Russia: a country well versed in the game of geopolitics.
Despite having an economy just slightly larger than Australia’s, Russia is a giant on the
world stage and arguably its biggest move in the 21st century was its annexation of
Crimea.
But this video is not about geopolitics; no, today we’re gonna learn the true cost of
Russia’s expansionism and trust me, it’s a lot more than you think.
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Early 2014 marked an end of an era and a rude awakening for Europe and the Western World.
Vladimir Putin did what was considered unthinkable: he initiated a military campaign of expansion
against Ukraine.
In the span of just one month, Russia annexed Crimea and instigated a war in Eastern Ukraine
that continues to this day.
And while we often hear that the West responded with sanctions, it’s not easy to determine
what the true cost of Russia’s aggression really is.
To understand what Russia paid we have to understand how Russia works.
A big chunk of the Russian economy relies on oil: about 7% of the country’s GDP comes
from the extraction of oil and while that might not sound like a lot, consider this.
These 7% account for over half of the federal budget of Russia; in other words, the price
of oil has a very direct impact on whether Putin’s finances add up at the end of the
year.
Now, when Russia began its Ukrainian intervention in February 2014 the price of oil was about
$100 per barrel and it had been hovering around that area for some time.
However, from August onwards there was a dramatic crash in the price of oil; in the span of
just six months oil dropped from $100 per barrel to just $50.
Of course, the global oil market is a very complex beast, but in this particular case
it’s actually pretty easy to find the culprit: the good old USA.
From 2010 onwards America began rapidly expanding its oil production, notably thanks to fracking
in North Dakota and Texas.
Now, usually when there’s a sudden increase in oil production the other big players in
the market like Saudi Arabia or Iraq get together and agree on production cuts to balance things
out and to keep the prices stable.
But in 2014 that didn’t happen.
Saudi Arabia and friends, collectively known as OPEC, just stood by and watched and America
was certainly very appreciative of their restraint.
The price of oil has pretty much stayed put at $50 ever since and as you can imagine that’s
had a pretty big impact on Russia.
Half a decade later and only now is the Russian economy starting to climb back to its pre-expansionist
heights.
Over the past five years estimates say that Russia lost 4% of its GDP due to the price
of oil.
In the meantime, the sanctions of the West have also bitten deep into the Russian economy.
Foreign investment practically dried up overnight in 2014 and it is still very far from recovering.
The combined effect of the sanctions chopped off another 6% of Russia’s GDP, so it’s
fair to say that Russia effectively sacrificed 10% of its economic output to take Crimea.
Here’s the thing though: the Crimean peninsula is not exactly the pinnacle of economic development.
It is a very strategically important location, no doubt, but its people aren’t really flush
with cash.
In fact, when Crimea was annexed into the Russian Federation in March 2014 it was the
poorest region in the entire country per capita.
To bring the new region up to the same level required massive investment to the tune of
$2 billion per year.
Since 2014 these direct subsidies have actually done wonders for the region: a $4 billion
bridge now connects Crimea to mainland Russia, and the peninsula has a renovated airport,
two new power plants and an increased military presence which of course boosts the local
economy.
While Russia in general continues to suffer from Putin’s expansionist policies, at least
the Crimeans are actually having it good.
Now, if you’re wondering what Putin’s next moves are and how he even got here in
the first place, you’re probably gonna enjoy listening to The New Tzar on Audible.
The Rise and Reign of Vladimir Putin is a fascinating biography and you can listen to
it for free right now if you register for a free trial of Audible by visiting audible.com/businesscasual
or by texting “businesscasual” to 500500.
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You can expect my next video in two weeks, and until then: stay smart.