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Russian aggression belies a struggling economy

What's behind Vladimir Putin's show of force in the Crimea? Commentators are busily weighing his geopolitical goals. Less commented on is the grim economic outlook he faces at home. It's entirely possible that one benefit of a Ukranian incursion, from Mr. Putin's point of view, is its ability to distract his citizens from his country's stagnation.

Russia's gross domestic product has plunged from a 4.5-per-cent growth rate in 2010 to an anemic 1.3 per cent in 2013. The U.S. Federal Reserve has added to Russia's challenge by beginning to taper its monetary stimulus, which is likely to mean higher U.S. interest rates. In response, the ruble has fallen 18 per cent as money has poured out of emerging markets in search of better yields in the United States. A panicked overnight decision by Russia's central bank to raise interest rates to defend the ruble underscores the country's dire short-term economic forecast.

The midterm prognosis is even worse because of a rapidly aging population. During the 1990s, the implosion of the Soviet economy and the accompanying decline in worker income caused the fertility rate – a measure of how many children a woman is expected to bear during her lifetime – to collapse to 1.16, one of the lowest in the world. Fertility has since recovered somewhat, but the impact of those low-birth years is just beginning to hit the work force now.

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Mr. Putin has warned of the pending economic consequences from this demographic time bomb. "[In the 1990s], our country faced a profound demographic crisis. The consequences of this crisis we have not yet felt ourselves, but they will be felt on the economic and social spheres, and in the industrial development."

As a result of the demographic hole in the Russian economy, the number of university graduates in the country is expected to fall to 50 per cent of the 2009 level in each of the next 10 years. A labour shortage is clearly in the offing and the economy will struggle to support the needs of a growing elderly population.

The Russian economy's lack of diversification also looms as a potential problem. Representing up to 30 per cent of the country's gross domestic product (GDP) and half of its GDP growth since 2000, oil and gas provided at least half of the state's budget revenue last year. But steady growth in Chinese demand is no longer assured and the re-emergence of hydrocarbon exports from Iraq and Iran is likely to put downward pressure on energy prices.

Even a full annexation of Ukraine wouldn't address Russia's economic problems, but investors are right to wonder whether this is only the beginning of a Russian rediscovery of Soviet-era imperialism.

Russian-born Julia Ioffe, a long time Moscow correspondent for the New Yorker and Foreign Policy magazines writes, "Putin sees the world according to his own logic … it is better to be overly strong than to risk appearing weak, and Russia was, is, and will be an empire with an eternal appetite for expansion."

Historian Michael Rubin, a former Pentagon official who is now a fellow at the American Enterprise Institute, says that Latvia, Lithuania, Estonia and resource-rich Kazakhstan are potential future targets for Russian military aggression, "especially if it rallies the Russian nationalist masses increasingly upset with corruption and [economic] stagnation back home."

Mr. Putin's ambitions are likely to be boosted by a cynical view of the West's money-hungry hypocrisy. Politico's Ben Judah argues that "Putin's inner circle no longer fear the European establishment. They have seen firsthand how obsequious Western aristocrats and corporate tycoons suddenly turn when their billions come into play."

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Russia's bold move in the Crimea is no doubt based on a consideration of many factors, but the political expediency of diverting its citizens from a grim economy should not be overlooked. Slowing GDP growth, a free-falling currency and negative demographics are a combination calculated to encourage an ambitious leader to look for distractions elsewhere.

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