Putin knows his military muscle isn't much without economic muscle

While Ukraine is the central point of conflict between Russia and NATO, economics may be the next battlefront.

According to Robert Dannenberg, a Goldman Sachs security analyst and CIA veteran, Russia’s President Vladimir Putin recognises the importance of gaining power through international economic agencies.

“Putin is conservative and nostalgic, but he also understands that it takes more than just rebuilding or modernising your nuclear arsenal to create a bi-polar world. You need to have economic power,” Dannenberg said during a Q&A in a Goldman note.

Russia seems far from realising these goals. Lowered oil prices and economic sanctions by NATO due to the Ukraine conflict have crippled the Russian economy in the past few years.

The country’s bonds have been downgraded to junk status, and its GDP contracted 1.9% in the first quarter of 2015. It does not seem that Russia is ready to flex its economic muscle.

In spite of the weak economy, Russia is attempting to boost its fortune by allying with more friendly economic powers, particularly China, and burgeoning markets.

According to Dannenberg, Putin’s plan is twofold. The first objective is to create closer formal ties with countries that have similar economic interests.

Last week Russia hosted the BRICS summit, a meeting of economic and political leaders from the growing powers of Brazil, India, China and South Africa. Russia is also a member of the Shanghai Cooperation Organisation (SCO), which has 14 members including China, India, Iran, Pakistan and Turkey.

They have even begun to court Greece as an economic partner in Europe.

Obviously based on those membership lists, Russia’s main focus is maintaining strong ties with China. Dannenberg highlighted this the most important part of Putin’s economic plan.

Vladimir putin Xi Jinping brics conference russia chinaRia Novosti/ReutersRussian President Vladimir Putin walks Chinese President Xi Jinping at the BRICS Summit in Ufa, Russia, July 9, 2015. Ufa is hosting the BRICS and the Shanghai Cooperation Organisation summits July 9-10.

“Putin knows that Russia’s relative economic weakness means there is no possibility of achieving his vision without China’s participation,” said Dannenberg.

He noted that Putin is willing to make serious concessions to achieve the goal.

“It is why he agreed to a natural gas deal with China in the spring of 2014 despite very disadvantageous terms for Russia,” he said.

In November, Russia and China struck a deal to create pipelines from Siberia into China and transport up to 38 billion cubic meters of gas a year and in April, Russia sold a stake in its Vankor oil fields to the Chinese in an unprecedented move.

Russia plans take aim at international economic institutions Putin believes are controlled by NATO nations. Here’s Dannenberg:

“He has consistently articulated, especially over the last year, that all the world’s major economic tools are controlled by the West and available to punish countries that don’t play by Western rules, whether it is the dollar as the world’s reserve currency, the governance of the International Monetary Fund, SWIFT, or Visa and MasterCard for consumer finance.”

This notion has already been picked up by the Chinese, who in recent months have made a push for the yuan’s inclusion in the IMF’s Special Drawing Rights as a reserve currency or even pushing to use the SDR as the base for all investment instead of the US dollar.

By connecting with China and other markets, Putin is expanding his conflict with the West from the streets of Ukraine to the economic markets of the world.

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