Monday, January 19, 2015

The Price of Oil and Changes in Russian Politics

Much of Vladimir Putin's bellicose actions in Crimea and Ukraine have been motivated by a desperate need to distract the Russian People from the rank corruption and mismanagement that are a hallmark of the Putin regime.   As a piece in The Economist discloses,  past Russian aggression has corresponded to periods when oil prices and hence revenues flowing into Russia have been high.  Now, with oil prices plummeting - when I filled up my car this weekend with premium (a drawback of a Mercedes) the price was $2.249/gallon - Russia's economy is reeling.  Thus, past behavior makes one wonder whether or not Russia may find it necessary to mollify nations it has been antagonizing of late or whether Putin will continue his Hitler want to be policies.  Here are some article highlights:
IN DECEMBER 1979 Soviet troops invaded Afghanistan. The oil price at the time was at its peak of $101 a barrel. The high price combined with fast-growing production of oil in Western Siberia provided the Soviet Union with unprecedented revenues. Instead of saving this money for a rainy day, the Soviet government financed foreign adventures and imports of food. Seven years later the Brent crude oil price fell to around $30 a barrel and Mikhail Gorbachev launched the policy of Perestroika (restructuring) and convergence with the West. The high oil price coincided with Soviet aggression, but as the price fell the Soviet Union became more democratic and friendly to the West.

That the oil price correlated with Soviet politics is not surprising – in the uncompetitive command economy oil and gas revenues accounted for 67% of all exports. But the correlation remained just as strong after the end of the Soviet Union and transition to a market economy, and oil and gas remained the main source of Russian export revenues. When Vladimir Putin came to power the price of oil was $25 a barrel. Mr Putin allied himself with America, did not object to NATO’s enlargement that took in the Baltic States and saw September 11th 2001 as Russia’s chance to get closer to NATO. Seven years later the oil price was at $105 a barrel and Russia invaded Georgia and the relationship with America was at the point of nadir, but thanks to the global financial crisis oil prices fell to $67 a barrel and Russia accepted America's reset policy even though it soon went sour.

Russia’s latest and most serious foreign adventure in Ukraine and its annexation of Crimea took place when the price of oil was still over $100 a barrel. But as the oil price fell Russia has not (so far) become any friendlier to the West nor to its neighbours. Mr Putin seems determined to break that correlation.

Mr Putin seems determined to break that correlation. Indeed, he has offered the war and patriotic euphoria as a compensation for the falling oil prices and lack of economic growth. The only way to bend the trend is by escalating aggression. This year will see a contest between Mr Putin's regime and the oil price. It will not be a pretty sight.

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