Guest Post: Is Putin's Luck About To Run Out?

Tyler Durden's picture

Authored by Jan Winiecki, originally posted at Project Syndicate,

With the Winter Olympics underway in Sochi, Russia is again in the global spotlight – and President Vladimir Putin is taking the opportunity to present his country as a resurgent power. But, beneath the swagger and fanfare lie serious doubts about Russia’s future. In fact, long-term price trends for the mineral resources upon which the economy depends, together with Russia’s history (especially the last two decades of Soviet rule), suggest that Putin’s luck may well be about to run out.

Mineral-resource price cycles generally begin with a rise lasting 8-10 years, followed by a longer period of stable, relatively low prices. Given that prices have been on an upswing since the middle of the last decade, they should begin declining within two years, if they have not done so already. Moreover, the last price trough lasted more than 20 years, implying that Russia cannot expect simply to wait it out.

But, beyond acknowledging the need to cut spending – an obvious imperative, after the estimated $50 billion cost of the Sochi Olympics – Putin has not signaled any concrete plans to tackle Russia’s economic weaknesses.

Russia faced a similar challenge in the 1970’s and 1980’s – and, like Putin today, its leaders failed to do what was needed. According to former Prime Minister Yegor Gaidar, who led Russia’s only post-Soviet government that was oriented toward systemic change, the socialist command economy exhausted its growth potential by 1970.

Under non-totalitarian circumstances, the threat of stagnation would have generated strong pressure for systemic reform. But the Soviet Union’s aging communist leadership, encouraged by the OPEC-generated oil-price explosion and the discovery of massive hydrocarbon reserves in western Siberia, took a different tack, using natural-resource revenues to finance continued military expansion.

In an effort to appease the public, the Soviet leadership increased food imports – both directly (meat imports, for example, quintupled from 1970 to 1980) and indirectly (by increasing feedstock imports). While this strategy worked in the short term, it caused food consumption to increase far beyond what the economy could sustain.

As a result, the Soviet economy became even more dependent on resource revenues, making it extremely vulnerable to price fluctuations in international commodity markets. When mineral prices began to decline in the early 1980’s – reaching their lowest point in 1999 – the economy, which had already been stagnating for about five years, went into a free-fall.

Today, the Russian economy is no more resilient than it was in the late Soviet era, with commodities, especially oil and natural gas, accounting for around 90% of total exports and manufacturing for only about 6%. If anything, the economy’s dependence on exports of fuels and industrial minerals has increased, meaning that smaller price fluctuations have a greater impact on Russia’s fiscal and external position. Indeed, some observers – including the Central Bank of Russia (CBR) – have predicted that the country’s current account could slip into deficit as early as next year.

A lasting deficit would eliminate the major economic difference between Putin’s Russia and its Soviet counterpart during the 1980’s – namely, the financial buffer that has been accumulated over the last decade. It is this buffer – which amounted to $785 billion in the 2000-2011 period – that protected the economy from a larger shock when the global financial crisis erupted in 2009, and that has financed Russia’s foreign-policy initiatives, including its recent cooperation with Ukraine.

The CBR’s warning of twin fiscal and current-account deficits assumed that oil prices would remain steady, at $104 per barrel in 2015. But my expectation that oil prices will decline over the next 3-7 years suggests that Russia’s medium-term prospects are actually considerably worse.

In short, Russia will soon have to confront diminished macroeconomic health, with few options for restoring it. Russia’s uncompetitive manufacturing sector certainly cannot pick up the slack, and this is unlikely to change, given Putin’s unwillingness to pursue the needed shift to a more knowledge-intensive economy.

This new reality will not only affect Russia’s foreign-policy and imperial ambitions; it will also undermine the relative social and political stability that has characterized the last decade. Without resource revenues, the government will struggle to finance the policies and programs that are needed to placate ordinary Russians. In this context, the Sochi Olympics, intended to herald Russia’s triumphant return as a global power, may soon come to be regarded as a swansong.



