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Thursday, 18 December 2014

Economic sanctions against Russia, in combination with the plummeting oil prices, will not win the hearts and minds of the Russian people. Instead, they will probably reinforce the position of Vladimir Putin.

While the inflicted pain of the economic sanctions and the low oil price is mounting in Russia, the average ‘Igor Six-Pack’ has no understanding for the nature and reason of these sanctions. Consequently, the sanctions might reinforce position of Vladimir Putin, instead of weakening it.

Soon, I and my family will visit Russia once again. In spite of the fact that – with the 75th birthday of my mother-in-law – we have a merry motive for visiting this economically battered country, it will be a fully different visit than the last time I was there.

My last visit to Russia was a visit to a country, that slowly, but surely improved itself and turned into a more normal, more modern and almost western country, with recognizable problems and its normal share of growing pains. Not perfect, but definitely on its way to a better future. Especially, when you took into consideration where the country came from in the Nineties of last century, the changes seemed remarkable.

The inequality of the Russian population was still huge and the particular problems – alcoholism, corruption, bureaucracy, lack of genuine economic growth (growth not borne by the oil and gas industry), underdevelopedness and clientelism – were yet one-of-a-kind.

Nevertheless, it seemed that the mounting middle-class of normal Russians with normal, respectable jobs, as well as normal success and prosperity, would lead to more economic stability for the future.

Of course, there was always the bombastic exuberance and accompanying bad taste of the Russian ‘happy few’, who had unlimited amounts of money to spend and indeed did so in the numerous hyperexpensive shops of Moscow and St-Petersburg.

Still, the fact that the average Russian could afford himself his daily share of decent food of decent quality and in decent quantities, as well as some (durable) consumption goods and household appliances that we already take for granted in the western world, seemed a good omen.

The only truly worrisome things in Russia were the swelling political dynasty surrounding President Vladimir Putin, worshipping him and depending on him without the slightest form of objection and criticism (‘Putin Kith and Kin’, aka friends and family) and the enduring political quarrels of Russia with countries like Ukraine, Georgia and Moldova about gas deliveries and territorial interests of Russian minorities in those countries.

And last, but definitely not least, the increasing national dependence of Russia on oil, gas and other minerals for its prosperity, due to a lack of serious industrial / commercial development and other economic drivers, if we exclude the vast Russian weapon industry, which is very successful in its own right.

The following snippets come from my 2011 article, behind the aforementioned link (click the link to see the accompanying charts in the article):

[…] a further, limited weakening of the ruble is not very problematic, but further dropping oil prices are.

To show you how problematic these dropping oil prices could be for Russian GDP, I took a YTD chart on WTI Crude and multiplied the 2010 Russian production of 10,15 mln barrels with the four price levels that I point out in this chart.

Doing this, I understand that price levels are never stable and I use these therefore only for demonstrational purposes.

It becomes clear from this calculation that the difference between the highest and lowest oil price in 2011 is a theoretical yearly revenue of $126 bln. And it becomes also clear that when the oil price structurally drops under $79,32, Russia has a serious revenue problem.

And with these predictive words from this August 2011 article, we are back in December, 2014, after a year that became much darker and moodier than many people would have anticipated less than two years ago.

Where 2014 should have been Vladimir Putin’s finest hour, with a proud and self-confident Russia hosting spotless Olympic Winter Games in Sochi, the year has slowly turned into a nightmare for the ‘eternal president’ of the Russian Federation.

In the aftermath of the protests on Maidan Square and the regime change in Kiev, the atmosphere between Russia and the Ukraine/ European Union block soured quickly, leading to ‘the mother of all revenge actions’: the nearly bloodless, but nevertheless utterly shocking Russian conquest of Crimea.

This event was followed by the unspoken, but yet very real division of Ukraine in a EU-oriented Western Ukraine and the Eastern parts, which have been openly looking towards Moscow since then (without really wanting to be a part of Russia by the way).

The result? A nasty and bloody civil war in Ukraine with opaque, but probably all too real interventions from Moscow and a neo-cold war stance between the Western world and Russia. 

When the Malaysia Airways MH17 was shot down on 17 July 2014 – allegedly with a BUK surface-to-air missile coming from the rebels in the Donbass region – the conflict escalated in a stalemate of nasty economic sanctions between the two involved blocks and a truly poisoned political atmosphere, that set the world 25 years back in time to the last years of communism.

And then the unthinkable happened in the last quarter of the year: the oil price, which had hovered around $100 per barrel throughout the year (WTI Crude) until August, suddenly started to drop like a brick until a level of $55.93 was reached, as of today.

One year price development of WTI Crude
Chart courtesy of
Click to enlarge
While the initial economic sanctions of the European Union and the United States were painful, but yet surmountable for the government and people of Russia, the oil price dropping to levels well below $60 isn’t. 

We will probably never know, whether this was an autonomous event (which you could call ‘the hand of God’) or an orchestrated manoeuvre of the United States and Saudi Arabia, in order to get Russia economically on its knees.

Nevertheless, the results of this sudden drop in oil prices – in combination with the simultaneously dropping Ruble – for Russia and the Russian population are devastating.

Where the official exchange rate of Rubles vs the Euro is now around 82Rs to €1 at the moment that I write this article, the bank shops in the streets of St Petersburg already calculate with rates of 120Rs to €1(!!!), making it nearly useless for Russians to exchange their hard-earned Rubles, in order to buy hard currency in return.

To name a few examples of the latest negative rate hikes of the Ruble: a Philips television set which costed 9,980 ₨ only a week ago, was today sold for 20,000 ₨. An electric shave of formerly 8000 Rs was now sold for 14000 Rs. Russian people complain that household appliances get more expensive ‘by the hour’ (litterally).

The whole Russian middle class – mostly honest and hardworking people with a respectable job – will be annihilated this way (not even to speak about the lower classes, who probably can’t afford their daily shoppings anymore soon), as their private wealth will blow skyhigh when this situation of near-hyperinflation lasts.

Consequently, when we speak with our Russian middle-class friends (people which you could call ‘Igor Six-Pack’), their stance is one of disbelief and misunderstanding:

What is going on? What are Europe and the US thinking at this moment? 

Why are these economic sanctions set against Russia? Where is the smoking gun that directly connects Russia to the MH17 plane crash? 

Why do we have to suffer for a battle that was not ours from the beginning?! 

And when the West want to impose sanctions to Russia, why not doing it in a way that hurts Putin, instead of hurting the whole Russian population?!

In my opinion, these are valid and justified questions, as it is an extremely unwise idea to sacrifice the politically moderate Russian middle class population in a hyperinflational extravaganza and thus spark a renewed envy and nationalistic hatred against the west, which might lead to further politicial escalation.

The concept behind these economic sanctions – that these will weaken the position of Vladimir Putin through the emergence of bottom-up unrest – is a mirage. 

Vladimir Putin might be not the most democratic leader in the world, but he is still very popular among the Russian population and the current situation will probably only reinforce his position in the Kremlin: us against them. 

So, if we are not careful, the whole situation might turn into a lose-lose situation that hurts both the West, Ukraine and Russia in a way that lies beyond belief.

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