By Nat Brown
Russian President Vladimir Putin.
As oil prices have dropped dramatically over the past month, Russia has been one of the nations hurting most. In fact, it’s possible that collapsing prices, combined with a raft of other economic problems, may be enough to force Vladimir Putin to back off of his domination of eastern Ukraine — which has begun to feel almost permanent just eight months after the annexation of Crimea.
Between the more than 4,000 dead in Eastern Ukraine and Russia’s continued acts of military provocation against Europe and the West, the country has grown significantly more aggressive abroad since March, and seems to have little interest in backing off. Ukraine’s defense minister is now reporting that there are 7,500 Russian troops in the eastern part of the country. The strategic port city of Mariupol continues to face assault by pro-Russian separatists with Kremlin-supplied weapons. Other border nations, including Estonia and Finland, are seeing signs of aggression too.
A Russian Orthodox priest blesses an Su-27 SM fighter jet at Belbek military airport outside Sevastopol. NATO's top military commander says he is "very concerned" that Russia's military build-up in the annexed Crimean region could be used as a launchpad for attacks across the whole Black Sea region.
But Russia’s current destabilization of Eastern Europe may not be here to stay — and there were signs of that development even before the oil news.
The country’s military escalation abroad has been accompanied by a steep economic downturn at home. Since the beginning of the year, the ruble has lost 30 percent of its value, and Russia’s central bank has already spent 20 percent of the country’s foreign-exchange reserves in an attempt to prop it up. The IMF has cut its Russian economic growth projection for 2015 to just 0.5 percent, and the outlook will only worsen with oil prices plummeting over the past several weeks.
Russian artist Vasily Slonov cuts a U.S. one dollar banknote as he creates an artwork depicting a portrait of Russian President V. Putin.
While the country has sufficient reserve funds to weather the short-term storm, the medium-to-long term is another question entirely, says Natasha Udensiva, a managing partner at Eurasia Energy Associates and a lecturer in international affairs at Columbia University. How long might the Russians be able to maintain their current stance? “They say they’ll be fine for two, three years,” Udensiva tells NRO. “I think they’ll be fine for at least one year and a half. Despite this huge inflation and all the terrible things going on in the country, they still have a lot of assets.”
A large factor in the ruble’s erosion of value has been the fall in global oil prices, which have declined steadily since the summer and fallen off even quicker in the past couple weeks. A large part of the currency’s dive is connected to the markets’ view of Russia’s economy as dependent on the price of oil, and Russia’s economy is pegged to high oil prices. Leon Aron, resident scholar and director of Russian Studies at the American Enterprise Institute tells NRO. “According to Russian and Western economists, Russia can balance the budget only at $117 a barrel; the national economy can only grow at $92–93 a barrel; and it goes into a recession at $80 or less.” As of this writing, the price hovers around $70 a barrel.
Russian President Putin expects oil prices to 'balance' by the middle of 2015.
Sanctions imposed on Russia by the United States and the European Union on top Russian-government officials, state-controlled oil companies, and major Russian banks are keeping the pressure on its economy — as much through perception as practical value. “Russian economists call them ‘gray’ sanctions,” Aron says. “That is, they create a sensibility, one very damaging in the mid to long run.” One of their particularly damaging effects is that Russian corporations, even those not directly affected by the sanctions, are now all but unable to borrow money from Western banks. Meanwhile, the country has $300 billion in corporate debt maturing over the next two years, and it’ll need to be refinanced. Udensiva agrees: “The sanctions are really squeezing them. There are a lot of projects they have to put on hold — mega projects — because they have absolutely no cash flow.”
Even without the external pressure of sanctions and cheap oil, Russia’s economy is hardly healthy. Rife with corruption and cronyism, lacking a true free market and or functional infrastructure, the economy has been headed for trouble for quite a while. According to Udensiva, economists had been predicting a decline well before the crisis in Ukraine. Only high oil prices had papered over the problems, she says, and fundamental reforms to the economy (such as a more independent legal system, less state control of industry, and lower levels of subsidies) are necessary.
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