December 22, 2014

Oil proves Putin's weak spot

Posted in Sunday Business Post · 29 comments ·

It’s ironic that in the week that the US lifted its ridiculous embargo on communist Cuba, capitalist Russia experienced one of the most debilitating crises any capitalist country can go through – a run on its currency.

It is also a bit paradoxical that the Argentinian Pope brokered the US-Cuba thaw, particularly as Cuba, while culturally Catholic, is officially an atheist country. This proves that cultural ties – in this case Latin American Catholic ties – are hugely important. Anyone who has visited Cuba will attest to the influence of Argentina on Cuba. Most of the tourists are Argentinian, and when Cubans are not playing baseball, Argentinian football is pervasive. Also pervasive in Cuba are the photoshopped images of the handsome, Argentinian revolutionary, Che – whom the Commies have managed to make as handsome as George Clooney in a chic beret and kalashnikov combo.

There is also something deliciously incongruous in the fact that it was the Pope who brokered the deal because Stalin – a leader whose “might is right” tactics are sometimes compared with Vladimir Putin’s – dismissed concerns about upsetting the Pope in the Catholic parts of Eastern Europe when he demanded rhetorically “How many divisions does the bishop of Rome have?”

This is again quite poignant because in the end it was religion that destroyed the Soviet Union – radical Islam in the guise of the Mujahideen in Afghanistan and a quasi-Catholic consciousness movement, Solidarity in Poland, urged on by a Polish Pope.

Like Stalin, Putin believes in hard power – the power of force – rather than soft power, the power of persuasion.

However, this week we saw the limits of hard power in Russia. No armoured division can help you when the people panic and start selling their own currency. Putin would have been better off seeking the counsel of the Pope, who, as an Argentinian, has lived through more currency crises than most.

Russia experienced an Argentinean-style currency meltdown this week, but unlike Argentina of the 1980s, when financial calamity brought down the military regime, the collapse of the rouble is unlikely to bring down Putin. It weakens him, but not fatally. Russia still has over $400 billion of reserves, a controlled press and no obvious rival to Putin right now.

But he has lost control. Control and certainty is what most Russians want. Regular readers will know that I often visit Russia, having gone there to try to learn the language in the early 1990s. I witnessed the chaos of the tail end of Gorbachev and the beginning of Yeltsin. I saw what it was like to live in a country with not enough food, where queuing all day was normal, and where the system was breaking down in front of your eyes.

After this type of chaos, culminating in the 1998 financial crisis, most Russians just want certainty. They want to know that tomorrow is going to be the same as today. They want a leader who can keep a lid on everything. They want someone who, it doesn’t matter how, gives them peace of mind.

Putin was that man. He was the master tactician, pulling the strings from inside the Kremlin, outfoxing the West in Crimea, doing deals with Iran and Syria in the Middle East and presiding over the progressive growth of the oil-driven Russian economy. He was all-powerful and Russia was powerful too.

Now the currency crisis has blown that omnipotent myth apart because no amount of nationalist flag-waving in Ukraine is going to bring back the average guy’s purchasing power, which has been halved this week. This is a serious setback for Putin who up to now hadn’t put a foot wrong in the eyes of many Russians.

So why did it happen?

The answer is oil – or at least Russia’s dependency on oil and other commodities. Russia is in essence a large extractive industry. Ask yourself: when was the last time you went into a shop and bought something that had “Made in Russia” stamped on it? Until you see that, Russia will not be a normal economy in the traditional sense of the word and as a massive extractive economy, its health is dependent on the price of commodities, mainly oil and gas.

Putin has been lucky because his rule has coincided with a massive global boom in commodities, driving up commodity prices and resulting in billions of dollars of revenue flowing into the Kremlin. Of course the main reason for this boom has been the voracious Chinese appetite for all raw materials.

Just to put this boom in context. In 1998 when I worked in Russia for a French investment bank in the dying days of the crazy, drunken Yeltsin presidency, oil was trading at $14 a barrel. Russia ran out of money, the currency collapsed and Russia defaulted on its debts. Had oil been at over $100 a barrel as has been the case for the past decade, this calamity would never have happened and we might never have heard of Vladimir Putin.

But why have oil prices fallen?

Here’s where the interlinking web between the Kremlin’s power politics and its own financial fate becomes very interesting because it was one of Putin’s oft-trumpeted foreign policy successes that has proved to be his Achilles heel.

