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The Costs Of Russia's Ukraine 'Victory'

The costs of President Vladimir Putin's victories could be steep.
The costs of President Vladimir Putin's victories could be steep.
Russia's aggressive policies in Ukraine since the fall of 2013 have resulted in some remarkable gains for Moscow.

Kyiv's European-integration plans have been derailed.

The strategically important Crimean Peninsula has been annexed.

And the destabilization caused by pro-Russian separatists in eastern Ukraine threatens to continue casting doubt over the legitimacy of the government in Kyiv and to give Moscow strong tools for further interference in Ukrainian affairs.

But the costs of these tactical victories could be steep -- even unbearable -- for Russian President Vladimir Putin's government if the West is able to come together in its response and to keep up the pressure into the long term.

"Russia has damaged itself on many levels," Jan Techau, director of Carnegie Europe in Brussels, says. "There are only very few real partners and allies they still have left, and even the most hard-core defenders have now realized that Russia will probably never be the kind of partner that they thought Russia would be."

Techau adds that Russia's international isolation as a result of Ukraine is likely to grow.

Whether or not Putin's Russia can cope with these challenges is an open question, says San Francisco State University international relations professor Andrei Tsygankov.

"It depends on whether the state that Putin has created has been able to change itself, has been able to become more functional, less corrupt, more able to mobilize resources for development, and therefore more able ultimately to move the economy in a positive direction," Tsygankov says. "Because, so far, at this point, the economy is stagnant and it remains to be seen if he will be able to activate the economy."

Russia is already facing limited sanctions from the United States, the EU, and other major economies. If the West moves on to blanket, Level 3 sanctions on entire sectors of the economy, similar to those imposed on Iran, the long-term costs would "be much more dramatic," Techau says.

More importantly, the Ukraine crisis has stepped up the EU's effort to wean itself from its dependency on Russian energy. Techau says that this is not a matter of a few months or even a few years, but as it happens it will mark "a major, major loss for Russia."

China To The Rescue?

In response, Russia is attempting to redirect at least part of its economy to the east. On the eve of Putin's visit to China this week, Prime Minister Dmitry Medvedev told Bloomberg that Moscow is seeking both trade and investment in the Pacific region.

"Just recently, literally a week ago, I hosted a special meeting of government ministers and managers of major companies about the prospects of cooperation with the Asia-Pacific region," Medvedev said. "And, to a considerable extent, this means cooperation with the People's Republic of China. We consider such cooperation extremely important for us and very promising. And I mean both in terms of increasing trade and of increasing investment."

On May 21, Putin's visit to China was capped off by the inking of a major, long-term deal to sell Russian natural gas to China. Although the details of the deal are still being analyzed, it is far from a certain answer to Russia's woes. Russia will sell only 38 billion cubic meters per year under the agreement, compared to the 139 billion it sold to Europe in 2012.

The price for the gas has not been revealed, but is rumored to be around $350 per 1,000 cubic meters, a price that is dangerously close to the estimated cost of producing the gas and that leaves almost no surplus profit to feed state coffers. Finally, in the best-case scenario, gas will start flowing only in 2018.

Development Models

Russia's willingness to endure political and economic isolation from the West is a sure indication that Moscow has rejected "neo-liberal modernization" of the type advocated by former presidents Boris Yeltsin and Medvedev, analyst Tsygankov says. However, a more state-centered "neo-mercantilist modernization" may be possible and seems to be the direction in which Putin is moving.

For Tsygankov, a key question is: "Will they maintain essentially the non-working mechanism, the non-functioning state that Putin has developed today or will they lead to a more Chinese-style modernization where it would be possible to build certain areas, certain industries strategically with an eye to the future?"
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He argues further the conflict with the West over Ukraine could offer Putin an opportunity to compel Russia's economic elite to stop stashing their assets abroad and to invest in the Russian economy. In the short term, however, the conflict has produced record outflows of capital from Russia in the first quarter of 2014.

Tsygankov warns state-driven modernization on the Chinese model may be threatened by the increasing militarization of the Russian economy. Military spending is now projected at more than 30 percent of state spending, approaching the estimated 40 percent seen in Soviet times. Tsygankov says this is a real danger.

"It makes sense from a military-strategic standpoint because if Russia compares itself to China, for instance, or even to the United States then it needs to invest in its military. But economically, it can't really afford it," he says.

As if to emphasize the point, Russian Central Bank Deputy Chairman Sergei Shevtsov warned on May 20 that the state Pension Fund has been underfunded by more than 200 billion rubles ($5.78 billion) in 2014 and that "this must not happen again in 2015 or the following years."

International Relations Architecture

Moscow's policies in Ukraine have also disrupted the overall architecture of international relations -- straining the EU and NATO and revealing the limited effectiveness of the Organization for Security and Cooperation in Europe (OSCE). Nonetheless, the EU has come together on limited sanctions, at least, and -- more significantly -- has accelerated its Association Agreement with Moldova as a direct consequence of Russia's involvement in Ukraine.

But at the same time, they have discredited the Russia-led Commonwealth of Independent States (CIS), which has refused even to discuss this major conflict between two member states. Likewise, the Russia-led Collective Security Treaty Organization (CSTO) has also failed to offer a platform for regulating the conflict or discussing Moscow's disputed annexation of Crimea.

The Ukraine crisis has also affected the Russia-led Customs Union and Eurasian Union projects. Although the Customs Union continues to function as an economic body, loyal members Belarus and Kazakhstan have made political statements that demonstrate a growing wariness of Russia. Moreover, the entire project -- once the flagship of Putin's foreign-policy agenda -- seems much less compelling without the prospect of Ukraine as a member.
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Russian historian Andrei Zubov told RFE/RL's Russian Service that Putin's actions represent an attempt to return to methods of international relations that Europe has rejected.

"Putin has definitely embarked on a path similar to the 19th-century when there was an impulse to unify national lands into a single state, when it was accepted to relocate peoples who were inconvenient or disagreed such as Crimean Tatars or Ukrainians in the Donbas," Zubov says. "But it is a complete dead-end, and Europe has already understood that this is no way to exist."

Carnegie's Techau says that everything the world has done in response to Russia's Ukraine gambit must have been predicted in the Kremlin's cost-benefit analysis. However, he believes, the Kremlin is also counting on the West's indignation to wane quickly as it did after Russia's 2008 war with Georgia.

So far, he says, Putin must feel justified, as the Ukraine crisis has revealed cracks within the Euro-Atlantic alliance, within the EU, and within NATO.

But this, Techau argues, is merely a tactical win for the Kremlin.

"Western, open societies, democracies will, eventually, correct their course," he says. "This was a wake-up call. Something is going to happen there, so the short-term gain [will be] paid for by a longer-term consolidation of the Western community. I'm convinced that that is the case."
Andrei Shary of RFE/RL Russian Service contributed to this report.

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