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Stop War Vladimir PutinRussian President Vladimir Putin has a long history of making decisions that do not reflect the interests of the Russian people. He is one of the most error-prone political leaders. His decisions reflect ‘cognitive bias’ that goes unchallenged by his advisors.”
Dmitry Peskov, President Putin’s press secretary, proclaimed in January that Russia has been a reliable energy supplier to Europe at difficult times and that the then discussions in the British media regarding the possibility of Moscow cutting supplies in response to sanctions were “fake hysteria”. On 27 April 2022, Peskov repeated the claim that Russia remained a reliable energy supplier. But who would now believe Peskov’s claim?
Russian President Vladimir Putin has a long history of making decisions that do not reflect the interests of the Russian people. He is one of the most error-prone political leaders. His decisions reflect ‘cognitive bias’ that goes unchallenged by his advisors. Cognitive bias results in poor decisions based on misinterpreting information. Putin is processing and interpreting information, but cognitive bias occurs when a decision-maker attempts to simplify information processing. This can include ignoring information that does not fit with the decision-maker’s view of reality.
On 27 April, Putin made another disastrous miscalculation that will negatively impact the Russian people for decades. The decision was made for Gazprom, the state-owned energy company, to stop sending gas to Bulgaria and Poland as both countries had missed deadlines set by Putin to pay for gas in roubles rather than dollars. There are two important points to make here.
First, Peskov’s claim that Russia remains a reliable energy supplier must be challenged. This claim must be balanced against Russia’s attempt to impose alterations in agreed contractual terms on consumers and then illegally withhold supply.
Second, legal contracts matter as they play a critical role in underpinning economic relationships and globalisation. Contractual relationships are based on a signed agreement with clearly specified terms. A key issue is not enforcement of these terms, but the reputational damage, and related legal costs, which might come from any threat of enforcement. The key here is ‘reputational’ damage. Most contracts are not enforced, and legal battles are avoided as any courtroom dispute usually benefits neither party, but results in reputational damage.
Economic transactions are based on trust between the parties involved and this trust is then underpinned by contract. Putin’s attempt to impose alterations in contractual terms on consumers of Russian energy is an unusual and unwelcome example of direct government interference with agreed commercial contracts. Putin hoped that this action would work to Russia’s advantage. This ‘hope’ is an excellent example of cognitive bias that works against the long-term interests of the Russian people. No government should ever engage in actions that undermine the trust that underpins commercial contracts.
The attempt to impose alterations in contract terms, combined with the unilateral withdrawal of gas from Bulgaria and Poland, has completely undermined any trust remaining in any contractual agreements between Russian companies and their international clients. This is a critical point.
The Kremlin has a long history of breaking treaty obligations including the 1994 and 1997 agreements in which Russia accepted Ukrainian territorial integrity including sovereignty over Crimea. Putin ignored these agreements. All international agreements negotiated between the Russian government and any other country must now be considered suspect and open to Russian reinterpretation. This means that it is pointless to even attempt to negotiate with the Kremlin.
Putin’s latest error is to remove the trust that underpinned Russian commercial contracts. How is it now possible to negotiate a long-term contract with a Russian company? All Russian commercial contracts should be considered as high risk and subject to political interference including withholding of supply for political rather than commercial reasons.
All this means that Peskov will continue to proclaim that Russia is a reliable energy supplier. However, actions are more important than words. Until trust in Russian commercial contracts is re-established then all companies and governments should avoid entering into long-term contractual agreements with Russian commercial interests.
Trust matters in all contractual relationships. For Russia, the challenge is that trust can be destroyed in an instant but takes many years and even decades to form. For Russia, the key challenge is not winning the Ukrainian war, but trying to rebuild the trust in contract law that is so critical for the long-term future of the Russian economy and its people.
Putin’s cognitive bias includes a distorted focus on the value of capturing territory, and he has failed to appreciate that the most valuable resource held by a company and a government is ‘trust’. Who now would trust Putin and Russia’s current political administration in any negotiation?
Written by: John R. Bryson, Professor of Enterprise and Economic Geography, Birmingham Business School