Are there any problems with lower oil prices?
Some economies benefit from lower oil prices, and some are hurt. Among the winners are India and China, since agriculture and manufacturing are so energy-intensive. Also, China has become the world’s largest car market. Among the losers are Iran and Russia, whose budgets depend on significantly higher oil prices. And Russia is the second largest oil exporter in the world, shipping 7 million barrels per day.
Compounding Russia’s problems are international sanctions that went into place after they annexed Crimea. These factors have helped push the Ruble down over 40% recently.
With less hard currency to support their budget and limitations on what goods they can buy, living standards in Russia have fallen. Recently Vladimir Putin gave a defiant speech where he clearly laid the blame for their problems on Europe and the US.
So what might they do? A little mischief in the Middle East or Latin America could boost oil prices. Russia has the second strongest military in the world, with over 15 thousand tanks and 350 naval vessels. Surely they could find something to do. It would be a mistake to assume that a little budgetary distress will make Russia capitulate. They have demonstrated over the years that they have a tremendous ability to absorb pain. Indeed, they often see suffering as a source of strength.
Falling oil prices and Western sanctions have wounded the Russian Bear. And there’s nothing more dangerous than a wounded bear.
Douglas R. Tengdin, CFA
Chief Investment Officer
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