Common Cents

Rogue Reward

Ralph Murphy

(11/2014) Russia's annexations of Ukraine’s Crimea region in March of this year accompanied with hostilities in East Ukraine have proven costly in military violence as well as domestic dealings. The Russian economy is largely hydrocarbon dependent with oil and natural gas providing 52% of the Federal government income, and about 70% of its export earnings. Drastic oil supply increases recently by the United States, now the world's top producer, political sanctions, and Organization of the Petroleum Exporting Countries (OPEC) energized output have made the need for Russian oil far less prevalent. The country needed the earnings for its illegal foreign adventurism, key point being the Ukraine. They're not going to get it, and the result could prove calamitous for the integrity and continuity of this lightly populated monolith.

In March 2014, Moscow annexed the Crimea region of Ukraine and added it to eight existing Federal Districts of the Russian empire. The Russians had signed a Naval base agreement with then Ukraine President Viktor Yanukovych, himself an ethnic Russian, to lease the facility in Sevastopol through 2042 with a five year option beyond that date. It was a rewrite of a previous agreement that had given the Russians base rights through 2017. The accord was in exchange for decreased fuel costs for Ukraine by Russia, but Yanukovych’s minority government at about 17.5% backing was ousted in February 2014. The Russians sent special forces to seize Crimea and add it as the Crimea Federal District following President Vladimir Putin's signing of a parliament or Duma order. They didn't honor the decreased price agreement, and it's being debated as a secondary issue to Russia's military presence in Ukraine and support of separatists.

Moscow considered it their fiefdom and though the demographics came nowhere near parity with Ukrainians in any of the regions, Russia supported sedition units both foreign and domestic to seize power. Crimea was lost, but the struggle continues there and in the East as Moscow appears to want to annex "New Russia" (Putin's term) as he has Crimea. He really appears to want a land bridge from Russian territory to Crimea itself along the Black Sea, but has been thwarted to date despite intense fighting. All the adventurism has been costly in lives and lost rubles, and as noted before the oil funding source to finance the venture is no longer viable.

Russia projected and needed oil revenues at about $100 per barrel over the next several years to help finance the costly Crimean legal, political, social and infrastructure maintenance. It was about $111 dollars a barrel for much of 2011/'12. As of this month, the commodity was selling for about $80 dollars a barrel in New York. Projections say it could drop even lower, but at $60 a barrel. It might level off as United States fracking becomes too costly for large scale production below that rate. The United States is the world's top producer at 11.1 million barrels a day in 2014 followed by Saudi Arabia and Russia each near 10 million.

Sanctions on Russian businesses specifically oil and banking have impacted the economy, but nothing like the panicked capital flight, foreign and domestic, which followed the unpredictable lawlessness in the nation's Ukraine ventures. $95 billion has moved to safer exterior investments and the Deputy Economic Minister fears it could go considerably higher.

The same thing happened in 2008 following Russia's invasion of neighboring Georgia when 25 of the nation's business leaders (strong political influence) lost a reported $230 billion dollars while the Russian stock market (RIS) dropped 71% of its value due to "capital flight." That external capital loss can "bled" a nation dry, and Russia's currency "a mess" or inflation devalued, leading to decreased oil revenue from the stronger international importing currencies.

Organization of the Petroleum Exporting nations are to meet November 27 to discuss price levels, but for the first time since the 1980's are concerned about competition, e.g. the US oil suppliers to Europe taking market share. A (Persian) Gulf based OPEC official said succinctly, "Saudi Arabia and the rest of the Gulf have no intention whatsoever to accept the idea of a cut (in production) at the November meeting." The Americans are producing to affect, and the Iranians may step up output if the International Atomic Energy Agency (IAEA) and United Nations can keep that nation's plutonium below weapons grade to lift sanctions. Again, 70% of Russia's hard currency is hydrocarbon based. There's unrest domestically as unstable Oligarchs appear to back foreign and domestic adventurism which few will win, and escalating anarchy is near certain. Hopefully, the left won't take advantage of the political and economic debacle as their cadres are in place. They are not efficient, but can control the economy.

Russia has to face reality and to project itself quite quickly in the nation building now designed as "Federal Districts." Seven districts were indicated in 2000 when Putin assumed the Presidency of the country following President Boris Yeltsin's tumultuous reign after the Soviet dissolution in 1991.

An eighth region in the North Caucasus was added in 2010, and the Crimea Federal Republic added March 21, 2014. The latter might really signal Russia's "Waterloo" as an empire. It triggered sanctions, capital outflow, military seizures, and an apparent shift in the ruling Oligarchs as only the nastiest players appear able to ride out the current unrest. They'll be about the only winners short term, but Russia itself would benefit from devolution of power and costs to new nations stemming from the current eight Federal Regions as the country has a scant 150 million people, far more languages and an area which covers about an eighth the world's land mass!

The major oil producing region is currently in West Siberia Federal District with Roseneft producer owned 69.5% by the Russian government and 19.75% by British Petroleum. Those fields have offered up to two thirds Russia's production, but are proving more costly in extraction. East Siberian Federal District fields along with newer projects to include an Ocean Pipeline running 260 miles from Skovorodino to Daqing, China are now viable. A political region in the North Caucasus was added in 2010, and the Crimea Federal Republic added on March 21, 2014.

World demand for oil is down a bit as Europe suffers from debt issues and misused capital associated with restrictive resource allocation in a crippling European Union. China's earnings are also down slightly on last year. Supply has risen dramatically as the United States has passed traditional top producer Saudi Arabia, other Middle East suppliers increase output, and Mercantile (export dependent) Russia tries to compete amid the undisciplined socio economic chaos in that nation. The West has run to their aid in the past, but as long as Russians have "boots on the ground" in foreign ventures they may have to just "pick up the pieces" and move forward divorced to a better lifestyle. Time will tell.

Ralph Murphy is a former member of the CIA Headquarters Staff in Langley, VA.