Complex structures, such as states and empires, are always prone to collapse and they usually give little or no previous warnings. The collapse of the Soviet Union, indeed, had not been predicted by anyone and it came completely unexpected. In the present crisis, instead, Western analysts seem to have fallen in the opposite mistake, predicting the rapid demise of the Russian Federation. But that didn’t happen. On the contrary, the Russian economic system showed a remarkable resilience and it strongly rebounded after a bad moment, last year. (image below from Bloomberg).
So, predicting collapses is always very difficult in a world’s situation that looks more and more like a Russian Roulette (an appropriate name in this context), but played with nuclear weapons. It might well be that some states which at present look very solid could be the ones to experience a sudden and unexpected Soviet-style implosion (let me not say which ones these states could be).
Let’s go more in depth in this matter. The collapse of Russia was expected in the West mainly as the result of the recent crash of the world’s oil market. That repeated the situation of the late 1980s, when the old USSR was bankrupted by a similar effect: a rapid fall of oil prices which strongly reduced the revenues from oil exports. However, the present situation is not exactly the same. The main difference is related to the perspectives of the oil market. In the 1980s, low oil prices were generated by new oil fields entering the market after the first oil crisis – for instance the North Sea. The supply increased and prices collapsed around 1985 at levels that today we can’t even dream any more – around 20$-30$ in current dollars – and they remained there for nearly two decades.
Today, there is no equivalent of the new resources that had entered in production in the 1980s and the price collapse has been generated mainly by a demand slump. Additionally. what we call today “low prices” are at least twice as high (in current dollars) than they were in the 1980s. And these “low” prices are bankrupting the whole US tight oil industry. That can’t be without effect in bringing back oil prices to the levels which were considered “normal” up to last year. Consider also that Russian production costs are not the highest in the world, as shown in this figure
The values shown in the figure are very uncertain but, as long as oil prices do not fall below US 40 $, Russia should be able to survive; and they seem to be doing exactly that. In the short term, at least, the “oil weapon” that some analysts saw as unleashed against Russia, failed to obtain its purpose.
Certainly, however, the question of the long term management of the Russian mineral resources cannot be ignored. There are elements indicating that Russia’s oil production is peaking this year and, according to Ron Patterson, USA and Russia may peak together. How would their respective economies react to that? More in general, how will Russia manage the unavoidable long term depletion of the country’s resources? What do the Russians want to do with their mineral wealth? Who is going to use it and for what purpose? Planning on the basis of the fundamental elements of the depletion process (*) would be the best for Russia to avoid a future resource crisis.
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(*) The problem of oil depletion is very poorly understood everywhere in the world, but, according to my personal experience, it may be that it is even less understood in Russia. For instance, over more than a decade of existence of the Association for the Study of Peak Oil (ASPO) there have been many national chapters (including ASPO-Italy). However, there has never been an ASPO-Russia (if you google for “ASPO Russia” you’ll find the Astrakhan Shipbuilding Production Association, which is not exactly the same thing!).
dissident on Sun, 3rd May 2015 1:42 pm
The oil and gas sector of Russia’s economy accounted for 13% of GDP in 2013. So a naive estimate of the impact of a 50% oil price drop (assuming gas prices also drop this much) is a 6.5% loss of the GDP (without multipliers). But it does not work that way since there is value added production and it is not the raw oil price that gives the 13%.
The other show stopping detail is that the 13% is in rubles and not dollars. Workers are paid in the domestic currency, corporate transactions are in rubles as well. The ruble devaluation nullified the oil price drop.
So the important story is inflationary shock from the forex rate drop. However, after hitting an annualized peak of 36% the CPI was back to its 2014 pre-devaluation levels by the second half of March, 2015, and has stayed low. The inflationary shock has totally dissipated even though the ruble has not recovered its early 2014 exchange.
In the final analysis, this was a blip much milder than the 2008 financial crisis.
JuanP on Sun, 3rd May 2015 1:59 pm
Ugo, there is not much meat in this article. I know you can do much better.
Everybody here at PO knows that I have been saying from the beginning that Russia would weather this storm without major problems. I feel that by now this should be obvious to all the smart people here, even those who disagreed with me on this point.
I am afraid, though, that I agree with the analysis in that ZH article Davy linked to earlier. The American-Russian War is only getting started and will continue escalating until either Russia or the USA cease to exist in any recognizable way. As I have said before, I believe that the USA will lose this fight and this will be the end of America’s hegemonic dreams, our economy, and maybe even the nation. This conclusion is derived from a cold, calculating analysis of Russian and American strengths and weaknesses. Please understand that, being a US resident, I do not wish this to happen because it will be very bad for my wife and for me, but I can’t help seeing things the way I do. I really wish I could be more optimistic about this.
shortonoil on Sun, 3rd May 2015 2:06 pm
In the final analysis, this was a blip much milder than the 2008 financial crisis.
According to the BIS debt held by the petroleum industry is now $2.5 trillion. Most of that must be in the West because the Russian oil industry has almost none. The Russian have a considerable advantage just from the debt perspective. Servicing debt becomes extremely difficult when revenue drops, and revenue has fallen by 50%.
St. Roy on Sun, 3rd May 2015 3:05 pm
JuanP
You got my vote
MSN Fanboy on Sun, 3rd May 2015 3:31 pm
Resource crisis in Russia, errr, remember that shale boom America? LOL
A better title: RESOURCE CRISIS PLANET EARTH
J-Gav on Sun, 3rd May 2015 4:05 pm
Yes, Dissident, you’ve well understood the basics there.
Davy on Sun, 3rd May 2015 5:06 pm
Juan, I disagree on Russia having an advantage overall. Sure they have several advantages and have improved greatly mainly because of oil revenue. They Are a Mafia state with a Don running the show. Russia is fossil fuel dependant for their strength with fossil fuels becoming unaffordable at the same time Russia is expanding their budget. They are a population in decline no longer having the toughness of their grandfathers.
That and so many more issues for both countries puts Russia on the same level as the Americans overall if you add up all the negatives on all sides. I am biased against Russia but I am also obsessed with balance and fairness. No nation will survive the end of BAU in tact. Both the U.S. and Russia are too large to survive the end of BAU. China and the EU are likewise looking to fly apart. Nope Russia is a dud. We know the U.S. Is a dud.
Plantagenet on Sun, 3rd May 2015 5:14 pm
Russia today is much weaker then the USSR that the USA defeated in the Cold War, but Putin has started a new Cold War with the USA and the west anyway.
IMHO Putin’s new cold war will end much the same the 20th century cold war ended—badly for Russia.
Davy on Sun, 3rd May 2015 5:22 pm
Planter, come on the Russia today is worlds apart from the decrepit USSR. Putin is the paramount leader today. That is a good and bad for Russia obviously. If Putin chokes on a fish bone then what for Russia? If Obama choked on a fried chicken bone the U.S. would not even notice.
AgentR11 on Mon, 4th May 2015 10:59 am
Plant, the only reason the USSR lost to the US/NATO was because they tried to play keeping up with the Jones’; and of course being a much smaller economy, couldn’t pay the bills.
Do you see any carriers being laid down in Russian shipyards? Recent navy guys over there had to beg just to be allowed to draw one on paper.
Russia acquired a couple yards with Crimea that physically could do the job. Still no carriers, and no orders for carriers.
Russia will not repeat the USSR’s mistake. There is no need, and Putin knows it.
Jaws on Tue, 5th May 2015 3:18 pm
Putin is just smart enough to get you killed.