TIME russia

Russia’s Lackluster Economy Means Putin Simply Can’t Afford a New Cold War

Vladimir Putin
Russian President Vladimir Putin prepares to toast with ambassadors in the Alexander Hall after a ceremony of presentation of credentials by foreign ambassadors in the Grand Kremlin Palace in Moscow, Russia, Wednesday, Nov. 19, 2014. Alexander Zemlianichenko—AP

Moscow needs the West

One of the axioms of global geopolitics is that a country can project power only as far as its economic might allows. There is good reason why the United States, by far the world’s largest economy, has been the dominant force in all things political and military for the past 60 years. And we can see China now rising to superpower status on the back of its spectacular economic ascent.

Vladimir Putin should take note. As Russia’s president attempts to reassert his nation’s clout in Europe, he is doing so on an ever shakier economic foundation. The question for Putin going forward is whether his stumbling economy can support his geopolitical ambitions. The answer is anything but clear.

Russia’s economy was struggling even before Putin’s adventurous foray into Ukraine. The country had been one of the high-fliers of the developing world, so much so that Goldman Sachs included Russia in its BRICs — the emerging economies that would shape the economic future — along with Brazil, India and China. But a feeble investment climate, endemic corruption and excessive dependence on natural resource exports eventually laid Russia low. Growth last year sunk to only 1.3%, down from the 7% to 8% rates experienced a decade ago.

Since Putin’s intervention in Ukraine, Russia’s economic situation has worsened severely. GDP inched upwards only 0.7% in the third quarter from a year earlier, and the International Monetary Fund is forecasting mere 0.2% growth for all of 2014. Sanctions imposed by the U.S. and European Union in the wake of Putin’s intervention in Ukraine have blocked some major Russian banks and companies from accessing financing in the West, starving them of much-needed foreign capital. As a result, the value of the Russian currency, the ruble, has deteriorated by 30% against the dollar so far this year, routinely hitting new record lows along the way.

In a recently released study, the European Bank for Reconstruction and Development predicted that Western sanctions would help push Russia into a mild recession in 2015. Sanctions, the bank noted, “negatively affected business confidence, limited the ability of companies and banks to access international debt markets and contributed to an increase in private capital outflow.”

Meanwhile, Putin’s countermeasures have made matters worse. His decision to ban the import of some foodstuffs from the West has caused prices for fresh produce and other necessities to rise. Combined with the weakening ruble, that’s pushing up inflation, which bites into the pocketbook of the average Russian family. Moscow’s economy minister recently said that he expects inflation to exceed 9% by early 2015. The nasty mixture of a depreciating currency and escalating prices have forced the central bank to hike interest rates, which will act as a further drag on growth.

Headwinds from the global economy are making matters even worse. Tumbling oil prices spell bad news, both for overall growth and the financial position of the government, which is reliant on tax revenues from its energy industry to fund the budget. In 2013, oil and gas accounted for 68% of Russia’s total exports, while duties on those exports, combined with taxes on mining, accounted for 50% of the federal government’s revenue.

Putin so far hasn’t flinched. Instead, he has been scrambling to evade Western sanctions and find new sources of exports and investment in Asia. On the sidelines of the Asia-Pacific Economic Cooperation summit, held in Beijing this month, Russia agreed to a deal to supply even more natural gas to China, on top of a $400 billion pact inked earlier this year.

That “pivot” to Asia will take time to bear fruit, however. Right now, none of the negative factors damaging Russia’s economic prospects look likely to turn positive any time soon. “We expect the stagnation trend to continue and potentially accelerate next year, exacerbated by lower oil prices, tighter monetary policy and continued uncertainty on the geopolitical front,” noted Barclays economist Eldar Vakhitov in a recent report.

Still, Putin’s economic woes haven’t yet translated into political problems. The Russian public appears to be patriotically rallying around Putin’s aggressive foreign policy and setting aside concerns about the economic fallout. In the latest poll conducted by the Levada Center, a Moscow-based independent research organization, an amazing 60% of the respondents said they believed that Russia was heading in the right direction, up significantly from 40% a year earlier. Putin’s approval rating stands at an even more astronomical 88%.

