Let’s Talk About Russia: Are Declining Oil Prices a Good Thing?
Take a look at two graphs.
Do you know what they are?
The title of the blog may have given away the first one: it’s the price of Brent Crude Oil over the last month. As you are likely already aware, the price of oil has fallen considerably in just the past month. There are quite a few reasons for this including increased United States domestic production, fewer supply disruptions around the world, and OPEC remaining constant with its supply goals.
Have you guessed what the second graph is? If you’re astute and following global affairs, you’re likely guessing that the second graph represents the comparison of the US Dollar and the Russian Rouble over the last two months.
While the hills and valleys are not precisely the same as the oil price graph, you can plainly see a correlative effect between the relative strength of the Rouble and the price of oil. This is not a particularly surprising realization as it is generally well-known that oil and gas products make up about 60 percent of Russian exports.
However, this tumble in prices mixed with recent reports that inflation in Russia is looking like it will hit about 8 percent in 2015 bears all the hallmarks of a Russian recession. On top of this, many of Russia’s state-owned businesses have been leveraged heavily on loans to Western banks. With the advent of sanctions pressures as well as decisions not to lend to quasi-nationalized entities, the lines of credit for major Russian industries appears to be shrinking rapidly. Thus, the inevitable conclusion is that a Russian recession would be devastating and prolonged in the event there is not an immediate socio-political scaling back of the more belligerent Russian policy aims.
So, is this a good thing or a bad thing? The immediate short-term answer is that this is a good thing. Russia must continue to make its deliveries over the winter to Western Europe in order to buoy its economy. However, the Kremlin is not blind to the economic realities that are imminently going to befall the nation. Rather, as is plainly evident in the annexation of Crimea and the blatant invasion of Donetsk is Eastern Ukraine, the Russian play for decreasing reliance on industrial importation is evident. Under the guise of protecting ethnic Russians, the Kremlin is making the economic plays to bolster itself against a coming economic maelstrom.
If Russia is on the verge of a major recession, shouldn’t the long-term answer be that Russia will be de-fanged and willing to cooperate with the international community. To this, the answer is murky. While it is always the hope that cooler heads prevail in tense situations, history indicates that this just is not the way human nature works.
Note: Reductio Ad Hitlerum follows. If you think that Weimar comparisons are inappropriate, that’s certainly your prerogative. One hopes that you are correct. I only make the comparisons to illustrate the way in which human nature in the modern era seems to support predictions.
From 1919 to 1933 the Weimar Republic (this is the name historians have given it) succeeded the German Empire after the First World War. The Weimar Republic was a fractious, at best, attempt at a Federal Republic. Increasing nationalism coupled with economic depression and staggering inflation made the nation susceptible to autocracy. In Weimar, the national socialists stoked fears of communist plotting and garnered tremendous power in the Reichstag and forced the eventual acceptance of Hitler as Chancellor. With claims of undoing the wrongs of Versailles and visions of a triumphant German culture, Hitler was an inspiration to a depressed and stagnant nation. The rest is obvious history.
While it is easy to make the Putin-Hitler, Crimea-Sudetenland, Donetsk-Anschluss, Soviet Empire-German Empire, and Versailles-Sanctions analogies, one piece of the analysis is consistently missing: in both situations, there are people in power who remember a time before the current system was in place. Some explanation is needed here. Authority of a system is directly contingent to its historical legitimacy. Kings and Emperors who usurped dynasties have this constant fear. Look no further than the Crisis of the Third Century in the Roman Empire, or the Year of the Four Emperors earlier. When a new person or group comes to power, legitimacy of that power is always tenuous.
The Russian Federation in its current form has existed since 1992. While 22 years has allowed for a new generation to reach the age of maturity, this generation has yet to reach the age of governance. Those in power still remember an imperial system in all but name. The socio-cultural heritage of empire is not something that immediately changes with a switch in political leadership. To the contrary, as was evident in Weimar, national humiliation is a bonding agent between peoples that can easily be fueled nationalist rhetoric. Add into this an economic downturn that can be played against the long-time foreign policy rival of your state and you have the ability to generate huge popular support for your policies and agenda.
