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When Will Putin Run Out of Money… or Support?

Vladimir Vladimirovich Putin must be a happy man right now.

He has two overseas expansion projects for Russia, in Ukraine and Syria, both of which are going well.

Diplomatically speaking, he’s running circles around President Obama and the West in general.

There are just two worries for him at this point: oil prices that may remain in the $40 to $50 range, and an impending election in March 2018.

Economic Malaise

The Russian economy has been in decline since the price of oil fell below $100 per barrel, and there’s no sign of it bottoming. The International Monetary Fund projects a continued decline in 2016 and only very modest growth in 2017.

Meanwhile, the Russian budget is heavily in deficit in 2015 and is running down the Russian Reserve Fund at a rapid pace.

Putin has drained 2.6 trillion rubles ($41 billion) in 2015, more than half of the fund’s total. At present rates, the fund will run out before the end of 2016.

At the same time, Russian military spending is increasing rapidly to compensate for Putin’s geopolitical ambitions.

To top it all off, a new U.S. president will arrive in January 2017, and the chances are surely high that he or she will be less accommodating of Russian expansionism than the incumbent.

Thus, for budgetary and geostrategic reasons, it’s likely that Russia’s position will be grim by early 2017.

Assuming oil prices are still low in January 2017 and with an election little more than a year away, Putin will be left with two unpalatable options.

He can either stand down his military adventurism and squeeze the budget generally, hoping that the economy will recover enough to garner re-election.

Or he can double down on expansionism, raid the Russian companies that have cash and valuable assets (notably Gazprom, Rosneft, and the energy and minerals sectors in general), squeeze domestic consumers a la the old Soviet Union, and perpetuate both his rule and his aggressive foreign policy.

The problem with the former is that ending expansionism will be highly unpopular with the chauvinist Russian people. And it’s unlikely that Putin would be able to get the economy recovering quickly enough to make voters forget the national “humiliation.”

The latter option would require either canceling the March 2018 elections or holding wholly fictitious ones in which Putin wins with a Soviet-style majority of 99.98%.

Given Putin’s temperament and approach to life, I’d bet he’ll choose this alternative.

Putin the Omnipotent?

A permanent Putin dictatorship (lasting until, say, his 80th birthday in 2032) would be a very unpleasant place to live and a dangerous antagonist for the West.

Like the Soviet Union, its economy would be centrally planned, with the energy and resource sectors devoted wholly to the service of the military machine – although there may be some private enterprise still permitted in non-strategic sectors, such as retail.

The country would be expansionist in the former Soviet Union (especially Ukraine and Kazakhstan), the contiguous parts of Eastern Europe (such as the Baltic States and Bulgaria), and parts of the Middle East.

Iraq would probably become a Russian protectorate to provide additional oil revenue for the machine.

And there’d be no Communist theory behind this behemoth, just autocracy – the Russian economy is simple enough and has sufficient natural resources that this brutal approach can be made to work adequately.

Alternatively, if Putin chooses the path of retrenchment and a more or less fair election in March 2018, it’s likely that he’ll lose – although Russian voters have been confused in the last decade by high energy prices during a period of poor economic management.

Thus, the limited understanding of market mechanisms available in an economy that hasn’t been properly run since Pyotr Stolypin was shot in 1911 has been blurred further.

Perhaps the people won’t blame Putin for their renewed poverty?

In any case, the inheritance of an opposition leader, perhaps a sober version of the well-meaning Boris Yeltsin, seems very unattractive.

Oil prices might well still be low, so there’d be no chance of massive foreign exchange revenues.

The commanding heights of industry would be in the hands of Putin’s cronies, so the new leader would have no chance either to influence their policies or to install better or friendlier management without yet again violating property rights, a very fragile flower indeed in Russian circumstances.

Plus, the new leader would inherit the remnants of a powerful and expensive military, unproductive of any gains that could be sold to the Russian people. This same military would bedevil the new leader’s relations with the rich West.

Finally, he’d have little chance of attracting foreign investment to boost the economy. The energy sector would be running down because of past poor management and low prices, while the remainder of the economy would be a “no-go” area for foreign investors because of the uncertainty of Russian property rights.

Thus, after a single term in office, although admittedly of six years rather than four, Putin would be swept vengefully back into power in March 2024, to undo any beneficial changes the intermediary might have made.

Bottom line: Putin seems all-powerful now, but economic forces are likely to cause a crisis by early 2017 that will result either in his removal or the abolition of democracy.

Either way, the prospects for the Russian economy are bleak.

Good investing,

Martin Hutchinson