Why is Putin Smiling?

by Kevin D. Freeman on October 6, 2014


The Russian economy appears to be in trouble. The ruble is collapsing. Oil prices are cratering and oil is Russia’s primary output. The dollar has strengthened for nine straight weeks. And yet, Vladimir Putin seems unperturbed. He powers on in efforts to build a new alliance that challenges the dollar and the Western financial system.

As you can see in a chart from The Wall Street Journal, the ruble has really struggled:


Western observers have predicted that Russia may be forced to impose capital controls:

Putin, for his part, denies any need for capital controls:


Putin Rules Out Capital Controls as Russian Outflows Grow

By Ilya Arkhipov – Oct 2, 2014
President Vladimir Putin joined the central bank in ruling out measures to hinder the accelerating flow of money from Russia after speculation that policy makers are weighing the possibility of capital controls sent the ruble to a record low.

“We don’t plan to introduce currency restrictions or restrictions on the movement of capital,” Putin said today at a Moscow investment forum organized by VTB Capital.

His comments echo central bank Chairman Elvira Nabiullina, who earlier told the same conference that speculation policy makers are considering limits on capital movements is “absolutely baseless.” The bank is weighing the introduction of temporary capital controls if the flow of money out of the country intensifies, according to two officials with direct knowledge of the discussions….To CONTINUE at Bloomberg…

Why is Putin confident that capital controls won’t be necessary? Two reasons. First, Russia has enormous capital reserves. In fact, Russia is one of the largest holders of reserves, ranked fifth in the world, far ahead of U.S. official reserve holdings and just behind Saudi Arabia and Switzerland.

Second, Putin truly believes he can make the Western financial regime unnecessary through a Eurasian alliance. On October 3, he signed into law just such an effort:


Russia completes ratification of Eurasian Economic Union, as Putin signs law

October 03, 2014

Russian President Vladimir Putin has signed a law ratifying a historic treaty, committing Russia to an economic union with Belarus and Kazakhstan. The Eurasian Economic Union will come into effect in January 2015.

Putin’s signature in the document puts the final dot in Russia’s ratification of the union which will be in place on January 1, 2015, as the other union states are expected to complete ratification in the next few days.

The economic union is the next step of integration within the Customs Union between the three countries. The agreement had previously been ratified by the Russian State Duma and the Federal Council of Russia.

It will help cut trade barriers and be the largest common market in the ex-Soviet sphere, comprising over 170 million people. The troika of countries will cooperate in energy, industry, agriculture, and transport. The ruble will become the de facto currency of the organization, although each country will still keep their local currency.

Financial integration is a major part of the agreement, while Russian, which is very widely spoken in both Belarus and Kazakhstan, will be the working language of the union. The headquarters of the union will be in Moscow, with the courts in Minsk, and Almaty will be the home of the financial regulatory body.

Citizens of Russia, Belarus, and Kazakhstan will have the right to work freely throughout the member states without the need for a work permit. Over the last three years trade within the Customs Union has increased by $23 billion, or by nearly 50 percent. At the end of 2013, it stood at $66.2 billion.

Belarus and Kazakhstan are in third place in foreign trade with the Russian Federation, after the EU and China. To READ at RT….

Russia is also confident in its relationship with China. In fact, according to The Wall Street Journal, Vladimir Putin has become a cult hero to the Chinese people:

Why Russia’s President Is ‘Putin the Great’ in China

Like Xi Jinping, Vladimir Putin Is Seen as a Strong Leader Who Isn’t Afraid to Confront the West

By JEREMY PAGE Oct. 1, 2014

BEIJING—In the recommended-reading section of Beijing’s Wangfujing bookstore, staff members have no doubt which foreign leader customers are most interested in: President Vladimir Putin, or “Putin the Great” as some Chinese call him.

Books on Mr. Putin have been flying off shelves since the crisis in Ukraine began, far outselling those on other world leaders, sales staff say. One book, “Putin Biography: He is Born for Russia,” made the list of top 10 nonfiction best sellers at the Beijing News newspaper in September.

China’s fascination with Mr. Putin is more than literary, marking a shift in the post-Cold War order and in Chinese politics. After decades of mutual suspicion—and one short border conflict—Beijing and Moscow are drawing closer as they simultaneously challenge the U.S.-led security architecture that has prevailed since the Soviet collapse, diplomats and analysts say.

The former rivals for leadership of the Communist world also increasingly share a brand of anti-Western nationalism that could color President Xi Jinping’s view of the pro-democracy protests in Hong Kong. Beijing accuses Western governments of stirring unrest there, much as Mr. Putin blamed the West for the pro-democracy protests in Kiev that began late last year.

Russia has begun portraying the Hong Kong protests, too, as U.S.-inspired. Russian state-controlled television channels this week claimed that Hong Kong protest leaders had received American training.