What the future may hold is another issue. A good part of Putin’s political success has been based on his record of improving people’s welfare, but with no relief in sight for Russia’s economic troubles, it may only be a matter a time before the general populace begins to feel the pinch more sharply. Nor can Putin ignore his economy’s need for foreign investment and technology to upgrade industry and create jobs. He may eventually find himself facing a critical choice — maintaining his foreign policy goals or softening his stance towards the West out of economic necessity.

Recall that the Soviet Union collapsed, after all, because its economy could not sustain its international policies. Putin has to watch that history doesn’t repeat itself.

TIME Fast Food

McDonald’s Says Russian Health Inspectors Target 200 Restaurants

Inside Burger King And Subway As McDonald's Faces Growing Challenge From Rivals
A logo hangs on display outside a McDonald's food restaurant in Moscow, Russia, on Sunday, April 7, 2013. Andrey Rudakov—Bloomberg / Getty Images

Russian courts also ordered 9 to close

More than 200 McDonald’s restaurants in Russia are being audited by health inspectors, the company said in a public statement over the weekend.

McDonald’s vowed to challenge a court-ordered closure of nine restaurants, according to a Russian-language statement released by the Illinois-based company, Bloomberg reports.

Health inspections of the Russian branches — there were at least 440 as of August — began shortly after countries in the West imposed sanctions against Russia during the conflict in eastern Ukraine.

Regulators argue the searches are part of a widening investigation of sanitary violations, but critics in August dismissed the probes as an exercise in political retaliation.

[Bloomberg]

TIME Ukraine

Ukraine’s Prime Minister Tells U.N. That Moscow Must Stop Arming Rebels

"We are the country that needs peace and it's difficult to hammer out any kind of peace deal at the barrel of a gun, made in Russia"

Ukrainian Prime Minister Arseniy Yatsenyuk on Wednesday demanded that Russia pull its forces out of Ukraine and stops the supply of arms to pro-Kremlin rebels.

Speaking at the U.N. General Assembly in New York City, Yatsenyuk said Moscow must start real peace talks with Ukraine.

“We urge Russia to pull back its forces, to pull back its artillery, to stop the supply of Russian-led terrorists, to restore the control over Ukrainian-Russian border and to start real talks — peace talks,” he said.

Yatsenyuk also urged Western nations not to lift sanctions against Russia until Ukraine regained control of all of its territory, the BBC reports.

In March, Russia annexed Ukraine’s southern peninsular of Crimea, sparking clashes between the Kiev-aligned military and pro-Russian separatists in the east of the country.

Yatsenyuk insisted that he intended to reclaim all lost territory. “Crimea was, is and will be a part of Ukraine,” he said.

Russia denies equipping the rebels or sending forces into Ukraine.

On Wednesday, U.S. President Barack Obama said he would consider lifting sanctions on Russia if the government abides by a cease-fire signed on Sept. 5. Despite the agreement, fighting has continued in the rebel-held eastern city of Donetsk.

The U.N. says the number of people killed in Ukraine since the conflict began in April has topped 3,000.

“We are the country that needs peace and it’s difficult to hammer out any kind of peace deal at the barrel of a gun, made in Russia,” Yatsenyuk said.

TIME russia

Russia Bans Wide Array of Food Imports From the U.S., EU

Russian Premier Dmitry Medvedev announces sanctions at the Cabinet meeting in Moscow on Thursday, Aug. 7.
Russian Premier Dmitry Medvedev announces sanctions at the Cabinet meeting in Moscow on Thursday, Aug. 7. Dmitry Astakhov—AP

"The situation now requires us to take retaliatory measures."

Russia banned a wide array of food imports from Western countries Thursday in a spiraling sanction war amid the worst ties between Russia and the West since the Cold War.

A day after Russian President Vladimir Putin ordered the additional restrictions, Prime Minister Dmitry Medvedev said he signed a decree banning for one year the import of foods such as meats, cheese and vegetables from the European Union, the United States, Australia, Canada and Norway, the Associated Press reports.

The measures will cut off what would have amounted to some $12 billion in imports from the EU and more than $1 billion in imports from the U.S., according to the AP. They are also likely to take a toll on the supply of higher-end food goods for Russia’s wealthier urbanites, according to the AP.

