Russia’s Crude Paradox

As of Friday, the price of oil on the world market stood at $50 a barrel, the lowest it’s been since May 25, 2005. This is both bad and good news for Russia. As the world’s largest oil producer, Russia’s economy and international standing is measured in its ability to pump and sell crude. Russian independence is in relation to the price of oil. For the power elite in Russia the drop in oil prices bodes as a possible bad omen. But not quite yet. According to statements by Russian Development and Trade Minister German Gref, Russia’s Stabilization Fund, which now stands at $88.5 billion as of January 1, will not begin to take a beating until or if oil prices drop below $27 a barrel.

However, for consumers in Russia, who pay an average of $1.45 for a gallon of gas in Moscow (1 gallon equals 3.785 liters and it is now 38 rubles to the dollar), the drop in oil prices provides more relief to an ever increasing autocentic nation where monthly income averages around $300 a month.

But Russia’s, let alone the world’s other industrial(izing) nations, fortunes and misfortunes in regard to the price of oil might not be fully in their own hands. In the era of globalization, economic (mis)fortune is determined by the strength of the vast economic web that spans to every corner of the globe. Russian domestic economic policy is merely an afterthought when local conflicts in Asia, Africa, and the Middle East can veer the global economic rudder. The power of “peripheral nations” to affect the economic stability of “core nations” is a result of what analysts call the “resource curse.” Impoverished nations who have oil and gas as their sole economic resource are also some of the most politically unstable, making them an increasing factor in determining the economic future of the world’s powerhouses.

Nothing points to this fact more than Sebastian Junger’s excellent article “Blood Oil” in the most recent issue of Vanity Fair. Junger argues that the world’s oil prices could potentially be held hostage by small militant groups like Movement for the Emancipation of the Niger Delta. Since January 2006, MEND has intensified attacks on Nigerian oil pipelines and infrastructure and has repeatedly kidnapped oil workers. The effect of one attack on a Shell oil field in early 2006 resulted “in roughly 250,000-barrel-a-day drop in Nigerian oil production and a temporary bump in world oil prices.” The group’s most recent incident occurred Sunday, when MEND members hijacked a cargo ship and took 24 foreign nationals hostage. It is too early to tell if this attack will have an impact on the price of oil when markets open on Monday.

The threat of small power, Junger argues, can have nightmarish economic affects. In one scenario hypothesized by the Oil ShockWave conference:

[A] near-simultaneous terrorist attacks on oil infrastructure around the world could easily send prices to $120 a barrel, and those prices, if sustained for more than a few weeks, would cascade disastrously through the American economy.

Gasoline and heating oil would rise to nearly $5 a gallon, which would force the median American family to spend 16 percent of its income on gas and oil—more than double the current amount. Transportation costs would rise to the point where many freight companies would have to raise prices dramatically, cancel services, or declare bankruptcy. Fewer goods would be transported to fewer buyers—who would have less money anyway—so the economy would start to slow down. A slow economy would, in turn, force yet more industries to lay off workers or shut their doors. All this could easily trigger a recession.

Granted, by Oil ShockWave’s estimation the American economy would most likely be directly affected by such attacks. As of November 2006, the United States imports 10,126,000 barrels of oil a day, 919,000 of which comes from Nigeria and 1, 444,000 from Saudi Arabia. But suffice to say, a slump in the American economy would send shockwaves around the world.

How would regional conflicts affect Russia? If the last year is any indication, the economic prognosis of high oil prices is good for Putin’s state. The war in Iraq, political tension and instability in the Middle East and West Africa, and ecological disasters like Hurricane Katrina has produced a boom for Russia. The macroeconomic success of the Putin Administration is funded by petrodollars. This is not to say that as the world largest oil exporter, global instability is only good for Russia. Multinational oil conglomerates have hardly complained about rising oil prices. At the bottom line, the real beneficiaries of high energy costs are the global elite.

Still, the fact that 60 percent of Russia’s budget comes from oil and gas revenues makes it increasingly hostage to political (in)stability around the world. While, say, attacks by Nigerian militants in the Niger Delta might spike oil prices to Russia’s benefit, “at the same time,” writes Igor Nikolayev, “Russia is gradually becoming integrated into the international economic community. That means it is important to take into account economic-growth trends in industrial nations and emerging markets, the volatility of the world’s major currencies, and the movement of leading stock-market indices, among other factors.”

Thus, a paradox. Economic forecasters in the Kremlin are hedging their bets that oil prices will remain around $61 a barrel for 2007. From this estimate they are predicting that the Russian economy will show a 4.8-4.9% percent growth rate from 2007-2009. High oil prices equal a continued economic boom.

Yet, the maintenance of high oil prices comes at, albeit a long term cost. First, prices will rise at home, cutting into household and personal incomes creating dissatisfaction among the population. This is possibly the least threatening outcome since the Kremlin hardly responds to domestic political pressure. Second, high oil prices will raise tensions between Russia and importer regions like the European Union and its near abroad—Ukraine, Belarus, Georgia. It is no surprise that questions about Russia’s “reliability” come exactly when prices are so high that it gives Russia extra muscle against its customers. Nor is it strange that Russia’s problems with its near abroad have come when energy has become an effective political weapon against its former satellites. The cost of high prices here can potentially be costly, but that cost is more in relation to wider geopolitical struggles. If the English language media is any indication, Russia’s energy supremacy and its willingness to wield it have inaugurated a new Cold War. Third, and perhaps most costly, is that high oil prices resulting from geopolitical instability only hurt Russia in the long term, especially if its economic fate beyond petrodollars is increasingly tied with the economies of the United States, Europe, and East Asia. The Russian state might continue the fantasy that petrodollars can maintain its national sovereignty, but that may one day become a fetter on its economic solvency.

Hence Russia’s crude paradox. Either way you cut it, in the long run oil is more a curse than a blessing.