“Be careful what you wish for, because you just might get it”. Some say this aphorism has Spanish origins. Others attribute it to Oscar Wilde. Wherever it comes from, as sayings go, this one contains much truth. Getting what you want can indeed have unseen and unpleasant consequences. That’s worth remembering, as we celebrate cheaper oil, while watching the Russian rouble plunge.
Since mid-summer, the rouble has largely tracked the decline in global oil prices. Last week everything changed. Crude remained stable but the Russian currency collapsed, losing a third of its dollar value in a day. Responding to “Black Monday”, Russia’s central bank hiked interest rates from 10.5pc to 17pc.
The rouble has since strengthened from 80 to the dollar to around 60. That’s still some 50pc down since the start of the year. Relatively stable at the time of writing, there’s no doubt more rouble volatility to come. The bear is by no means out of the woods.
Almost all Western commentators view the fall in oil prices from $110 a barrel in June to around $60 today as unequivocal good news. Perhaps the most attractive aspect, for many, is that cheaper crude harms Russia – which derives 42pc of its budget revenues and 65pc of export earnings from oil and gas. As the rouble plunged last week, my Twitter account was full of jibes from senior economists and commentators. “Champagne at 75 to the dollar or 80?” asked one Tweet. “Yeah baby, Russia is going down,” observed another. “Putin is getting what he deserves”.
I live in the UK, drive a car and have a home to heat. I also understand lower fuel costs generally mean faster growth for an oil importer like the UK. So I, too, like cheap oil, but every silver lining has a cloud.
Yes – America’s “shale revolution” has seen domestic production rise from 7.5m to 10m barrels daily. The US could soon usurp Russia and Saudi Arabia to become the biggest crude producer on earth. That’s won’t happen at $60, though, because most American shale producers can’t make money if oil is under $75. Cheap oil stymies expensive “unconventional” suppliers, while cutting investment in future capacity, generating the next price upswing. It could even derail America’s oil renaissance.
US producers have taken on over $500bn of low-cost debt since 2010 to fund high-cost shale drilling. Lower oil prices makes creditors worry such loans will go bad, with borrowing costs across America’s oil sector spiralling in recent months, particularly for the smaller producers that drove the shale boom. The US oil-production bubble could, in fact, go bang – with the debts now of sufficient large potentially to cause “sub-prime” style fall-out.
Cheap oil wouldn’t then look so clever. The same applies if various Middle Eastern oil-exporters erupt into violence because governments can no longer afford the expensive job-creation programmes and other spending that keeps the lid on social unrest. Another Arab Spring would see oil prices spike, wiping out the benefits of recently less expensive crude.
Then there’s our response to Russia’s latest economic woes. America and the European Union have obviously imposed sanctions to cramp Moscow’s economic style. But should we really welcome a currency collapse in one of the world’s major economies? Is that sensible, given the systemic dangers lurking – represented not least by the end of US quantitative easing and over-priced Western stocks?
This time last week, a combination of financial sanctions and cheaper oil meant Russia has slowed significantly this year and was on course to contract by 0.5-1pc in 2015. That lacklustre performance, since sanctions began in March, has already contributed to a significant slowdown in Germany – which now has major trade links with its vast Eastern neighbour. While barely touching America, sanctions largely explain why the Eurozone’s biggest economy contracted between April and June and almost entered recession during the third quarter.
The Eurozone can’t recover if Germany isn’t strong. The UK, in turn, can’t stage a proper recovery with the single currency area, its major trading partner, is on the skids. Last week’s rouble collapse, and the detrimental impact it will have on business sentiment and investment, even if the turmoil ends now, means Russia will contract by 3-4pc next year. That pleases hawkish commentators, given their hope that a deep recession might result in the ousting of President Putin. But it’s bad news for the jobs and livelihoods of ordinary households across the whole of Western Europe.
While a bit slow off the mark, the Russian authorities, for the most part, are doing the right thing. Last week’s rout would have been much worse had they not raised rates. Given the significant extent to which Western Europe’s banking system is exposed to Russia – particularly lenders in France, Germany and Austria – it’s also reassuring we haven’t seen capital controls. As such, Russia remains the only major emerging market with a fully open capital account. Were that to change, which it might if the currency plunges anew, shaky banks across the EU could themselves be seriously rattled. Who knows where that would end?
The reality is that the Russian economy, for all the flak thrown at it, is actually pretty strong. There’s a big current account surplus and government debts are among the lowest in the world. With liabilities in roubles and many revenues in dollars, the fiscal balance actually improves when the currency falls. A mere $2.1bn of sovereign borrowing is repayable next year – which is miniscule.
Russia’s massive reserves, meanwhile, while less than six months ago, remain well above $400bn. That covers over a year of imports, four times the usual three-month safety threshold. Moscow has reserves equivalent to around five years of external debt payments, compared to the recognized 12-month benchmark.
There is no question, though, that repeated and sustained speculative attacks on the rouble, egged on by international observers and aggravated by ever-increasing sanctions, could see Moscow’s reserves evaporate. No matter that much of the $100bn of corporate Russian debt due for rollover in 2015 is held by overseas subsidies, so repayable at home and immune from US financial sanctions. Currency dealers, sensing a rout, care nothing of economic fundamentals. And, having floated freely in recent months, the rouble is now fully exposed to the niceties of algorithmic and high-frequency trading.
Whatever our views on Putin, the Russian President remains extremely popular among his own citizens. A recent University of Chicago poll put his support at 80pc. As someone who has lived in Russia and conversed extensively with many local people, I’ve never bought this idea the population is “brainwashed” – they’re far too smart for that. Even among those who don’t watch the admittedly pretty stodgy state-run TV channels, citing independent television or newspapers as their main news source, Putin enjoys 75pc support.
Most Western politicians condemn the Russian President because he pursues his nation’s interests and doesn’t do what our governments want. While events in Ukraine and Crimea are often presented as black-and-white, the reality is actually grey – with significant wrongdoing on both sides. Most well-informed people know this, wherever they’re from – even if, in the current climate, they don’t have the guts to say it.
We Westerners can cheer on Russia’s economic problems. We can hope for a full-on currency collapse and rub our hands with glee. If that happens, though, Russia’s next leader could make Putin seem like a softie. We could also provoke a repeat of the systemic global meltdown of 2008 – in which the big Western economies would suffer more than most.