Russia Seen as Biggest Threat in Poll Even as Oil Erodes Putin Power
Comment of the Day

November 17 2014

Commentary by David Fuller

Russia Seen as Biggest Threat in Poll Even as Oil Erodes Putin Power

Here is the opening from this assessment of the poll by Bloomberg:

Russia poses the biggest security risk to world markets and will be the biggest loser from the drop in oil prices, according to a Bloomberg Global Poll of international investors.

Asked which of five possibilities posed the greatest risk to global financial markets, 52 percent of participants chose the Russia-Ukraine conflict. Twenty-six percent cited Islamic State, while Ebola barely registered with 5 percent. The U.S. was seen as the most likely beneficiary from lower crude prices.

Russia is being buffeted by the twin blows of sanctions and an oil-market selloff that threatens to hollow out its economy. While the country is menacing Ukraine with tanks and sending its jets into foreign airspace, President Vladimir Putin said Nov. 14 that the drop in crude is potentially “catastrophic” for the world’s largest energy exporter.

“The Russia-Ukraine situation is more dangerous as we have a sovereign state, which is trying to increase its power by creating chaos both through threatening actions of war,” Mikael Simonsen, chief sales manager for cross asset sales at Nordea Bank in Helsinki and a poll respondent, said by e-mail. “This might impact the common thinking of how developed we are today, and impact the risk premium.”

David Fuller's view

Russia’s economy is in meltdown, due to bad management from Putin, international sanctions against his regime and the slump in oil prices.  This is reflected by Russia’s RTSI$ Index and the Ruble, shown inversely against the USD.  However, Russia’s military remains the third strongest in the world, and Putin wants to intimidate us with this power.  It is a war of attrition which the democratic West can win, if it holds its nerve. 

The graph entitled: Winners and Losers of Oil Price Plunge, published by Bloomberg, is quite incorrect, in my opinion, in saying that the US is the biggest winner from lower oil prices.  Yes, the economy is stronger, energy production excepted, but layoffs in the fracking industry are about to erode some of the best paid blue collar jobs.  Fracking states have prospered but this is about to be thrown into reverse, unless oil quickly moves back above $90 a barrel. 

I maintain that WTI and Brent oil prices are overextended to the downside, but we have yet to see any clear upward dynamics.  I think the price of oil will recover somewhat, but maintain that OPEC is finally and permanently losing control, due to increased global supplies of oil and natural gas, while most energy production from renewables is also increasing.  Meanwhile, some firming in oil prices is likely next week, coinciding with the OPEC meeting on 27th November.  

The biggest winners from lower oil prices, in my opinion, are India and Japan, because their own oil production is minimal. 

See also: Why Cheap Oil Is Bad for the U.S. Econony.

 

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