TIME energy

Oil Prices Changing the Face Of Global Geopolitics

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Russia and Venezuela are two of many to be involved in the upcoming changes

In a documentary that aired recently on the Canadian Broadcasting Corporation’s popular The Fifth Estate program, an allegory of Vladimir Putin was presented. The wily Russian president was described growing up in a shabby St. Petersburg apartment, where he would often corner rats.

Now, punished by low oil prices and Western sanctions against Russian incursions in Ukraine/ Crimea, Putin is himself the cornered rat. Many wonder, and fear, what he will do if conditions in Russia become increasingly desperate.

In the last six months oil prices have plunged over 50 percent and the Russian economy is hurting. The country now faces slowing economic growth, a depressed ruble, and runaway inflation estimated to be up to 150 percent on basic foodstuffs.

The Kremlin is counting on austerity cuts to help balance its budget, which has revenues coming in at $45 billion lower than earlier projections. The exception, significantly, is defense. With the military exempted from the austerity plan, it begs the question of whether Putin will “play the nationalist card,” such as he did in Crimea, in an effort to strengthen greater Russia during a period of economic weakness.

Georgia On His Mind

We are already seeing this to be the case. As Oilprice.com reported last week, Putin is set to absorb South Ossetia – Georgia’s breakaway republic that declared itself independent in 1990. Under an agreement “intended to legalize South Ossetia’s integration with Russia,” Russia would invest 2.8 million rubles (US$50 million) to “fund the socio-economic development of South Ossetia,” according to Agenda.GE, a Tbilisi-based news site.

The situation is analogous to Crimea because, like Crimea, South Ossetia contains a significant Russian-speaking population with ties to the Motherland.

If Putin succeeds in annexing the tiny province, it will be a real poke in the eye to the United States, which provoked Russia in the early 1990s by promoting construction of a pipeline between the former Soviet republics of Azerbaijan and Georgia. The BTC pipeline moves oil from Baku in Azerbaijan to Tbilisi in Georgia and then onward to Ceyhan on Turkey’s Mediterranean coast.

BTC started operating in 2006. Then, two years later, Putin built his own pipeline to cut out Georgia. The South Ossetia pipeline run by Gazprom stretches 75 kilometers from South Ossetia to Russia.

The current move on South Ossetia is a way for Russia to assert its energy independence in the face of Western sanctions and low oil prices.

It comes as Russia announced plans to divert all of its natural gas crossing Ukraine to a route via Turkey. As Bloomberg reported last week, Gazprom will send 63 billion cubic meters through a proposed link under the Black Sea to Turkey – after the earlier South Stream pipeline, a $45-billion project that would have crossed Bulgaria, was scrapped by Russia amid opposition from the European Union. By sending the gas to Turkey and on to Europe via Greece, Gazprom is in effect sending Europe an ultimatum: build pipelines to European markets, or we will sell the gas to other customers.

According to one observer, the proposed land grab in South Ossetia combined with the snub to Europe by shifting its gas to Turkey and bypassing Ukraine, is a classic Putin power play:

“Russia is preparing to absorb a province of neighboring Georgia, and delivering an ultimatum to Europe that it could lose much of the Russian gas on which it relies,” Steve LeVine writes in Quartz. “Putin has argued that the west is simply intent on ousting him and weakening Russia… Faced with these perceived attempts to undercut him and his country, Putin suggests that he has no choice but to pull around the wagons and stick it out. This could go on a long time.”

Plunging Oil Prices Crash The Stock Market?

When oil crashed in 2008 all hell was breaking loose. Lehman Brothers went up in smoke and stocks were in a nosedive. Oil has once again crashed -50% in only 6 months but equities haven’t followed – at least not yet! Will stocks hold up going forward? You might find it hard to believe just how much wealth could have been created last time this happened. If we learn from the past, this could be a second chance to make an absolute fortune.

Some have speculated that the oil price crash was orchestrated by the Saudis, possibly in collusion with the United States and other Gulf states, to punish Iran, its main political and religious rival in the Middle East.

