Friday, May 25, 2012

China Slows, Russia Hurts: Cause and Effect?

The New York Times finally stumbles on a relevant news story: China's economy begins to slow. To most of us who have been paying attention, this is not exactly news. And some of us have even suggested that when China's economy slowed, leading to a reduction in demand for commodities, that some of the commodities - supplying countries such as Russia might feel the pinch.

Russia's government requires very high pricing for both oil & gas in order to finance President Putin's ambitious quest to re-build the USSR in everything but name. But with global oil prices slumping -- and the prospects for a significant dive in gas prices over the next several years -- Russia is being slapped in the face with a cold and bracing bucketful of reality.

More on Russia's acute problem of capital flight:
"There is large-scale capital flight from Russia, despite the economic recovery," Dmitriev said. "And this capital is flying into the epicenter of the global financial crisis, which is in Europe. That is actually the same as creating a food supply in the center of an atomic explosion."

...Russia, which relies on oil and gas exports for half of its budget revenue and Europe as a market for more than 50 percent of its exports, may suffer a worse recession than in 2009 if energy prices plunge, according to Dmitriev.

..."If these trends continue, we will see the escalation of political violence and repression on one hand, and the worst economic crisis on the other," said Dmitriev, a deputy economy minister from 2000 to 2004. "This may lead to Putin losing control and a chaotic political transformation." _SFGate

Neither news story on Russia's problems points toward the China slowdown as one of the causes of Russia's downturn, but China's share of the global commodities markets makes it absolutely certain that a downturn in the great dragon's economy would send shocks through the economies of most large exporting nations -- including the giant bear of Russia.

As several of Russia's important energy customers begin learning how to "make their own energy," using newer oil and gas extraction technologies developed in North America, the pain felt by the wounded bear -- already suffering a potentially fatal demographic crisis -- can only worsen.

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