Once Again, a Swing and a Miss for Vladimir Putin
“The best-laid schemes o’ mice an ‘men gang aft agley.”
— Robert Burns, “To a Mouse, on Turning her up in her Nest with the Plough,” 1785
Last Wednesday, crude oil prices experienced their largest one-day drop in more than seven years, plunging a breathtaking 12% as new data revealed that U.S. facilities were developing massive stockpiles of “black gold” that nobody was interested in buying. Reuters reported: “Crude oil stocks in the world’s largest consumer nation swelled by 6.7 million barrels, the U.S. Energy Information Administration said, more than seven times the 900,000-barrel increase analysts had expected.” Streetwise Professor has more on the price collapse. That was Putin’s third strike.
As we reported on Wednesday, Vladimir Putin was simultaneously and feverishly engaged in an outrageous effort to panic world gas markets and drive up the price of natural gas so as to squeeze out a bit of revenue before gas prices drop just as precipitously as oil prices, which they always do following a pattern of a six-month lag. Putin’s scheme was to switch off the taps to Ukraine, causing European supplies to dry up and provoking panicked buying. Already, he has been forced to back down from his barbaric behavior (strike one), which totally failed to produce the desired result and drove Europe into the waiting arms of the United States (strike two) and further blackened Russia’s already ruined international reputation.
Three strikes and you’re out, Mr. Putin.
Reuters reports that the price of crude oil on Russia’s domestic market has fallen to a shocking $12/barrel as the result of a supply glut. As we have previously reported, Russian industry has virtually shut down because of the national financial crisis, and the lack of demand has pushed the price of domestic oil into a state of horrifying freefall. Meanwhile, brutally high export tariffs have destroyed oil company profit margins on the international market as the price of oil has fallen well under $40/barrel, with Russia’s inferior Urals blend flirting with the $30/barrel barrier. With no profitable outlets for it oil, Reuters quotes a trader with a Russian major as follows: “We are about to start shutting down wells in Siberia.”
In yet more horrifying and undoubtedly related bad news, a Kremlin aide has admitted Russia may need to go begging for foreign loans in order to fund its budget next year, and may insist that all state-owned companies cut their dividend payments to investors in order to divert the cash to fill the Kremlin’s corrupt coffers. The last time the Kremlin experienced a budget deficit, it solved it by simply cutting off wage payments to employees and letting them starve. Will that too soon be in the offing?
Oil’s Not Well in Putin’s Russia
As oil goes, so goes Russia's currency
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?
The Moscow Times reports:
The country’s falling oil output may make a planned export pipeline to the Baltic Sea a costly white elephant — built for political rather than economic ends, its critics say.
Designed to cut Russia’s dependence on transit states, the BTS-2 link is poised to boost shipping costs for oil majors and further dry up state funds at a time when Russia needs billions to support the ruble and help companies refinance foreign debts. “It is unclear where Transneft intends to find oil for the new pipeline given declining oil production and exports and already ample spare capacity in the pipeline system,” said Valery Nesterov, an energy analyst at Troika Dialog. “Transneft faces the prospect of paying up to $5 billion for a project that would bring no additional revenues, except those accompanied by a similar increase in costs,” he added.
A New Low in the Annals of Russian Stupidity
We’ve chronicled some amazing instances of Russian stupidity here on this blog over the years, but this one may well take the cake: It was announced last week that Russia was “considering” the possiblity of cooperating with OPEC to reduce the world’s supply of crude oil and artificially jack up prices. Oil prices actually rose on the news, about 1% but still below a — for Russia — sickening $52/barrel. This notion is stupid on so many levels it’s difficult to know where to begin.