Tuesday, April 8, 2014

Window on Eurasia: 'Oil Weapon' Will Not Make Russia Go the Way of the USSR, Moscow Analysts Say

Paul Goble

            Staunton, April 8 – Many in both Moscow and the West believe that the US destroyed the USSR by driving down oil prices and could do the same thing with the Russian Federation now, but in fact, the West did not deploy the oil weapon that effectively in the past and could not do so now or in the future, two Moscow analysts argue.

            On the one hand, Vladimir Milov and Valery Polkhovsky suggest in “Novaya versiya,” Russia has far more resources to withstand any such attempt.  And on the other, the West is operating under far from constraints, domestically and internationally, and could not continue any such policy long enough (versia.ru/articles/2014/apr/07/sideli_na_trube).

            Thus, the two suggest, the only way for the Russia Federation to go the way of the USSR, would be for its current leaders in Moscow to make mistakes similar to repeat the kind of mistakes Soviet President Mikhail Gorbachev did and to do so not just once or twice but over an extended period.

            Russia’s annexation of Crimea, Tatyana Shestakova of “Novaya versiya” says in her write up of their comments, has “provoked a new wave” of suggestions that the West will deploy the “energy weapon” against Moscow by artificially cutting the price of oil as it supposedly did at the end of the Soviet period and thus undermining the country’s existence.

            Milov, who heads the Moscow Institute of Energy Policy, says such suggestions are based on a mistaken reading of what happened a generation ago and a failure to understand how different both Russia and the West are today.

            “After the Arab oil embargo in 1973 and the prices rises of 1979-1981,” he says, “Western countries adopted systematic measures” to reduce their consumption of oil and dependence on imports from OPEC countries.  As a result, OPEC’s share of the world market fell from 51 percent in 1973 to 28 percent in 1985, and its price from 36 US dollars a barrel in 1980 to 28 US dollars in 1984.

             The West itself thus “objectively benefitted from the decline in the price for oil regardless of the fate of the Soviet Union,” Milov continues. And given the large number of unknowns, it would have been “very difficult to predict what effect all this could have had for the Soviet economy.”

            The fall in the price of oil certainly hurt the Soviet Union, but Milov argues, Moscow could have undertaken the kind of reforms China did and survived. Instead, Gorbachev sought to preserve “the ineffective old economic model” and went ever more deeply in debt. Thus, not falling oil prices but rather “the inadequate policies of the Soviet authorities” killed the USSR.

            Nonetheless, many in Russia and the West draw parallels between the situation now and that of the 1980s and focus on “the dangerous dependence” of the Russian state budget on the price of oil, a price that Moscow by itself cannot determine or maintain, especially in the face of the dramatic expansion of US production.

            But Polkhovsky, an analyst with the FOREX Club, notes, “it is necessary to pay for all this, as is well known,” and the advanced technologies which underlie the growth of oil and gas production in the United States are “very expensive.” The US couldn’t continue them for long if oil prices fell much below 90 US dollars. Investors simply wouldn’t take the risk.

            Consequently, he suggests, the US would not take steps that would harm itself and its allies perhaps even in the first instance. But even if it decided to try, Polkhovsky continues, it would be “difficult to flood the world with oil,” and that too operates as a constraint on what Washington might choose to do.

            But even if the US decided on such a policy and even if it found ways to implement it, the FOREX analyst says, it “would not be able to achieve its goals by this means.”  That is because “Russia today is not the USSR of the 1980s.” It doesn’t import grain but exports it, and it has alternative sources of supply for many of the things it might not be able to buy in the West.

            “The main thing,” however, Milov insists, is that Russia has the reserves to withstand any such challenge for longer than it could be maintained.  It has a small state debt unlike the USSR in Soviet times, when “even Gorbachev’s financially irresponsible policy required more than five years to push the country to the edge of bankruptcy.”

            Polkhovsky adds that there is another factor acting as a constraint on the United States in this regard. Russia is “far from the main opponent of the US as was at one time the USSR.”  Any “sharp struggle with the Kremlin” cannot be a Washington priority because “the main competitor of the United States is China,” and the US will need Russia in that fight.

            The only thing an attempt to deploy the oil weapon might do, the two conclude, is to force Moscow to carry out the kind of economic reforms that many economists like themselves have been urging.  But any possibility that Russia will “repeat the fate of the USSR depends entirely on itself” and not on anyone else.

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