The Russian currency crash on Monday and Tuesday is likely to reduce the chances for Russian leaders to initiate new foreign adventures and may well result in efforts to make a deal on Ukraine. Vladimir Putin and his allies realize that in an economic downturn, they won’t have the financial resources to undertake efforts to destabilize other neighboring states. Instead, we should be looking for Russia to undertake some retrenchment, with Putin to try to calm things down a bit in the hope that he can persuade EU states to allow the sanctions they have in place against Russia to expire. This would allow for market sentiment to improve somewhat, which Russian leaders hope would allow the ruble to strengthen even if continuing U.S. sectoral sanctions mean that a corporate liquidity crisis is inevitable.
Russian leaders recognize that for European sanctions to end, the conflict in eastern Ukraine needs to be resolved. It is no coincidence that the situation in the Donbas has been calmer in recent days than at any time since last spring. While I imagine that neither the Russian nor European sides at this point know exactly what it would take to call off the sanctions regime, Russian leaders may be hoping that even a partial stabilization of the conflict may be enough to prevent EU member states from reaching consensus on renewing the sectoral and financial sanctions that are particularly economically painful to both sides and that are due to expire in July and August 2015.
Given this analysis, one might be surprised that Putin didn’t express more of an intent to compromise in his press conference today. But anyone expecting a soft line in this forum doesn’t understand how Putin operates. The press conference is first and foremost a PR opportunity for a domestic audience. In such a forum, he has to maintain his position in order to reassure his base that he’s not changing course. Even if he wanted to compromise, he wouldn’t announce it at the press conference. In fact, I doubt that he’d announce it publicly at all.
Instead, we should watch Russian actions in coming weeks/months. They will provide a better indication of Putin’s next move(s). But at the same time, I don’t expect much more in the next few months than an effort to avoid further escalation. I think that for now the leadership thinks it can still wait this out, that oil prices will rise sometime in 2015, that the EU will fail to agree to renew sanctions next summer. This is not 1998. Russia has the reserves to wait out the hard times, if they only last a year or two.
Parts of this post appeared originally in The Monkey Cage.