Leadership: The Price Of Empire

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October 6, 2014: The latest (September 12th) round of sanctions against Russia (because of the Russian invasion of Ukraine) have made it impossible for the Russians to effectively carry out many of their oil and gas exploration and development efforts. Oil and gas are 14 percent of the Russian GDP and over 70 percent of exports. With the price of oil and gas falling exploration for new sources of oil and gas are even more critical. This work requires the assistance of specialized Western firms and that is no longer allowed. The seriousness of these sanctions was soon reflected in the value of the Russian currency (the ruble) which fell to a record low (38.8 rubles per dollar). Russian, and foreign, investors are alarmed at the impact of the sanctions on the Russian economy and the ruble/dollar exchange rate is a major indicator.

Senior members of the Russian business and finance communities have told Russian leaders about all the economic harm these sanctions are doing. Among Russians there is a lot of unhappiness with what their government is doing in Ukraine, or at least with the resulting confrontation with the UN and the West. Even some major Russian businessmen are urging the government to reconsider. These billionaires, along with government and non-government economists, are warning that the sanctions and loss of trust (from the rest of the world) will do an enormous amount of damage to the Russian economy. But the people running the government insist that the West will back down and leave Ukraine with no choice but to let go of whatever territory Russia wants. Most Russians are also appalled at their governments’ threat to use nuclear weapons if the West and Ukraine do not give in to Russian demands. Nevertheless the idea of rebuilding the Russian Empire is popular with most Russians, especially older ones. That popularity is eroding as awareness of its economic cost sinks in.

The impact of the UN sanctions have been made worse by the falling price of oil. Russia is economically very dependent on oil revenue and the falling oil price is a major, and growing, problem. This oil price decrease is caused largely by American innovations (fracking) that have unlocked huge quantities of oil and natural gas. For example, in 2010 foreign oil accounted for half the oil consumed in the United States. That is now 20 percent and falling rapidly. The U.S. expects to be a major oil and natural gas exporter soon and that hurts the economy of Russia a great deal. 

 

 


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