When Putin is Backed into a Corner, He Gets Dangerous
(Article Revised February 5, 2016)
ITS ABOUT THE PRICE OF OIL STUPID
Russia is facing very difficult economic times. This is dangerous for Russia, but just as dangerous for many other nations and the situation generally in the Middle East. The signs are clear that very hard times are ahead for Russia. For those who pay attention to Bible prophecy, the issue is simple: Can Putin allow the sinking ship that is his economy to continue taking on water and sinking deeper into the black ocean of oblivion? He is burning through cash. Russian banks are crashing. Reserves aren’t endless – some suggest he has 18 months before the till runs dry. His public won’t put up with hardship forever. Neither will Putin’s cronies from the FSB (the post-Soviet name for the KGB) allow Putin to do nothing to staunch the bleeding. In short, Putin is being backed into a corner and he will have to take action – perhaps drastic action. Things could get very dangerous.
The single biggest factor is the price of oil. Russia receives over 50% of its revenues from the sale of oil and natural gas. That is why the pipelines of Ukraine are so crucial. They constitute the delivery mechanism for much of what Russia exports to Europe. It is also why Russia cares so much about existing and planned pipelines in the Middle East. Wonder why Russia doesn’t want ISIS to make money by moving its oil “thefts” from Iraq across the border of Turkey? They don’t want that oil to enter the oil marketplace. Wonder why Turkey and Russia are threatening war? Russia is attacking ISIS oil being trucked into Turkey? Why is Turkey shooting down Russian aircraft? Turkey wants Russia to leave the oil (from Which Erdogan of Turkey is profiting) to stop the attacks. Airspace is just a sham. The issue is oil.
There is considerable discussion now about Saudi Arabia and Russia coming to terms regarding cutting oil production to drive prices up. There are some very intelligent article about the factors involved in whether this compromise can come about. The long and short of it can be summarized with a few quotes from the article:
Citing an article from Bloomberg: “There’s little sign the countries themselves are ready to reach an agreement despite the economic damage wrought by the lowest prices since 2003. Long-standing obstacles remain — Saudi Arabia’s desire to defend market share, Russia’s inability to cut production in winter months — and analysts say talk of a deal probably reflects the hope of producers in pain rather than the expectation of concrete action”. (Javier Blas, “What a Saudi-Russian Deal on Oil Output is Elusive”, Bloomberg, January 6, 2016)
THE PRICE WAR ON OIL – WILL THE SAUDI’S AND RUSSIA’S AGREE TO END IT?
Daniel McEndree for OilPrice.com summarized the fact that the “oil price war” between Saudi Arabia and Russia favors the Saudis. They have the ability to outlast the Russians. Here is an extended quote from his article of February 1, 2016, “Russia Cries Dyadya (Uncle), Is Saudi Arabia Listening?”
The Russians potentially enter any discussions with a weaker hand. The Saudis and their Gulf Arab allies probably can withstand lower prices longer than the Russians. Russia lacks the financial resources the Saudis and their Gulf Arab allies have at their disposal.
Their sovereign wealth funds and foreign currency reserves in absolute and per capita terms exceed Russia’s, the value of their government owned energy assets are greater than the value of the Russian government’s energy assets (which are already partially privatized), and Saudi Arabia and its Gulf Arab allies have access to international capital markets, whereas the Russian government, because of U.S. and EU sanctions, does not.
They also have the means to pressure Russia. The Saudis have spare capacity (according to the IEA have some `1.5~2.0 million barrels per day which they can bring on line within three months), while the Russians lack spare capacity. Finally, Russia’s major energy companies report quarterly results, whereas with a few exceptions, Saudi and Gulf Arab energy companies do not. Thus, the Saudis have access to critical Russian microeconomic financial data, whereas the Russians do not have such access to Saudi and Gulf Arab data.
MOTHER RUSSIA CEASES TO BE A BANK FOR ITS MINIONS
There is another significant telltale sign that the situation in Russia has grown very serious. Russia has announced they are ceasing their foreign loan program. What does this mean? The remainder of this article provides a discussion on the economic pressures Russia faces.
I have assembled for my readers the questions and comments from an insightful 8 minute interview conducted within the last week. George Friedman, who runs a forecasting think-tank, Geopolitical Futures, provides the details as he talks with Edward D’Agostino of Mauldin Economics. My notes are not perfectly word for word, but very close and represent a more “complete sentence” compilation of the interview. It’s worthy of a careful read if you agree that what is happening in Russia has an enormous impact on the U.S.
The implications reinforce what I have communicated over the past few months. Putin is being backed into a corner. Something serious is likely to happen. And soon.
