For Putin, Public Opinion May Be More Worrisome Than Sanctions

Vladimir Putin’s apparent new-found caution may be more a function of Russian public opinion than his fear of sanctions by the US and our European allies.  The Pew Research Center found that 75% of Russians supported Putin’s annexation of Crimea, but only about a third support a similar grab of southeastern Ukraine.  This is no small matter for the man in whose eyes President George W. Bush saw a warm and fuzzy soul.

We combed through tracking polls conducted by Levada, a Russian independent survey firm, and found that as recently as December Putin’s approval rating was at 61%.  In the west a 61% approval rating might have heads-of-state pouring Champaign, but that was Putin’s lowest rating in a dozen years. Now, Putin is basking in the warmth of an 82% approval glow, and that is probably a huge consideration for him.

His economy is weak and getting weaker, and he may very well feel that this is no time to trade his lofty approval rating for real estate his countrymen don’t seem eager to own. Unemployment is high, prices are heading north, wages (along with the ruble) are heading south, and economic growth is rapidly petering out.  He clearly has rough sledding ahead, and he may figure he can manipulate Ukraine politically and diplomatically to his advantage without turning off his public with excessive muscularity.

And, in our view, he would be right. He knows sanctions won’t work because not one country in the west (the US included) wants to dampen their own struggling economies to come to the aid of Ukraine.  Putin figures the west will speak loudly but wield a relatively small and manageable stick.  Without really meaningful western support Ukraine will have no choice but to “agree” to dance to Russia’s tune, given the wallflower status she has been relegated to by the west doing the Geneva Waltz.

It is not hard to see why. Notwithstanding all the bluster from the west, European purchases of Russian gas (about a third of total European gas consumption) rose 2% while the bear swallowed Crimea in the first quarter of the year, and, at the same time, Europe sold nearly $250 billion worth of goods to Russia last year. The odds of trashing that kind of trade are probably zero and Putin knows it.

And while it is true that Europe is the primary financier of Russian debt, think what would happen if push came to shove and Putin ordered Russian companies to stop servicing their debt to European bankers. The banks just aren’t going to support having their host governments putting their financial underpinnings in peril.

Energy sanctions could, in theory, work — but only in theory.  The west just isn’t going to go there.  Look, no one produces more energy than Russia.  No one.  Russia produces just about the same amount of oil as Saudi Arabia (just under 10 million barrels a day), so who in the world would boycott Russian oil.  And what good would it do if some group of European countries did?  Prices would skyrocket, crippling the very economies propping up Western Europe. And Russia probably wouldn’t suffer because China would buy all of that high-priced oil.  After all, just as Russia produces more energy than any other country, China consumes more energy than any other country.

On paper, the US and Western Europe have the wherewithal to cripple Russia.  But everyone knows it is a chimera that won’t materialize.  Clifford Gaddy, a Russian expert at the Brookings Institution, summed it up pretty succinctly recently. “The whole idea that we are going to defeat Russians by imposing hardship on them boggles my mind,” he said.  Russia can tolerate more pain than we and our allies are willing to impose.Without strong European support there is not a great deal we can realistically do. US trade with Russia amounts to less than 1 percent of our aggregate trade.

Unfortunately, the largest investors in Russia are international energy exploration companies. No one really wants to curtail their investments in exploration (well, there’s always the Sierra Club). Exxon Mobil is America’s largest investor in Russia. Exxon is exploring and producing off Sakhalin Island in northeastern Russia, and has partnered with Russian oil giant Rosneft to explore in Russia’s Arctic region.  According to Pavel Molchanov, an oil analyst at Raymond James, Russia accounts for about 6 percent of Exxon Mobil’s global production. Another US company Molchanov mentions is Weatherford, an oil services company, which is also deeply involved in Russia. Today, Weatherford has 346 rigs, 74 percent of its international rig count, operating in Russia.

Then there’s London-based BP, which owns a 19.75 percent stake in Rosneft.  BP’s investment is valued at roughly $13 billion.  That’s about 9 percent of BP’s total market capitalization. Molchanov says The Rosneft holding also accounts for about 30 percent of BP’s production, 36 percent of its reserves and contributes about 15 percent to the firm’s net income.

Royal Dutch Shell; same story. The Dutch company has a stake in Gazprom’s big oil and gas field in Siberia and is also a partner in the Sakhalin Island venture. That facility is now estimated to supply about a10% of Japan’s gas needs.

Sanctions against Russia would be much less effective than, say, sanctions against Iran (the effectiveness of which remains to be seen). Iran never exported more than 2.5 million barrels of oil a day. International sanctions slashed that to about 1 to 1.5 million barrels a day. That wasn’t hard for the rest of the world to make up.  But what would the world do if it lost Russia’s 9 million barrels a day?  There would be a worldwide crisis, and the world isn’t going to suffer a crisis for Ukraine.

There’s one other big fly in the ointment.  So far, as we’ve discussed in recent essays, the sanctions that have been applied are causing no pain to the European economies.  To go to the next round of sanctions, the round that, essentially, goes beyond crimping the travel of individuals, the EU would require unanimous consent.  Is there really anyone who believes that is going to happen?

As one German expert observed, “the thumbscrews the West has thus far implemented haven’t instilled much fear in Putin and his associates. Russia has little foreign debt and large currency reserves, giving it a transitional period of at least two years — enough time to find new buyers and distribution routes for Russian gas. We’ll be sitting in the cold before the Russians run out of money.”

Given that few serious observers believe that sanctions worry Putin very much, it seems pubic opinion in Russia might be the soft power that is giving Putin pause.  Who would have believed it?

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