Russia is Iran’s friend in the Middle East. It has supported the isolated Tehran regime and this, allied to Russia’s alliance with Assad in Syria, gives Russia leverage in the region. While Syria is in the news, Iran is the key.

Since 1979, Iran has been the US’s number one enemy. If you doubt the depth of the hatred between Iran and the US, talk to Iranian emigrants in the US, whose support for the Republicans is rock-solid; and, of course, one of the Republican Party’s articles of faith is opposition to Iran.

Then Obama comes along and begins to throw out feelers to Tehran. This doesn’t only annoy Israel, Iran’s sworn enemy, but also Iran’s other foe in the region, Saudi Arabia. The Sunni Saudis can’t stand the Shia Iranians. This rivalry is as deep and antagonistic as any.

So when the Americans start to cozy up to Iran, what does Saudi Arabia do? It finances Sunni outfits like the Taliban – and its mental cousin, Isis. This is in order to make sure that post Saddam, Iraq doesn’t become a Shia power on the Saudis’ northern border.

It is also the most efficient oil producer in the world, so it signals its dislike of the US’s love affair with Iran by increasing oil supply, causing the price to collapse. This has a triple effect. The Saudis know that the rest of the producers need high oil prices, like Iran, to make their outdated refineries profitable.

It also knows that the US needs higher energy prices to make its incipient shale industry economically viable. It also knows that Russia, its geo-political enemy and supporter of its foes in the region, needs high prices to make its deep-mined oil competitive.

So the crown princes in Riyadh wait and wait and then turn on the taps, undermining Putin just when he seemed most powerful moving geopolitical chess pieces around from Ukraine to Crimea, while doing deals with Assad and Tehran.

Ultimately oil, his greatest strength, is also his greatest weakness. And the Arabs know this, triggering chaos as the Pope heals wounds between the US and Cuba.

As Lenin once observed: “There are decades where nothing happens and then there are weeks where decades happen.” This could be one such week.

  1. Weakest Spot

    Fantastic article I enjoyed reading it . It had insight and details and unfolded many complexities readers would encounter in other newspapers .Empowerment of the reader would be apt to describe the experience from reading David’s prognosis .

    Alas , I must complain .Why did the revelation stop so suddenly ‘inflight’ ? It was so good and I searched frantically elsewhere in this newspaper to find more . It seemed like reading a paragraph in in a whole storey in these critical times of what now is so important in the worldly events we have around us in our dailies lives today .Dishevelled and in disbelief was how I felt that no more to be read was to be found .

    ‘Putin’s Weakest Spot’ is what I now fear next .

    History has written how the hard power of Napoleon and Hitler failed to penetrate and defeat Russia and the consequences paid subsequently by those armies. Today their resurgence continues in Europe . Code Napoleon is found bedded in EU Brussels bureaucracy and Hitler’s ideas are found in various parts of Germany and Austria reforming their once latent Nazis propagandas .Their rises are becoming bigger as time now passes .Our national politics will be influenced by these events in 2015 .

    Sunny Saudi has scored a world victory with their soft power ….at least for now . How will Putin’s weakest spot retaliate ? Are we underestimating his strength ? My bet is that this is the beginning of what is to follow next year . Just like Hitler and Napoleon .Saudi will be next . Hard power requires a physical presence as in armies and tanks . Soft power does not . Soft Power requires a presence but not in a physical sense .This is where the history of the past and the future will be played out in 2015 . To be felt and not seen . We have already begun to see preview with what happened recently with Sony and their withdrawing of the screening of a political film about North Korea. Who is this hacker will not be as difficult as finding Wally in comic books .He probably lives in USA .
    Wally might have a Russian cousin in Moscow who speaks Arabic and comes of age in 2015 .Just imagine Macbeth saying ‘ is this a dagger in my hand the handle towards mine hand …come let me clutch thee ‘ . We know that Macbeth did do the murder . What happens in life if you and all in the nation imagined something hurtful without cause and cannot see it in 2015 . And it becomes worse and you cannot find out why ? It is like feeling sick when you should not because you are imagining it and then productivity malaise erupts in the nation. We each lose our individual actors ability to perform in work because we are reduced by a soft caste invisible constraint inflicted upon us .Latent implosion inside us .
    A Wahhabi Saudi script may be the hall mark of how we might read the next chapter in this currency destruction. A stone tablet might be found from the sands from Timbuktu inscribed with ‘how great the sun shines when you dance in the moon light there’ . Waves of sand might flow to the sea churning and curdling buildings like Swiss Roll fillings and all before it all gone . and as the tv add says ‘ when it is gone , it is all gone , and when it is all gone , it is gone too ‘. Now that’s gone. Doo Bye

    • michaelcoughlan

      Alas , I must complain .Why did the revelation stop so suddenly ‘inflight’ ?