[ZH - It seems pretty clear what Putin needs - higher oil prices... makes you wonder what his next plan is...]

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Flakmeister's picture

The wheels are coming off the resource driven kleptocracy...

BTW, Tyler, higher oil prices don't solve matters if the economy gags on Brent at $115....

SilverIsKing's picture

I think Putin will be just fine as long as he doesn't accept a position at JPM.

Occident Mortal's picture

Check out this link


The infamous volatility of oil prices is actually fading. Oil prices are quite stable at this level.

Probably because of the more diversified consumption across more countries, i.e. East Asia.


Oil is more resiliant to the US business cycle than at any time in the past 50 years. Good money to be had writing Iron Condors in this space.

Clint Liquor's picture

Mineral-resource price cycles generally begin with a rise lasting 8-10 years, followed by a longer period of stable, relatively low prices. Given that prices have been on an upswing since the middle of the last decade, they should begin declining within two years

Of course, massive worldwide QE that has never occurred in History will have no affect on the historic 'price cycles'.

There will not be normal cycles for a very long time.

Flakmeister's picture

Oil starting its bull run long before QE....

In fact, the pre QE peak price has not been retraced...

philipat's picture

I'm calling BS on this. This is PTB propganda pure and simple. The price of energy is headed much higher, despite the shale distraction. And with Europe not having any (Except for Norway and Scotland in relative small and declining amounts) Russia is very well positioned. Especially true after The US didn't invade Syria to allow Qatari gas to transit to The Med and thus provide another source of energy.

Flakmeister's picture

Russia needs Europe, all of its infrastructure points that way.

It is not going much higher because everytime Brent gets above ~80 Euro the economy goes splat and European demand drops...

Look at the chart in Euros...

It currently 80....

Georgia_Boy's picture

I am curious about this, given the same argument now has to be faced for predicting the secular price trend for most any other commodity, possibly even gold. QE is the monkeywrench that makes me a lot less confident in saying whether any commodity is above or below long term price trends at any given time now. Yet, if QE only served to make the one percent richer and little wealth effect on the 99 percent, not all commodities should react the same to this huge increase in the supply of fiat money.

Oil is fairly unique among commodities due 1. to the limited world supply, and 2. its status as an enabling commodity, the energy key that unlocks supply, and demand to some extent too, for other resources. Gold is unique by its role as medium of exchange in the absence of confidence in fiat money. The one percent can soak up a big share of the world's supply of gold if it suits them, not too surprising that there would be a big secular bull market in it if the currency goes to hell. Oil, not as much. The one percent consume more, but cannot eat 50 percent of the food supply, drive 50 percent of the miles, consume 50 percent of the plastic, or even fly 50 percent of the air miles. Metal ores, wood, etc., even more democratic. Oil hasn't had a gold type bull market since 2009, read that as whatever guarantee of future results that you will.

Vampyroteuthis infernalis's picture

What is really killing Russia is the same blight striking Europe, US and especially Japan. Lack of young people. I have read that the former Soviet Union lost around 100 million people after the iron curtain collapsed. There is no way they can make up for that loss of population.

Demographics is destiny

zuuma's picture

Why is there such high youth unemployment, then?

Flakmeister's picture

Extraction of resources is not labor intensive...

TBT or not TBT's picture

Raising children is, however, and that's how and why Russian Russia is dead nation walking. Buh bye. Done.

TBT or not TBT's picture

Countries with high youth unemployment AND deathbed demographics are consuming their capital, not investing in new. And this extends to the most fundamental capital of all: people.

Flakmeister's picture

Consuming it or stashing it in Switzerland...

But you clearly get it...

Flakmeister's picture

When there is essentially zero spare capacity weighing on the market, the price will get pinned to the maximum that the economy can support...

Martel's picture

There will be a big hangover after Sotchi. Russians will surely feel betrayed, now that their ice hockey team was beaten by Finland. Like this article tells, ice hockey matters most, and now they're out.

