Rouble Trouble

Back in September 2012, Russian president Vladimir Putin was feeling confident:

Russia’s President Vladimir Putin has said its possible to use the rouble as a reserve currency.

“We hear more and more statements about reserve currencies,” the president said at the APEC CEO summit, claiming the “Rouble can claim for the role of reserve currency.

Let’s see how that’s working out in December 2014:

ruble

Oh dear.

The collapse of the ruble against the dollar is mainly the result of the crude price dropping from a high of just over $100 per barrel in July to around $70 per barrel today.  Russia is highly dependent on oil and gas exports to balance its federal budget, having utterly failed to diversify its economy and remove red tape during the 14 years that Putin has been in charge.   According to some sources, Russia needs a crude price of around $118 per barrel to balance the budget, hence $70 per barrel oil is going to be hitting them hard.  And now having seen OPEC ignore the pleas of Russia to cut production, the markets have reacted.

But this is only part of the problem.  The slump in oil price would be bad enough on its own, but Putin and his pals decided that 2014 was the year in which it would annex the territory of a neighbouring state and forment an uprising in the same country immediately afterwards for reasons that can only be described as expansionism for the sake of it, something more fitting for the 19th century than the 21st.  Russia’s economy was already taking a battering from the sanctions imposed by the west in response, followed up by a set of retaliatory sanctions on, erm, themselves as the Machiavellian geniuses in the Kremlin sought to ban Russian citizens from buying Lithuanian cheese (at least until the Kazakh mafia gets their act together).

Consumer prices were already soaring in Russia due to the sanctions, and now with the collapse of the ruble things are about to get a lot worse.  Russia is so reliant on imports that its citizens are extremely exposed to currency fluctuations, in contrast with those of the Euro area for example, who can maintain purchasing power over staple goods even if their currency falls.  Up to now, the Russians have been asked to tighten their belts in preparation for a lengthy economic war against the west, which thus far they seem prepared to do without too much grumbling.  But the bottom dropping out of the ruble is going to be a lot harder to pin on the west, driven as it is by the oil price.  And complaining that the American currency is too strong against the Russian ruble is going to appear somewhat contradictory to the Kremlin narrative that Russia is on the cusp of a new era of global importance while the US is in decline.  As prices rise and the emerging middle classes – who have long been uncritical supporters of Putin – find they cannot go on foreign holidays any more, they might start asking questions of their leadership.

If they do, they’ll find their leadership isn’t listening and is too preoccupied with maintaining their own feathered nests (spare a thought for poor Igor Sechin, whose salary will only be a mere $83,000 per day instead of the $115,000 that he is used to).  And they may also start asking whether meddling in the Ukraine and annexing Crimea was really worth it.  I’d imagine that the Crimeans are the ones feeling most nervous at the moment.  There is even less chance of that bridge being built now, and those who voted to join Russia in the expectation of generous handouts might find the residents of mainland Russia somewhat more hostile to the idea than they were in the summer.  Not that I think anything will change: the Russian population will stand meekly by while Putin and his cronies treat them with complete contempt.

An article in today’s oil and gas journal should give them an idea of what’s in store for them:

Italian contractor Saipem has vowed to continue work on the South Stream pipeline project despite Russia saying the project will not go ahead.
Saipem was reacting after Russian President Vladimir Putin said during a visit to Turkey that the project to pipe gas from the Russian Black Sea to Europe was effectively dead.
A brief statement from Saipem read on Tuesday: “With reference to the contract for the construction of the South Stream pipeline, Saipem notes the statements made by the Russian authorities and Gazprom’s chairman in the media. 

“Saipem states that it has not received any formal notice of termination of the contract from the client, South Stream Transport BV.

No, of course you haven’t.  The Russians couldn’t give a sow’s arse for Saipem, who are a contractor and therefore worthy of the same levels of consideration and respect as a stray dog in Smolenskaya Ploschad’.  That Saipem, its parent company Eni, and various Italian politicians have spent years felching Putin over South Stream counts, as expected, for absolutely nothing.  When will these people learn?

Not any time soon, it seems:

“Operational activities therefore continue to progress.

 

“The potential interruption of work and any possible cancellation of the project are subject to the terms of contract.”

Ah yes, the terms of the contract.  Because the Russian government has a fearsome track record of adhering to contractual terms, especially in their dealings with foreign companies, doesn’t it?  Yes, I can see why the Italians are feeling so confident and don’t see any need to stop work.  You just keep racking up those costs chaps, I’m sure Putin will honour the invoice, really.  It says so in the contract.

So if this is how the Russian elite treat a large foreign company carrying out engineering and construction works on what was purported to be a flagship international energy project, what sort of shrift does the average Russian citizen think they’re going to get?  They know the answer, and deep down always have.

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One Response to Rouble Trouble

  1. Frozen says:

    Chinese chicken has doubled in price. Murmansk ladies of the night have doubled in price. Let them eat cake.