Oil Price Drop Hurting Russia

Putin's Press conference

Photo courtesy of radiosvoboda.org

Oil Price Drop Hurts Russia
| published December 18, 2014 |

By R. Alan Clanton
Thursday Review editor

Saudi Arabia may be flooding the world oil markets with cheap crude drilled from its abundant supply on the peninsula, and its intended target may in fact be those U.S. producers now edging more deeply into the market with alternate sources—but Saudi Arabia’s unintended victim turns out to be Russia.

Americans have watched as gas prices continue to fall, a precipitous decline which began months ago. In some states gas has fallen to below $2 a gallon at the pump, and the result has been a bit more buying power in the retail stores just in time for Christmas. But there is no joy in Moscow over this worldwide glut of oil. Those falling prices—coupled with a sudden, somewhat surprising drop in worldwide demand—have done more damage to Vladimir Putin’s economy than ten months of sanctions by the United States and the European Union.

Coupled with the sanctions, the drop in demand for gas and oil is pushing Russia deeper into the start of what could be its worst recession ever.

Russian President Putin has placed blame for his country’s crisis squarely on the United States and its European allies, most of whom have enacted some form of economic sanctions meant to punish Russia for its annexation of the Crimea and its incursions into the Ukraine—and for Moscow’s tacit, if not outright support of the pro-Russian militants now at war with the Ukrainian army and the government in Kiev. That civil war, which began early in 2014 and is now approaching its grim one year anniversary, has split the Ukraine, and cost the lives of thousands of people (included the 298 who died when a Malaysian Airliner was shot down over a remote stretch of cropland near the Ukrainian border with Russia).

Putin claims that the U.S. and the European Union seek to render Russia impotent as a world economic power. Putin, comparing Russia to a bear, suggests his enemies want that bear to be a docile pet.

“They won’t give up,” the Russian President says of the U.S. and the EU nations, “because they will always try to chain it. As soon as they chain it, they’ll rip out its teeth and claws.”

Although Russia’s support of the pro-Moscow militants has made Putin popular at home—indeed, his poll standings are among the best of any recent Russian president—it has sabotaged Russia’s once thriving economy. The war itself has been costly—billions of rubles spent each month to maintain that enormous military footprint along (and by some NATO estimates, inside) the Ukrainian border, and spent on supporting and supplying the militants in their increasingly costly war with Kiev. But the sanctions put a crimp on Russia’s trading power. Some of the harshest sanctions were directed at Putin’s wealthiest cronies and political allies—billionaires with vast power and deep investment in oil, gas, pipeline construction, technology, and media. Putin retaliated with sanctions of his own, along with threats of oil cutoffs for some of the European countries most dependent on Russian energy.

Some economists and business analysts suggested that Russia may have been able to ride out that storm; but then, oil prices began to drop worldwide, along with demand. That unexpected turn rendered Putin’s threats of an energy embargo meaningless. Worse for Moscow, it undermined the last remaining leg of the tripod keeping the economy upright—a generally logical belief that oil and gas prices would continue to rise (or, at least remain stable) long enough for the U.S. and its partners in Europe to grow weary of the sanctions. And when those oil prices began their freefall, any chance that Russia could avoid recession was basically lost.

Just as many European countries have economies deeply dependent on imported oil—and in the case of some of those nations, that oil comes almost exclusively from Russia—Moscow’s economy is equally dependent on oil…as its primary export. Take away demand for oil, and Russia’s economy suffers measurably within days. With the price of oil now averaging $60 per barrel, and with predictions now becoming commonplace of prices dropping to a new low of $40 by the spring, Russia could see its economic engine shrink by five to seven percent—and those are the conservative figures. And if economic sanctions remain in place, that means that the market planners in Moscow will have few alternative sectors in which to attempt to shift demand (computers and cell phones, to name two examples).

The forecasts are so bad for the near future for Russia’s economy, that Putin himself braced the Russian people for what could be two years or more of recession. Putin suggested that some priorities will have to be shifted, and that some national spending will face cuts. And amid the falling ruble, several major companies have suspended sales and production altogether in Russia, including automakers.

The freefall in the value of the ruble has been so dramatic this week that consumers in Russia are feeling the pinch, and a bit of panic. Many are buying food supplies, batteries, and essential winter clothing—using money just received from paychecks—out of fear that the value of their money will be worth even less the next day. This has driven hundreds of normally cautious and conservative companies, from McDonalds to KFC to Apple, to rapidly raise prices in Russia to stay ahead of the cash panic. And it’s not just U.S. companies who see fit to increase prices; companies from countries as diverse as Finland, Germany and China are also feeling the pinch, and are adjusting prices accordingly.

Some worry that the situation could get worse before it bottoms out for Moscow, while others feel that rock bottom is near. Either way, the outlook for Russia’s place in the global market is gloomy.

Putin and his economic thinkers are, therefore, quickly looking for ways to plan for the long term, as well as bolster investor confidence. Russia’s grand high speed rail project—set to be built alongside a new high-capacity oil pipeline—will link Moscow to Beijing by both rail and by energy. China is one of the few countries still in need of ever-expanding supplies of oil. Though the pipeline project will cost billions to complete, Putin hopes that it will assure a steady market for oil exports once it connects Russia’s oilfields with China’s industrial centers. The high-speed rail is Putin’s way of expressing extreme confidence in the future of both Russia’s relationship with China, but also confidence in the future of the Russian economy. Tourism facilitated by that train line could generate millions in easy money for both China and Russia, and the high-speed rail would also make doing business back and forth much faster and easier. If completed as planned, the high-speed rail would make it possible to travel by train from Moscow to Beijing in about 30 hours—as compared to the four-to-five days it now takes to get from one capital to the other.

Putin made his remarks to a throng of reporters at his annual press conference event in Moscow this week. During his long-winded commentary, he blamed the west on Russia’s current economic woes. Putin offered no apologies or contrition—either for Russia’s involvement in the Ukraine, which most of the world has condemned, or for his own economic policies. He dismissed rumors that he could become politically unpopular if the recession deepens, and stressed that the Russian people will simply have to get used to living frugally during the crisis.

A few of most vocal political opponents have even dared to suggest that if the economy weakens more, the Russian people should reconsider their loyalty to Putin, and initiate a campaign to oust him from office.

In reaction to Russia’s oil export woes, and its deep recession, the ruble fell on world markets for several days in a row—sliding 16 percent in one 48 hour period. The Russian Central Bank met earlier this week in a series of emergency huddles to try to stave off further recession and possible collapse. That feverish meeting produced a decision to raise interest rates to 17 percent immediately, a move which did little over the next days to halt the slide.

In his remarks to journalists, Putin criticized the Russian Central Bank for some of its recent monetary decisions. Putin also deflected any blame personally for the economic crisis his country now faces, refusing to express regret about Russia’s military intervention in the Ukraine, and expressing little remorse for his jailing of business and political opponents.

Meanwhile, a tenuous and fragile truce has been reached in the Ukraine. Fighting was supposed to have stopped altogether on or around December 9, but some skirmishes have remained heated since that date. During the last few days, however, there have been signs that the violence is finally declining after terms of the truce were made clear to all combatants in some remote areas. The truce was meant in part to be a first step toward a peace deal, and a possible withdrawal of Russian troops from the area. European leaders have called for Russia to cease any further military assistance to the separatists.

Related Thursday Review articles:

Moscow to Beijing by Rail in 30 Hours?; Thursday Review staff; Thursday Review; November 21, 2014.

The Economic Impact of Ukraine’s War; R. Alan Clanton; Thursday Review; August 25, 2014.