Vladimir Putin has taken yet another historic mis-step. The gravest mistakes he has made to date are undoubtedly the annexation of Crimea and his hybrid war with Ukraine. Yet a number of other miscalculations are close behind – the war in Syria, pension reforms at home and the rewriting of the Russian constitution in his hope of ensuring him a role as Russia’s ruler for life come to mind.
This week, though, another candidate for a top spot on that list made headlines: The crash of global oil markets and the immediate devaluation of the Russian ruble. Both are a direct result of Russia’s decision to withdraw from the so-called OPEC+ agreement of oil-exporting nations to reduce output. In Russia, only the president himself can make such decisions and it would seem that he could not have chosen a worse time to do so.
This commentary should in no way be misread as an endorsement of the OPEC deal. The organisation is peopled by reactionary monarchs, corrupt pseudo-democracies and ideological regimes. OPEC is a typical cartel, simply trying to artificially inflate prices, much to the detriment of consumers. Private companies operating in that fashion in free-market democracies are regularly fined for such behaviour.
Russia didn’t exactly garner praise when it originally signed onto the OPEC deal – which has been extended several times – in late 2016. Still, it makes even less sense to sabotage such a deal after one has agreed to it. That is especially true at a time when the nervousness of global commodities markets amid the growing Coronavirus pandemic can easily be pushed into full-scale panic by new destabilising factors.
Yet that is exactly what Putin, who has styled himself as a guarantor of stability, has chosen to do. Now, at a time when global energy demand is at a historic low because of concerns over the scale of the Coronavirus pandemic, the Russian president has further destabilised the skittish global oil market by starting a pricing war.
Russia’s uncompromising refusal to adhere to OPEC’s proposed policy of cutting oil production caused the deal to fall apart entirely on March 6. Even those production-cutting agreements that were to be valid for a three-year time frame have now been suspended. Thus, all bets are off now and oil-producing countries are free to produce as much as they like starting April 1.
Ultimately, Russia has abandoned its partners in the middle of a worldwide collapse of oil prices. That doesn’t mean one should feel sorry for cartel members, but it does explain why Saudi Arabia – one of OPEC’s key members – has reacted so viciously. Last week, the kingdom announced it would massively expand production as of March 8, while at the same time offering huge rebates to its customers – most critically those customers in the European market, which is so important for Russian producers.
The move immediately caused energy prices to plummet by almost one-third, meaning oil is currently trading at half the price it was in January. Putin has now started a full-blown price war on the oil market and Saudi Arabia and Iraq have joined the skirmish by ramping up production and slashing prices.
It would seem that EU countries would be thrilled by this turn of events because cheap oil is like a stimulus package for national economies – but panicked investors are currently ditching their shares in a number of European firms. They see something that Vladimir Putin appears to be blind to: The possible wide-reaching consequences of the Coronavirus pandemic on global markets. Furthermore, they recognise that a collapse of the global oil market would be extremely disruptive, eventually leading to macroeconomic destabilisation – negatively affecting the balance of the global economy, bankrupting companies and increasing the likelihood of payment defaults.
Nevertheless, in some instances that is exactly what the Kremlin is hoping will happen. For years, US shale oil companies have been a thorn in the Kremlin’s side because they have allowed the US to grow into an ever more powerful competitor to Russian firms. Thus, Moscow would welcome the collapse of such companies, many of which are carrying significant debt. Another favourable side effect in Moscow’s eyes is the economic strain such disruptions would bring to bear on Russia’s other main competitor, Saudi Arabia.
However, Russia does not seem to have factored in the very real consequences of a global economic recession in which the collapse of debt-ridden US competitors would eventually set the banks financing them teetering as well. It would not be a stretch to imagine a chain reaction that could put the world back in the same position it found itself in during the 2008 global financial crisis. That would be a situation that now, as then, could have disastrous consequences for Russia.
Russia immediately got a taste of that possible fate when the ruble tumbled as a direct response to Putin’s policy announcement. The result will be a spike in inflation – which had just recently been brought under control – and hard times for a domestic economy heavily dependent on imports. It will also lead to a substantial loss of income and prosperity among the Russian people.
Thus, it’s not hard to imagine that Vladimir Putin’s decision to start an entirely unnecessary global oil crisis in the middle of a worldwide health pandemic could catapult the move to the top of his list of historic mistakes within a matter of months. DW