Russian Meltdown

Published on: 16:47PM Jan 15, 2015

From loyal viewer Peter Gadwa, a reaction to my comments on the Russian economic crisis:

“The sanctions are about as effective as throwing tennis balls at a tank.  The drop in oil prices does really hurt.  Watch for Russia to continue to strengthen ties with China, Iran, India, Kazakhstan, etc, while reducing trade with Europe.”

Peter, opinions are mixed on the effectiveness of the sanctions, but i believe they are underestimated because they take time to work. And as you point out, the consequences have been overshadowed by the precipitous drop in oil prices.

The sanctions do have one immediate impact: they raise food prices. In fact, the Russian media, which are now very nervously parroting kremlin propaganda, rail about the sanctions constantly. Whether we think the sanctions are effective or not, the Russian people are being told they are the real cause of their misery.

But the biggest issue facing the government and the people, I think, is the widespread corruption among the rich oligarchs of the Russian economy. When Putin flooded their economy with 230 billion dollars of stimulus in December to steady the ruble, over 200 billion was immediately exported overseas by government officials who also just happened to run Russian banks. The funds targeted to slow the plunging ruble instead bid up prices of fine art and London real estate.

Putin remains remarkably popular, but the depletion of their sovereign reserves and the flight of capital out of the country almost guarantee a severe Russian recession in 2015. Many U.S. and European economists think that is a best case scenario. Whether China is interested in supporting an economy more corrupt than their own seems doubtful to me, as they are beginning to face their own headwinds, and oil supply is suddenly less of a problem.