Finland's clinical 3-1 quarter-final victory in front of a devastated capacity crowd at the Bolshoy Ice Dome will leave the most expensive Olympics without the show-stopping climax that Russians had ached for.

Only spectacular victories elsewhere might soothe the Russians, and those victories might not be coming. Disappointed people will be more likely to question the whole thing, along with Tsar Putin's rule. I doubt it will be Ukraine-style riots for Russia, but after the games are over, Putin is a bit more soiled than before.

Flakmeister's picture

Hockey is the continuation of politics by other means....

Just witness the 1972 Summit Series or Lake Placid in 1980...

nope-1004's picture

But guaranteeing a higher oil price puts the supplier in your court.  Once you have the supplier, you can then force the medium of exchange.

.... Not that its never been tried before or anything.....


Occident Mortal's picture

So the entire basis of this article is the assumption that commodity prices follow a rigid 8-10 year cycle?


What a load of garbage.

BurningFuld's picture

Russia just knocked out of Men's Hockey at Sochi. <= much bigger headline for Putin.

Carbon Beach's picture

I Agree. When I glanced at this article I thought maybe someone, somewhere, had discovered cold fusion again.

OceanX's picture


And that is where I stopped reading...

onelight's picture

Doesn't seem like they got $50 billion worth of international prestige for the $50 billion they spent on the Sochi Olympics, whatever else pertains.

CrimsonAvenger's picture

Certainly not based on the efforts of US commentators. Seriously, have we ever tried to shit on an Olympic host the way we're shitting on Russia right now?

john39's picture

have to admit, the lgbt temper tantrum led by obamao has been pretty comical.   i would say a backfire... 

Vampyroteuthis infernalis's picture

We are seeing LGBT overreach here folks. The anti-progressive backlash begins in .....3....2.....1.....

Herd Redirection Committee's picture

Wasn't it more like $40 billion for Putin, oligarchs, select members of the IOC, their sponsors, and then $10b cost of actually putting on the Olympics?

TBT or not TBT's picture

The main risk to Russia's future is the ongoing depletion of its most important resource....people. Russian demographics are worse than dismal. The scary part is, what does a paranoid, proud nuclear armed nation do on its way out? It's going to feel pretty godammned apocalyptic to culturally Russian russians. If history is any guide, they will share their pain.

Georgia_Boy's picture

The Ukrainians aren't even the half of the cultural danger either. If I were the Chechens, or any Muslim splinter group in any of the Russian-sphere Stans right now, I know I'd be turning up the heat on my unwanted masters right now.

Rafferty's picture

All the muslims have to do is wait and let domographics hand them power.  Thier numbers are explodin while, thanks in part to Soros' abortion campaign actual Russian numbers are plumetting.

TBT or not TBT's picture

Abortion rates in the soviet era were enormous. That was just 20 odd years ago. Those uncountable millions of Russians are not forming young families now because they don't exist. Sadly, the health of Russian society continued to get worse after the fall. 70 years of ultra statism, that's two and a half generations of destruction.

Dr. Acula's picture

"The main risk to Russia's future is the ongoing depletion of its most important resource....people"

What are you talking about? It looks like the Russian population is usually growing:

Current Russia Population Growth Rate: 0.40%

Oh regional Indian's picture

Abiotic Oil, FTW!

Cold Fusion FTW!

Thorium, FTL...

Over Unity FT frigging W! (I Know 2 developers of them specifically).

Me, FTW :


The energy crisis is with-in. We are losing the spring to our mortal coil all too easily. Afraid.

And no, Putin's luck is not going to Run out. What a joke. Leader of the second most powerful (most perhaps) military in the world makes his own luck.


Canadian Dirtlump's picture

Russia is no doubt doomed to failure for not bending over and being a vassal state of the invisible satanic hand which operates the western powerbase through agents ( many of whome enjoy dual citizenship ). Russia is part of the new axis of bad people who hate freedom.


If they just submitted to free wetsern democracy they'd be doing as well as us all.


