Wednesday 20 January, 2016 Update: Crashing Oil Prices And Russia

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This is going to be a very brief update and I apologize.

As oil prices continue to tumble it is time to look at the consequences this situation is starting to bring. First off, it’s worth mentioning that the oil price fall-off is not the only game piece bringing about the volatility in financial markets at the moment. Investors are concerned about what is happening in China and the possibility of an economic slowdown here in the United States as well. These three factors have managed to combine and cause enough chaos in the markets to make some economists begin to believe that the worst is yet to come. Shades of 2008 are becoming visible to some people. While it is true that Wall Street appears headed for a correction while energy and commodity prices suggest an impending recession, this is not 2008 all over again.

As the oil price drop continues, it would be wise to start paying attention to Russia. Cheap oil is a nightmare coming to life for the Russian economy.  The nation’s budget for 2016 was predicated on an annual oil price of $50 per barrel as well as an end to the recession in 2017. Brent Crude is currently at less than $30 per barrel. If the price hovers between $30-$40 for an extended period of time, the Russian government is going to have to introduce sustained cutbacks in its spending. Infrastructure and investments will be the first areas to see the knife. And as much as Moscow has attempted to hold off cuts to the massive military modernization underway right now, it might have no other plausible choice soon.

In a nutshell, the prospects for prolonged economic difficulties in Russia are high.  Eventually, the hardships will be felt by Russian citizens and when that happens, Vladimir Putin’s base of support will suffer. To prevent this from happening, Putin might be forced to double down on one of the foreign adventures currently underway. A large part of Putin’s popularity at the moment has to do with the wave of patriotism that swept the nation in the past two years. If the economic outlook does not improve for Russian citizens, Russia’s leader will need to divert their attention away from the fact that their daily lives are becoming more difficult. Think about the ways which Vladimir Putin might go about doing this.

I have thought about it, and do not like what I see coming down the road.

 

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