By Jim Geraghty
Tuesday, April 08, 2025
On the menu today: I get accused of never giving the
Trump administration credit for anything — not true, not true, not true. But this morning, I get to give the
administration credit for what may turn out to be one of the most ingenious
geostrategic moves in American history. I’ve given the Trump administration a lot of deserved criticism for a slew of policy decisions that favor Vladimir Putin and Russia. But
now, seemingly out of nowhere, the administration has unsheathed a metaphorical
dagger and is poised to plunge it deep into the heart of the Russian economy
that funds Putin’s war machine.
And the darnedest thing is that the Trump administration
is probably doing it by accident.
Trump’s Trade War Inadvertently Crushes Russia’s Oil
Prices
Treasury Secretary Scott Bessent, on Meet the Press
this weekend, emphasized that oil prices are going down:
“The little publicized story this week, everyone wants to look at the stock
market going down. You know what else went down? Oil prices went down almost 15
percent in two days which impacts working Americans much more than the stock
market does.”
Indeed, when investors and institutions expect a
recession, they think demand for things like gasoline and jet fuel will
decline, so the price of oil goes down. You may recall that when the Covid-19
pandemic began, the price of a barrel of oil plunged; on April 21, 2020, Brent crude oil was just $9.12 per barrel,
when it had started the year at $70 per barrel. People weren’t driving
nearly as much, and almost no one was taking flights, creating a glut of supply
and drastically reduced demand.
The lifestyle consequences of this new trade war won’t be
as severe as Covid, thankfully, but demand is still going to decline. A trade
war against the rest of the world raises prices on all imported goods. That
means there’s less money to spend on other things, which slows down the economy
and reduces economic growth.
This trade war is going to generate an enormous amount of
economic pain, all around the globe.
Hey, which countries’ economies are extremely dependent upon oil prices? Russia, among others —
as Bloomberg News lays out:
“We are very closely monitoring the
situation, which is currently characterized as extremely turbulent, tense and
emotionally overloaded,” the Interfax cited Kremlin spokesman Dimitri Peskov as
saying Monday. Russian authorities are working to minimize “the consequences of
this international economic storm for our economy.”
Crude prices are critical for
Russia’s federal budget, which relied on oil and gas for almost 30% of its
proceeds in January-February, according to government data. As the nation’s
spending in the first two months of the year accelerated due to the war in
Ukraine, any decline in revenues could put pressure on the nation’s finances.
The country’s Urals grade, by far
the country’s top export stream, slumped to $52.76 a barrel at the Baltic Sea
port of Primorsk on Friday, data from Argus Media show. It was last below $50
in June 2023.
Almost one-third of all Russian government spending is on the defense
budget. Invading another country that is hell-bent on resisting your
conquest costs a lot of money, even when you’re using donkeys. Russia spends an estimated $135 billion annually on the war, or more than
$11 billion per month.
The Russian government’s budget for 2025 assumed an
average oil price of around $70 per barrel. Whoops! Back in January, the
“Russia-focused, English-language independent media outlet” the Insider looked at Russian
government’s budget assumptions:
For Russia, a decline in oil prices
would result in significant budget losses and a growing deficit, which is
currently projected at a relatively modest 1.1 trillion rubles, or 0.5% of GDP.
But a mere $10 drop in oil prices reduces oil and gas revenues by about 2
trillion rubles [$23 billion]. Thus, if prices fall from the planned $69.7 down
to the entirely possible price of $58 per barrel (the World Bank’s forecast of
$73 for Brent minus the Urals discount), the deficit could rise to 3 trillion
rubles [$35 billion], or 1% of GDP. If global prices drop to $40, the deficit
could reach nearly 10 trillion rubles [$117 billion, or more than] 3% of GDP).
Such a sharp decline would push Russian oil companies to the brink of
profitability.
“This is a fundamental shock that
will affect the entire structure of the economy. Export revenues support the
ruble exchange rate and the budget. It’s a mistake to think that this won’t
impact non-export budget revenues. Most budget revenues are indirectly tied to
export revenues,” explains Oleg Itskhoki, an economics professor at the
University of California. “A sharply increased budget deficit would be
difficult to finance through domestic borrowing. It’s unclear who would
voluntarily buy government debt under such conditions — likely no one except
banks under pressure from the [Russian] Central Bank or Finance Ministry.”
You might think, “Eh, so the Russian government runs a
deficit, they’ll just borrow the money and pay their creditors back later.” But
loaning money to the Russian government is a lot riskier than loaning money to
the U.S. government; Uncle Sam (almost) always pays his debts on time. Russia already defaulted on some of its foreign debt back in June 2022.
