Falling oil prices spell disaster for Russia and Vladimir Putin

In March when Russia first began its invasion of Ukraine, oil was trading well above $100 per barrel, but now, its around $81 (the lowest level in three years). While this may be good news for American drivers, it is alarming for Russia, a country that relies heavily on oil revenues. In fact, over half of the governments revenues come from oil and gas. Furthermore, oil has been key to Putins grip on power since Boris Yeltsin lost power in 2000, fueling a booming economy that grew 7% on average from 2000 to 2008. These oil issues will subtract 1-1.5 percent from Russias GDP, and the International Monetary Fund earlier this month reduced its 2015 growth forecast for Russia to 0.5% from 1% in July. From whatever angle you from it, Russias economy is hurting. Its stock market has plunged 6% in the last three months, and the Russian Ruble (their currency) has dropped 20% against the dollar this year. Pessimistic financial analysts believe Russia will slip into recession by 2015 or 2016.

What this means for Ukraine, where resistance troops are still trying to fight off Putins advance, is that there may be a chance depressed oil prices could take a bite out of Putins military agenda. However, last month a Russian news agency called Itar-Tass reported that military spending will rise by 21% in 2015. But then, a few weeks later, Russian Finance Minister Anton Siluanov was quoted by Reuters saying the country cannot afford the defense program they are currently employing. So, it remains uncertain as to how this crisis will affect Ukrainians. But for the moment, the pain being felt as a result of the oil prices will probably not enough out of Russias GDP to cause the effects to trickle down to civilians. The fighting in Ukraine continues, however, and Putin persistently blames the U.S. and Europe for expanding the North Atlantic Treaty Organization up to Russias borders. He has made it clear he intends to keep Ukraine out of the alliance for economic reasons.

It is also still unknown how the Russian government will attempt to compensate for its massive financial losses. The government has a history of seizing assets to bolster its own control over the energy industry; in fact, last month Russian state prosecutors seized an oil company belonging to one of the countrys oligarchs, Vladimir Evtushenkov. If oil prices remain seriously depressed, Putin could cut social programs and pressure businesses to maintain full employment.This may seem drastic, but the regime under Putin is far more consciously prepared to react to this crisis than Russia in the 1990s. So far, Russia has stepped up its efforts to reach out to other nations and establish economic relationships (this could be in part because they have been shunned by the EU and the United States, obviously two very important economic world powers). Specifically, in May China and Russia signed a $400 billion, 30-year natural gas deal. Furthermore, Chinese Premier Li Keqiang signed on agreement with Prime Minister Dmitry Medvedev to build a high-speed transport corridor linking Moscow and Beijing.

Russias economic plight has implications all across the world. As Russia flounders, American and European energy producers are flooding the markets with their oil. Demand growth has slowed, but output in the U.S. has hit a 30-year high. Producers in the Organization of Petroleum Exporting Countries (this coalition includes countries like Saudi Arabia and Iraq) have also cut prices. My questions are, how do you think Russias financial strife will affect the situation in Ukraine? Do you think the United States should become more involved in the struggle over Ukraine? Why or why not? Also, how does the United States lack of connection with Russia hamper our own industries?

A war machine is heavily reliant on its own form of fuel: money. Without it, an army and the invading nation cannot move forward. It is forced into a standstill or pushed back to its own borders. With the recent drop in oil prices, Russia is verging on an economic crisis and may eventually no longer have the power to remain in Ukraine. Therefore, to answer your question how do you think Russias financial strife will affect the situation in Ukraine?, Kristen, I believe that while Putin may try to do anything else, Russia will be forced to recall some its forces from the region because, at the moment, improvements in the stance of oil does not look promising. For example, despite the steep drops in prices, the Organization of the Petroleum Exporting Countries (OPEC) has been unwilling to restrict production levels. With these continued levels adding to the already present surplus of oil, this does not look promising for improvement in the Russian economy. On Tuesday, Putin recognized that Russias national budget is definitely under duress due to this recent and continuing fall in oil prices as Russia relies on sales from oil and gas exports for about half of its federal budget. Evgeny Nadorshin, the chief economist at Russian conglomerate AFK Sistema, says that the Russian economy will definitely begin to decline by the end of the year if the prices remain near $90 a barrel, especially since the Russian economic growth is expected to reach no more than a measly 0.5% this year. With this in mind, it will become increasingly difficult for Russia to remain an influential force in the Ukraine if its economy is becoming increasingly crippled by the day. If this economic trend continues, Russia will most likely have to pull out of the region for the sake of its economic welfare. This brings me to your next question: Do you think the United States should become more involved in the struggle over Ukraine? Why or why not? Due to the recent economic factors that limit Russian progression, I do not think that the US should become more involved in the region at the moment. With the recent decline in economy, Russia may remove itself and by not sending in a coalition the US will have avoided an unnecessary conflict. However, if the oil economy does show signs of revival and Russia continues to push for control of the region I do believe we will eventually need to become involved to protect the rights of the Ukrainian people. But, for the time being, I believe that involving ourselves in this region will be an unwise and rash decision that we cannot afford at the moment, especially with the recent rise and threat of ISIS. Therefore, we must wait to see the end result of this economic decline and intervene only when absolutely necessary.

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