Did Putin Forget to Look at this Chart?

The price of oil finally bounced on Friday, with US light sweet crude trading for $75.88 a barrel, as I’m writing this, up $1.67. The 2.3% gain should make Russian President Vladimir Putin breathe a sigh of relief.

The day didn’t start out propitiously. Putin saw a “catastrophic decline in oil prices,” he told the state-owned TASS news agency during an interview (Business Insider). That scenario was “entirely possible, and we admit it,” he said.

The plunge in oil prices (about 27% since June) comes on top of the ruble’s downward spiral (about 30% against the dollar since the beginning of the year).

Global oil consumption is expected to fall by 1% in the first quarter of 2015 from the current quarter, the International Energy Agency estimated. OPEC members are in no mood to seriously cut production; like everyone else, they need all the moolah they can get. Production is soaring in the US, and no one here is any mood to cut production either, with new money flooding into the sector. Something has to give.

But Russia would be OK, according to Putin.

“A country like ours finds the situation easier to cope with,” Putin explained. “Why? Because we are producers of oil and gas and we handle our gold and currency reserves and government reserves sparingly.” Emphasis mine. “Our reserves are large enough, and this allows us to be sure that we will meet our social commitments and keep our budgetary processes and the entire economy within a certain framework.”

So how large are these in currency reserves? Turns out, they were $480 billion in October 2013. They have now been whittled down over 20% – in just 12 months! – to $383 billion. That’s what Putin meant with “sparingly.” Five years of this, and the foreign exchange reserves will be zero.

But wait… Oil prices just began skidding a few months ago. The drain on these reserves has other origins, such as the total lack of confidence by Russians in the ruble, in their banking system, and in their legal system, and this lack of confidence created a tsunami of capital flight that the Russian government has been unable to check.

Russians are dependent on imports for a big part of their consumer goods, and they still remember what happened to the ruble in the 1990s when prices were marked in dollars because the value of the ruble was plunging so fast no one could keep up with it. So when things get iffy, they check exchange rates on a daily basis. When the ruble drops, they see their spending power dropping, and they try to save what they can by dumping their rubles and buying dollars and euros. It makes perfect sense.

The Central Bank of Russia, in trying to counteract this and prop up the ruble, or at least manage its decline, was buying these rubles and selling euros and dollars. But on Monday, it too must have taken a gander at the chart below. Worried of where this might lead, it decided to preserve Russia’s foreign exchange reserves and let the ruble float wherever it may.

Because this chart of Russia’s currency reserves from 2009 through October 2014 – specifically the 20% decline in just the last 12 months, to $383 billion – should give them the willies:

Putin was right, though. Russia will make it through this phase in better shape than some other countries. But that doesn’t say all that much: OPEC member Venezuela, for example, is nearing hyperinflation, accompanied by shortages of all kinds, an increasingly unpopular political regime, potentially explosive social unrest, and a very high probability of default – not within the next ten years, but within 12 months. Some of this has been in the works for a long time, but the current price of oil is pushing the country relentlessly and rapidly toward a financial cliff.

That’s probably the kind of comparison Putin was referring to when he said, “a country like ours finds the situation easier to cope with.” But it will be tough, and if the price decline lasts long enough and goes deep enough, it will be very tough. For oil producing countries whose governments are dependent on oil revenues, the price of oil can be a nasty mistress.

It is possible that a miracle intervenes at any moment now and that the price of oil bounces off and zooms skyward. We’ve seen stocks perform these sorts of miracles on a routine basis. But when it comes to oil, miracles have become rare. Read…  How Low Can the Price of Oil Plunge?

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  12 comments for “Did Putin Forget to Look at this Chart?

  1. Si says:

    So… I am not saying I disagree with the article (which I don’t) but I am struggling to understand this – Japan is desperate to destroy its currency and get inflation going in order to get the economy going (i.e. people spending) and yet the same threat to Russia is the end of the world! I really don’t get it. Japan has to buy in its energy (bad) but devaluation boots its exports (good), but their trade deficit doesn’t seem to support that this is happening. What are Japans reserves – printed Yen?

    Russia will get through this because they are resilient and tough, and they won’t freeze to death in the winter.

    I wonder if all this is simply a carry trade game (or just economic warfare) kept alive by confidence care of our ‘all caring’ banking overlords. As the Leman moment showed us, that confidence is fragile.


  2. john tucker says:

    That little action on Friday may well turn out to have been a “dead cat bounce” … you have noted here that nothing substantial has changed and I didn’t see anything either …

    The reason that Russia will be okay is to be found elsewhere … few americans study world history with any depth …officially 8.7 russian soldiers died in WW II and 16 million civilians, against only 400,000 US deaths … the statistics for Stalin’s regime, for WW I, are equally as frightening … Americans start whining if someone takes away their nicorette gum or their diet coke, but russians are accustomed, historically, to horrific belt-tightening. They will survive this…. but the USA, in its present form of government, may not ….

