Suffering Comes Naturally

You only have to read about the Eastern Front during World War II, where 70% of that conflict’s casualties occurred or picture the austere life during the modern Soviet era to understand Russian tolerance levels for pain. Euphoria still resonates among the Russian people as President Vladimir Putin retook Crimea and challenges Ukraine on the control of the latter’s eastern province. The notion of reuniting the once-great Soviet empire still sends wondrous chills down the backs of so many Russian “patriots.” But life in Russia is getting downright miserable for the vast masses of Russian citizens.

It’s been a double-whammy – plunging prices for fossil fuels coupled with the back-and-forth economic impacts of sanctions and Russian counter-sanctions based on near-universal condemnation of Russian aggression in Ukraine. The combined impact has been the crash of the rouble, a precipitous fall of 25-30% over the past few months. For ordinary Russians, the cost of common commodities, from fabrics to foodstuffs, has crushed their standard of living like no other.

Even as Russia has banned luxury (and other) imports from the EU nations imposing sanctions, Russian replacement goods are not as high in quality (but suppliers are taking advantage of the ability to charge higher prices), and many of the European standards have simply been transshipped to neighboring countries where they are “repackaged” as coming from acceptable exporters and then resold at even higher prices to Russian consumers. Prices at the grocery store have simply soared.

Further, Russian companies that have borrowed vast corporate sums in the international marketplace are forced to repay foreign-currency debt with vastly under-valued Russian roubles, a huge hit to the bottom line. Russian central bankers may offer some financial relief to these borrowers in the short term, but as time passes, even central bank reserves will be severely taxed.

Yet Russia is a nation rich in oil and gas resources, so doesn’t that offset the pain? Nope! When you couple the rise in consumer prices for goods in general with a concomitant 30% fall in the price of a barrel of oil, the impact on the average Russian is devastating.

Why has the price of oil dropped?  Consumers in a struggling European economy have cut back on their consumption of gas and gasoline, traveling less and holding home temperatures to slightly more uncomfortable levels. Add the economic slowdown in China, which has created a parallel reduction in the demand for oil and gas imports, and you’ve got a huge slack in demand. And remember when the United States was a huge net oil importer? Well, blend in U.S. development of new oil and gas resources, primarily due to the application of new fracking technologies, and the global markets for oil have dropped the price of a barrel of quality crude to well under $80/barrel.

Russians are used to hiding their expressions of anger against the government. For centuries, talking too loud about your masters has resulted in banishment, death, torture and/or prison. So while there is national pride at Putin’s willingness to take on the rest of the world, sometimes it is hard to measure civilian sentiments on deprivation generated by government policies.

One has to believe that the euphoria is still real, but as more than one Russian and European economist has noted, the rise in prices and the decline of the Russian standard of living have just begun. The full impact of banking, insurance and other sanctions have yet to take hold, and these are simply expected to make the international import-export business that much more difficult.

With declining values to the rouble, the ability of Russians to invest overseas has declined proportionately. Worse, perhaps, is the fact that no sane Westerner is about to invest in new industries in Russia at this time, despite the currency exchange advantage. Putting assets in a country angry at your country of residence, looking at ways to create reverse sanctions, is not a smart play.

In the end, the Cold War appears to be back. Putin has announced that he expects to remain at the helm until 2024, and if this hubristic projection holds true, we are going to be dealing with this aggressive leader for the foreseeable future. Tensions between East and West are likely to remain bad and perhaps get worse. As Ukraine places the issue of joining NATO to their voters, Russia has declared that this is a red line that they would never accept. Russia is laying claim to much of the Arctic passage, challenging not only the United States, but Canada and Scandinavia as well (including Danish Greenland).

Will Putin be able to continue to blame the West for Russian misery? Will the Russian people buy into that blame game? And what exactly are the risks of escalating a miserable situation into much, much worse? How solid is Mr. Putin’s hold on his people?

I’m Peter Dekom, asking nasty questions but hoping for a positive resolution in world with more than enough horrific distractions and challenges.