By: Jeffrey Tso

The rouble has fallen almost 50% against the United States Dollar over the past year.

In his traditional annual press conference, Vladimir Putin referred to Russia as a cornered bear, hunted by a West determined to chain and declaw. Russian bankers warned of the end of the banking system, and the collapse of the economic collapse. Only a few months before, his actions in Ukraine had seemed to make the Americans and Europeans impotent to oppose his ambitions.

Was the turnaround a result of the sanctions that the West imposed? Or perhaps a karmic reversal from his intrusion in Ukraine? It is arguable depending on where your political sympathies lie.

The likely explanation is none of the above, but rather a function of another, unlikely struggle.

Over the past year, American shale oil has allowed its production to rival Saudi Arabia, creating a massive glut in the oil market. The only alternative to raise prices and restore the profit margin would be to cut production. However, as Saudi Arabia discovered in 1970s and 80s, lowering production would be tantamount to ceding market share. Naturally, as the largest the OPEC producers, Saudi Arabia would have to sacrifice disproportionately to oppose the reduction in prices.

Instead, they decided to engage in the price war, banking on the lower break-even point of their highly developed oil facilities to force American producers out of business. With shale oil breaking even at as low as $59 per barrel, this in turn forced other oil producers to operate at a loss.

Iran could only profit at $131, Russia at $105, Venezuela at $161.

While the United States is not largely dependent on oil exports for trade, numerous nations, nearly 68% of Russian exports are based on the energy sector. Such dependence leads to currencies to be known as oil currencies, susceptible to volatile changes of supply and demand in the market.

The Russian response has shown the urgency of the situation. The overnight rate, which is the rate in which banks can borrow from the government, rose from 10.5% to 18% overnight. As a point of comparison, Canada’s overnight rate is a mere 1%.This indicates massive withdraws from private banks are forcing them to borrow to fill in deficits. Despite these measures, the December 17 still saw the rouble tumble nearly 20% against the Euro and USD.

Whether there was a calculated effort to ruin the Russians or not, Putin’s grim diagnosis is an incoming 2 year recession.