Putin, pipe down on Ukraine

Moscow is pointing fingers again. The gas delivery crisis in Europe? It's all Ukraine's fault. The economic crisis in Russia? Oh, wait, there is no crisis, according to the state-controlled media. But if there were, it's all America's fault. Truth be told, neither Ukraine nor the US are blameless. But that misses the larger point.

Yes, Ukraine appears to have paid late for natural gas from Russia last year, and it failed to agree on a price hike for this year. Their dispute led Russia to cut off gas for Ukraine on Jan. 1. This week, gas destined for Europe and Turkey via Ukraine ceased.

Also true, the global financial crisis started in the US (Prime Minister Vladimir Putin says the US "infected" the world). And Russia had nothing to do with plummeting oil prices that are causing this oil exporter to rapidly spend down its foreign currency reserves, bail out indebted oligarchs, and prop up a sagging ruble.

But if Russia only looked in the mirror, it would find its own policies have exacerbated its woes. By blaming outsiders, it misses an opportunity to strengthen the economy, which must be done.

One reason that Russia's behemoth gas supplier, Gazprom, is tightening the screws on Ukraine is that it needs money. Instead of investing adequately in operations, it borrowed heavily to buy up private concerns – part of Mr. Putin's ill-conceived strategy of renationalizing Russia's oil and gas industry. Gazprom is now deep in debt (about $50 billion) and is negotiating a rescue with the government.

Its debt load reflects staggering national corporate debt (about $500 billion). Like Gazprom, companies have financed their borrowing from abroad (the dominance of Russian state banks has suppressed lending opportunities at home).

Meanwhile, the Russian economy may grow by only 1 to 2 percent in 2009, or perhaps even contract – this after seven years of annual growth of 6.5 to 7 percent. And, Russia will face a budget deficit, because money from oil and gas exports provides 60 percent of official revenue. Russia must evolve from a one-trick economy and diversify.

Corruption and unreliability have also caught up with Russia. Before the Wall Street crisis, investors were fleeing Moscow's stock market, which fell by more than 70 percent in 2008.

Putin is doing everything but actually addressing these problems. Domestically, he's shoring up his grip on the state. He still has high approval ratings, but just in case public criticism swells, he's got a handy excuse in all those enemies abroad – from Georgia, to Ukraine, to the West – and he could always manufacture more threats.

For now, he's got enough foreign currency reserves (though depleted) as well as rainy-day funds to weather the economic storm – depending on how long it lasts.

And he's helped by the fact that ordinary Russians are not yet broadly affected. They aren't in the stock market; they don't hold heavy mortgages. Still, unemployment is spiking in places, as have protests, and wary Russians are pulling rubles from bank accounts.

The Kremlin strongman is hoping energy prices rebound before the masses realize that the house that Putin built may be a house of cards. If he's wrong, he'll also have himself to blame.