Perfect Timing For A Perfect Storm

Russia’s economy is highly dependant on oil prices. When oil prices dropped by 45% since 2015, imports dropped by 50%, GDP fell sharply and ruble rate halved in Russia. Oil and gas account for 60% of Russian exports and provide more than 30% of country’s GDP. Recent correlation between oil price and dollar exchange rate against ruble is -0.6 that is when oil price drops $50, value of $1 increases 30 rubles. In years, dependency of Russian economy and value of ruble became more resilient against oil shocks in line with Russia’s policy to accumulate foreign currency during oil price hikes. This policy puts pressure on ruble, however it also creates a nice cushion for the value of ruble during bearish oil prices.

There are many ways to pamper oil prices, OPEC’s cut in supply, global recession like the recent pandemic or war threats. As shown in the above graph, Russia’s invasion of Afghanistan, starting with rumours in 1978 and materializing on December 1979 was perfectly timed when prices exceeded $100. There were too many forces in play then like Iran-Iraq war or FED rates around 20%, and economic instability and global inflationary threats. Prices stayed high during 1980 after Iran oil embargo.

Let us recap what we are discussing now, oil prices close to $100, FED’s about to increase interest rates multiple times in 2022, Ukraine is on the hook like Afghanistan, ruble is strong and a likely war in Ukraine will keep oil prices high for the rest of the year. Current high note dialogues among US, EU and Russia only help Russia cut a better deal, and this time Russia already has the better hand, after having secured to be a stable natural gas supplier to Europe through 12 pipelines since ?2009 and Nord Stream since 2011. Now, almost 40% of Europe’s gas is provided by Russia, 100% of Eastern European Countries. EU cannot unanimously decide to act against Russia, soon-to-be-largest-economy China is on Russia’s side and US’s LNG storage silos in Greece will not be in time.

It looks like a perfect timing for a perfect storm.