“Until the last moment, we hoped that our foreign colleagues would understand that sanctions lead to a deadlock and no one needs them,” Medvedev said, according to the AP. “But they didn’t and the situation now requires us to take retaliatory measures.”

The restrictions follow the harshest sanctions yet imposed by the West last week targeting a large swath of the Russian economy, including finance, oil and defense. Those measures were intended to squeeze the already troubled Russian economy even further, after Russia seized Crimea in March and is suspected of continuing to support pro-Russian separatists in eastern Ukraine.

Medvedev also said Ukrainian airliners would be banned from flying over Russian airspace. He said such measures may be extended to Western airliners, some of which currently fly over Siberia from the U.S. en route to other parts of Asia.

[AP]

TIME russia

Over 27,000 Russian Tourists Are Stranded as E.U. Sanctions Take Effect

A group of 30 Russian tourists wait at Antalya Airport in Turkey on Aug. 4, 2014, after their Russian tour company went bankrupt
A group of 30 Russian tourists wait at Antalya Airport in Turkey on Aug. 4, 2014, after their Russian tour company went bankrupt Anadolu Agency/Getty Images

Oligarchs are having to ditch their private jets, too

Over 27,000 Russian tourists have been left stranded abroad after the collapse of Russian tour operator Labirint. The firm cited a “negative political and economic situation” as a reason for its failure, Sky News reports.

Labirint is the fourth Russian tour company to tank in three weeks. “We worry that this is only the beginning and that there will be a domino effect,” a spokeswoman for the country’s Federal Agency for Tourism told radio station and news site Echo of Moscow.

The marooned tourists, in countries such as Egypt and Bulgaria, are a visible sign that the E.U.’s sanctions on Russia, imposed over Moscow’s role in the ongoing Ukraine conflict, are having some effect. Tougher punishments were imposed last week, following the downing of a Malaysia Airlines jetliner in eastern Ukraine on July 17, purportedly by a missile fired by pro-Russian separatists.

Besides affecting tour operators, sanctions have also led to a grounding of Russian budget airline Dobrolet, a subsidiary of state-controlled Aeroflot. The carrier ended up on the sanctions list because it provides direct flights from Moscow to Crimea, the Ukrainian region annexed by Russia earlier this year.

The targeting of Russian banks, meanwhile, has caused Russia’s second oil producer Lukoil to scale back investment plans because it cannot access funds, while Reuters reports that leading Russian banks have been forced to reassure clients that they are able to meet their commitments despite being on the E.U. list.

Prominent Russians are also being inconvenienced. Gennady Timchenko, a billionaire businessman close to President Vladimir Putin, has had his private jet grounded after Gulfstream stopped servicing the aircraft and its pilots were prevented from using its navigation equipment. However, he told Russia’s Itar-Tass news agency that he’d found an alternative to his Visa and MasterCard credit cards.

“As soon as the sanctions came in I got myself [a Chinese Union] card … and it works brilliantly!”

The sanctions could also hurt European businesses, however. Adidas has scrapped its revenue and profit target for next year because of its exposure to the Russian market, U.S. aviation giant Boeing could lose its contracts with Dobrolet, and the German Committee on Eastern European Economic Relations has said that more than 25,000 German jobs are in danger. There is an expectation among European investors that future growth may be hampered, with the euro zone’s Sentix investment index in August dropping to its lowest level in a year.

“As this slump derives from an event which is subject to politics and power play, the central banks, particularly the European Central Bank, will have difficulty in trying to counter this,” Reuters reported Sentix as saying.

Moscow has begun to hit back at sanctions by imposing bans of its own, mostly on food products. It has already banned Polish apples (it says for health reasons, but Polish farmers think the move is retaliatory) and Australian beef. Now, Reuters reports, Moscow is mulling a ban on U.S. poultry — it currently buys around 8% of U.S. broiler-meat exports each year.

MONEY The Economy

Why Sanctions Against Russia May Actually Work This Time

Sanctions aren't always effective, but you have to consider the economic force that Europe and the U.S. can bring to bear.

Economic sanctions leveled against Russia last week by the U.S. and Europe raise a question: Is such pressure effective in getting nations to change their behavior?

Sanctions have been invoked more than 100 times in the past 50 years against dozens of countries, including South Africa, North Korea—and even the United States.