Whether or not that is true, there is no denying the effects of a low oil price on Iran’s economy. “Iran is already missing tens of billions of dollars in oil revenue due to Western sanctions and years of economic mismanagement under former President Mahmoud Ahmadinejad,” Bloomberg reported on Jan. 7. Like Russia, Iran is looking at spending cuts in next year’s budget, which is based on an overly-optimistic $72 a barrel crude oil price.

However, unlike Russia, which is “circling the wagons” and pulling further away from the West currently, the oil price drop could actually lead to more of a détente between Iran and Western countries. In a speech on Jan. 4, President Hassan Rouhani said Iran’s economy “cannot develop in isolation from the rest of the world,” while at the same time, Iran’s foreign minister was negotiating a nuclear deal that could see the lifting of UN sanctions, the Washington Post observed.

Then there is the cooperation between the West and Iran over the terrorist group ISIS. The National Post’s J.L. Granatsein wrote in a column on Tuesday that Iran has deployed substantial numbers of its Revolutionary Guard elite Al Qods brigade into Iraq and Syria to fight ISIS, along with Western allies including the US, Britain, France and Canada. This is despite Iran’s support for Hezbollah in Lebanon and Syria’s president Assad.

“Politics makes strange bedfellows indeed, but not much can be stranger than this. Led by the Americans, hitherto the Great Satan to the Iranian leaders, the ties between the West and Iran are becoming tighter, each side reacting to the horrors of Islamist fundamentalism throughout the region,” Granatsein writes. “The Iranians have been hurt by sanctions, and they are being wracked even more by the falling price of oil. Easing curbs on trade and Iranian banks may mitigate the effects of the oil price collapse.”

Venezuela Bracing For The Worst

The other major loser in the oil price collapse, Venezuela, may not see such a positive outcome. Wracked by decades of economic mismanagement by Hugo Chávez, the South American oil producer was already struggling to pay its debts when new president Nicolás Maduro came to power.

Now, with inflation running at 60 percent and lines forming outside state grocery stores for food and other basic supplies, Maduro faces the specter of serious social unrest if conditions do not improve. The country has some of the world’s cheapest gasoline prices, but Maduro has refused to end fuel subsidies, fearing, no doubt, a repeat of widespread riots in 1989 that left hundreds dead after gasoline prices were allowed to rise.

Venezuela is even more dependent than Russia on the price of oil, earning some 96 percent of its foreign currency from oil sales, putting Maduro in the untenable position of either borrowing more, despite crushing debts, or slashing spending:

“With only $20 billion left in its reserves, and $50 billion in debt to China alone, Venezuela appears headed toward a choice between abandoning its oil giveaways and defaulting on its debts, or starving its own population to the point of revolt,”according to the Washington Post.

This post originally appeared on OilPrice.com.

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TIME russia

Russia Says It Would Consider Financial Help for Greece

Russian Federation Council member Anton Siluanov delivers a speech as Russian Federation Council deputy chairman Ilyas Ukhmanov, Russian Federation Council chairperson Valentina Matviyenko, Russian Federation Council deputy chairmen Evgeny Bushmin and Yuri Vorobyov (L to R, background) look on at a plenary meeting of the Russian Federation Council on Jan. 28, 2015.
Russian Federation Council member Anton Siluanov delivers a speech as Russian Federation Council deputy chairman Ilyas Ukhmanov, Russian Federation Council chairperson Valentina Matviyenko, Russian Federation Council deputy chairmen Evgeny Bushmin and Yuri Vorobyov (L to R, background) look on at a plenary meeting of the Russian Federation Council on Jan. 28, 2015. Pitalev Ilya—ITAR-TASS Photo/Corbis

Finance minister says Russia hasn't yet received a request for assistance

Russia’s finance minister said his country would consider providing financial support to Greece, raising the stakes for the European Union as it confronts the new Euroskeptic reality in Athens.

