The Strange Case of Dr. Vladimir and Mr. Putin
Economic warfare in the Baltic Sea and in the states is as old as the Vikings – and its long history continues as Finland and Sweden’s impending NATO membership is reshaping the region. While many focus on the sizable military challenges that a bigger and stronger NATO will pose for the Kremlin, the immediate and lasting peril for Moscow will be economic. Russian President Vladimir Putin’s ill-advised invasion of Ukraine not only places Moscow’s vital Baltic maritime trade under increased threat from a NATO blockade, it also seriously, if not permanently, destroys the development of the centerpiece of his ambitious vision of restoring Russia. as a great power: the 3,500 mile Northern Sea Route (NSR).
Since Putin came to power in August 1999, he has been very “Dr. Jekyll and Mr. Hyde” in his dictatorship and governance of Russia, going from a grandiose economic visionary to a petty dictator determined to conquer territory and/or or domination, as evidenced by its forays into Ukraine, Syria, Crimea, Chechnya and Georgia. Apparently he is unable to reconcile the two, and while the Russian economy, corrupt as it is, is necessary to achieve the former, the latter is destroying the Russian economy. Nowhere is this self-destructive conflict more evident than in Putin’s brutal and reckless decision-making in Ukraine – and the corresponding outsized economic disaster it creates for Russia in the Baltic Sea and the NSR.
Like almost all oil states, Russia relies heavily on energy exports as a percentage of its gross national product (GDP). Depending on fluctuations in commodity prices, energy exports account for 10-25% of Russia’s overall annual GDP. Prior to Putin’s “special military operation” in Ukraine and subsequent Western sanctions, oil and gas exports accounted for 50-60% of all Russian exports – and 70-85% of those fossil fuels transited either through the Baltic Sea, either through the Black Sea Sea or Arctic Ocean.
Not all GDPs are equal – currency producing GDP is inherently exponentially more valuable. Russia’s maritime oil and gas trade and the strong foreign currency it has generated have been a key factor in proactively protecting, if only temporarily, Russian commercial markets from US and European sanctions. It will again be needed to rebuild Russia’s shattered war economy. Moscow, at its pre-war peak, reportedly amassed $633 billion from oil and gas exports in foreign exchange reserves – the fourth highest at the time in the world.
It will be difficult to replace lost oil and gas revenues. As it stands, Moscow is facing severe disruption to shipping in the Black Sea and elsewhere due to its invasion of Ukraine – up to a 55% drop in inbound cargo traffic. Putin cannot afford to be dragged into a deeper conflict with NATO in the Baltic Sea over Finland and Sweden.
Despite Putin’s caustic assertion that Russia was no longer a “gas station” in December 2020, Putin (uninterrupted since 2007) has made capitalization of oil and gas reserves a cornerstone of his plan. director to restore Moscow to great power status – including using a Russian Mir mini-submarine in August 2007 to ostensibly plant a “rustproof titanium flag” on the seabed of the North Pole in support of its disputed claim by the United Nations of all oil and gas rights in the pole. Indeed, the entire foundation of Putin’s great power resurrection rests on reviving former Soviet dictator Joseph Stalin’s “Red Arctic” dreams of dominating the Arctic polar region and exploiting the NSR.
In May 2018, Putin began to give weight and shape to his vision of year-round oil and gas extraction and shipping for the NSR – ordering “by 2024 the flow of goods along the NSR are expected to increase to 80 million tonnes”. In December 2019, then Russian Prime Minister Dmitry Medvedev set Putin’s master plan in motion by passing legislation in the Duma for a ” [15-year] Modernization and expansion plan of the main infrastructure developing the NSR. As far as Ukraine, Russia has continued to push for foreign investment in bricks-and-mortar NSR projects – including offering $41 billion in tax relief for the Rosneft Vostok oilfield and a package of $300 billion in incentives” to provide new incentives for new ports, factories and oil and gas developments on the coasts and in the waters of the Arctic Ocean.
Despite extreme swings in oil and gas prices during the COVID-19 pandemic and an ensuing sharp global shift towards renewable energy, Russia has also continued to invest steadily in its Baltic fossil fuel port systems, including in July 2021 allocating $2.1 billion to dramatically expand Primorsky, Russia’s largest Baltic seaport — increasing its oil and gas offloading terminal capacity by 20%.
Then came Ukraine – and everything in the Baltic and in the NSR fell apart for Putin. Finland and Sweden are shaken by the invasion and have applied for NATO membership. Russian oil and gas exports fell precipitously in the Baltic and elsewhere – and NSR oil and energy investors fled in a mass exodus, including BP, which levies a $25.5bn pretax charge on profits due to the exit of its 19.75% stake in Rosneft, a Russian state company.
In the words of Robert Louis Stevenson, Dr. Vladimir’s statesmanship in the Baltic Sea and the NSR was undermined and lost by Mr. Putin in Ukraine. Supply chain problems, sanctions, foreign divestments and lack of capital could soon turn NSR infrastructure projects into “ghost towns”. Yes, Mr Putin has options. He could arm the Iskander M missiles with nuclear warheads in Kaliningrad and/or build up a significant number of ground forces there to threaten the Suwałki Gap in order to potentially prevent the Baltic states from reinforcing NATO forces – however, Dr. Vladimir can no longer afford the cost.
If this were a novel, Dr. Vladimir would come to his senses and realize that Mr. Putin’s temerity is strengthening and developing NATO, and will soon lead to the stationing of NATO troops along the Finnish border. of 830 miles with Russia – just 443 miles from Murmansk in the NSR – dashing his dreams of restoring Russia as a great power by making the NSR a profitable commercial reality. But this is not fiction. Putin is at war with himself and cannot see it. Meanwhile, Russia’s GDP is expected to contract wildly between 8.8% and 12.4% in 2022.
Mark Toth is an economist, historian and entrepreneur who has worked in banking, insurance, publishing and global commerce. He is a former board member of the World Trade Center, St. Louis, and has lived in US diplomatic and military communities around the world, including London, Tel Aviv, Augsburg, and Nagoya. Follow him on Twitter @MCTothSTL.