Is Ukraine Hitching Its Economic Cart to Collapsing Horse? Russia

By Walter Derzko

If you only read the headlines of most newspapers, the perception you would get is that Russia is a rising regional power with ambitions of becoming a global super power again.

A public 2009 Canadian military foresight report summarizes the following: “Since 1999, Russia has been experiencing an economic revival largely based on its oil and natural gas exports. Unlike the USSR, modern Russia is not challenging the world order, only the current power distribution.”  It concludes: Wanting to be a player on the world stage again, Russia will pursue continued relations with Europe, NATO, and the United States in order to prevent marginalization and help recreate Russia as at least a regional power. For the foreseeable future, Russia will not aggressively challenge the United States or its allies.”

In fact, this vision of Russia may be overly optimistic. The reverse may now be true.

In reality, both Russia and Gazprom, the state-owned gas company, are both quietly going broke, which the mainstream media and experts ignore. But wait a minute, you ask? Isn’t Russia selling oil and gas like there is no tomorrow? Yes, but that is Russia’s strength for the time being and its Achilles Heal in the medium and long run.

Russian Energy Minister Sergiy Shmatko admitted last November that the Russian oil sector had reached the point where it needs immediate reforms and a reduction in the tax burden, in order to prevent a rapid decline of oil production, starting in 2011-2012. This sector, meanwhile, generates over 40% of Russia’s export revenues, so that reducing the tax burden on the oil sector when Russia is already carrying a budget deficiency in the area of 10% is a very challenging task indeed. Coupled with tumbling oil production, we may see another collapse of both oil and gas prices in the near future. Europe is not as dependent on Russian gas as it once was. It now has other options, such as liquefied natural gas from Qatar and shale gas from Poland and Ukraine within the next five years.

Gazprom also carries a very heavy debt load, and can sustain stability only if its revenues increase, which looks unlikely. Russia had already depleted most of its sovereign wealth fund reserves, and is running budget deficiency 9-12% per year. Under these conditions it will have no resources for bailing out Gazprom. The recovery of the gas market in Europe will not be sufficiently fast, and will not produce sufficient demand to offset emerging competition from Central Asia, Azerbaijan, Qatar, and possibly Poland and Ukraine in European markets.

Remember too that oil price manipulation (keeping oil prices artificially low for a decade) was a geopolitical weapon that was successfully used by the USA (Zbigniew Brzezinski and the Reagan Administration) in an attempt to bankrupt the former Soviet Union. It worked.

Back in the 1970s and 80s, cybernetic experts in Kyiv and Moscow using system dynamics modelling, predicted the collapse of the Soviet Union due to low oil prices, by 1990 plus or minus one or two years - not a popular notion at the time, but key people did pay heed. Two years before the collapse of the Soviet Union, Russian and Ukrainian oligarchs started to move their wealth off-shore in 1988-89.

Similar systems dynamics modelling shows similar collapse signals and that Putinism in Russian and President Yanukovych’s regime in Ukraine will suffer a similar fate as did the former Soviet Union.

These geopolitical and economic developments may lead to the economic collapse of Gazprom in the short term and the Russian Federation during the second half of the current decade. Russia already defaulted on sovereign debt in the 1980s and won’t hesitate again to leave foreign bond holders with worthless paper. Such a collapse, even if it won’t impact on the territorial integrity of the Russian Federation, will essentially weaken Russia. It could lead to the rapid escalation of ethnic tensions in the Northern Caucasus, massive infiltration of Chinese migrants into Siberia, and growing separatist movements that will fill the power vacuum. Its ability to play the role of the superpower may be diminished at the regional level and over a larger geographical area, which includes Moldova, Ukraine, Russia, Kirgizstan, Tajikistan, Armenia, Georgia, and Azerbaijan, which may become unstable. The cause of such instabilities are still existent “frozen” conflicts in Transdnisteria, Abkhazia, South Ossetia, Karabakh, and border disputes in Central Asia. So far, all these conflicts remain “frozen” because of Russia’s heavy military grip. As this weakens, the probability of cross boarder and internal conflicts grows.

So if the worst case scenario takes hold in Russia, similar to conditions before the collapse of the Soviet Union, why would Ukraine want to strengthen its economic and political ties with Russia, a losing horse?

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