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 THE END OF VLADIMIR PUTIN

Could the war in Ukraine bring down the Kremlin?

When rebel crosshairs fixed on Malaysian Airlines flight MH17 30,000 feet above the sunflowers of Eastern Ukraine, they had no idea what they were about to blow up. No clue they were about to incinerate hundreds of Dutch holidaymakers. None whatsoever they were about to wreck a decade of the Kremlin's finest diplomacy-years of cleverly preventing the Americans from building a united Western front by playing divide and rule amongst the Europeans.

The rebels blew up more than a plane. They blew up Russia's winning position in Brussels against sanctions. Europeans like to think they play games with others, but the truth is that for years Russia has been pulling strings inside the European Union. The boys in Brussels like to boast about the EU. But they are ashamed to admit how far the Kremlin had gamed them: playing them off each other with energy, armaments and oligarchs.

None of the heavy hitters in Europe were willing to give these up big, juicy bribes for Ukraine. This is why serious sanctions have taken so long. Because for all the fighting talk from the Eurocrats, Russian money has run rings around its interests, its cash aiming to cripple any common foreign policy. Russia is Europe's third-biggest trade partner. Moscow's investments in the continent are enormous: Russia does over 40 percent of its trade with the European Union, supplying the bloc with roughly a quarter of its gas, while receiving more than $310 billion in loans from its banks.
Kremlin tactics were simple: use this money to divide and rule. That's why Russian diplomats no longer sound like KGB agents. They never talk ideology; they always talk about money. Putin's best diplomats now sound like clever businessmen: Does Germany want its own personalized pipeline? Excellent. Now, we only want Berlin to be a little more understanding on human rights… Would France, or Italy, like special military and energy deals? Fabulous. This could be arranged, but please, no more lectures on how to behave. Would Bulgaria, Hungary, Romania or perhaps Austria like our latest pipeline routed through sovereign territory? Wonderful. But remember, we need you to stand up for us in Brussels. Would London like to be the destination of choice for our lovely oligarchs? Superb. Now, let's not look too closely at offshore finance.

Russian diplomats have been creating covert allies, especially out of the weaker Eurozone states such as Italy, Portugal and Spain. These recession-battered governments wanted nothing more than millions more Russian tourists or cheaper energy discounts. In exchange, they have been more than happy to make the case for Moscow inside the EU. They were not alone. Russian diplomats went shopping around southeastern Europe with the proposed South Stream pipeline - using the proposed route to buy friends and favors in Brussels out of Austria, Greece, Hungary, Italy and Slovenia. These crafty games have stymied hopes of the bloc ever forming an energy union to conduct gas deals with Russia. Instead states still deal individually.

But nowhere were they as successful as in Athens and Nicosia. The European Council on Foreign Relations, a think-tank network, even went as far as labeling both Greece and Cyprus as Russian "Trojan horses." This should come to little surprise: The Kremlin has turned Athens into a military partner and Nicosia, the Greek Cypriot capital, into a money laundering hub, with roughly $150 billion flowing in annually from Russia. And surely enough, both Greek and Cypriot delegations in Brussels have consistently argued the Russian case on all matters to do with the Black Sea and the South Caucasus - even vetoing EU proposals to send border monitors to disputed frontiers in South Ossetia, Abkhazia and Moldova.

This is why nothing big happened on sanctions before the downing of MH17. Kremlin sweeteners had divided the big three players: Britain was refusing to lose its business with Russian banks; France was determined not to lose billions in military contracts; and Germany, which gets 40 percent of its natural gas from Russia, refused to budge on anything to do with energy. With the big boys thus compromised, the weaker southern European countries gave pushback: With Italy in the lead, they wanted nothing more than to warm up European relations with Russia again.

Washington was increasingly frustrated as inaction in Brussels. European politicians were insufficiently moved by Ukraine's humanitarian and geopolitical catastrophe to lose big money. They had been looking at potential sanctions on Putin and simply fretting - how many votes do we stand to give up with all this lost Russian money? The MH17 changed everything. That one rebel error means Vladimir Putin has gone from unpleasant neighbor to monster in the court of European public opinion.

Europe's politicians woke up to tabloid headlines like: "Putin killed my son." Suddenly for Britain, Germany and the Netherlands - the home country of most of those incinerated on the MH17 - not standing up to Putin was no longer about money. These politicians suddenly risked losing their credibility and their votes at home. Suddenly, the calculation flipped: For David Cameron and Angela Merkel in particular, sanctions were suddenly politically profitable.

Russia's rebels have achieved what American diplomats failed to do. For months, American diplomats had been lobbying the 28 EU member states to take a stronger stance toward Russia. Not even Britain was particularly obliged-all those rubles can buy a lot of wobbly upper lips, apparently. But no longer: Russia's European diplomacy now lies in the wreckage of the MH17. The package that was carried through this week looks set to hit the kleptocratic network that underwrites Putin hard. Russia's economy is already teetering on the edge of recession. The move to restrict the access of Russian state banks to Western financial markets will hurt not only the Kremlin's coffers, but also the Russian oligarchs whose companies are tied into them.

