American-Russian Economic War Yet to Bend Either Side

Both Russia and the United States accept short-term economic pain for longer-term strategic goals.

Oil fell below $59 a barrel on Tuesday when the Russian ruble plunged more than 11 percent against the dollar in its steepest single-day decline since the 1998 financial crisis. The collapse of both owes much to the standoff between Russia and the West in Ukraine and suggests the two are willing to endure short-term economic pain for the sake of longer-term strategic goals.

The ruble has lost over half its value against the American dollar since the start of the year. The collapse is partially due to falling oil prices and partially due to a lack of foreign capital flowing into Russia as a result of economic and financial sanctions Western powers imposed in the wake of its occupation and annexation of the Crimean Peninsula from Ukraine in March.

The Russian central bank expects the economy will contract between 4.5 and 4.7 percent next year if oil stays below $60 per barrel.

A weaker currency does have some positive impact on Russia’s public finances. It helps compensate for falling revenues from oil and natural gas which are sold abroad for euros and dollars.

Import restrictions Russia imposed on European agricultural products in retaliation for the Western sanctions could also help stabilize its trade deficits. There is less money coming in because of the falling oil price but there is also less going out to buy food.

Russia invariably sees America’s hand in its currency’s collapse and it might not be altogether mistaken. Saudi Arabia, the world’s largest oil exporter and an American ally, has not cut output, which would shore up the price of oil, and stopped other OPEC powers from doing so.

The Saudis have several reasons not to act, argues Mohamad Bazzi at Reuters.

The kingdom has two targets in its latest oil war: it is trying to squeeze US shale oil — which requires higher prices to remain competitive with conventional production — out of the market. More broadly, the Saudis are also punishing two rivals, Russia and Iran, for their support of Bashar al-Assad’s regime in the Syrian Civil War.

Whether Saudi Arabia and the United States conspired to drive down the price of oil or not, their interest have converged. Both oppose the Assad regime, which Iran and Russia defend, while America wants to dissuade Russia from further aggression in Ukraine without risking war in Europe.

Since annexing the Crimea, Russia has supported a separatist uprising in Ukraine’s southeastern Donbas region.

Russia needs oil to trade around $100 per barrel to balance its budget. Iran, suffering from more stringent Western sanctions because of its suspected nuclear weapons program, needs even higher prices.

As Bazzi points out, Saudi Arabia is also anxious about unconventional oil extraction in North America that could reduce the world’s dependence on itself.

If there is a strategy, it might not be working. Neither Iran nor Russia appears to have changed its behavior under economic pressure. The former has resumed nuclear talks with the West but they have yet to produce an accord. Russia is not retreating from Ukraine. It seems to prioritize the strategic imperative of keeping this crucial Russian borderland out of Europe and NATO over whatever economic pain the West is able to inflict upon it.

America’s policy is a mirror version of Russia’s in this sense. It, too, appears willing to hurt its economy — a little — by allowing Saudi Arabia to undermine its shale revolution for the sake of preventing Russia from dominating Eastern Europe.

Although unlike their Russian counterparts, American consumers aren’t feeling the pinch. Falling oil prices almost directly benefit them in the form of cheaper gasoline — even if it could come at the expense of American energy security in the long term.

One comment

  1. It would appear that Putin failed to calculate the fallout from the end of QE on his commodity-based economy. The Fed has been able to mask deflation for the last few years with massive money printing but now that QE is over and wall street doesn’t get $10s of billions extra each month to speculate in commodities and assets, demand and pricing are becoming clear. The Fed has also been leading people to believe that they are in control of interest rates. It is now obvious that they are not or rates would have risen when the Fed stopped buying boat loads of bonds and mbs for the expressed purpose of “holding rates down”. I read a book a few months ago that predicted this quite clearly. I think you can get it on Amazon, called: Deflation: The Seismic Shift In Finance.

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