2015-2016 Energy Price Drop Will Disentangle Russia, Not Crush It

Energy prices are dropping. Commodity prices are dropping, actually, in general. Production is slowing. People are finally realizing that China is as flimsy as government construction. The Euro is indeed linking Eurozone economies by failure instead of success, and doing so in a way that limits their market rights. The EU is inherently unstable. Cold War II is finally no longer a secret (though many folks are still oblivious to it).

Long story short: a lot of stuff is going on!

This is one of those “interesting” periods in history — the kind that Chinese proverbs use as a curse. Or, rather, we are re-entering a normal period in history, one where there are more than two poles to the world, and the Cold War alignment stresses are not purely polarized — which means more interesting plays for middle empires (like France), and a very strong possibility that empires that are currently viewed as either permanently vanquished (Japan and Thailand) or part of the new world standard (China) are likely to either find a way to rise again, or endure complete collapse prior to changing form entirely upon resurrection.

Japan might realize the space play it could make by diverting public largess toward space instead of beautifully designing dead-end mountain roads. China will very likely endure a civil war, but it could just as easily be won by the standing government which changes form after it wins as it could be reformed as a republic under a totally different political concept. France my find a way to leverage its African empire to provide an energy alternative to Germany and thereby insulate it from Moscow’s control at the same time it forces it into a subordinate relationship (winning a Napoleonic victory without fighting a war — the way the Germans thought they were “re”winning WWI without fighting a war by imposing the Euro as the new European currency under their former central bank, renamed as the ECB). The Turks may find a way to leverage their water control position over Iraq and work to put ISIS in control of Baghdad as part of a bid to force them to normalize by giving them something that can be taken away. Tehran and Washington are very likely to become close allies. etc.

The world is changing.

Many folks feel guilty pleasure at watching Russian financial numbers decline and the ruble fall as energy prices sink worldwide. Folks think “ah, this is finally it, once Russia’s economy suffers enough, Moscow will have to agree to work with Washington and stop bullying the East so much”.

Well, that last part isn’t going to happen. Not because of energy prices, anyway. There are two reasons for this: Russia doesn’t need money the same way other countries do, and in some regions alternatives to Russian energy are impossible to obtain at any price.

The first point is that Russia is a raw-materials exporter, and also maintains a considerable high-tech domestic manufacturing capability. The reason we don’t see more Russian products in the world, though, is because Russia lack much heavy shipping infrastructure. In particular, its ability to push products to ocean ports is severely limited, so it will never make sense to produce finished goods in the interior of Russia, ship them by rail or truck overland to deep water ports (across hostile political lines, no less — if you think pre-Civil War inter-state tariffs were insane within the United States, imagine what they look like in the middle of a Cold War-style mutual embargo and tariff festival), and from there to the world. China is a much easier shortcut. On the other hand, it will always make sense to ship raw materials from the interior of Ukraine or Russia (which are effectively controlled by the same political decision-makers — even more obviously now than ten years ago), because raw materials can only be had at their sources.

A big part of Russia’s power comes not from being able to throw money around, but by being able to make client states become dependent on material subsidies from Russia. If the Russian’s are subsidizing gas at a certain price in Germany, then the existing infrastructure will be built with that in mind. That lowers the difficulty of obtaining and routing that energy source. That means it lowers the cost of extending that infrastructure and thus deepening systemic dependency on that source over time. That means Russia winds up with a lever of control. As long as nothing bad happens Russia will keep the gas flowing. Once things go their way or favors are refused gas lines might “suffer breakdowns” and prices might arbitrarily increase. It doesn’t matter if the global market price for natural gas is X if that gas is physically impossible to obtain in any significant quantity when you are talking about powering an entire national economy’s energy needs. The local spot price of the gas can be whatever Russia makes up — and if Russia wants to cause pain it can simple experience a series of conveniently timed technical difficulties.

The Russians of today can, as they have for the past several waves of their history, substitute labor for capital when necessary. The methods by which this is accomplished change a bit every generation — conforming to the expectations of the peasantry (and for all practical purposes Russia is still a country of peasants and royalty). A drop in the ruble is annoying, it prevents Moscow from keeping the charade of open engagement with Western economies alive, but does not fundamentally change the power relationship between the West and East, and certainly does not change the geopolitical calculus over the long-term.

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