They are a middle ground between war and peace. They often succeed in lowering living standards in the target country, but only sometimes achieve their political objective.

Here are a few examples:

Cuba: The U.S. banned travel and most trade with Cuba in 1960, in protest against the turn to communism by Fidel Castro, whose revolution against the regime of Fulgencio Batista succeeded in 1959. The sanctions have been maintained ever since, though loosened a bit of late. They have probably helped to keep Cuba poor. However, they have not induced any major change in Cuba’s communist system.

North Korea: The United Nations imposed sanctions on North Korea in 2006, trying to discourage it from pursuing its nuclear weapons program and to punish it for human-rights violations. There is little evidence that the sanctions have affected the actions of Kim Jong-Il, North Korea’s former dictator, or his son Kim Jong-Un, the current dictator. North Korea has lived with international sanctions on and off since 1950.

South Africa: In protest against Apartheid, a policy of racial segregation and discrimination by whites against blacks, there were various efforts by countries and by private parties to organize sanctions. The United States got serious about sanctions in 1986, during President Reagan’s term, imposing a variety of trade and capital-flow restrictions.

With Nelson Mandela leading a peaceful uprising by the black majority in South Africa, the country repealed most of its Apartheid laws in 1991. While the economic sanctions were not the only factor leading to repeal, they helped to make the South African government take the opposition’s demands seriously.

The United States. In 1973-1974, the Organization of Petroleum Exporting Countries (OPEC) imposed the so-called Arab Oil Embargo, designed to discourage U.S. support for Israel. The U.S. suffered a recession, but it never abandoned its friendship for Israel, or its practice of supplying Israel with advanced weapons.

The new sanctions against Russia—focusing on the banking, energy and arms industries—are designed to make it refrain from supporting pro-Russian separatists in the Ukraine.

There are two reasons to hope that they will succeed. One is that Russia does have important trade ties to Europe. The other is that sanctions work best when the countries imposing them have more economic power than the target does.

The U.S. and Europe together have more than $33 trillion in gross domestic product; Russia has about $2 trillion.

John Dorfman is chairman of Thunderstorm Capital LLC, an investment management firm in Boston. He can be reached at jdorfman@thunderstormcapital.com.

TIME Innovation

Five Best Ideas of the Day: July 31

1. Sanctions have backed Vladimir Putin into a corner – and that’s where he is most dangerous.

By Julia Ioffe in the New Republic

2. The new vanguard of journalism entrepreneurs won’t destroy media; they’ll probably save it.

By Ann Friedman in Columbia Journalism Review

3. Can Congress rein in the spies?

By David Cole in the New York Review of Books

4. Already heavily subsidized, making mass transit free could help cities attack congestion and pollution.

By Henry Grabar in Salon

5. Things are improving in Africa: A data visualization

By Our World In Data

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

TIME Foreign Policy

Obama Contends with Congressional Backseat Drivers on Ukraine

Congress again threatens to push Obama foreign policy with legislation

A Malaysia Airlines jet is shot down over the Ukraine and Congress is, of course, full of back-seat foreign policy advice for President Obama. The problem is when they start passing some of this advice to be signed into law.

Some say Obama has already been too aggressive. “[T]he crisis in Ukraine started late last year, when the EU and U.S. overthrew the elected Ukrainian president, Viktor Yanukovych,” said former Rep. Ron Paul, a Texas Republican. “Without U.S.-sponsored ‘regime change,’ it is unlikely that hundreds would have been killed in the unrest that followed. Nor would the Malaysian Airlines crash have happened.”

On the other side of the hawk spectrum, Republican Senators such as Marco Rubio and Mark Kirk felt compelled by the tragedy to call on Obama to pass energy, banking and defense sectoral sanctions against Russia, which has been supporting Ukrainian separatists but denies having anything to do with the downing of the plane. Thus far the Obama Administration’s punishment for Russia’s seizure of the Crimea and rabble rousing in eastern Ukraine has been targeted individual sanctions and visa restrictions.

“I don’t know how anybody can say our response has been anything but timid and cautious,” said Senator Bob Corker of Tennessee, the top Republican on the Foreign Relations Committee. “Hopefully on the positive side, this will galvanize the international community to take the kind of steps that should have been taken months ago to push back on [Russian President Vladimir] Putin and cause him to pay the kind of price that he should pay for this outrageous act.”

