16 Dec 2014

Russia: a belligerent bear with its claws in Ukraine?

Six months ago the IMF predicted that the oil price – then at roughly $100 per barrel – would rise thanks to unrest in Iraq and the crisis in Ukraine. Iraq is still being torn to shreds, Ukraine’s east is still being dismembered but the oil price has imploded by a staggering 40 per cent to just over $60.

This has happened because of over-production around the world, America’s increasing reliance on its domestic fuel sources and declining demand in China, where the economy is sputtering. Whatever the reasons this amounts to an oil shock and its consequences are still being played out.

For drivers of large cars in the UK or USA it has obviously been good news because they can drive longer for less. Americans, as they head on their annual holiday treks cross country to see relatives, will be relieved. But unless the extra cash is going to be spent by consumers on other things, the usual boost from low oil will remain conspicuous by its absence.

The niggling global unease may keep consumer exuberance in check and Christmas spending low. Let’s see. Then there are the losers: oil producers like Venezuela, already a basket case, will become poleaxed. Nigeria, Africa’s largest oil producer, will head into harm’s way and Saudi Arabia, which gets 90 per cent of its income from crude, will end up building fewer mega-mosques and shopping malls for a year or so.

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But the biggest loser by far is Russia. Moscow has failed to plough its mineral wealth into investment in other parts of the economy and the reform necessary to attract foreign capital. Now Putin’s economy has been hit by a double whammy: the collapse of the oil price and western sanctions over Ukraine.

The rouble has fallen in line with oil. It has lost almost half its value to the dollar despite the fact that interest rates were hiked to 17 per cent yesterday. The Russian central bank is talking openly about a disaster. So far there has not been a run on the banks, as there was in 1998 when Russia defaulted on its debt.

Perhaps ordinary Russians realise the suicidal potential of a mass exodus of deposits. Don’t be surprised though if the Russian government imposes capital controls in the near future. Vladimir Putin is still riding high in the polls as the president who has defied the interfering west and resurrected Russia’s glory. But for how much longer?

If the economy tanks further the populist love affair with Putin may turn to revenge. The big fear is that the fallout will move from economics to politics and that Russia will start 2015 as a wounded and belligerent bear with its claws in Ukraine, nukes in its pocket and a bruised nationalist ego. That would be the more serious oil shock.

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5 reader comments

  1. Philip Edwards says:

    Answer: Nah, a tenth rate C4 News Yankified neocon propagandist doing what he always does – what his paymasters tell him to do.

  2. Alan says:

    The article flounders in it’s attempt to portray RU economic issues. Mostly speculative and exaggerated.

  3. Andrew Dundas says:

    Both Adam Smith & Karl Marx observed that the driving force of nations is their economies. That governments’ remedies were of lesser importance.

    It’ll be interesting to observe whether Putin can successfully turn around the present floundering Russian economy. Any bets anyone?

  4. Andrew Dundas says:

    Additional observations:
    Macro-economics predicts that the lower price of a regular purchase item (such as petrol) increases overall spending by low and mid-income families. We’re already seeing those increases starting in Eurozone and the UK. [Of course we also got a boost from the drop in VAT to 15% in 2008 and the hike in benefits that combined to pull the UK economy away from the recession that has bugged the Eurozone].
    Micro-economics predicts that demand for a commodity such as petrol often does not cause an upswing in sales of that commodity. Again, that looks to be holding true for the short-term at least.
    Moreover, Wall St is anticipating that the US economy’s current growth will accelerate. That optimistic sentiment is spurred on by Janet Yellen’s advice that the timing of an interest rate hike is not far off.
    Cheaper oil is an ill-wind that is blowing some good. For once, OPEC is on our side!!

  5. wall putty says:

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