Robert Shaw Bridges
After stopping to fill up my car on the way to visit family in Ohio this holiday season, I marveled at the extremely low gas prices, wondering if I’d traveled back to the 1990’s. While the drop in oil prices this year by about 51% by most estimates has certainly fueled American consumer spending over the holidays, in Moscow, Putin is starting to feel a slight chill. Historically, the slick that has greased the wheels of the Russian economy has been oil, the price of which grew seven-fold over the decade prior to 2007. Beginning with the global financial crisis of 2007 and the subsequent collapse in the price level, ultimately led to an 8 percent reduction in GDP growth at the bottom of the recession in 2009. While Russian economic gains seemed at first to have been propped up by a boom in oil exports in the early 2000’s, the collapse in consumer credit issuance after 2012 ensured that a rise in oil prices would not stimulate consumer spending. Unlike in the late 1990’s, when Russia could resort to industrial capital left over from the fallen Soviet Union needed to stoke the flames, in 2011, consumption was being fueled by credit on the back of an almost maximized productive capacity. Now with a boom in the domestic supply of oil and gas in the U.S. (thanks in part to the growing shale oil drilling and fracking sector), and the continuation of economic sanctions against Russian oil industries, Putin can no longer rely on its traditional export to keep the engine going.
After riding his high approval ratings due to the invasion of the Crimean peninsula in February, President Putin is now trying to contain domestic backlash from the 50% drop in the ruble’s value against the dollar. The Kremlin has likewise grown increasingly paranoid, sensing a foreign plot by Saudi Arabia and the United States to subvert the regime through economic sanctions. In December, as Bloomberg author Joshua Yaffa recently commented, the running joke in Russia was, the ruble, a barrel of oil, and Putin would all be just over 60 after the New Year. Despite the skepticism, the concentration of capital in the hands of the energy exporters will likely rise in the near future and once firm leaders cozy up to Putin’s government, they will be clutching the last coals necessary to reignite the dying embers of their industry. As for the entrepreneurs and venture capitalists, they unfortunately will have to wait outside the walls of the Kremlin in the bitter Russian cold, unable to receive benefits from the borrower of last resort.
Unfortunately for Putin, however, the greater Russian public is not alone in its doubts regarding Russia’s economic future, and there are those in the international community who feel this is one issue he will not be able to overcome. International capital markets are refusing to lend to Russian companies under these present circumstances, making refinancing the approximately $700 billion in debt, weighing down their balance sheet, difficult to say the least. The only solution for these companies is to buy more dollars to finance their debts, putting further downward pressure on the ruble, which could lead to a deflationary spiral. For both analysts outside and officials inside the Kremlin, this vicious cycle will be difficult to overcome and will cost Russia greatly in reserves to prevent widespread default and panic. What will Putin do in the face of thousands upon thousands of angry ‘middle class’ Russians unable to fulfill their twenty-first century consumer wants and (especially so come wintertime) needs?
With state worker wages iced over, and most of the government revenue essentially cut in half, Putin has to find other sources for investment in Russia’s productive capacity and fast. Political tensions are certainly high and Putin seems to feel personally victimized by the countries that he claims, “would have come up with some other excuse to try to contain Russia’s growing capabilities.” What is clear now, is that the person failing to keep out the cold is the one clutching the red-hot poker.