Sure, the Russian government could attempt to strongarm
institutions operating on Russian soil into loaning the Kremlin money — there are still a decent
number of international banks doing business in Russia — but that trick
only works for a short while, as those institutions start taking their business
elsewhere.
One Russian
newspaper greeted the tariffs — and the absence of any new tariffs on
Russia — with the headline, “Trump rejuvenates Russia’s economy.” But that
initial assessment was spectacularly shortsighted. Sure, Trump isn’t imposing
new tariffs on Russia. But he is imposing new tariffs on every other country
that buys Russia’s oil and gas. By blocking other countries’ sales to U.S.
customers, he’s slowing down those other countries’ economies, meaning they
can’t buy as much oil and gas from Moscow.
Lower oil prices mean less government revenue for Moscow;
less government revenue means more loans and pressure on Russia’s banks. The Central Bank of the
Russian Federation already has interest rates at 21 percent, and inflation for
2025 is projected at 7 percent to 8 percent. The Russian housing market is grappling with “soaring interest
rates and a sharp curtailment of state subsidies for first-time buyers.” New car sales are at their lowest point in a decade, and
rail-freight traffic is down 20 percent in the last year. Everybody who
could afford to leave has made a run for the border; since the start of the
war, billionaires who once held Russian citizenship have changed
citizenship to European countries, the UAE, Uzbekistan, and Monaco.
What happens when the Russian government doesn’t have
money coming in? Besides all the other negative consequences, Russia can’t
build tanks and guns fast enough to replace the ones they’re losing in Ukraine.
On February 19, Christina Harward of the Institute for the Study of War
examined Russia’s economy and concluded:
Putin planned for Russia’s
full-scale invasion of Ukraine to last weeks — not years. Putin’s false
assumptions about Ukraine’s ability and willingness to defend its territory led
him not to prepare the Russian economy or military recruitment system for a
protracted and expensive war with high losses. Putin has failed to make
difficult but necessary decisions to create the systems necessary for
sustaining a protracted war. Russia’s protracted war and high losses on the
battlefield are already causing major economic issues in Russia, and these
economic problems will likely mature within another 12 to 18 months.
. . . Russia’s defense industrial
base (DIB) cannot produce new armored vehicles and artillery systems at rates
that can offset Russia’s current tempo of losses in the medium- to long-term.
Russia is reportedly able to produce about 200 IFV (infantry fighting vehicles)
per year — far below even the more conservative figures for Russia’s IFV losses
in 2024. Russia is reportedly able to produce about 50 artillery gun barrels
per year but is unable to quickly scale up this production as Russia currently
only has two factories that are equipped with the specialized machines used to
produce gun barrels.
The Russian war machine can’t run without steady oil and
gas revenues. By starting a giant global trade war, Donald Trump may have just
inflicted a body blow against the Russian economy, which will squeeze the
finances of the Russian government to the breaking point. No, there’s no
indication that Trump intended for any of that to happen, but let’s not get
hung up on looking in the mouth of that gift horse. Supporters of the cause of
Ukrainian independence will eagerly welcome good news in any form.
ADDENDUM: Speaking of supporters of the cause of
Ukrainian independence, upon my return from Ukraine, a friend said I needed to
check out a new book, Portraits of Ukraine: A Nation at War, written
by Gregory Slayton, along with Sergei Ivashenko, and a small team of
researchers and photographers. It is a gorgeously laid out combination of a
coffee-table book, history book, contemporary journalism, and photojournalism.
Slayton helps run the international
charity Family First Global. He told me after the war started that his
group and other small faith-based charities started organizing a collection of
relief supplies in Warsaw, Poland, and driving them across the border to
distribution centers in eastern and southern Ukraine. About two years ago, when
donor fatigue was settling in, Slayton and his fellow relief workers recognized
that a lot of Westerners knew little about Ukraine and its people, and were
succumbing to Russian misinformation efforts. Portraits of Ukraine is
his effort to help the Ukrainian people tell their story in their own words,
covering the independent nation’s tumultuous history, from all the way back in
513 B.C. to the events of the summer 2024.
Covering everything from food to folk art to faith —
including Ukraine’s Jewish and Muslim communities — the book is a labor of love
that comes through on every page. All the profits go to well-vetted
pro-Ukrainian charities and relief organizations. Check it out.
No comments:
Post a Comment