Rouble, Rouble, Oil and Trouble: Russia’s Financial Meltdown Imminent

As the price of oil fell to $50 a barrel last week from the astronomical $140 in July, motorists and industry captains let out a mighty cheer. But while to some this may mean it’s time to get out the Land Rover and start driving up and down the street again, it’s very bad news for the oil-rich countries who depend on high oil prices for quality of life.

We already know that Alex Salmond’s beloved Scottish independence was riding on expensive oil, and now Canada’s economy is starting to feel the real effects of falling prices. But Russia is expected to be hardest hit, with most of its revenues coming from high taxes on oil extraction.

Back in September, before OPEC announced it was considering cutting back production by as much as one million barrels per day, Russia’s deputy Prime Minister and Minister of Finance Alexei Kudrin announced that the country would be in deficit if oil prices fell below $70 per barrel. A forecast by the Economic Expert Group, a Russian economic consulting firm, backs this up, saying prices for 2009 would have to hold fast at $95 per barrel to avoid an economic breakdown.

This news comes as energy giant Gazprom is wheeling and dealing with members of OPEC in Peru to form an energy super-consortium with other Russian firms to share in the oil found in Orinoco. Russian President Dmitry Medvedev is heading to Venezuela to clinch the deal, in the hopes that this new partnership between cash and oil- hungry Russian energy companies and Venezuela’s state-owned oil provider could offset the disastrous plunge in prices. There are doubts, however, that Medvedev’s dash through South America could repair the damage done by cheap crude, and that Russia’s bargaining power is deeply compromised. Watch this space.

Posted by Carmody Wilson in Green Rush | November 24, 2008 11:11AM |