Kirk also called on Attorney General Eric Holder to launch a wrongful death suit. “I want to hear that the Department of Justice will bring one hell of a wrongful death suit against Russian assets located in the United States to make sure that there is significant cost paid by Russia for this action of shooting down with an international airliner with a weapons system that is directly related to Russian armed forces,” he told CNN.

Senator John McCain of Arizona, the 2008 GOP presidential nominee, went so far as to call on Obama to arm the Ukrainian government. “Now is the time to provide Ukraine with the weapons and other military assistance they have requested and require to defeat the separatist groups and secure their country—assistance that, had we provided it earlier, might have enabled Ukrainian forces to succeed in this effort by now and thereby prevented last week’s tragedy,” McCain said on Monday.

So far, all Obama has threatened is to levy unspecified costs against Russia, along with urging the Europeans to step up on sanctions.

Congress, and particularly the party in opposition, has often expressed strong views on the President’s foreign policy. Despite the fact that, constitutionally, foreign policy is the purview of the Oval Office, Congress drove the War of 1812 and was a key factor in the Mexican-American War. They also dragged Franklin Roosevelt’s heels in getting into World War II and had an enormous impact on Vietnam policy, not to mention Democratic efforts to defund President George W. Bush’s actions in Iraq.

But Obama not only has to contend with opposition complaints about his foreign policy, but with some friendly fire as well. Senate Foreign Relations Committee Chairman Bob Menendez, a New Jersey Democrat, has been the driving force to get Obama to beef up sanctions against Iran, support Israel more strongly and hold a tougher line on Cuba. Menendez has helped push through sanctions that the Administration has explicitly said it didn’t want, something he could do again against Russia if the Administration doesn’t act.

Obama has not had an easy time with Congress on much of anything, but particularly on foreign policy. The other end of Pennsylvania Avenue is quick to condemn, and yet when they are asked to act, for example with Syria or Libya, they suddenly remember the separation of powers. Congress in both instances failed to pass any kind of resolution approving action in either country. That’s because polls show that from Libya to Syria to the Ukraine, the American people have zero desire to engage in more wars. Which means that despite the sturm und drang coming out of the hawkish wing of the GOP, Obama is probably more likely to listen to Paul’s libertarian Dovish wing.

TIME Ukraine

Ukraine Claims Russia Shot Down Military Jet

Ukraine
Ukrainian Army jets fly over the Ukrainian government military base while troops wait for Ukrainian President Petro Poroshenko's visit in Devhenke village, Kharkiv region, eastern Ukraine on July 8, 2014. Evgeniy Maloletka—AP

The alleged incident is the third this week of a Ukrainian jet being fired upon

A Russian plane shot down a Ukrainian jet as it was flying on military operations over east Ukraine, Reuters reports.

Ukrainian military spokesperson Andriy Lysenko confirmed Thursday that a SU-25 warplane was shot down Wednesday evening by a Russian jet.

The allegation is the most vehement to date of Russia directly intervening in the military conflict engulfing east Ukraine. Russia’s defense ministry has refused to respond to the accusation.

Lysenko, a spokesperson for Ukraine’s Defense and Security Council, told journalists the plane was downed by a rocket strike. He added that the pilot ejected without danger.

This is the third incident of a Ukrainian plane being fired upon this week. Last Monday a Russian missile allegedly shot down an An-26 transporter plane. Two of the eight people on board were killed, Kiev said.

On Wednesday, another SU-25 plane was struck by a rebel missile, though the pilot managed to land the plane with little damage. Ukrainian officials don’t suspect Russian involvement.

The conflict in east Ukraine between government forces and separatist rebels has been ongoing for three and a half months, with over 270 Ukrainian servicemen killed. Kiev has accused Russia of assisting the rebels.

On Wednesday U.S. President Barack Obama enforced sanctions on some of Russia’s largest companies, reducing their access to funds. Western governments have accused Russia of failing to help halt the violence.

