What’s happening with Russia?
Source: Wikimedia Commons
At the beginning of the year Vladimir Putin had everyone jumpy. His aggressive actions in Crimea and Ukraine had set the world’s teeth on edge. Russian MIGs were testing Finnish and Swedish airspace. How do respond to a great power that insists on a 19th century imperial vision?
But now, the Russian Bear doesn’t look so aggressive. A tentative cease-fire is holding in eastern Ukraine between the government and Russian-backed rebels. The Russian stock ETF is down 20% so far this year. What changed?
In a word, oil. Because of growing US supplies, high Middle-East production and concerns about global growth, the world oil price has fallen to $85 / barrel. This puts tremendous pressure on the Russian government’s budget:
Under current spending, an $80 oil price will result in a budget deficit equal to 2 ½ percent of their economy. This is a problem when it’s difficult to borrow, and it’s difficult to borrow when you’re a world pariah. The combination of lower oil prices and global financial sanctions may reign in some of Putin’s global ambitions.
It’s difficult to pursue expansive goals when you’re running out of money. Russia has an inefficient, antiquated energy sector—the result of cronyism and lack of any rule-of-law. I’m not saying peace is breaking out. But if they help contain the Russian Bear, lower oil prices are a good thing.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!