Oil’s Not Well in Putin’s Russia
After perusing scholar Andrei Illarionov’s devastating report on Russian industrial production which leads our issue today, it’s hard to imagine there could be any more bad news for Russia, but there’s plenty. The Moscow Times reported last week that
The economy is not expected to grow until the second half of next year, a deputy economic development minister said Thursday, as the government considered cutting oil export duties to zero, in what would be one of its boldest steps yet to promote growth. Deputy Economic Development Minister Andrei Klepach said the economy could contract by as much as 0.5 percent in 2009 under a pessimistic scenario crafted by his ministry, but the base projection foresees growth resuming by mid-2009 and reaching 2.4 percent for the year.
Klepach also said the base line scenario saw capital outflows of $90 billion and a current account deficit of $45 billion next year. The country’s reserves will top $300 billion by year end, down from $435.4 billion on Dec. 12, he said.
This is simply a devastating admission about the centrality of the world market price of crude oil in the Russian economy. The plummeting price of oil, down two-thirds in half a year, has wiped out Russian economic growth and thrust the economy into a recession. And the price of oil has fallen for just one reason: American demand has evaporated. Thus the lesson is clear: America has the power to crush the Russian economy simply by ceasing to purchase crude oil.
Is this the great result achieved by Vladimir Putin in his first decade of ruling Russia?
2.4% growth on Russia’s tiny economic base and spread out across Russia’s giant population is totally insignificant, and it’s the best-case scenario. In the worst, Russia is facing a massive recession that it cannot recover from without the prior recovery of America’s economy.
How can the Kremlin suspend the oil duty? Has it forgotten that this duty is the sole source of income for the country, and would have to be replaced with massive outlays from the already rapidly vanishing reserve fund? Kreplach’s admission that reserves will be around $300 billion by the end of this year is truly stunning. That means Russia has already squandered half is once-mighty reserve fund in less than one year of economic crisis. What if the U.S. recession deepens and oil falls another half or two-thirds in value? What happens when the reserve fund falls to zero?
And let’s not forget: It’s been Putin’s policy throughout his terms in office to undermine the American economy by any means possible. Quite literally, he’s sought to kill the goose the laid Russia’s sole golden egg. That’s insane.
Putin is flailing blindly, like a child. The Moscow Times reports: “Chris Weafer, chief strategist at UralSib, said the government was trying to do the impossible in balancing the needs of the oil companies with that of the federal budget.” Weaver states the obvious: “The bottom line here is they can’t do both.”
Here’s what the World Bank had to say:
“If oil prices in 2009 and 2010 average $30 a barrel, that would be a nightmare scenario for a global economy. The pressures on the current account and public finances in Russia would quickly rise to a point where the financing constraint would become so sharp that it’s possible even to envisage Russia’s return from a creditor to international organizations to a borrower.”
Russia’s crude oil production is expected to fall by 8 million tons and exports by a similar amount next year, further diminishing Russia’s oil-based revenues along with falling prices.
Social unrest is growing daily, rising as the ruble falls. Russians are now waking up to the reality that the arrogant cold-war provocations of their KGB government were insane delusions of grandeur, leaving them friendless as their economy topples around them, and confronted by many steadfast foes. Like the grasshopper of fable, the Putin regime has frittered away the Russian summer, and an abysmally bleak winter now lies ahead, with larders empty and bellies to match.
Ask not for whom the dinner bell tolls, Mr. Putin. It tolls for thee.
Russia needs to kiss their customers Zopa. The oil companies who are the sellers acted like bastards during the price gouging in the Summer of 2008. American’s panicked. We found substitutes or cut back. I bought a Hybrid. Many of my friends did as well. We’ve turned away from foreign oil. Unless china and india start mass selling cars, I don’t see the demand coming back for oil any time soon.
Russia better start to diversify their economy, beef up tourism (plane tickets will be cheap). The days of big oil are gone. People got the message. We’ve moved on to alternatives.
I am afraid , the major reason for falling oil prices is economical and financial CRISIS , not because you bought Hybrid, stupid. What alternatives ?
Mass tourism? In RUSSIA?
Have you ever BEEN there?
That’s a laugh/cry scenario, bro’.
The U.S. is no where near independent from foriegn oil. Our development of alternatives thus far is nothing but a ‘spit in the wind’. As soon as the economy begins to recover, you will again see the price of oil sky rocketing. Unfortunately the low price of oil will also see new exploration dry up, making the problem in a few years that much worse.