Putin's Next Move?

While our economy sits on the edge of collapse, one thing that may have been lost in the confusion is the price of oil. The price of a barrel of oil has fallen from a high of $140 per barrel to right around $80 per barrel currently. This price drop is due almost entirely to a worldwide drop in demand for oil as the world economies teeter on the edge. As such, while most of our pocket books get tighter, one place where we will all see relief is at the gas tank.

While much of the world is likely happy to see oil dropping, one person that is not is Vladimir Putin. In the summer, I surmised the theory that Garry Kasparov, former chess champion and current political opponent of Putin, has about what motivates Putin geo politically. Kasparov believes that Putin's every geopolitical move is done in order to prop up oil prices. The Russian economy is a house of cards based entirely on inflated oil prices. Russia has seen an enormous growth in wealth over the last seven years and that is due entirely to the enormous growth in oil prices. The Russian economy is not diversified, and wealth is not distributed throughout most of the society. What the Russian economy has is a blossoming oil industry, propped up by the inflated price of oil. Russia supplies about one quarter of Europe's energy needs.

The Russian economy could withstand a drop in oil prices for a while, but it cannot withstand a fundamental shift in oil prices. Because the world's economies are sputtering that is exactly what is happening. The price of oil is plummeting because worldwide demand is plummeting. This is a dynamic that Russia, and Putin, cannot stand for too long.

Putin has numerous options, and we have already seen him attempt to take some of them. Just a week and a half ago, Russia announced an arms deal with Venezuela.

Venezuelan President Hugo Chavez and Russian President Dmitry Medvedev watched the signing of deals between state energy companies in the southern city of Orenburg. Chavez also was expected to watch a major Russian military exercise during his second visit to Russia in just over two months.

The Kremlin said Thursday that Russia is granting Venezuela a US$1 billion
credit for the purchase of Russian weaponry. The arms purchases have
sparked concern in the U.S. and among some neighbors of Venezuela, such as
Colombia, which has accused Venezuelan officials of supporting leftist
insurgents.

Often, we have seen Putin insert himself into geopolitical spheres where there is oil and get into bed with geopolitical loose cannons that sit on significant oil reserves. I believe he does this because instability often causes the price of oil to increase at least in the short term. An armed Venezuela has the potential of doing significant damage to the oil market. If Hugo Chavez feels he is militarily powerful enough, there is no telling what he might do with the significant amount of oil that he sits on. Over the last several years, Putin has gotten into bed with the Iranians, and blocked any action against them in the Security Council. This, I believe, he also does because instability by the likes of Iran causes short and long term rises in oil.

Of course, we are in a different time then we were only a couple of years ago. The sort of geopolitical stunts that Putin could pull to force oil up ten and twenty percent are gone. Making arms deals and rattling sabres would have worked while the world's economies were somewhat solid. In this downturn though, Putin will have to do something dramatic. Back in August, he invaded Georgia, and with it, a two week drop in oil stopped and turned around for a week.

If Putin is to stop the slide in oil, he will have to do something as dramatic. John McCain often says watch the Ukraine. This is actually the most logical step for Putin. Like Georgia, Ukraine is not yet in NATO. Furthermore, like Georgia, the Ukraine has a significant ethnic Russian population. Their "protection" could be the trojan horse that Putin could use for invasion much like Georgia. Most importantly, a significant oil pipeiline known as the Oddessa/Brodsky pipeline runs right through the Ukraine.

I believe that Putin read the Europeans as weak and he believes that they wouldn't have the stomach for any serious military confrontation as long as they were convinced that whatever incursions occurred temporarily. His show of force in Georgia appears to wrapping up, and if the Europeans thought that any incursion into the Ukraine would only last for months, I believe that whatever "strong diplomatic language" they used, it would stop at language. A significant incursion into the Ukraine, close enough to the pipeline, could be all the oil market needs to jump at least temporarily.

If Putin is really bold, he could move into any one of the three former Baltic States, Estonia, Latvia, and Lithuania. Incursions into these three hold a dicier proposition, but one that Putin could even see as an opportunity. That's because they are all NATO members. NATO charter states clearly that an attack on one is an attack on all. Yet, Putin might believe that won't be enough motive for the Europeans to confront him militarily. If NATO folds even though one of its members is attacked, NATO literally would fold and the alliance would forever be useless. Each of those three nations also sit on significant oil.

The diciest proposition is Poland. That's because not only are they a part of NATO, but their military would likely give the Russians its biggest challenge. Putin may not want an invasion that he isn't one hundred percent certain he can win.

One thing is clear though. Putin has little time the way that oil is going. A move may soon be necessary because his economy simply can't survive oil prices anywhere below $50 a barrel.