[Reuters]

TIME Iran

A Side Effect of Iranian Sanctions: Tehran’s Bad Air

An overview of Tehran, July 7.
An overview of Tehran on July 7, 2014 Kiana Hayeri for TIME

Air pollution has decreased significantly since sanctions were temporarily lifted in January. As Iran and the U.S. attempt to hammer out a comprehensive nuclear deal before the July 20 deadline, the capital city’s newly cleaner air hangs in the balance 

When the U.S., the U.N. and Europe implemented, in 2010, one of the harshest sanctions regimes ever seen globally to curb Iran’s suspected development of a nuclear-weapons program, it was widely expected that the country would soon fall to its knees. Instead, Iran absorbed the blow, and though weakened, has managed to keep its economy afloat.

The sanctions all but stopped international financial transactions, limited military purchases, reduced the import and export of petroleum products and significantly curtailed trade — but you wouldn’t know it by walking the bustling streets of Iran’s capital of Tehran. According to economist Saeed Laylaz, Iran imported $3 billion worth of European luxury cars last year, triple the number before sanctions. Grocery stores are packed with all kinds of American products: from Coca-Cola to Snickers candy bars to Duracell batteries, while electronics shops even in small towns proudly display the full range of Dell, Hewlett-Packard and Apple products — even the iPhone 5S. The sanctions didn’t hurt Iran, say Iranians; they merely amplified an economic crisis wrought by government mismanagement in the preceding years.

About the only place where the impact of sanctions is visible is in the skies above Tehran. Iran may have the fourth largest proven petroleum reserve in the world, but it refines little of its own product, depending instead on imports of fuel from Europe. Sanctions cut those commodities off, sharply reducing supplies of gasoline. In order to keep Iran’s 26.3 million cars, trucks and motorcycles on the road, government officials were forced to convert petrochemical factories into ad hoc refineries, an expensive and inefficient process that produces a low-grade fuel choked with pollutants.

The results were devastating. Already home to some of the world’s most polluted cities, Iran saw a dramatic increase in the air pollution that contribute most directly to ill health, according to a worldwide World Health Organization assessment released in 2013. It is impossible to definitively link the impact of sanctions to the rising rates of childhood asthma cases and lung disease documented by Iran’s Health Ministry over the past four years — the concurrent increase in car ownership may also play a role. But when some sanctions, including those on the import of gasoline, were lifted in January under an interim agreement that proffered relief in exchange for substantial negotiations over the scope of Iran’s nuclear program, the impact was visible.

In June 2013, the pollution in Tehran was so bad that the mountains surrounding the capital could not even be made out from the 13th floor of a hotel popular with journalists in the city center. A year later, however, the last vestiges of winter snow could be spotted high on the mountains to the north of the city. “Sanctions significantly contributed to pollution, and particularly the kinds of pollution that are damaging to health,” says Rocky Ansari, an economist and sanctions expert at Cyrus Omron International, a firm that advises international companies on investing in Iran. Even before the sanctions were lifted, he says, the government was working on improving refining capacity in the country, but the international decision to clear the way for increased imports of refined fuel was a huge boost. “Now that hardly any petrol from petrochemical factories is being used, the pollution has reduced, and already people can breathe better air.”

That may be the case, but many Iranians are still holding their breath. The interim agreement ends on July 20, and a comprehensive deal that limits Iran’s ability to produce nuclear weapons in exchange for a permanent lifting of sanctions is still in doubt. Iran says its nuclear program is purely for peaceful purposes, but a long history of subterfuge when it comes to international inspections has raised doubts about the country’s true intentions. The U.S. wants to see a sharp reduction in Iran’s ability to enrich nuclear fuel to weapons grade; Iran says it will not submit to overly onerous limits on its nuclear energy program.

The temporary agreement can be extended by up to six months, a point raised by French Foreign Minister Laurent Fabius on the sideline of talks in Vienna on July 13. “If we can reach a deal by July 20, bravo, if it’s serious,” he told reporters, according to Reuters. “If we can’t, there are two possibilities. One, we either extend … or we will have to say that unfortunately there is no prospect for a deal.” Should the talks fail, as with several previous attempts to strike a deal, the U.S. is likely to lead the call for even tougher sanctions, risking more conflict in a region already in turmoil — and further darkening the skies above Tehran.

— With reporting by Kay Armin Serjoie / Tehran

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