The Cold War between the USA and Russia may be over, but there is no real peace yet as tensions have shifted into economics. What exists now between Russia and the West is an Economic War.
With oil prices falling yet another $2.85 a barrel Monday to close at $62.99, the total drop since its recent peak-close of $107.06 in late June amounts to $44.07, or 41.16% in less than six months. While this is hurting many of the more expensive oil producing wells in the U.S. – such as in the Bakken shale deposits of North Dakota and Montana – the pain is more acute for Russia:
“The contribution of the energy sector to Russian GDP will decrease by nearly 50% over the coming decades,” Energy Post informed in July of this year, as the plunge in energy prices was just beginning.
“The fuel and energy sector provides over 25% of [Russia’s] GDP and almost 30% of the country’s consolidated budget, two-thirds of foreign exchange earnings from exports, and a quarter of total investment in the national economy,” EP adds. “More than 45% of primary energy resources produced in Russia are exported, providing 70% of total export earnings.”
With so much of Russia’s economic health riding on energy, “conditions on external markets therefore play a crucial part in the development of the entire Russian economy”, EP makes clear.
Energy is Russia’s Achilles’ heel, and the country’s lack of diversification threatens its downfall… again.
This isn’t the first time Russia was financially brought to ruin. Remember what caused the Soviet Union to break apart? Economic collapse, which many believe was cleverly orchestrated by joint efforts from key Western nations, including the U.S., the U.K. and Germany during the 1980s.
Might the West be at it again? Are they trying to undermine Russia’s economy yet again? The drama of the last few years may be pointing to precisely that. It all starts with the fall of Libya in 2011, which was exacerbated by the Cyprus banking crisis in 2013 – two events which pushed Russian President Putin over the edge.
The West Pushes – Putin Pushes Back
The recent deterioration in Russia-West relations dates back to the West’s response to the 9-11 attacks in New York, with incursions into Russia’s backyard as Western coalition set up bases a little too close to Russian territory for Putin’s comfort.
“Russia’s case against American involvement in the Middle East dates from the post-Sept. 11 campaigns in Iraq and Afghanistan,” reported the New York Times in September of 2012.
Putin’s irritation with the West’s increased global presence was stoked even more with the bombing of Libya, a long-time Russian ally. “It has been at the forefront of Russian discourse for at least a year, since Mr. Putin broke out of his role as prime minister and delivered a passionate criticism of the NATO bombing campaign in Libya [in 2011],” NYT explained. “Vladimir V. Putin, then serving as prime minister, was especially enraged last fall after an angry crowd killed his ally, Col. Muammar el-Qaddafi, an event he later condemned as a ‘repulsive, disgusting’ scene.”
In response, Putin pushed back, thwarting the West’s involvement in other regions, including Syria. “Russia has blocked Western initiatives to force Syria’s president, Bashar al-Assad, from power,” NYT continued. “Mr. Putin has dug his heels in on the issue of Syria, frustrating Western hopes that he could persuade Mr. Assad to leave his post voluntarily.”
When Push Leads to Shove
But the West was growing increasingly irritated with Russia right back, especially when secret intelligence had long known of money-laundering funds and secret bank accounts belonging to Russian political and business leaders which had stashed billions of dollars in Cyprian bank accounts.
“Moscow’s mafia finds an island in the sun: Cyprus is awash with dubious dollars from Russia,” reported The Independent as early as August 1994. “Hundreds of Russians have deposited millions of dollars in cash in the Mediterranean island of Cyprus in what local bankers suspect has been a giant scheme to launder the profits of covert Middle East arms sales and the proceeds of Moscow’s mafia.”
By 2013, the amount of Russian money stashed in Cyprus was astounding. “It is estimated that about one half to a third of all Cyprus bank deposits are of Russian origin,” the BBC reported in March of 2013. “The ratings agency Moody’s estimates that there is about $31bn (£21bn) of Russian money in Cypriot bank accounts – $12bn from banks and $19bn from businesses and individuals,. Moody’s also estimates that about $40bn has been loaned to Russian companies based in Cyprus. The suspicion – particularly in Germany – is that a lot of the money is from ill-gotten gains.”
Deals were also uncovered pointing to kick-backs received by prominent Russian politicians, bankers and business leaders for securing loans from Russia to Cyprus.
So what did the West do about all that suspected money-laundering? Some believe they simply shut-down Cyprus’ banking system by calling all its debts to the West, in a round-about way. Unable to pay, Cyprus was forced to confiscate money from accounts held at its banks.
“Those with deposits of less than €100,000 (£85,000) will be spared, but those with more than €100,000 – many of them Russian – will lose billions of euros under draconian terms aimed at preventing the Mediterranean tax haven becoming the first country forced out of the single currency,” reported The Guardian in March of 2013.
“Russia loses out as Cyprus reaches deal,” reported CNBC. “Irish finance minister Michael Noonan told CNBC, ‘[Cyprus] certainly didn’t move to give financial assistance to their depositors, so I can’t second guess about the Russian public opinion.” Belgian finance minister Koen Geens “said he had ‘no idea’ what Russia’s reaction would be,” CNBC expanded.
Well, we all know now what the Russian response was. Almost a year later, in February of 2014, Russian troops spill into Ukraine’s province of Crimea (though not donning Russian military uniforms), which Russia officially annexes on March 21st. Over the coming weeks and months, more Russian military personnel and equipment begin the still ongoing Russian occupation of eastern Ukraine.
The West shoved back with economic sanctions against Russia, which in turn shoves back with threats to cut-off oil and natural gas sales to Europe.
So the West takes a page out of U.S. President Ronald Ragan’s playbook in the early 1980s, devising a plan to bring Russia to its knees once and for all.
How Will the Shoving End?
Since June of 2014 an oversupply of crude oil from America’s shale deposits to Canada’s oil sands to Saudi Arabia’s continuing overflow have brought the oil price down more than 40% in less than six months.
Normally, the reaction by the OPEC cartel of 12 influential oil producing nations which produce some 40% of the global oil supply would be to cut-back production to stabilize the price so it doesn’t keep falling. Russia and Iran have been visiting with all of their fellow OPEC partners over several weeks, urging them to reduce their production.
But at their last meet two weeks ago, the decision out of OPEC was for no change in oil production. This alone is a telling sign that collusion is afoot, as it is completely contrary to OPEC’s self-interests to allow the oil price to continue falling.
How will it all end? “For Russia, a perfect storm of economic woe looms,” headlines Market Watch. “Plummeting crude oil prices, international sanctions, the crumbling ruble and rising sovereign debt yields are creating what one analyst called the ‘perfect storm’ for the Russian economy,” yesterday’s report stressed. “And if the price of crude oil continues to decline, it’s only a matter of time before the Russian Federation is once again facing the prospect of default.”
The cold war between Russia and the West may be over, but relations are not warm by any means. There is a war still ongoing between the two sides, an economic one which will not end well, unless the man with no knees finds a way to bend. Few expect he will. The end of this war will not be pretty.
Joseph Cafariello
