16 January 2015

Cheaper oil best weapon against Russia’s aggression

Kyiv Post: 16. January 2015
by Ivan Verstyuk

Russian energy company Lukoil’s ice-resistant oil drilling platform at the Korchagin oil field in the Russian sector of the Caspian Sea.

The strength of Russian President Vladimir Putin’s regime is a derivative of global oil prices -- in other words, weak and getting weaker. So far, however, Putin’s economic troubles have not encouraged him to call off the Kremlin-backed war against Ukraine or relinquish Crimea.
But there is hope that Russia’s economic weakness will soon hurt its ability to stir up global instability.
Russia’s economy is now in recession for the first time since 2009 after suffering a double blow from key crude oil benchmarks falling below $50 per barrel and Western sanctions.
Back when the price of oil soared to $100 a barrel, Russia took 70 percent of its export revenue from oil and gas, but that proportion is sliding to under 50 percent at the current prices. If oil stays below $50 a barrel, as it is forecast to do for much of the year, estimates are that the Russian government will lose $45 billion in revenue and that oil production, with many wells in Russia becoming unprofitable.

The Moscow Times reported that the government is, in fact, preparing cuts to all areas of government spending except the defense budget, which approaches nearly 10 percent of Russia’s now-reduced gross domestic product of some $1 trillion. 
One only has to look at the 70 percent drop in oil prices from 1980-1986 to see how they undermined the Soviet Union, leading to its collapse in 1991. Russia, with 144 million people, is one of the few nations that loses economically with cheaper oil prices.

Russia’s foreign reserves are down to under $400 billion and the country has $678 billion of foreign debt, mostly owed by private companies. The ruble’s devaluation by more than 50 percent -- to 65 to the dollar -- makes repayment much more difficult.
Russia’s economy remains controlled by Putin and his favorite oligarchs, stifling reforms that would open the economy to competition.

Russians, while showing their support for Putin in opinion polls, also believe that this year will be harder for their country than last year, according to the Levada Center.

Western pressure has prompted Russia to turn to China for financial help. But that comes with a cost also.
“As we can see, Eurasian identity is a factor of instability which brings breakups, recurrent destruction, as well as weak integration of the state’s tissue,” wrote Igor Yakovenko, a historian, in an article for the Russia in Global Affairs magazine. “Eurasianship seems to guarantee that a state will be unable to survive modernization. This was the cause of the disintegration of the Ottoman Empire, the Russian Empire and the Soviet Union.”

But given the absence of strong institutions or political competition to keep Putin accountable in check, it’s hard to be optimistic about Russia’s future as anything but a corrupt kleptocracy.
Ukraine’s best hope for surviving Russian aggression is that the cash-starved regime of Putin struggles to supply its troops and proxies in Donetsk and Luhansk as well as take care of Crimea’s 2 million residents. Economic constraints are once again proving much more powerful than the statements of condemnation issued repeatedly by the West in the last year.

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