[A dangerous situation between the west and Russia threatens to become increasingly more dangerous]
A plummeting currency, rising inflation and sagging oil prices — that's the stuff Vladimir Putin's nightmares are probably made of.
The former KGB operative has staked his reputation for years on Russia's spectacular economic growth throughout the 2000s, thanks to its dependence on increasingly lucrative energy exports.
As the price of oil, Russia's most important export, climbed from $16 a barrel in 1999 to more than $140 in 2008, a new middle class enjoyed the fruits of prosperity, eagerly burying the memories of the impoverished 1990s.
But as the Kremlin now lords over Ukraine and stares down the West, Putin's nationalist gambit is finally being felt on the home front, threatening the central notion that's helped keep him in power so long.
"The myth of 'stability' has now been broken," says Anders Aslund, a senior fellow at the Peterson Institute for International Economics.
While Putin's grip on power is still far from tenuous, the steady stream of gloomy economic news is probably causing at least some concern in the Kremlin.
The effects of Western sanctions and steady drop in global oil prices to a five-year low of below $70 this week are costing Russia some $140 billion annually, according to the government's own estimates.
Russian officials on Tuesday warned the country faces a recession in 2015 that could see the economy shrink for the first time in five years.
Ordinary Russians have watched as their currency lost nearly 40 percent of its value since the beginning of the year. They can also expect double-digit inflation by early next year, officials predict.
Taken together, these stats are why Putin has long stopped trumpeting his country's economic statistics in order to boost popular support, says Alexander Baunov, an editor of one of Russia's only remaining independent news outlets.
Instead, the third-term president harps on the historical injustices he claims Russia has suffered at the hands of foreign powers, part of a nationalist drive casting his country as a bulwark against the West and shielding him from domestic contempt.
"The frustrated president-economist has turned into the president-historian before our eyes," Baunov wrote Tuesday on Slon.ru. "And usually this portends nothing good."
Even those with ties to Putin are warning about the dangers of his current political strategy, which has spooked investors and boosted capital flight to nearly $130 billion this year.
Thanks to a fierce propaganda campaign that's played out over state-controlled media here, few people realize the economic malaise is the Kremlin's own fault, says Denis Volkov, a researcher at the independent Levada Center think tank.
Instead, many remain resentful of what state television insists are aggressive and irrational Western policies toward Russia.
"Almost no one understands the point of view of the other side," he says. "People do not even understand why the West is imposing sanctions, for example."
Other observers say that while Putin can still count on the propaganda coup his state media machine has pulled off, it's only because Russians haven't had to cope with the downturn for long.
What comes next, says Volkov, is still anyone's guess.
On one hand, Putin has already successfully weathered a mass protest movement and defanged his political opposition. On the other, it's the first time his 14-year rule has been put through such economic trials.
"We're only in the very beginning of this situation," Volkov adds, "so it's rather hard to forecast how it will develop."
Further deployment of America’s global anti-ballistic missile defense poses a threat to the US and those European countries that agreed to host it, because it builds up a dangerous illusion of invincibility, President Vladimir Putin said.
“This [ABM] constitutes a threat not only to the security of Russia, but to the whole world, in view of the possible destabilization of the strategic balance of powers. I believe this is dangerous for the US itself, as it creates a dangerous illusion of invulnerability and reinforces the tendency of unilateral, often ill-considered decisions and additional risks,” Putin said in his annual state of the nation address to the Federal Assembly.
Russia will not get involved in an expensive arms race, the Russian president said, yet the country’s defensive capacity in the new conditions will be securely guaranteed.
“There’s no doubt about that – consider it done. Russia has both the capacity and creative decisions to do so,” Putin said.
The European Phased Adaptive Approach, a centerpiece of the US missile defense shield in Europe, implies deployment of Arleigh Burke-class guided-missile destroyers, all of which are fitted with the Aegis weapon and radar system, interceptor batteries in Poland and Romania, radar in Turkey, and a command center at Ramstein, Germany, a US Air Force base.
Russia is considering the system to be a major threat to its own security and has threatened to increase its own arsenals and missile shield piercing capabilities in response.
“Talking to Russia from a position of strength is meaningless,” said Putin, stressing that ‘deterrence policy’ towards Russia is nothing new.
“The deterrence policy was not invented yesterday, it has been always conducted towards our country, for decades, if not centuries,” Putin noted.
“Every time somebody considers Russia is becoming too powerful and independent, such instruments are turned on immediately,” said Putin.
In his speech Putin also recalled the fate of Adolf Hitler, who also planned to destroy Russia, and the Nazis’ misanthropic ideas.
“Everyone should remember how that ended,” Putin said.
Russia cannot afford the liberty of being weak, he added.
“The more we retreat and offer excuses, the more impudent become our opponents, acting in the most cynical and aggressive manner,” Putin said.
Putin recalled the situation in the 1990s when Russia showed unprecedented openness to international cooperation, but it faced “the support of separatists from abroad: informational, political, financial and from intelligence agencies, was absolutely evident.”
All that was taking place at a time when Russia “considered its recent enemies as close friends and nearly allies,” Putin said.
Could rapidly falling oil prices trigger a nightmare scenario for the commodity derivatives market? The big Wall Street banks did not expect plunging home prices to cause a mortgage-backed securities implosion back in 2008, and their models did not anticipate a decline in the price of oil by more than 40 dollars in less than six months this time either.
