Each of the Baltic states, meanwhile, has reportedly entered secret consultations for international assistance. Estonia, which ran into financial difficulties even before the global crisis, is already in recession. So is Latvia—dubbed an economic “basket case” by Britain’s Guardian newspaper. Lithuania is not far behind. “Iceland was the canary,” wrote Lars Christensen, head of emerging markets research at Denmark’s Danske bank, in a research paper tabled before Hungary and Ukraine even appealed for international aid.
Whether Russia will be able to leverage its massive cash reserves to buy assets and influence from its neighbours rests entirely on the price of oil. “If prices stabilize, there will be a great opportunity for Russia to pursue economic influence in the former Soviet countries,” says Shamil Yenikeyeff, a Russia expert with Oxford University’s Institute for Energy Studies. Kyrgyzstan, which has an external debt of $2 billion—“and never really wanted independence from Russia in the first place”—will be the first country to fall under Russian control, Yenikeyeff predicts. “But,” he cautions, “if oil goes below $40, you can forget about Russian influence in eastern or central Europe, you can forget about Russia using its newly found economic power in its foreign policy, and you can forget about the resurgence of Russia’s influence.”
Already, oil prices have dropped below the budget-critical $70 per barrel, he says. If they go much lower, Russia will start running a deficit. Its rainy day reserves, designed to deal with low oil prices in times of crises, can only sustain the country for up to a year and a half. So far, there’s no sign the bottom has been reached, says Peter Boone, an associate at the Centre for Economic Performance at the London School of Economics: “The world is at the start of what appears to be a potentially deep, global recession, and could expect demand for oil to fall sharply.” During the Asian economic crisis of 1997, non-OECD oil demand fell by four million barrels per day, he says. “It is difficult to predict how large the decline will be this time, but it is very plausible that oil prices will fall back to early 2000 levels”—of $30 per barrel—“or less.”
If they do, the Russian government will face a choice: “To either bail out its own companies or to bail out itself,” says Yenikeyeff. Russia’s oligarchs have borrowed a combined $530 billion on external markets, using shares in their companies as collateral, explains Russia expert Nick Gvosdev, professor of international relations at the Naval War College in Newport, R.I.; all told, some $47.5 billion will have to be repaid to jittery creditors by the end of the year. In order to keep assets in key companies, including gas giant Gazprom, from falling into Western hands, Moscow will be forced to bail them out; so far, the state has set aside a $50-billion state loan to assist Deripaska and the cash-strapped oligarchs.
In the weeks ahead, Putin and President Dmitri Medvedev will decide whom to bless with the rescue funds, bringing even more of Russia’s financial sector under state control—which does not bode well for Russian efficiency, growth or the battle against corruption, says Jeff Mankoff, associate director of International Security Studies at Yale. Indeed, expect some decisions to be explicitly political, he says: “What has oligarch X done for government? Has he played by the rules? Do we like him?”
The “next big oligarch” says Cliff Kupchan, a Russia analyst with the New York-based consulting firm the Eurasia Group, will be “the Russian state.” Russia will effectively be re-nationalizing many of the country’s strategic industries, he says, an ironic reversal from the chaotic privatization of the 1990s. Then, of course, a small group of Kremlin-friendly businessmen was able to acquire the state’s newly privatized assets at a fraction of their real value from a nearly bankrupt Russian state. In sharp contrast, Moscow, today, is very much in the driver’s seat. As many highly leveraged companies totter, the Kremlin even seems poised to regain control of the industries it so recklessly sold off over a decade ago—so long, of course, as the price of oil stays above $40 per barrel.
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