American diplomats have now got what they wanted. European sanctions have spooked Russian elites. They may try and laugh it off, but behind the scenes they have been busy calculating how much they stand to lose. Banks are the organs of an economy: Start to restrict their access to financial oxygen and they can strangle interlinked, and unexpected, parts of the system down the line. This has shaken their confidence in Russia's banking system. There is a growing consensus in Moscow that the Kremlin has been so distracted with the geopolitics, and its diplomatic fallout, that it has completely taken its eye off the country's worsening economics.

But these sanctions are first a psychological blow to Russia's ruling class. They like to think of themselves as businessmen, tycoons, captains of industry. They love nothing better than investment summits and watching the flashy advisory board presentations where they can feel fully part of globalization. Nothing, perhaps, save their Mayfair mansions and French chateaux. They have Swiss bank accounts and German business partners. They now see it all at risk.

Those around Putin have become globalized: The oligarchs, the ministers, the security chiefs known as the siloviki- they have gotten to know London well. The have grown accustomed to jetting to Davos to clink champagne and munch canapés with Western CEOs. And of course, they have their own pet Westerners - British bankers, French lawyers, German accountants - helping them gracefully integrate, and elegantly hide, their ill-gotten money.

The only major player in the Russian elite who has not globalized is Vladimir Putin. If reports of his secret wealth are true, he's the only Russian billionaire not regularly flying in and out of London and Zurich, or enjoying summers in renaissance Italian villas, or grandiose French country estates. Putin is the only major player in Russian politics not to have built an airport life for himself-bouncing back and forth on the morning flights and letting life in Moscow and London begin to blur. He prefers his holidays in Russia: hunting in Siberia or sailing on the Volga.

These sanctions - limited though they might be - open the door to more. Russian elites now fear Western sanctions will become routine answers. This is why the Kremlin is dreaming about China. The men who run Russia are paranoid they will slowly have to swap London living for Shanghai nights. Their foremost hope is that they can make up for sanctions on Western financial markets by moving their financial activity to Singapore, Shanghai and Hong Kong. Russian bankers and lawyers who know the Asian markets well are suddenly overloaded with oligarchs and officials investigating opening Far Eastern accounts. With gritted teeth, they are prepared to get to know Chinese nightlife.

Russia's pivot to Asia does not mean American sanctions are failing. There is little confidence China's shaky banks can ever replicate the Western financial security they had grown used to. Russians are right now holding more and more money in cash, and ultra-secure safes are selling out fast in Moscow. There is an increasing fashion to put your savings in bundles of dollar cash. With nobody sure what happens next in Ukraine, or how far sanctions will now go, huge distrust and uncertainty has been injected into the banking system.

Let us not make overmuch of Europe's sudden display of fortitude, though. Russia's ruling classes are not about to throw Putin out: They are too bugged, too monitored, too frightened to attempt that. These banking sanctions are mild, but sanctions nevertheless. And yet something very important has changed in Russia. Putin is slowly morphing from being the guarantor of the oligarchs' billions into a threat to their wealth. They have started - for the first time - to become losers in Putinism.

Russia's establishment has not reacted uniformly to the sanctions, either. The Kremlin looks more united then ever: Under threat, the gray men who rule Russia have come together. They have more or less stopped travelling to Europe for pleasure and are now taking their holidays at home. For them, it is not all bad: There is a mixture of nationalist euphoria and a sense, in severing from the West, that they may get the chance to seize an even larger share of a shrinking pie.

But the business elite has become full of grim pessimism and depression. There is a grim mood, with fretful talk that Putin, in betting on the hapless Ukrainian rebels, may just have ended Russia's chance to grow like an emerging market again without there being anyone strong enough to stand up to him. Minds have drifted to an expected economic crunch. Many fear that the coming financial bite will see the president's current 80 percent-plus popularity ratings quickly vanish. Russia has of course seen this before: Putin secured similarly sky-high popularity ratings during the 2008 Georgian war. But they almost halved during the steep 2009 recession in Russia, a downturn that fueled major middle class protests against his rule in Moscow a in December 2011.

When the next crisis comes round, Moscow billionaires are unlikely to remain as loyal to the Kremlin as they were then. But they are also likely to be more intimidated into doing so. This is what the United States needs to start thinking about: how to play the politics of a Russian fiscal crisis someway down the road. What guarantees and concessions could it offer the Russian elite to tempt them away from Putin? That, of course-not the faint rumblings of a rejuvenated NATO-is exactly what Vladimir fears most.

Ben Judah, Politico

 
 
 
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