*shits pants laughing*


Their oligarchs are evil but ours are noble right?

akak's picture

Moreover, there is this incredibly blinkered and idiotic "analysis":

Mineral-resource price cycles generally begin with a rise lasting 8-10 years, followed by a longer period of stable, relatively low prices. Given that prices have been on an upswing since the middle of the last decade, they should begin declining within two years, if they have not done so already. Moreover, the last price trough lasted more than 20 years

"Generally"?  Based on what, the last 30-40 years?  Which was ONE such supposed 'cycle'!

Give me a 100 or 200 year chart of mineral-resource prices, and try to make the same egregiously erroneous argument.  In addition, the author utterly ignores the current world monetary and fiscal situation, which all but promises significant if not radical debt monetization and hence currency depreciation going forward.

One single datum does not a trend make.

Steaming_Wookie_Doo's picture

Yes, minerals and energy vary in importance over time. We've had times where wood is king, then coal, natural gas, oil, radioactive/nuclear fuel, etc. Silver used to be huge for the photographic industry, but with digital photography and advanced printing technology, the mfg of gelatin silver paper, film, etc has gone down dramatically. 

If the author really wanted to harp on resource "one trick ponies", he should go after the Gulf monarchies, who rely on 90% of their income from 1 source (oil), and they have ridiculous welfare--let's call it social bribes-- to continue to accept the status quo. Any change in the oil consumption paradigm will utterly kill these countries and drive them back to the middle ages (at best).

Jumbotron's picture

Precisely right Flakmeister.  The more pictures of this clown like some outdoorsman stud just harkens back to the days of old Russian propaganda.  The more the swagger......the more bullshit you're trying to produce to hide the fact that your situation and your country is going into the toilet.

Who in their right mind could have ever believed that a totally corrupt, morally bankrupt country that lurched from Communism to a Fascist Oligarchy could EVER come out on top of the world scene is beyond me !


Enough about Obama and the U.S.A.     About Putin and Russia..........

caconhma's picture

Putin is a walking dead man. He is just another Saddam building his new palaces and making speeches. He is a thief, a gangster, and a clown.

Very shortly Russia will follow Ukraine. A mafia elite controls both Russia and Ukraine. Their oligarchy is keeping their loot in US and EU banks. Consequently, it is just a matter of time before Russian people will revolt like Ukrainian people doing it now.

As for the Soviet Union, it has collapsed because their ruling Communist Party leadership became utterly corrupt and stupidly believed into their own lies and propaganda. This is why the Soviet Union is gome and Communist China is an evolving giant. China was capable of changing its Mao doctrine in a dynamic fascist economic and political society.

Dr. Acula's picture

"Communist China is an evolving giant."

I think you mean "expanding bubble".


Radical Marijuana's picture

The whole world's "luck" is running out.

kralizec's picture

Most honest post I've read all day.

TBT or not TBT's picture

The ZH masthead covers that, if you scroll up: "on a long enough time line...".

That has to with individual humans. However, ideas(including here entire cultures) and of course genetic codes can and do carry on....but only some of them. Russian Russia committed suicide and will not likely pull out of its power dive. This is baked into the demographics of Russia.

Kirk2NCC1701's picture

Jan Winiecki's "luck" will run out when someone exposes him as utterly ignorant of economics and monetary policy.  Especially when the former (economics) is based on the latter (monetary policy) being a Ponzi that I have seen nowhere else in the Galaxy.

"The Fed & Friends have boldly gone where no man has gone before."  -Kirk out.

Ulterior's picture

"putkins luck" - a new meme

Theta_Burn's picture

The Russians are doing fine.

They are a resurgent power.

They control vast resorce

They export and get paid well for those resorces

The corruption in Russia is worse than anywhere else?

Try harder Project syndicate.....

Flakmeister's picture

I'm impressed, how did you type that with your tongue jammed up Putin's asshole?

Theta_Burn's picture

So your saying I'm wrong? or gay?