaster, the rest of the world was beginning to see the cracks as well.

Gorbachev did not want to end the Soviet Union or its arrangements around the world. At the same time, however, he had to reform the system to handle the many pressures that Russia inevitably faces. The Soviet leader pulled troops from Afghanistan, downsized the armed forces and slashed military spending. He opened a dialogue with U.S. President Ronald Reagan on a nuclear arms reduction, starting a thaw with the West. And under perestroika and glasnost, Gorbachev introduced deep political and social reforms. The policy changes took years to implement, and, ultimately, the outcome was not what the Soviet leader intended: His country, as he knew it, collapsed.

Making the Choice

Putin has fallen into the same trap that lured Brezhnev, then left Gorbachev to pick up the pieces. The Russian system is vulnerable to shocks, both internal and external. It will be able to muddle along for many years to come - much as the ailing Soviet system did in the late 1970s and early 1980s - thanks to Putin's enduring popularity and his cronies' resistance to reform. Still, it is becoming more obvious that, facing problems at home and pressures abroad, Russians in and out of government are starting to consider the country's next stage. Today's decisions will affect the country for decades. The problem is deciding what will take priority.

Already, the Russian people are feeling the weight of the recession. But increasing social spending to alleviate its effects will leave less cash for other areas. To mitigate social unrest, the Kremlin is rallying support across the country for its military campaigns abroad. But Russia's displays of military might are straining its ties with the West and limiting foreign investment in the country. In turn, the lack of investment is exacerbating the recession.

Though Russia could pull out of its economic slump in a few years, the dearth of foreign investment today will delay large projects, particularly in the oil sector, in the future. Eventually, this will impair oil production. Proponents of liberal reform therefore advocate scaling back foreign military campaigns and conceding on Syria and Ukraine to mend ties with the West and reinvigorate investment in Russia. On the other hand, as NATO builds up on Russia's borderlands, Moscow needs to project a strong military presence, not only to deter further encroachment but also to maintain domestic support. This gives rise to another pressing issue. Russia's military is in desperate need of modernization, and if the Kremlin does not invest now, then the military will fall behind in the long term relative to its peers. But how will the Kremlin finance the makeover - with money taken from its already lean social spending budget or by putting off energy investment?

For Putin, the decision to ease foreign tensions and reform at home or to confront the mounting challenges abroad is a daunting one. But the era of assembling piecemeal strategies is coming to a close. Now, Russia's need to plan for the future has become more urgent than ever.

"Putin's Choice" is republished with permission of Stratfor.

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