      Yeah. No conclusion. I disagree with the analysis thought.

  2. michaelcoughlan

    “Oil proves Putin’s weak spot”

    Au contraire. Oil is one of his strongest spots. Not only has the crises not weakened him he has been immeasurably strengthened by it. The ordinary Roosky’s know that the real cause of the drop in oil price is the perfect storm of the yanks interference, the Saudi’s interference, and rehypothecation in the financial markets. So ordinary Rooskys will stand behind Pukin now more than ever.

    So what’s going to be the defining characteristic which will set the sociopaths and psychopaths apart in this one? Ans; He who has the strongest ledger. And who is that? Gladheshere not Pukin.

    Russia’s major exports are indeed extractive from the following;

    not to mention thousands of tanks even if the blow their turrets off when enemy combatants merely knock politely on the outside. Their most important exports which is made in Russia is their rocket and space technology.

    The real observation in all of this is when we find items in our shops with “made in Saudi Arabia” will be the game changer because oil is Saudi’s weak spot.

    Russia can eyeball the Saudi’s, Blather Obarasement, and wall street in this one because with Russia’s unmatched capacity to endure unimaginable sorrow and suffering only a fucking head case like Blather Obarasement would attempt to call the bluff of Gladheshere not Pukin.


    • EugeneN

      That would be all the more readable if maybe it referenced names we all know rather than whatever you and your 4 or 5 buddies like to name leaders as. I think Obarasement is Obama, but nobody could possibly work out who Gladheshere is because Gladstone has been dead these past few years.

      • michaelcoughlan

        Hi Eugene,

        There is only me. Ok. I was just having a bit of sport with the names. Vladimir Putin is still in a strong position. Barak Obama has a very week position because his country is so bankrupt.

        Thanks for the post.

        Best for Christmas.


  3. Deco

    Well, this is what I see.

    I see the English language financial media attesting to Moscow being the problem, with an enthusiasm unmatched since the same media organs demanded “too big to fail”. And why is this ? Because nothing has been fixed. Because the bailouts, the stimulus packages, and the debt addiction just keeps growing.

    The Chicago Boys school Ponzi-economic theory of lets all get rich by getting into debt, and pretending that we own something is at a dead end.

    It was all one long borrowing binge. The debts are astronomical. So this is a serious problem, and nobody in official power in the economics that followed this path are going to admit it.

    The real problem is ….. “RT”. RT is broadcasting non stop messages about the whole thing being dodgy, immoral, and an elabourate fraud.

    Which incidentally, is 100% correct.

    This RT non-stop broadcasting is in effect undermining the “faith based system” in Milton Friedman style economics.

    The non stop criticism of Western financial oligarchism is annoying the super-rich in the West, and threatening a power redistribution within Western society. It is even threatening the intellectual assumptions that have become “accepted norms” like manipulating the markets to protect the regime – in the West.

    As regards the Saudis, they are a society with an enormous amount of oil, and a ridiculously backward societal concept. Sociologically, it all depends on absurd levels of money, and persistent brainwashing. They are more afraid of modernity than they are of Tehran. And they have the money to go on the offensive against modernity. Saudi Arabia is a paranoid entity at the centre of a lot of unhealthy developments in the Middle East. It is very likely to lash out, and demand attention when not taken as seriously as it would like.

    I am concerned that the implosion of the unconventional hydrocarbon business might cause another disaster. The margins are thin. There are many US based banks that are leverage to a bet that might turn sour. And this could cause all sorts of implications on Wall Street, with Joe Sixpack being stung with the bill (again).

    There is also the issue of private sector debt in Canada, and Norway which are both are serious levels. That could cause serious problems also.

    Russia has serious problems, but the Russians are very frank about their problems. Even in the leadership. Participating in a siege of Russia, that is led by the same dimwits in Washington who gave us the debacles of Iraq, and Libya is not a sensible course of action. US Foreign policy is America’s worst enemy.

    In the interim, lower oil prices will help drive up growth in the short term in the large oil importer economies.

    • joe hack

      Some Good points…

      “In the interim, lower oil prices will help drive up growth in the short term in the large oil importer economies.”

      With increased growth comes increased growth in energy supply so those with a higher market share with regards energy supply will gain and the fracker and tar heads wont be able to survive the present prices.

