Unconventional Wisdom

During the Cold War, the Soviets were contained by physically surrounding them with allies (NATO) while pelting their firewall with messages from the Voice of America, Newsweek and CNN. Precious little got through. Just how total this exclusion in the pre-Internet and BC (Before Cellphone) days was is illustrated by the story of defector Viktor Belenko and the American supermarket. Traveling through suburban Virginia he noted the vast array of goods and absence of rotten smells in these establishments and suspected fake news.

"I congratulate you," Belenko said en route back to the mansion."That was a spectacular show you put on for me."

"What do you mean?'

"I mean that place; it's like one of our show kolkhozes where [our government] takes foreigners."

Nick laughed, but not Peter. ["Belenko], I give you my word that what you've just seen is a common, typical shopping center. There are tens of thousands of them all over [the U.S.A.]. Anywhere you go in the United States, north, south, east, west, you will see pretty much the same. Many of the shopping centers in the suburbs of our cities are bigger and fancier and nicer."

But it wasn't fake; just that Belenko's mind couldn't take in the new paradigm. Forty years later the Internet, cellphones, and a shift "from a centrally planned economy to a globally integrated market economy" made the sight of consumer goods familiar in Russia. But finding the money to buy these goodies depended on oil.  Oil is the lifeblood of Putin's ambitions and his Achilles heel. Obama's reset with Russia may have failed to slow Putin, but the lack of money caused by sanctions and the collapse of oil prices worked just as advertised.

The Russian economy experienced two major shocks in 2014 ... the first shock was the sharp decline in oil prices during the third and fourth quarter of 2014, exposing Russia’s extreme dependence on global commodity cycles. ... The second shock was the economic sanctions resulting from geopolitical tensions, which negatively affected investor appetite for Russian investments.

Lack of money was a powerful restraint. The oil crash collapsed the ruble and forced a 27 percent reduction in the Kremlin's military budget in 2016. With oil prices set to stay flat, the Russians have to keep drilling and investing simply to stay level, as the Oxford Institute for Energy Studies notes. The Kremlin doesn't make any real spending money until the world oil price gets above levels before the great oil crash of 2014, which may not happen anytime soon. As the Oxford study explains:

The correlation between upstream spending in ruble terms and oil production is ... an R-square of 0.96. However, companies would not spend their money on increasing output without some commercial incentive, no matter how much the Kremlin might urge it [without] ... the Russian tax system ...these taxes ... are also calculated relative to the oil price and have a sliding scale. The rate of export tax, for example, changes when the oil price goes above $15, $20 and $25/barrel. As a result, as the oil price rises the government take increases significantly, but when it falls it is government revenues that take the largest hit.