The Pew Research Center says China is one of the few countries where popular support for Russia has risen since Moscow’s confrontation with the West over Ukraine—rising to 66% in July from 47% a year earlier. …To CONTINUE READING at The Wall Street Journal…

Putin has made serious efforts in the past to court the Chinese in challenging America. They appear to be successful and the challenges of Hong Kong and the Ukraine are solidifying that effort.

It is important to note that even as the United States would like to dismiss the idea of a non-dollar world, others see a new reality emerging. For example, Financial Times (London) recently shared the following on September 30 about the BRICS nations developing an alternative financial system:

“If this future materialises, it will mean a rebalancing in global governance powers towards China and away from the “Washington consensus”. In a sense, the west has only itself to blame. The bank – which will have initial capital of $50bn and maximum allowable capital of $100bn – was formed in response to the west’s reluctance to devolve influence to emerging powers.

The IMF, for instance, allocates just 10.3 per cent of its voting rights to Brics countries despite the fact that they have more than doubled their share of global GDP to 21 per cent in 2013 from less than 10 per cent in 2000. European countries, by contrast, control voting rights of 27.5 per cent for just 18 per cent of the world’s output. To add to the imbalance, the IMF presidency is reserved for a European while that of the World Bank routinely goes to an American.


This has added to Russia’s confidence. Putin is also aware of what we have shared in the past, namely that our financial system is vulnerable to a serious cyber-economic attack. Putin’s aides have alluded to that reality. Our cyber and homeland security experts have warned of its probability:

“Every action has a reaction, however, and Russia’s response to the West’s latest step remains to be seen. What we do know, though, is that Russia has long integrated cyber operations into its larger military strategy and doctrine. Indeed, Russia’s campaign against Ukraine has invoked such strategy and tactics, using cyberattacks to disrupt Ukraine’s communications systems, and information warfare to engage in psychological battle against the Ukrainian government and broader publics. These attempts to undermine Ukrainian authorities and deny them maneuverability also aimed to foster and maintain a spirit of resistance to Kiev among pro-Russian forces within Ukraine.

Against this background, it is no great leap to suggest that Russia may consider turning its cyber skills against those who initiated sanctions on Russian behavior, just as the heat in the kitchen rises. From a Russian perspective, this would fall into the category of turnabout is fair play. Cyberattacks have the added attraction of plausible deniability, since it is difficult to trace with full certainty the source of an attack. Russia can also place itself at a further level of remove by relying upon proxies for their cyber operations as they have in the past. With the latest round of sanctions as a potential spur to Russian escalation along these lines, U.S. energy and banking executives in particular — not just chief information security officers and chief security officers—should take the threat seriously, with CISOs and CSOs being on the lookout for indicators.”

And, the recently announced attack on JP Morgan Chase and a total of 10 major institutions makes the point. The Russians are capable even without the Chinese of hacking and taking down our stock market and banking system. With the Chinese? Unimaginable. From The New York Times (October 3):

The breadth of the attacks — and the lack of clarity about whether it was an effort to steal from accounts or to demonstrate that the hackers could penetrate even the best-protected American financial institutions — has left Washington intelligence officials and policy makers far more concerned than they have let on publicly. Some American officials speculate that the breach was intended to send a message to Wall Street and the United States about the vulnerability of the digital network of one of the world’s most important banking institutions.“ It could be in retaliation for the sanctions” placed on Russia, one senior official briefed on the intelligence said.

It should be abundantly clear that both Russia and China have a weapon of undeniable capability. Perhaps this explains why both Russia and China now feel emboldened to confront our military capabilities. From The Washington Post:

China, Russia flex muscles in increasing number of close calls with U.S. aircraft

By Craig Whitlock – October 4, 2014

A recent spate of dangerous midair encounters between American military aircraft and Chinese and Russian planes in the Pacific is the result of increasingly assertive strategies by both U.S. adversaries to project power far beyond their borders, according to the top U.S. Air Force commander in the region.

Air Force Gen. Herbert “Hawk” Carlisle, the head of U.S. Pacific Air Forces, said China’s naval and air forces in particular are “very much continuing to push” and becoming more active in international waters and airspace in Asia.

“They still talk about the century of humiliation in the last century. They still talk about this as the rise of China,” Carlisle said in an interview. “They still talk about this as their great nation. And they want to continue to demonstrate that.”

While the Pentagon has long expected an increase in Chinese military activity in the Pacific, it has also had to confront a resurgent Russia, which is conducting more long-range reconnaissance and bomber missions in the region and even approaching U.S. territory. To CONTINUE READING at The Washington Post…

Russia also knows that its control of gas supplies ahead of Winter provide leverage in Europe. And China is making direct Euro-Yuan trade deals that also cut out the American dollar. Russia is prepared to dump dollars and urge the BRICS and Europe to join them.

We can continue “whistling past the graveyard” by viewing recent dollar strength and ruble weakness as a sign that we’ve already won an economic war. But, Putin is still smiling. Maybe there’s more happening than we are willing to admit. He sure seems to believe so.

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