If the price of oil stays at this level or goes down even more, someone out there is going to have to absorb some absolutely massive losses. In some cases, the losses will be absorbed by oil producers, but many of the big players in the industry have already locked in high prices for their oil next year through derivatives contracts. The companies enter into these derivatives contracts for a couple of reasons. Number one, many lenders do not want to give them any money unless they can show that they have locked in a price for their oil that is higher than the cost of production. Secondly, derivatives contracts protect the profits of oil producers from dramatic swings in the marketplace. These dramatic swings rarely happen, but when they do they can be absolutely crippling.
It has been estimated that the six largest “too big to fail” banks control$3.9 trillion in commodity derivatives contracts. And a very large chunk of that amount is made up of oil derivatives.
By the middle of next year, we could be facing a situation where many of these oil producers have locked in a price of 90 or 100 dollars a barrel on their oil but the price has fallen to about 50 dollars a barrel.
In such a case, the losses for those on the wrong end of the derivatives contracts would be astronomical.
When things are nice and stable, the derivatives marketplace works quite well most of the time.
But when there is a “black swan event” such as a dramatic swing in the price of oil, it can create really big winners and really big losers.
Financialization is always based on the presumption that risk can be cancelled out by hedging bets made with counterparties. This sounds appealing, but as I have noted many times, risk cannot be disappeared, it can only be masked or transferred to others.
Relying on counterparties to pay out cannot make risk vanish; it only masks the risk of default by transferring the risk to counterparties, who then transfer it to still other counterparties, and so on.
This illusory vanishing act hasn’t made risk disappear: rather, it has set up a line of dominoes waiting for one domino to topple. This one domino will proceed to take down the entire line of financial dominoes.
The 35% drop in the price of oil is the first domino. All the supposedly safe, low-risk loans and bets placed on oil, made with the supreme confidence that oil would continue to trade in a band around $100/barrel, are now revealed as high-risk.
Most of the time the big banks are very careful to make sure that they come out on top, but this time their house of cards may come toppling down on top of them.
If you think that this is good news, you should keep in mind that if they collapse it virtually guarantees a full-blown economic meltdown. The following is an extended excerpt from one of my previous articles…
For those looking forward to the day when these mammoth banks will collapse, you need to keep in mind that when they do go down the entire system is going to utterly fall apart.
At this point our economic system is so completely dependent on these banks that there is no way that it can function without them.
In fact, as I have written about previously, the “too big to fail” banks have collectively gotten 37 percent larger since the last recession.
At this point, the five largest banks in the country account for 42 percent of all loans in the United States, and the six largest banks control 67 percent of all banking assets.
If those banks were to disappear tomorrow, we would not have much of an economy left.
I keep on saying it, and I will keep on saying it until it happens. We are heading for a derivatives crisis unlike anything that we have ever seen. It is going to make the financial meltdown of 2008 look like a walk in the park.
Our politicians promised that they would do something about the “too big to fail” banks and the out of control gambling on Wall Street, but they didn’t.
Now a day of reckoning is rapidly approaching, and it is going to horrify the entire planet.
Three leading members of the European Union are reportedly working on a draft resolution to be submitted to the UN Security Council, as a counter to the Palestinian draftexpected to be brought to a vote later this month.
France, Germany and Britain were leading the effort with Paris at the forefront, Haaretz reported Wednesday night. According to the report, the US is aware of the French, German and British initiative.
The resolution is set to outline the principles of a peace deal between Israel and the Palestinians in the timeframe of two years. The Palestinian draft also reportedly calls for a two-year deadline, but specifies that this is for a full Israeli withdrawal from occupied territory.
On November 17, the European Union harshly condemned Israel for settlement expansion, threatening to “take further action” to respond to Israeli moves deemed harmful to the two-state solution, but refrained from announcing concrete sanctions.
“Actions which call into question stated commitments to a negotiated solution must be avoided,” the EU’s Foreign Affairs Council declared in Brussels. “The EU deeply deplores and strongly opposes the recent expropriation of land near Bethlehem, recent announcements of plans for new settlement construction, in particular in Givat Hamatos, Ramat Shlomo, Har Homa and Ramot, as well as plans to displace Bedouins in the West Bank and the continued demolitions.”
The council — which consists of the foreign ministers of the EU’s 28 member states — urged Israel to reverse these decisions, as they “run counter to international law and directly threaten the two-state solution.”
Plans to expand construction in East Jerusalem seriously jeopardize the possibility of the city ever becoming the capital of Israel and a future Palestinian state, the council’s conclusion states. “The EU closely monitors the situation and its broader implications and remains ready to take further action in order to protect the viability of the two state solution.”
The foreign ministers reiterated their support for the Palestinian unity government, calling on Palestinian Authority President Mahmoud Abbas to assume control over the strip.
Echoing language first used in council conclusions from July, the EU concluded by stating that the “future development of the relations with both the Israeli and Palestinian partners will also depend on their engagement towards a lasting peace based on a two state solution.”
At about the same time that the EU foreign ministers discussed the wording of these conclusions in Brussels, Haaretz published a copy of an internal EU document that shows that the union is mulling taking drastic steps in the event Israel continues to advance policies thought to jeopardize the two-state solution, such as expanded settlement construction in sensitive areas such as East Jerusalem.
The EU could also take actions “reinforcing” the Palestinians’ unilateral statehood bid, according to the leaked document, either by recognizing a Palestinian state or by supporting or not opposing the Palestinians’ efforts to join international organizations.
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