      As always Oil proves Putin’s strong spot

  4. Deco

    The Pope has shown the way forward in respect of diplomacy. Engaging in a dialogue has made more sense.

    The blockade of Cuba was ridiculous. Canadians, Mexicans and most Europeans could go there. Everything is in a state of disrepair. And there is a myriad of small scale inefficiency.

  5. Galbraith’s Quest

    Were he alive today this once famous economist would have taken us to a new upper level redefining the subject and making economists accountable for their tenure of purpose and not to be allowed issuing shortcomings in a science forcing readers down the barrel . Galbraith did believe in astrology and wished he had more time to embrace it . Thus until another younger Galbraith arrives along the science is incomplete .

    To whet your appetite Putin is a Libra ……….so is Gerry Adams …Ivan Yates …..Michael Douglas ….David Trimble ….Its a Air Sign that impacts a genius to a succor who begins to believe they are too.

  6. Danny

    “Russians just want certainty. They want to know that tomorrow is going to be the same as today. They want a leader who can keep a lid on everything. They want someone who, it doesn’t matter how, gives them peace of mind.” – It is not only Russians who seek certainty and strong leadership, it would be nice to experience it in Ireland too!

  7. Mike Lucey

    I cannot see an abundance of oil as any country’s ‘weak spot’, a target yes. If the ‘bear’ gets angry enough its the EU that will suffer when the cold break comes this winter especially Germany and the UK. It would not surprise me if Putin looks for gas payments in Gold or only sells to non NATO countries. That would throw a spanner in the works and at the same change the complexion of things.

    Russia looks to be in good shape and has been steadily building its exports over the Putin years and will no doubt weather this (probably Central Bank) engineered storm.

    Its obvious that the ‘indispensable nation’ are having a go at Russia in order to retain their world hegemony. The agreement by the Saudis in low oil prices might also be looked on as an attempt by them to also test the bottom line price for USA fracked oil / gas.

    Its looks that the Russia / China alliance is also getting stronger as a result of the attack on the ruble.

    ‘China foreign minister says willing to help Russia’

    ‘China is willing to help Russia if needed but believes that the country has the ability to overcome its current economic problems, Chinese Foreign Minister Wang Yi was quoted as saying in a state newspaper on Monday.’

    The quicker Washington realises that we are now entering 2015 not 1945, the better for the world at large. Washington has abused its superpower status for too long and must now start thinking before doing, otherwise we could be looking at the final World War.

    • michaelcoughlan

      very good analysis mike.

    • joe hack

      very good and closer to the truth of this world war!

      “The agreement by the Saudis in low oil prices might also be looked on as an attempt by them to also test the bottom line price for USA fracked oil / gas.”
      There may be no agreement with the “west” on this but it may be true it is about market share and remember Russia has effectively increased it’s market share via pipelines to china and more recently turkey so Russia has itself effected the the price of oil short time anyhows.

    • CallerNJ

      I think he means his over-reliance on oil is his weak spot rather than having oil, although it seems to be phrased that way for sure.

      I do agree with you though, there is a very important player, maybe the most important player, left out of this scenario. China.

      China has boosted it’s challenge to the IMF and directed its renminbi that bit more toward becoming a reserve currency.

      China has both soft and hard powers and is using them both, whether the West agree with this usage or not.

      With such an important ally it’s hard to discount Russia, although they may ultimately end up being played by the Chinese.

  8. joe hack

    “Made in Russia” just spent awhile searching my meagre belongings for items made in Ireland, USA, Italy, and most of Europe, little to be found – what happed to CJHs Guaranteed Irish – except a few alcoholic stuffs but then again I have some Russian vodka. I do know that the Russians make lots things from space rockets to armaments to nuclear power station some there production includes cars, homemade brands as well a foreign and their trucks made by Kaz are constantly wining European truck of the year but then there few agreements with the EU to sell them here -Back to Ukraine , custom agreements with Russia, EU associations, and the attempts at the steeling of Russia resources again – ah history.

    One must remember when Russia had 7/8 % growth circa 2000 2008 oil was around 60 dollars a barrel and I was paying 70 to 80 cent a litre EU wages have not risen since …Russia wages have increased fixing that just puts them back to 2008 where we still are…

    Saudi Arabia, and Russia possibly even Iran are keeping an eye on market share and prices at 60 dollars affect those more expensive methods of oil production such as Canada’s tar sands the USAs fracking and the North Sea oil all of which are lose makers even above 60 dollars a barrel.
    Having a short term budget deficit may be more desirable than losing market share in the long term.

