Russia, Ukraine, and Oil

In the last week, there have been reports that Russian troops are beginning to mass once again in the former Ukrainian border, and have been crossing into the country as unmarked vehicles. There is no such thing as exact numbers, but per a Forbes columnist, it is now about 7000 or more troops already inside Ukraine with some 50,000 massing outside (I won’t go into the hardware, which I personally find very interesting).

The obvious question is the following: Will Russia invade Ukraine? My short answer: No.

Firstly, I’m not surprised by Russia threatening to invade Ukraine again. During the summer, Russia took advantage of an aberrant event: the successful overthrow of the former Ukrainian government. However, it has the most power in the winter, when its dominance over the flow of oil to the rest of Europe will allow it to dictate political and economical terms from a position of strength. So, if at any point, Russia felt inclined to push its advantage as the clear regional power of Eastern Europe, it was going to be during a winter (and especially a cold one).

In a way, though, Russia was provoked into action by 3 factors: the price of oil, its future economic prospects, and, to a lesser extent, the recent accords between the U.S. and China. This forced Putin to produce a show of strength both domestically and internationally (though more with the immediate area).

The current price of oil cannot help Russia sustain meaningful growth in its economy. It is amazing to me that, despite crude oil trading around~$75 per barrel, the OPEC has not reduced production. While general economic growth does play into the price of oil, a reduction of 25% is not an insignificant amount. The country most harmed by this? Venezuela. Jefferies estimates that the country will earn $16bn less in 2015, and it needs oil to rise to $110 a barrel to balance its accounts. It gives an idea of how it is affecting Russia’s budget.

Russia faces a strong chance of a recession in the next 12 months. Its Q3 GDP grew above estimates, but it was 0.7% vs. c0.3% (consensus estimate); its worst slowdown since a 2009 contraction. Along with oil, the sanctions imposed by international players is worsening the economy and contributing to the continued flight of capital. The populace will surely feel the effects soon, and Putin needs to generate some type of nationalistic fervor for the country to remain rosy about its future.

China and U.S. accords covered a number of issues, but none more important than the tariff of tech products. Yes, hooray, China has agreed to a climate agreement, but the big news is that the U.S. and China would drop tariffs on a wide range of tech products that could cover $1 trillion in trade. This means that more investment money will go into China as venture capital is still a huge positive trend in the market, while Chinese companies could become kingmakers in the U.S. (see Ali Baba). With more money being deployed in China, it will mean less money from established investors in the West.

Russia needs to show that it holds sway in the international arena, but with its usual economic tools somewhat dulled, it is now relying on its military might. This show of force will not directly lead an invasion of Ukraine, but you can be sure that they will try to win the hearts and minds of the Ukrainian people through any means possible. And if anyone thinks Russia will give up and be content with what it has already achieved, Kiev was the first capital of the Russian state; there is great meaning in that.

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