Never Poke a Russian Energy Bear

I published several blogs on Russia and natural gas this year, discussing the use of its natural gas resources as a lever on Europe.  Winter is here and Russia has employed this leverage on Ukraine in 2006 and 2009.  This time is different.  According to the 2013 BP Statistical Review:

• Russia is the number 2 producer of oil at 12.9% of global production (behind Saudi Arabia at 13.1%); and
• Russia is the number 2 producer of natural gas at 17.9% of global production (behind the US at 20.6%).

Oil prices have dropped from a high in July 2014 of approximately $112/bbl Brent to approximately $70/bbl Brent (today), a drop of 37.5% in 5 months. With energy being Russia's largest export, this is devastating to its budget and trade deficit.  Add to this woe, the collapse of the Russian ruble and accelerating this week.  This has stoked the flames of inflation to a point of nervousness among its politicians.  On top of that, there is some $35 billion in corporate debt repayments due in December, causing angst among the executives who are putting pressure on the politicians.  And sanctions continue to be applied.

This bear is cornered and being poked from all sides.  If there is a year for extracting more revenues from its natural gas exports, then this is it.  It is the perfect storm: an early winter in Europe, a large natural gas dependency on Russia, a falling ruble, a falling oil price, mounting trade deficit, and irritating sanctions.  Putin may act swiftly and harshly by imposing price hikes on all exported natural gas and there is no easy replacement of it for  Europe.  If Europe does not comply, then Putin could throttle back the quantity or shut the pipelines down.  While this is a poor strategic move in the long-run, you never want to poke a bear in the corner in a short-run.