    Gas and oil production effect the price of both:
    With agreements on pipe lines to china and more recently turkey Russia has potentially increased its future market share and thereby production while the Bulgarians are banging European heads trying to get the south stream back on track.

    As Saudi Arabia has said those that want increased oil prices should reduce there production so it seems it is Russia itself that has had a big effect on the price of oil by opening up new gas fields to increasing production.

    When you look at Russia and it’s peoples -one the few sovereign nations- and try to figure out how it will respond in any given crisis don’t look in the mirror as money is not a driving factor and Putin know the Russian people.

    The First act of war is to demonise your enemy if it were about LGBT then the USA would not be holding hands with the Saudi princes while avoiding Sochi…
    “New Russia-China Deal Could Further Hit Natural-Gas Prices” so said the wall street journal.

    • Deco

      The First act of war is to demonise your enemy if it were about LGBT then the USA would not be holding hands with the Saudi princes while avoiding Sochi…

      Has John Kerry ever raised the issue of LGBT rights in his discussions with the various members of the Saudi regime ?

      Even once ?

  9. joe hack

    As always energy will prove to be Russia strong spot and it needs little or nothing from outside it’s own borders possibly the only true sovereign country with little or no reason to be aggressive but with every reason to defend and protect it’s resources.

  10. dwalsh

    David’s comparisons of Putin with Stalin are equally obscene and absurd.

    The Western banking plutocrats, who are our real rulers. want us to believe that Vladimir Putin and Russia is the enemy of Europe and of each one of us. He is their Emmanuel Goldstein whom we are all to hate.

    In fact Putin is the nominated enemy of the Western bankers because he refuses to submit to their bankrupt rule. He dares assert Russian national independence in an age when the nation state is being subjected to discipline and rule by the transnational banking elites.

    Putin is the enemy of the Western bankers; not of Europe or of human civilisation. It is the Western bankers and their bankrupt criminal financial casino market system who are the enemy of humanity and civilisation. Their system is a global cancer and potentially terminal.

    As regards ‘might is right’ any objective examination of world history since WW2 will quickly reveal which nation has been the primary rogue state wielding its military dominance and its ‘we are always right’ exceptionalism doctrine to wage continuous wars across the planet, both overtly and covertly, against any nation that resists it stated policy of full-spectrum domination. That nation and state is not Russia. Not even close.

    • cooldude

      Best commentary on this subject so far. Putin will not do any more business with the corrupt western bankers and now he must be eliminated. This is how it works and how it worked for Gadafi and Sadam Hussein. As soon as they wanted to get paid for their oil in different money than the mighty $US they were eliminated. The first thing a bunch of “rebels” did in Libya was to set up a western controlled central bank. This just shows the real agenda behind the so called revolution.

      Also Iran and Syria refuse to let the western central bankers issue their debt money in their countries because it is against their religion. They are next in line for “freedom” which really means debt slavery. The only religion allowed is worship of the central banks and their debt money.

      Very poor article and analysis.

    • Deco

      dwalsh – spot on.

      American is not a democracy anymore. It is a corporatocracy. Gore Vidal said that America is a one party state with two corporate wings.

      Government of the 1%. for the 1%, by their lackeys.

  11. michaelcoughlan

    Hello David,

    You are the only main stream economist who has highlighted that the imbalance between capital and labour is both symptomatic and a cause of much of what’s wrong.

    I respectfully suggest the following book for your christmas stocking.


  12. michaelcoughlan

    Hi David,

    Your mate Constantine gives excellent analysis on russia in the second half of max’s video here;

    best regards,


  13. Adelaide

    For a different interpretation.

    Max interviews former energy market regulator Chris Cook about the possible causes of the oil price collapse and what the future holds for Russia.

  14. michaelcoughlan

    Happy Christmas everyone.


  15. E. Kavanagh

    It doesn’t makes sense to me to throw in the Yanks as losers in the situation of low priced oil. Certainly cheap oil affects US oil companies; but the US economy is so large and diverse, and cheap oil has many positive effects: it helps sales of larger US SUVs, the average American has more money to spend on other stuff, energy prices are lower so companies make more money etc. Plus a bigger goal than profitable North Dakotan oil is achieved: cheap oil puts Russia, Venezuela, Iran and other US foes in severe trouble.

    I would have thought that Saudi Arabia and the US are at least on the same page in terms of oil prices, if not actually actively colluding in that endeavour.

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