Roiled by sanctions, a collapsing currency and large capital flight, Russia now faces the effects of a sharp fall in oil revenue. Companies pushed to the brink may be looking for government support at a time when the authorities’ ability to respond is curtailed by the decrease in their own revenues. The effect will be to strengthen the winds of recession, inflation and financial instability in Russia.

How this affects the global economy depends in great part on Russian President Vladimir Putin. Up to now, Putin has been able to resort to regional geopolitical adventures, most notably in Ukraine, to counter and divert popular dissatisfaction in Russia over the domestic economy. And he has done so notwithstanding the resulting imposition of Western sanctions on his country.

Will the additional domestic downturn lead Putin to change course on Ukraine as a way of lifting Western sanctions and alleviating overall pressures on the economy? Or will the internal pressure push him to extend his regional adventures?

Should Putin take the second course, the West may impose more economic sanctions, including on the energy and financial sectors, and Russia would probably follow with counter-sanctions on energy supplies to Europe. This could push Europe into recession -- which would negate much of the good impact that lower oil prices have had on the global economy.
 

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