So does this mean Russia is going to invade Poland in 2015? Probably not. However, I am not as convinced that the Russian timetable for international provocation is as open-ended as some commentators have predicted. Rather, the Kremlin is aware that its energy power and its economic backing is already in twilight. The consequence of this is either to capitulate to the West and seek greater economic cooperation with the European Union and increase the movement of goods and capital, or move to capture industry and production means in order to make other nations dependent on the Russian economy.
Which will Russia choose? The annexation of Crimea and the de facto puppet state created in Donetsk were met with tepid sanctions and disapproval from the West. Moreover, the West has repeatedly refused to engage Russia on the geopolitical stage. Putin, with firm control over the propaganda machine in the nation as well as a rapidly modernizing military, is in the position to make a decisive move to truly test the West’s resolve. Coupled with this, the Kremlin is aware of the fact that the President of the United States is a lame duck with a Pentagon that, in the early months of 2015, will be leaderless. Like Germany before, the bold step is to make a play for one of the Baltic States. Latvia, Lithuania, and Estonia are all members of NATO and, as such, are subject to Article 5 protections. That is, an attack on one state is an attack on all states.
What would the United States do in the event of a “revolution” in one of the three Baltic States? It is plainly obvious that the current Russian model of invasion is not tanks rolling into a country, but rather Russian liberators protecting civilians. So, would Americans be willing to defend the people of Estonia and, consequently, start a regional conflict that could quickly escalate into the Third World War? Go ahead, ask the regular American on the street. My guess is that you will get a response rate of 80% saying that Estonia is probably a great place to live, but I wouldn’t want my son or daughter dying there. Putin knows this.
The other way forward, in the event the Kremlin refuses to directly confront NATO, would be to make a play for Finland. While Finnish popular opinion seems equally divided between petitioning for NATO membership and remaining neutral, consistent Russian aggression on the long border between the two nations may be enough to put enough unease into Finns to prevent NATO aspirations. However, in the event the converse is true, it is sorely against Russian strategic interests to allow Finland to become part of NATO. Thus, if Russian intelligence points to a vote in that direction (like the vote in Ukraine to bind itself closer to the European Union), the Kremlin will have sufficient incentive to make a play for Finland.
In the end, the only people who know Russia’s plans are the Russian leaders. However, history and worrying economic indicators do seem to draw the next year as being one of escalating tensions and a necessity for a Russian policy shift. This shift can either bring increased economic cooperation that could lead to prosperity, or this shift could lead to further Russian destabilization of Eastern Europe.
So why should we care? You will note that I’ve taken a particularly objective stance in this post. Would American bellicosity over the territorial integrity of the Baltic States necessarily de-escalate this situation? Additionally, and perhaps more importantly, are the Baltic States strategically defensible? It is difficult to argue, even from a default position of non-intervention that the national integrity of Poland and Germany are enough in the American strategic interest that committing military resources to their defense prevents significant decay at home.
How should the United States respond, then? There clearly is not one precise answer to this question. Certainly the United States’ position around the world as promoting free markets has been considerably tarnished and our alliances or strategic partnerships in the former Soviet sphere of influence have decayed. While a strong NATO military presence in Eastern Europe is commendable, the reality that there would likely be no support for the defense of the Baltic States leads one to look for other options. Possibly the best solution would come in terms of giving massive incentives to American businesses and technology firms to being to invest in nations bordering Russia. Likewise, though targeted sanctions are a good attempt at trying to limit the dire reality that sanctions usually only hurt the poor and innocent, support for investment in competitive businesses in Russia may help to break open the Russian economy from the movement toward state capitalism
To conclude, a spiraling Russian economy coupled with an autocrat at the height of his power and rampant nationalism is in no one’s best interest. While Putin may daydream about Russian flags flying in Berlin, the reality is he’d much rather rule over a prosperous Russia and be remembered more as Peter the Great than Ivan the Terrible. However, as any student of Russian history knows, Ivan the Terrible is regarded as one of the great Tsars of Russian history.