The Obama Gas Gambit: Will it Backfire?

Having taken military options off of the table, Obama and the West are relying heavily on the threat of a Russian recession to counter any further movements by Putin into Ukraine.

There have been calls for Obama to deploy the strategic oil reserves as sanctions. Some commentators have even suggested that Obama discussed using this strategy during his visit to Saudi Arabia.

Indeed, this strategy on its face appears to have the potential to dissuade Putin from being rash. From Timothy Ash at Standard Bank PLC:

“What is crystal clear is that lower oil prices really hurt Russia. Indeed, oil prices are the Achilles heel for the Russian economy. Twelve years ago the Russian Federal budget balanced at USD22 per barrel for oil, now it is more like USD110. And I reckon a fall in the oil price to USD80 per barrel would already cause very significant pain to the Russian economy, balance sheet and its markets. At USD80 or lower, the Russian economy would head into deep recession, the budget and current accounts would run significant deficits, capital flight would accelerate markedly depleting FX reserves and putting hefty downside pressure on the rouble. You could indeed argue that a large part of Putin’s success over the past 13-14 years has related above all else to high oil and commodity prices – he has been fortunate in this respect. If oil and commodity prices fall Russia would be heavily exposed.”

However, it is also abundantly clear that Putin is a dynamic player and not just a static actor. Putin is looking East. As mentioned in my previous posts the reasons for this are twofold. First, Russia’s regional influence depends more and more on China’s energy strategy. Second, Putin’s narrative is that Russia is the only “Great Power” willing to stand up to American Hegemony.

Consequently, it appears that two large Petrodollar (i.e. deals denominated in oil, not USD) have been announced by Russia. First, a $20 Billion arms-for-oil deal with Iran. This substantially undermines the US’s negotiations with Iran on nuclear disarmament. As I’ve mentioned before, a consequence of Russia’s invasion of Crimea is that the post Soviet collapse world nuclear order is unraveling and paper deals no longer hold any credibility (as the collapse of the 1994 Budapest Memorandum is now the precedent). It also undermines the US’s policy with respect to Syria as Russian arms are boosting Assad’s fight against the rebels.

Second, it appears that China may be embracing Russia. A major Russia-China gas deal may be announced in May. This would offset the isolation strategy that the West is using.

In summary a new twist on the old quote: Without Ukraine Russia Is Just A Country, With Crimea and China Russia Is An Empire

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In other news Russia paid lip service to the idea of deescalation along Ukraine’s border, but it doesn’t appear that there have been any significant troop movements away from the border. As a reminder there are approximately 40,000 Russian troops stationed on the Ukrainian border (with some reports of up to 100,000). NATO also continues to build up its forces along the Eastern Borders.

Also – Ukraine has released a report detailing the the Russian FSB was involved in the February sniper attacks against civilians.

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