    • Lars says:

      John, I think you are right. The average Russian is far more hardened in any respect than the average Western citizen. I guess someone here have read about Russian employees not being paid for months but they still turn up for work every morning. You would hardly see that in the West. It seems Russian society kind of works despite everything. A financial crises is not enough to bring them down.

  3. Lars says:

    I think it`s a bit odd Putin/Russia hasn`t threatened to lower their oil production to raise prices. They are the World`s second largest producer after the US. I think it`s well within Putin`s means and power to be able to dictate that to the big Russian oil companies. All it would take are some hints from Putin and I bet the oil price would gain several dollars at once. And it wouldn`t take much higher prices to outweigh a falling production and the Russians would save some of their oil reserves instead with increasing evidence showing they are actually at peak production.
    So why doesn`t Putin do it? I bet he has some good reasons. He knows the “low” oil price(s) isn`t going to stay here for long.

    • David R.(Canada) says:

      Lars. I think you do not really understand what’s actually happening here. Saudi Arabia literally lowered their selling price by decree; not by increasing production. This lowered price has been engineered on purpose for some end; I’m not sure what.
      Was it to screw up the fracking/shale oil and gas industries? Was it to screw up the Canadian oil-sands projects? Or was it to retaliate against Russia for supporting Assad and effectively preventing the gas pipeline from being built to Europe?
      Having said all that, I believe that Putin is playing for time. Time is on his side. The economies of Europe and the US are slowly sliding towards the cliff-edge, ready to fall. It’s just a matter of when.
      Putin just has to wait, while continually goading the West and causing them to waste ever more resources when reacting to his moves.

      • Lars says:

        David R., you misunderstand. I have not commented on what the causes of the “low” oil prices now are, just asked why Putin doesn`t seem to care and do anything about it. One could of course argue that he can`t do anything at all, just sit and wait as you suggest. I agree with you that Putin just has to wait. The West has squandered lots of resources in Afghanistan, Iraq and God knows where not.

        If Saudi Arabia started all this I doubt they did it on their own. In the 80s the US used Saudi Arabia as an “oil weapon” against the then Soviet Union, no doubt that was the main factor for their collapse. The Saudis could have another good reason for helping the US destroy the Russian economy since it will hit their arch enemy Iran hard too. This is as you say “hitting two birds with one stone”.

        Personally I don`t think the intention is to screw up neither US fracking nor Canadian oil sands, but this could be a side effect. Anyway this is anyone`s guess.

        As for the South Stream pipeline to Europe I don`t understand how the EU dears mess with this, given the extremely weak resources situation the continent faces. After all you in North America are far better off in that regard.

      • Lars says:

        David R.

        Didn`t I? Did you read what I wrote? I merely commented on why Putin doesn`t seem to try and do something about the low oil price, not WHY this low price has come to happen. That`s a big difference.

        On the other hand I agree that Putin has time on his side, and that was also my conclusion if you read the last two lines.

  4. Lakshminarayanan says:

    “But when it comes to oil, miracles have become rare.”

    Central Bankers cannot print it… that is why!

  5. All else being equal, there is nothing Putin can do but wring his hands and sweat. He could help himself a great deal by getting by ‘de-invading’ Ukraine and asking for a do-over. War = certain bankruptcy for Russia.

    Keep in mind, without ‘growth’ (current state of affairs) there is nothing in the way of business expansion to allow reconstruction after wars. When these finally end the devastation is permanent!

    Here is finally something new under the sun. In prior wars since the beginning of modernity (1455) every war has been followed by growth and repairs. No more … devastation is permanent.

    Meanwhile, conventional ISLM supply and demand has stopped working as well. Right now there is a shortage of fuel … $75/barrel says so! Our world is built assuming sub-$20/barrel fuel into perpetuity. All of our precious ‘stuff’ is underwater! What this means is that the shortages affect customers before they affect drillers: shortages = customer insolvency which means they cannot bid prices higher.

    Without customers w/ money there is nobody out there for drillers — such as Russia — to lay off their debts onto. (Oopsie!)

    If Russia (or Saudia) cut production, customers will be even less solvent => prices will decline further => less solvent drillers => less production => customers less solvent in a vicious, self-reinforcing cycle. Drillers are therefor pushing tools as fast as they can hoping to end the shortage … but they cannot due to depletion which accelerates along with drilling. Something else new under the sun …

    Don’t believe this is occurring just sit back and watch. Might want to reconsider that deadbeat car while yr at it …

    • Ugh, badly edited, no?

    • Mark says:

      take away an Americans Windows phone or Tee Vee and all hell will break lose; The Russians have experienced poverty and will shrug their shoulders. Plus the Trillions in gold that Putin has stashed means that they can outlast us.

  6. LG says:

    Is it me or all the charts lately look like 2009?

Comments are closed.