Image copyright AFP

Vladimir Putin accused the US and EU of conspiring to weaken Russia at his end-of-year news conference on Thursday, but as the country's economy tanks he has nobody to blame but himself, argues Russia analyst Ben Judah.

Russia blames the West. Not only for the war in Ukraine - the result, it says, of a revolution orchestrated by Western powers - but for the slump in the oil price, and the collapse of the rouble. There is talk in the Kremlin of an American-Saudi conspiracy and Nato economic warfare.

But in reality the war and the rouble crisis could have been avoided, and nowhere is this more evident than in relation to the oil-dependent economy.

The Kremlin has known, ever since the oil boom took off 10 years ago, that a political system was being built on the basis of the one thing in Russia that Vladimir Putin could not control - the price of oil. The Kremlin's own accounts estimate that sales of oil and gas accounted for 50% of Russia's federal budget revenue in 2013. And ominously, roughly half the Russian population lives off the state budget - either as state employees, pensioners or as benefit claimants.

Image copyright Other

Ben Judah

Ben Judah is the author of Fragile Empire: How Russia Fell In And Out Of Love With Vladimir Putin.

He is now writing a book about London as a global city.

This means that a collapse in the oil price threatens the fragile foundations of the current system, in which the Kremlin buys the loyalty of the majority with state handouts. The Kremlin needs the price of oil to remain high, and even to rise if it is to continue to deliver rising living standards.

Instead Russians may now have to face austerity.

We have not done much of what we were planning to do and saying we would do to diversify our economy for the past 20 years Vladimir Putin

"If the situation continues to develop unfavourably like this, we will have to adjust our plans, and it is certain that cuts in some areas will have to be made," Putin said at his news conference.

Russia's 2015 spending plans had assumed that oil would remain over $100. The country can only balance its budget with the oil price around that mark. The Kremlin may soon no longer have the cash to buy Russians' enthusiastic patriotism with television extravaganzas like the Sochi Olympics (price tag $50bn), or the sudden invasion and annexation of Crimea ($75bn, according to one estimate).

For the masses, the association between Vladimir Putin and rising living standards may soon be broken, while for the elite the Russian president no longer looks like a guarantor of economic stability. Within government there is talk of significant cutbacks and even mass lay-offs at state corporations like Gazprom. There is also a risk that to escape the currency crisis Russia may face a period of inflation, inflicting further wounds on ordinary people's living standards. Russia's middle classes are already facing onerous mortgage repayments, and the imported goods and foreign holidays they enjoy may become unaffordable.

At his news conference, Putin accused the West of conspiring to weaken Russia, and building a "virtual" Berlin Wall to contain it. In the Kremlin, the allegation is being made that Washington DC and Riyadh have conspired to collapse the price of oil in order to weaken Russia and Iran.

But even this would not absolve Vladimir Putin of responsibility for Russia's crisis. One of the main topics of debate in Moscow over the past decade, in both liberal and conservative circles, has been how to build a new economy able to withstand wild oscillations in the price of oil. The vulnerability of the rouble was well understood - there is consensus among the political elite that as long as more than 60% of Russia's export revenue continues to be drawn from oil, the currency will never be treated by markets as more than "paper oil".

There were reports from the intelligence services and from liberal think-tanks such as the Institute of Contemporary Development (INSOR) warning that an oil-dependent economy was hostage to Western financial markets and to possible manipulation.

Russian economy Energy exports 50% of Russia's government revenue comes from oil and gas 68% of Russia's total export revenues in 2013 came from oil and natural gas sales

33% of these were crude oil exports, mostly to Europe AP

Putin ignored advice from Yegor Gaidar, the former Russian prime minister who took up his post immediately after the collapse of the Soviet Union in 1992. He wrote a book-length appeal to Putin, The Collapse Of An Empire, arguing that the Soviet Union had financially imploded due to the sudden collapse in the oil price - thanks to American-Saudi agreements to increase production - and that the new Russia was repeating its mistakes.

In some way we prepared this storm ourselves Alexei Ulyukaev, Economy Minister

Moscow was to blame, he wrote, for basing its economy on barrels of oil, whose value could so easily be manipulated by its worst enemies. He drew a parallel with Spain, which became addicted to gold and silver in the 16th and 17th Centuries, and then slid into insolvency and lost its empire when the value of bullion tumbled.

Russia's own government knew that an oil crash was inevitable. Vladimir Putin ignored the government's Strategy 2020, which proudly announced that "structural diversification of the economy will become evident in the composition of exports". He ignored the pleas of Prime Minister Dmitry Medvedev, then serving as titular president, who in 2009 rhetorically asked the Russian public: "Can an economy based on raw materials and endemic corruption take us into the future?" Even the powerful Kremlin aide, Vladislav Surkov, currently leading on operations in Ukraine, warned in 2010: "We are not like Kuwait… We are unable to be a small prosperous emirate. We are a great big country that oil will be unable to feed. We must learn to make money from our brains."

The projects proposed by Russia's conservatives to invest in new industrial stock were ignored. The idea pioneered by Dmitry Medvedev and Vladislav Surkov to create a science park at Skolkovo outside Moscow grew into little more than a Potemkin village. Vladimir Putin, meanwhile, has often seemed to prefer the fast-paced dramas of Ukraine and Syria to the difficult work of fostering infant industries, promoting new technologies or small businesses.

"We found ourselves in a perfect storm and I guess it's not an accident, because in some way we prepared this storm ourselves," Economy Minister Alexei Ulyukayev told the Vedomosti newspaper on Thursday.

Putin, meanwhile, said: "We have not done much of what we were planning to do and saying we would do to diversify our economy for the past 20 years."

He added that "life itself" would now ensure the work was done.

But at the same time, he blames the West. It would be more accurate to say that responsibility lies with the Russian president and the politicians who failed to challenge him - and missed the opportunity to build a robust economy for Russia while they had the chance.

@b_judah is the author of Fragile Empire: How Russia Fell In And Out Of Love With Vladimir Putin.

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