International Forecaster Weekly

Economic War on Russia Heats Up

The fact of the matter is simple: there is an economic war being waged on Russia. and that war is starting to take its toll on the Russian economy.

James Corbett | December 6, 2014

First there were the sanctions. They started in March with EU, Canadian and US travel sanctions on specific Russian and Crimean individuals, and expanded in April to include several more Russian officials and 17 Russian companies. In July the sanctions became more serious, with US transaction bans imposed on energy companies Rosneft and Novatek and banks Gazprombank and Vneshekonombank.



These sanctions were followed by more trade restrictions, travel bans, transaction bans and asset freezing of individuals and companies by the EU, Australia, Canada, Japan, Norway, Switzerland and others. In September the ante was upped even further with joint EU-US sanctions on Russia's largest bank, Sberbank, as well as Rostec, an important Russian arms maker, and the deepwater exploration activities of Gazprom, Lukoil, Rosneft and other Russian energy giants.

Then there was the oil price manipulation. From over $100 in mid-summer down to under $70 this week, the price of Brent crude (and WTI along with it) has plunged dramatically in recent months. A price fall of this magnitude always has a specific source (or sources), and in this case the fall can be attributed to a “secret” deal between Saudi Arabia and the US that saw the US commit to a bombing campaign in Syria that the Saudis have long been campaigning for. In return, the Saudis agreed to open the spigot and bring down world oil prices. Why did the US desire this? No secret here. The action cuts significantly into the bottom line of some of the US State Department's biggest targets these days, including most notably Russia, whose oil price budget for 2015-2017 relies on a $100/barrel projection. With oil sales bringing in decreased revenue, the oil and gas-dependent Russian economy is going to be even further squeezed.

But this week we saw another major development. In a move that took everyone by surprise, Russian President Putin used a press conference on a state visit to Turkey to announce that Moscow was scrapping its long-hyped South Stream pipeline project. The project to deliver Russian gas to southeast Europe has been in the works for years, with construction on the pipeline starting in 2012. First delivery had been expected in 2016 with full operations coming online in 2018. In the end, the project was expected to cost $22 billion and carry as much as 63 billion cubic meters of natural gas per year into Europe. Now, that dream is over, and Putin lays the blame directly at the EU's doorstep:

“We think that the European Commission’s position was not constructive,” Putin said, noting the EU's refusal to grant permissions for the pipeline's transit through Bulgaria. “If Europe does not want to implement it, it will not be implemented. Of course, this is the choice of our friends in Europe.”

Dramatic as this move undoubtedly is (many key partners in the pipeline, including Italian energy giant Eni, claim to have only heard of the cancellation via Putin's press conference), the announcement may or may not be a bluff. A planning meeting between the EU pipeline transit companies and the EU's energy commissioner is scheduled to take place as scheduled next week, and some are speculating that Putin is trying to force their hand and gain acceptance for the pipeline from the EU Commission which has been holding the project up.

Regardless of whether this really is the end of the pipeline as originally scheduled, Moscow appears to be working on plans for an alternate route that would ship the gas into Europe via a Greek port. The revised plan, it seems, is to use the already existing Blue Stream pipeline to up Russian gas shipments to Turkey by 3 billion cubic meters per year and to ship that gas out via a “specially-constructed hub on the Turkish-Greek border for customers in southern Europe.”

This latest development is significant on a number of fronts. Firstly, it is a huge blow to Bulgaria, Serbia, and some of the other small Eastern European economies that would have reaped huge benefits as transit countries on the proposed pipeline route. This will further drive a wedge between these countries and the European Commission in Brussels, which will shoulder the blame for this decision. Secondly, it further cements Turkey's role as a key conduit into Europe and gives Ankara more leverage to throw around on the diplomatic stage. But perhaps most importantly, it signals an increasing desperation on the part of Russia to secure much-needed market access for its oil and gas.

The fact of the matter is simple: there is an economic war being waged on Russia. and that war is starting to take its toll on the Russian economy. The country's Economic Ministry just cut GDP growth expectations for 2015 to -0.8% and the Ruble slipped over 3% against the dollar on the announcement.. This sense of embattlement and economic warfare is leading to an increasingly beleaguered mentality at the Kremlin, and is reflected by Putin's latest address to the Federal Assembly which stressed that the nation itself is under fire right now.

So what is all of this about? Is it just about Crimea and the Ukraine, or is their a bigger agenda at play here? Mikhail Fradkov, the head of Russia's Foreign Intelligence Service and a former Prime Minister, was quoted on Friday as warning that this economic attack was aimed at producing regime change in Moscow. With the initial sanctions targeting key government officials specifically, this is not too much of a speculative leap. But is that really the only intended outcome of these sanctions and manipulations? One surprising alternative explanation for this attack presents itself as the answer to the age-old investigative query: Who benefits? As it turns out, China may be one of the biggest beneficiaries of the assault on Russia's economy.

Although many people have noted this fact, not so many have connected these dots explicitly. An increasingly isolated Russia with decreasing options for its energy exports is turning to East Asia, and specifically its Chinese neighbor, in a way that would have been surprising even a few short years ago. In addition to talks with Korea and Japan and other not-so-likely trading partners, this year also saw the signing of the long-negotiated Russia-China gas deal, as well as cooperation on a new credit rating agency and talks of a possible SWIFT alternative. In each case, China benefits greatly as it gets to buy up a greater and greater share of Russia's oil and gas exports at firesale prices and secure its upper-hand position in bilateral deals with Moscow. What's more, the prices on these energy deals are continuing to be lowered by the Saudi manipulation of the oil price. For energy-guzzling China, it's a win-win, and the fact that their regional frenemy is coming to the negotiating table with a noticeably weaker hand is not unappreciated in Beijing.

This is interesting to think about given my recent exploration at The Corbett Report surrounding China's role in the New World Order economy. If China is being used as a vehicle for 21st century economic growth in the way that Soros and others have suggested it should be, then the Chinese happy ending to Russia's economic pain takes on a whole new light. Are western oligarchical interests (Kissinger, Rockefellers, Rothschilds and others) further sweetening their investments in China and helping to oust a geopolitical rival at the same time? The idea needs further elaboration, but it fits into the bigger 3D geopolitical chess game taking place in the region at this time.

Regardless of the motivations behind this economic warfare, the tragedy of all of this is that, as always, it's the people at the bottom of the financial pyramid who are hurt the most by the clash of the geopolitical titans. Economic sanctions almost never achieve their intended goals (I'm sure that embargo is going to oust Castro from power any decade now!) and they disproportionately impact the poorest and weakest members of the targeted country. While the sanctions are having an effect on business in the country, those hardest hit are the ones at the average working Russian men and women who feel the pinch of inflation as the ruble depreciates and the price of imported goods creeps ever higher.

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