From the Interview with George Friedman. Founder & Chairman, Geopolitical Futures Interview by Edward D’Agostino, Mauldin Economics. January 24, 2016.
One Point of Clarification: Friedman dismisses the Sanctions against Russia as having much meaningful impact. Careful: The Russians can’t borrow monies from the West to offset short term problems. So the sanctions DO have a real bite on the future of Russian action.
To listen to the full interview CLICK HERE.
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D’Agostino: Let’s talk about the latest developments. The Global commodity rout – its impact is increasing. Qatar shut down Al-Jazeera America. Russia announces they are discontinuing their foreign loan program. What does that mean?
Friedman: Quoting the Russian Deputy Finance Minister, Sergei Storchak “Our budget is beyond strained. It is well beyond strained.”
The price of oil, its collapse has hallowed out the Russian budget. Russia is now saying, “Foreign loans have to go.” And of course foreign loans are critical to foreign policy. Foreign loans enable governments to influence people.
Russia has a $5B outstanding loan to Iran that has not closed yet, but the Iranians are expecting it. The Russians will struggle through to fund it. But what is happening is that one of the fundamental ways governments like the U.S. and Russia shape the world has been lost to Mr. Putin. No foreign loans.
D’Agostino: What candidate can fill their place? What does it mean for global influence?
Friedman: The U.S. could fill its place. But what is really the important thing: Putin has tried to downplay his domestic problems and make Russia appear to be a significant player on the world stage. When he entered the fray with Syria, one of the reasons was to show Russia is a global power. Failure to accomplish his goals there will have domestic implications. Military failure would greatly diminish the perception of his power. When the Russian leadership stands up and says, “We don’t have the money to make foreign loans” it creates real political problems. This will lead their public to ask, “How weak are we then?” So it creates a domestic issue for Putin. It creates a foreign political issue too. Other governments will have to ask, “ What have they done for us lately? And will we follow them?” To stop making foreign loans, it is a weakening in every dimension. The Russians wouldn’t even say this much if it weren’t worse than they put it. It is therefore far worse than what they are saying.
D’Agostino: What impact have sanctions had on Russia?
Friedman: Sanctions have had relatively little impact. They are marginally influential. It makes us feel better to apply them. But it’s had little impact. It’s all about oil. It is their major source of foreign currency. It has been the major funder of their domestic budget. Oil drove their entire economy. [See graphic below – NOTE: The majority of Russian exports are fossil fuels] Putin intended to take this oil, starting ten years ago, and build a real economy out of it. Despite this effort over the last decade, Putin failed to engineer that. Russia needs higher oil prices. They have said that $70/barrel was a breakeven point for them. We are way below that now (at $27/barrel) and we will stay that way for a long time. [That assumes of course that no major crisis develops that drives the price of oil up – Woodward]
D’Agostino: So long-term what does this mean? What actions might Putin take? You can’t back someone like Putin in a corner. What does he do?
Friedman: Well remember, one thing about Russia that makes it exceptional. Russia has always had a terrible economy. They can win wars and still have a terrible economy. It is not a one to one relationship: how good your economy is to how strong your military is.
Over the next two years, Russia gets much more aggressive. After two years, it is not clear how will the Russian federation hold together. It will be about building their military forces and doing things like they have done in the Ukraine and so on. They have been badly damaged. Even if prices rise again, it is not clear they can recover. The Soviet Union fell apart because of the “arms race” Reagan imposed upon them, and because of the low price of oil. Putin is more dangerous now than ever. He is playing a tough hand and he plays tough hands very well.
D’Agostino: What does a Russia without Putin look like?
Friedman: Putin could be run over by a car and it would make no difference. Russia is run by the FSB. It has been running Russia. Russia has always been run by the intelligence services, security people that held the country together. It goes back to the Czar’s intelligence service. To the Cheka. Then to the KGB. Later, the FSB was pushing Yeltsin aside, and putting one of their own in charge. If Putin has a heart attack tomorrow he will be replaced by another guy from the FSB. It is a terrible mistake for us to think that Russia is run by Putin personally. It is run by a system that produces people like Putin. If he goes, Russia goes on. Not well, but it goes on.
D’Agostino: The event when Putin disappeared, was it related to the FSB and what you are talking about now?
Friedman: Back when there was a four-day disappearance of Putin, we thought that it was a small power struggle within the FSB, Putin went to ground for a while, but Putin clearly won that fight. There are people in the FSB that will try to push him aside. There may be a fight, but who wants to win it? In other words, does anyone really want to run Russia now? So we think it is his, win, lose or draw.
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