The Financial Times: Russia is in trouble because of falling energy prices

“Russia’s most pressing problem is not Western-imposed sanctions or the protracted conflict in Ukraine. The problem is economic,” writes Nick Butler in The Financial Times, seeing “the risk that economic problems will lead to political instability both within Russia and near its borders.”

Putin's 15-year rule largely coincided with a period of high energy prices and rising oil and gas production, which allowed the Kremlin to "make happy," as the article puts it, many segments of the population, including businessmen, the military, the middle class in Moscow and St. Petersburg and even most of the rest of the Russians. “But the sun doesn't always shine,” Butler says, “and little has been done to prepare for the current economic downturn. Russia's economy is not diversified, and although there is a reserve fund that can provide some cushion if treasury revenues fall, its funds will soon run out."

Meanwhile, Gazprom is set to produce less gas this year than in any other post-Soviet year, the company's market share is falling and, according to Sberbank analysts, expected revenue will fall by almost 30% compared to last year.

“Competition between different gas suppliers, fueled by growing liquefied natural gas (LNG) flows, has broken the traditional link between gas and oil prices and is now changing the structure of a market that Russia took for granted. After years of cozy interdependence with European energy systems, Gazprom's trading operations are under constant fire from Brussels antitrust authorities,” the journalist writes.

“Oil is no better,” says Baltler. – None of the recent political and economic changes in the world, from the rehabilitation of Iran to the Chinese recession, give hope for rising oil prices in the foreseeable future. There is a significant excess of supply over demand.”

“While sanctions and the resulting isolation of Russia due to events in Ukraine are not the immediate cause of the country’s current problems, they are exacerbating long-term difficulties,” the article says.

“At the same time, concerns about the future of the Russian economy are fueling impressive capital outflows. Many of those who have succeeded in the last ten years fear that in times of need Putin might expropriate assets to keep the country afloat,” Butler says. “No one is doing more for London estate agents now than Vladimir Putin,” the article says.

“This situation is dangerous,” the observer believes, “since the capabilities of the Russian government are extremely limited. Oil and gas markets are being transformed by forces that neither Putin nor anyone else controls. It could take years to replay the downward cycle. The dispute over Ukraine is a removable obstacle, but even achieving full and amicable agreement on this issue will not restore Gazprom’s market share in Eastern Europe. A deal to sell gas from Eastern Siberia to China and other countries makes sense, but will not bring in money in the next ten years.”

“The real risk is that economic distress could force either the current or subsequent Russian government to change its political stance to a more assertive one,” the author points out. “The last 25 years have been in many respects a period of relative stability in Russia. But there is no guarantee that this situation will persist for long. Putin remembers all too well that one of the main reasons for the collapse of the Soviet Union in the late eighties was the collapse of energy prices,” Butler concludes.