When Putin suddenly forgot what millennium he was in and thought that Mother Russia would benefit from an imperial land grab, he set about a series of events that led to a slowdown in most of the world economy, a collapse in the price of oil which then served to devastate the Russian economy, and a massive strengthening of the US dollar.
A quick review of the causality reveals the following:
1st: Russia takes the Crimean Peninsula and sends troops to harass Ukrainian troops in Eastern Ukraine provinces.
2nd: Everyone becomes angry/frightened of Russia, so sanctions happen: U.S. has no trade with Russia, so U.S. imposes meaningless sanctions, and somehow manages to convince European leaders to impose meaningful sanctions; then Russia responds with significant sanctions against Europe.
3rda: Everyone (foolishly) fears that Russian oil and gas will be embargoed, and energy prices go through the roof.
3rdb: Every energy producer starts increasing production because energy prices are through the roof.
4tha: The European economy – which was only barely beginning to get back on its feet from the Great Recession (since it opted for the historically disproven economic quagmire of austerity) – was again taken out at the knees from a combination of the limited trade war with Russia and higher energy prices…
4thb: Russia was harmed greatly by the sanctions – though the sanctions Russia imposed on Europe hurt Russia more than any sanctions that Europe imposed on Russia.
5th: The slowdown in Europe and the dramatic slowdown in Russia caused a global drop in trade – as Europe began buying far less goods and services abroad.
6th: This reduction in global growth was ignored by the energy market, as the producers and major traders were still certain (???) that the trade war would expand and Russian oil would be embargoed.
7th: Finally someone realized that there was about 1.5-2 million more barrels per day (MMbbl/d) of oil being produced and sold than there was being consumed globally, and the world was running out of storage capacity for oil… the price of oil started to plummet, and Russia’s #1 export rapidly crashed from a value of ~$100/bbl to ~$40/bbl.
8th: A combination of an unusually mild winter in Europe, and anger/fear over Russian imperialism caused a reduction in demand for natural gas in Europe. NG is Russia’s #2 export. Oil and NG together comprised 68% of Russian exports in 2013. (Anger and fear could affect demand by power companies choosing to switch from NG to coal, and from businesses and homes choosing to lower the thermostat and encourage sweater-wearing, and from businesses and homes choosing to use petroleum to heat (heating oil, propane and kerosene heaters, etc).
9th: Gas, unlike oil is not a fungible commodity. The loss of gas demand resulted in a lowered price, as well as less total gas traded, with many more wells remaining spudded out and plugged.
10th: The value of the Russian Ruble dropped 50% over 15 months. Russia sold off most of its foreign holdings to cover its budget shortfall and still showed a deficit and rising debt/GDP. The debt has been rated as junk. The central bank loan rates are at 14%. The countries GDP is in contraction and is projected to continue contracting at a rapid rate.
11th: There are now talks of further sanctions. Many countries – including the U.S. and Iran (and the 4 other nations involved in the Iran treaty negotiations) – are quite interested in stopping the collapse of the price of oil while allowing Iran to sell more oil to global markets in exchange for more cooperation with the Nuclear Regulatory Commission. It’s almost convenient that the world’s 3rd largest oil producer happens to be belligerent and defiant… It’s possible that long-ago expected embargo on Russian oil might actually find some footing. It’s still unlikely, but at least for now it’s possible.
Articles that have cited this explanation:
Quit calling for the Fed to raise interest rates already!