Oil proves Putin’s weak spot

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.