Sunday, November 30, 2014

Putin's Options Only Getting Smaller

For decades, the Organization of the Petroleum Exporting Countries (OPEC) cartel has been the undisputed dominating force in oil production. Recently, with the stratospheric rise of production capability in the United States, it is looking more and more like OPEC can no longer maintain its ability to control global supplies and market prices. This, comes on the heels of an OPEC meeting in Vienna on Thursday where members could not reach an agreement on lowering collective production output, which would have stemmed the continued nosedive of oil prices. It seems for all intents and purposes, OPEC is a competitor for global oil market share.

As a side effect to this decline in oil prices and continued economic sanctions from the West, Russia’s economy is in its worst state since the late 1990s, with the ruble tumbling precipitously over the past few months. On Friday, the ruble fell 3.6% to an all-time low of 50.4085 against the dollar and officials within Putin’s administration estimate that Russia will lose $140 billion in revenue annually with the lower oil prices.  With continued sanctions by Western nations and the decline in energy revenue, Putin has turned towards neighbors—most notably China—to capitalize on the potential closer to home, as evidenced by the recent pipeline deal recent pipeline deal (see below) between Russia and China.

A Russian/Chinese partnership could be disastrous for the US as and Europe foreign policy as it would give Putin a way to circumvent the effectiveness of sanctions as well limited reliance on foreign pressure. For China it would have an effective counterweight to US and Japan power in the region and for Russia, a partnership to rival US/EU power.

Inevitably, an important player in all of this is India. In August, government officials were reported to be researching the feasibility of a gas pipeline running through the Himalayas from Russia. In addition, Prime Minister Modi is scheduled to host Putin on December 11th, which no doubt will be used to discuss possible energy investment between the two nations. This partnership would serve the policy goals of both leaders with Putin attempting to stave a recession and Modi making good on his campaign promises of economic growth and mitigating a symbiotic Russian/Chinese partnership.

As the Russian economy continues to feel the pangs of isolation from the West, Putin must learn that his foray into Ukraine and his policy of making the loyal elite wealthy is unacceptable. The outgrowth of oil supply versus global demand could not have come at a better time to put pressure on Russia. As past lessons have shown, international pressure can only serve to expedite a financial crisis. Hopefully Putin will realize it is too late before Russia faces another 1998.

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