Mark Nuckols

“Maidan” means public square in Ukrainian, it was on Independence Square in Kiev where the thuggish and corrupt regime of ex-President Viktor Yanukovych was overthrown. “Maidan” is a symbol of political freedom for ordinary Ukrainian citizens and a potential political nightmare for Russian President Vladimir Putin and his Kremlin cabal. Yanukovych is on the lam somewhere in eastern Russia, and Putin is grimly determined to avoid a similar fate. Whether he succeeds may depend largely on one variable: the price of energy, namely Russia’s oil and gas exports.

In more than one respect, Ukraine is Russia without oil and gas. They share a common culture dating back more than a millennium, and Ukraine was once part of both the Romanov and Soviet empires. Both countries suffer from systematic corruption, inefficient domestic industries, and ineffective government institutions.

Energy prices began their long ascent just as Putin became president in 2000, and the flow of petrodollars has been sufficient for him to purchase the loyalty of the voracious bureaucratic class. Putin sits astride a system of cronyism and patronage that keeps rival clans in place, while enough money trickles down to the population to secure nominal acquiescence.

In Soviet times, Moscow was a gray and dreary place, beset by shortages. And in the first decade after the Soviet collapse, chaos, instability and poverty reigned. But in recent years bustling cafes and restaurants have sprouted everywhere, the streets are jammed with Western branded cars, and the shopping centers are filled with imported goods.

The Sochi Olympics illustrate how the system worlds. Russia spend over $50 billion developing Sochi and the venues for the winter games. Half was stolen or embezzled, and the remainder went towards building an enormous prestige projects of little long-term value to the economy. But it was a seven year feeding trough for dishonest officials and well-connected oligarchs. And the public got to witness a grand spectacle which boosted national pride, governance by bread and circuses.

A decade ago, the budget – corruption and all – could be balanced as long as oil was $30 a barrel. But production costs have risen, just as the expectations of Putin’s supporter and the general public have increased. Now the Finance Ministry estimates that the budget can be kept in balance only if oil stays above $100.

Like other commodities, oil and gas prices are notoriously volatile and difficult to predict. However, futures prices show a decidedly lower long term trend. And increased production from shale, reduced tensions in the Persian Gulf, or slower Chinese economic growth could all be catalysts for lower prices.

Mark Nuckols

Mark Nuckols teaches law and business in Moscow. He has a JD from Georgetown and an MBA from Dartmouth. He has lived in Eastern Europe for most of the last 20 years, including Russia, Ukraine, Slovenia, and Georgia.