Russia-Ukraine crisis: When oil prices climb, Putin gets bolder
A previous version of this article incorrectly stated when Bob McNally served as an advisor to the administration of former US President George W Bush. The copy has been updated to reflect the correct years: 2001-2003.
Amid the historic tensions between Russia and Ukraine and the grand geopolitical dynamics currently unfolding between Moscow and the West, the role that crude oil plays in greasing the wheels of conflict can become obscured.
But a look back at past conflicts reveals a strong correlation between soaring oil prices and Moscow’s willingness to assert its will aggressively beyond its borders.
During Russia’s two military attacks on its former Soviet neighbours – the August 2008 war in Georgia, and its February 2014 seizure of Crimea and then the Donbas region from Ukraine – oil prices were at historically elevated levels ($125 and $102.57 respectively for global benchmark Brent crude).
Currently, oil prices are on the ascent again, reaching seven-year highs on Friday with US benchmark West Texas Intermediate crude topping $91 a barrel and Brent crude soaring past $92 a barrel.
Those gains fill Moscow’s coffers and might imbue the Kremlin with a sense of immunity from the threat of further Western sanctions or economic isolation.
Bob McNally, former senior director for international energy on United States President George W Bush’s National Economic Council and CEO of the energy consultancy Rapidan Energy Group, told Al Jazeera that oil forecasters have seen this pattern play out before in Georgia and Ukraine.
In each case, war was preceded by several years of high oil prices. by Bob McNally, CEO, Rapidan Energy Group
“In each case, war was preceded by several years of high oil prices, that no doubt played a role in emboldening Russian leaders,” said McNally, who was effectively Bush’s top energy adviser from 2001 to 2003. “Higher oil prices along with other measures Moscow has taken to protect its financial system from sanctions will help it withstand garden-variety sanctions.”
The West, which has struggled to present a united front in the latest crisis, has mulled everything from targeted sanctions on Russian oil and financial firms to cutting Moscow off from the vital Society for Worldwide Interbank Financial Telecommunication (SWIFT) financial messaging system, the circulatory system of global banking.
But those options could backfire on the West, according to Greg Priddy, an independent oil consultant and former chief energy analyst at Eurasia Group.
Hitting Russia’s oil industry directly, he noted, is impossible in an age when no country has the spare production capacity to replace it. And there are refineries among NATO’s Central European members – Slovakia, Hungary and the Czech Republic – which can only be supplied by Russian pipelines.
The SWIFT idea was quickly dropped, said Priddy, “because they realised that targeting SWIFT in a blanket way would mean, for instance, German utilities would have no way to pay for Russian natural gas, and that gets to be unthinkable”.
What history tells us
Historically, conflicts involving oil have generally involved the opposite proposition: not a petrostate menacing its oil-dependent neighbour, but rather an oil-dependent nation seeking to appropriate the resource from another.
Think the Iran-Iraq War, the invasion of Kuwait, Japan’s attack on Pearl Harbor following a US oil embargo, and even Hitler’s desperate thrust towards the oil fields of the Caucasus in World War II.
But possession of vast reserves of oil can also spur conflict, giving the more powerful party a sense of invulnerability.
This is particularly true when their potential adversaries are democracies sensitive to the public backlash of energy prices that will spike again if conflict breaks out, and whose own economies may depend directly upon their largesse for energy resources.
“It’s not so much high oil prices as Europe’s dependence on Russian gas that give Russia room for manoeuvre on the Ukraine crisis today,” said Thomas Graham, former White House adviser on Russian affairs and managing director of Kissinger Associates, a consultancy based in Washington, DC. “Russia can credibly threaten to cut off exports, confident that it can weather the downsides of a loss of revenue much more easily than Europe can weather the cutoff in heating fuel in the winter.”
Russia can credibly threaten to cut off exports. by Thomas Graham, managing director of Kissinger Associates
But the correlation in the specific case of Russia is striking. And there’s a bigger game afoot.
The Organization of the Petroleum Exporting Countries and its allies – OPEC+, a grouping that includes Saudi Arabia-led OPEC and its allies led by Russia – still has the ability to stabilise global oil prices if they act in concert.
Twice recently, in 2016 and 2020, they could not agree to do so, and oil prices cratered.
More recently, in January, the Saudis agreed to a Russian increase in production but resisted pressure from the West to step in and unleash its own reserve capacity to halt spiking prices, which are feeding inflation and, in turn, the erosion of public support for US President Joe Biden and other western democratic leaders.
The high prices have topped up Russia’s National Wealth Fund (its sovereign wealth fund), and helped Moscow advance the long-term goal it shares with China and other US antagonists: prying the global economy away from its dependence on the US dollar.
This has put Russia in a stronger economic position than in previous standoffs with the West.
“Under these circumstances, Russia’s economic situation looks better than ever,” said Turkish energy expert Umud Shokri, author of US Energy Diplomacy in the Caspian Sea Basin: Changing Trends Since 2001.
“Russia’s National Wealth Fund has made huge profits since last year’s boom in oil exports, with the country’s foreign exchange reserves reaching $640bn, the government’s public debt reduced, and its debt-to-GDP ratio at 12 percent … In the current context, Russia can largely resist Western sanctions,” he told Al Jazeera.
Russia has worked to sanctions-proof its economy. by Thomas Graham, managing director of Kissenger and Associates
Priddy agrees.
“Russia has a permission factor in that is clearly ‘too big to sanction’ like Iran,” he said. “What I think we have to be concerned about is that Russia has sufficient financial reserves that the scenario where Russia ‘trolls’ Europe and causes severe energy problems in Europe, which in turn makes it impossible to stay on message with regard to a western response.”
As compelling as the oil price/aggressive foreign policy correlation is, analysts widely agree that a combination of geopolitical considerations and Putin’s desire to stoke anti-Western sentiment at home probably are the main drivers of the crisis.
“Russia has worked to sanctions-proof its economy, it has reduced the share of dollars in its foreign currency reserves in favour of the euro and yuan, it has sold off dollar-denominated assets in its sovereign wealth fund, and it has moved to payment in local currencies in its energy trade with China,” said Graham, now a distinguished fellow at the Council on Foreign Relations.
“But the Georgian crisis of 2008 and the Ukraine crisis of 2014 were not initiated by Russia because of high oil prices. Russia was responding to developments that it believed jeopardised its security, much as it would say it is doing today.”
