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For Russia Oil Equals Money, What If The Money Dries Up Before The Oil Does? By Ziad K. Abdelnour
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For most countries, the economic slowdown in China and the accompanying slump in commodity prices represent something between nuisance and pothole. For Russia, they are a catastrophe.
Russia’s currency and economy, already squeezed by Western sanctions, have been sent into virtual free fall by slumping oil prices. The IMF now puts Russia’s long-term potential growth at 1.5%. I personally think it’s just 1%, astonishing for a country whose standard of living is barely 40% that of the U.S.
Russia is indeed skating on thin ice: Cheap oil, Western sanctions and years of mismanagement have sent its economy into a deep freeze. Now everyone is wondering when the ice will crack.
Inflation has soared to 15%, the ruble is trading near record lows, consumer and business sentiment is on the slide, and its companies are shut out of financial markets in the US and Europe.
Forward-rate agreements are signaling 23 basis points of increases in borrowing costs during the next three months. The Bank of Russia has lowered its key interest rate by a cumulative six percentage points to 11 percent in five steps this year.
The ruble has depreciated about 43 percent against the dollar in the past 12 months, the worst performance globally, according to data compiled by Bloomberg.
The central bank said last month that it may worsen its forecast for a 3.2 percent contraction this year after domestic demand fared worse than anticipated in the first six months. Russia will endure a two-year economic contraction if crude prices remain at $60 through 2016, including a 1.2 percent slump next year, according to the central bank.
Escalating violence in Ukraine could lead to new international sanctions, and there's little sign of a significant rebound in oil prices. In my personal opinion, the global surplus of oil is even bigger than Goldman Sachs Group Inc. thought and that could drive prices as low as $20 a barrel.
Oil and gas wealth enabled Russian President Vladimir Putin to cement his hold on power domestically and flex Russia’s muscles internationally. The loss of that wealth threatens to scramble the world’s geopolitical order, though there are no signs of that yet.
So just how long can Russia avoid complete economic meltdown?
Much will depend on how fast it burns through its remaining stash of foreign currency. Last year it spent $134 billion trying to prop up the ruble, bail out struggling companies and contain the crisis.
That splurge cut its international reserves to about $376 billion, more than enough to finance a year of imports if necessary, but the lowest level since the depths of the global financial crisis in March 2009.
Russia needs reserves for imports, but also to service $600 billion worth of foreign debt -- most of it held by Russian companies and banks.
Depending on who you ask, the crunch could come by the end of this year, or it could hold out for another 12 months beyond that.
As a general rule, countries under pressure can burn through reserves very quickly. It could be staring down the barrel of default, much like in 1998, sooner than expected.
Some experts think Russia's cash buffer could keep the nation afloat for another two years, even if oil prices stay at current levels and the conflict in Ukraine drags on.
Then again, no one can predict the future. And if oil prices surge back this year, some of Russia's economic problems will fade - highly unlikely in my opinion.
My personal opinion: If oil prices don't surge again, two highly likely scenarios I see - The collapse of Putin followed by the collapse of Russia or the alignment of the new Russia with the Islamists to control the world.... Mark my words.
It isn’t obvious that Putin and his inner circle are listening. After all, economic hardship has yet to undermine his popularity at home or his ambitions abroad. History suggests that shouldn’t be taken for granted.
Ziad K. Abdelnour is a Wall Street Investor & Financier, Pres.& CEO Blackhawk Partners, Chairman of the Financial Policy Council and Author of Economic Warfare: Secrets of Wealth Creation in the Age of Welfare Politics
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