Plunging oil prices, combined with NATO's sanctions for military incursions into Ukraine and spreading international recession have contributed to Russia's escalating financial hardship.
President Vladimir Putin, aiming to protect his huge popularity, used his version of the State of the Union address Dec. 4 to blame outside factors for Russia's current economic ills and, defiantly, put down a thinly veiled threat of war. The shock waves from his speech persuaded some observers, including Standard Bank analyst Tim Ash to conclude: “This is old school, Cold War Stuff.”
If the risk of war among big powers were to escalate, it likely would have global implications affecting all Americans and their businesses.
Russian incursions into the Crimean peninsula and eastern Ukraine are arguably the most serious geo-political event since the Cuban missile crisis of 1962. But this time the roles are reversed.
Nikita Khrushchev's threat to America was so acute that President Kennedy could not climb down, even if it meant nuclear war. Likewise, Putin cannot yield over Crimea, even if it means war. Putin enjoys massive domestic support similar to that afforded Kennedy.
From the outset of Russian incursions into Crimea, the Obama administration appeared to want to avoid military action. Instead, it initiated massive trade sanctions. However, the U.S. failed to consult adequately with NATO allies, especially Germany, who had far greater trade value with Russia and far more to lose. Dangerous splits appeared within NATO.
Capitalizing on these splits, Putin attempted to seize eastern Ukraine. This escalation had a negative effect, rallying NATO unity and increasing sanctions against Russia.
Saudi Arabia's inspired oil price plunge, now rumored to be a U.S./Saudi plan, is hurting Russia severely.
Oil and gas account for some 45 percent of Russia's revenues. Hit by declining revenues and falling into recession, Russia's Ruble currency continues eroding further from the year-to-date 40 percent fall.
Russia's budget is based on oil revenues at $102 a barrel, known as its Budget Break Even Price (BBEP). With oil under $70, Russia's government will soon be forced soon to cut spending. Adding to recession and severe currency debasement, oil price erosion could spell economic disaster.
While Putin offered amnesty for Russians returning a part of their estimated $100 billion of flight capital, he suggested no strategic plan to lift Russia from its worsening economic crisis.
Feeling his power threatened politically, Putin made clearly desperate statements in his State of the Union speech. Reuters reported that Putin appealed to traditional patriotism, accusing NATO of “pure cynicism” in trying to carve up and destroy the economy to punish Russia for being strong. “We are ready to meet any challenge of the times and win,” he declared.
Big power crisis escalation is dangerous to peace. Continental Europe depends upon Russia for 35 percent of its energy. If Putin cuts these supplies in mid-winter, it will cause suffering on both sides and raise tensions.
Should Putin fail to negotiate over Ukraine and his oligarchs not oust him, Russia will be perceived increasingly to be acting as a “rogue state,” precipitating a dangerous hardening of attitudes and a further increase in war risk.
Seemingly far away, Europe's defenses, economies and finances are closely interwoven with ours. War risk would affect us all.
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