The price of oil has fallen by half since the summer. The Russian ruble has collapsed. A bored, belligerent, and megalomaniacal dictator with a massive military is on the march…
So, what will happen next?
Eurasia Group’s Ian Bremmer says Vladimir Putin’s response to this escalating crisis is likely to be “geopolitical,” which doesn’t sound comforting.
How about global markets and economies?
Will there be cascading ripple effects like those that followed the Russian crisis in the late 1990s? Or, for that matter, the early stages of the global financial crisis 7 years ago?
We reached out to one of the smartest market observers we know, economist and hedge fund manager Mark Dow of Dow Global Advisors for some thoughts. Here’s our summary of his current thinking:
* The fate of Russia’s economy and banking system will depend on how “levered” the Russian economy is — in other words, how dependent it is on debt and other forms of credit. Mark does not have a good sense of this. [Based on some chatter we heard this morning, Russians are not yet rushing to Russian banks with wheelbarrows to yank out their rubles before they lose all their value, but this day might not be far away.]
* Some Russian oligarchs might see their fortunes demolished.
* The bigger story for the global economy is the collapse of oil prices, not the collapse of the ruble. The speed of the oil price crash will cause lots of reflection and re-examination on the part of investors. It will also likely lead to widespread “de-risking” — a flight to safe assets like Treasury bonds.
* It is the speed of the oil price crash that is important, not the magnitude. Rapid crashes like this catch people off guard. They also make them emotional and scared.
* Eventually, when the dust settles, cheaper oil will help stimulate the economy, but not as much as some people think. US consumers do not spend as big a percentage of their incomes on oil-based products as they used to.
I don’t have a strong sense for how levered the domestic financial situation is in Russia. My sense is a few oligarchs will get caught out. And Putin will have to struggle to retain his popularity. But this is in no way like 1998. There was a ton of foreign and domestic leverage in the Russian economy then. I think oil is the factor to watch for global markets, not Russia.
The falling ruble is something people can and will point to if we continue to sell off, but I think this is really about oil for international markets.
There will be dislocations [from the oil crash] for sure. Also, it will help consumers less than people think (oil is a smaller share of household budgets these days), but a net positive.
The real problem is the speed of the decline forces people to reexamine their priors, convinced there is something going on they don’t see. And in that reexamination they shed risk. Once the dust settles, it will be seen as a net positive.
The oil dislocations will come domestically from the paring back of exploration and production. Internationally, from the dependent exporting countries. But the speed factor is what has us so much on edge. The speed of the price change is almost always more important than the level for our psychology.
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