China’s devaluation calls Russia’s pivot to Asia into question

EPA/VADIM RUSAKOV

A file photo dated 22 November 1992 showing oil-pumping equipment standing abandoned at the oil well site near Surgut in Siberia, Russia. Global investors are worried by plummeting oil prices, which have fallen by about 50 per cent since the middle of the year as a result of a world-wide glut in oil and weak demand in the eurozone and China.

Short-to-medium economic prospects are bleak, whilst completing an economic u-turn requires billions in investment


Share on Facebook
Share on Twitter
Share on Google+
Share on LinkedIn
+

Recession in Russia has deepened over the past few months. The Russian economy has in the second quarter contracted by 4.6%, year-on-year.

The main cause is of course falling oil prices. Last week oil prices approached the $42 a barrel threshold (the lowest since 2009). Of course low oil prices are pushing out of the market non-conventional oil producers – US shale, Canadian tar sands, and deep sea explorations. But Iran is coming in the market after a long economic embargo, China is devaluing its currency and the USD is appreciating. On balance, everything that could go wrong for oil and gas producers, including Russia, has gone wrong. It is unclear when energy prices will hit a floor, other than the objective cost of oil production.

Cheap oil may shift the emphasis away from energy efficiency and alternative energy, which is good for the sector, if not for the planet, in the long run. But, in the long run we all die and in the short-to-medium term the prospects for the Russian economy are bleak. Since the beginning of 2015 the ruble has lost 31% ruble of its value – and dropping – and inflation stands at 15%, largely because the economy depends on expensive imports.

Natural gas should provide for a better revenue stream given market share and infrastructure, but the Ukrainian crisis undermines Russia’s relationship to Europe and Norway has already surpassed Russia as the biggest energy partner. Russia is promoting an alternative Eurasian Economic Union project, antagonizing Brussels in the so called “shared neighborhood” but without real growth prospects. It is Russia that accounts for 86% of the EEU’s GDP. The true alternative to Europe’s growth engine should be China, that is, a reliable market for Russian, Kazakh, and Turkmen oil and gas. But, China’s currency devaluation is signaling low demand.

The east alone will not suffice. At this point in time, there is really no alternative to Europe as a trading partner for Russia and this realization may mean that constructive diplomatic discourse should resume.

Share on Facebook
Share on Twitter
Share on Google+
Share on LinkedIn
+