Anton Siluanov told CNBC that Russia has not received a request from Greece for assistance, but his comments come days after the anti-E.U. party Syriza won parliamentary elections, vowing to renegotiate aid packages from the bloc that are tied to strict austerity measures.

“We can imagine any situation, so if such petition is submitted to the Russian government, we will definitely consider it,” he said, “but will take into account all the factors of our bilateral relationships between Russia and Greece, so that is all I can say.”

The Greek government’s clash with the E.U. over its debt risks cutting the country off from euro zone lenders and private investors. That could create an opening for Russia to expand its influence in Greece—an ugly prospect for the E.U. as it engages in a sanctions battle with Russia over the conflict in Ukraine.

E.U. foreign ministers agreed on Thursday to impose a new round of sanctions, according to the Associated Press, apparently overcoming for now concerns from the new Greek government about expanding the rift between the EU and Russia.

[CNBC]

TIME U.S.

Watch How the AK-47 Came to Be ‘Made In America’

In early 2015, a U.S.-based company got the green light to start producing what is perhaps the world's most recognizable assault rifle

TIME North Korea

Russia Confirms North Korea Leader’s Visit in May

TO GO WITH Oly-2012-PRK,FEATURE(FILES)
North Korean leader Kim Jong-Un saluting as he watches a military parade in Pyongyang on April 15, 2012 . Ed Jones—AFP/Getty Images

Kremlin declined to mention Kim Jong-Un by name, leaving some ambiguity as to whether the reclusive leader himself might attend

North Korea’s reclusive leader, Kim Jong Un, will reportedly make his first official visit abroad this May to attend a World War II commemorative ceremony in Moscow, Russian officials said on Wednesday.

Russia’s presidential spokesperson confirmed that North Korea’s leader was among 20 “state leaders” who plan to attend the ceremony, which will mark the 70th anniversary of the Soviet Union’s victory in World War II, South Korea’s Yonhap News Agency reports.

However, the Kremlin declined to mention Kim Jong-Un by name, leaving some ambiguity as to whether Kim would attend in person or would be represented by his nominal head of state for foreign relations, Kim Yong-nam.

TIME Know Right Now

Know Right Now: Fighting Intensifies in Eastern Ukraine

A weekend of fierce fighting in Ukraine's embattled Donbass region continued Monday

A weekend of fierce fighting in Ukraine’s embattled Donbass region continued Monday as pro-Russian insurgents encircled Ukrainian government troops in a new advance. The war of words heated up, too, as Russian President Vladimir Putin accused Kiev of relying on a “foreign legion” to wage war against the separatist militias. NATO Secretary-General Jens Stoltenberg called Putin’s comments “nonsense.”

TIME U.K.

Putin’s ‘Mafia State’ Under Examination in U.K. Inquest Into Spy’s Radioactive Death

BRITAIN-RUSSIA-BRITAIN-POLITICS-SPY-CRIME-FILES
Former Russian intelligence officer Alexander Litvinenko is seen on Sept. 14, 2004. Martin Hayhow—AFP/Getty Images

The High Court in London opens a 10-week hearing into the 2006 death of the former Russian intelligence officer and MI6 informant Alexander Litvinenko

It took Alexander Litvinenko 23 painful days to die. It has taken another agonizing 2,987 days for the British government to open a public inquiry into his murder, a process that cannot deliver justice to the victim, his widow Marina or son Anatoly, but may at least provide an official account of events leading up to his death. As he lay dying after ingesting radioactive polonium-210, Litvinenko blamed the Kremlin. The Kremlin rejected blame. Britain for eight years dragged its heels, reluctant to push for answers that might complicate its relations with Russia.

Yet the evidence expected to unfold at the High Court in London over the next 10 weeks is likely to reveal not only an intricate web of relationships between spies and diplomats, Kremlin loyalists and dissidents, but also a startlingly simple truth. Russia, in the era of Vladimir Putin, has rarely proven susceptible to diplomacy.

That realization may finally have helped to sway Britain’s Home Secretary Theresa May from her 2013 refusal to hold a public inquiry. An inquest into Litvinenko’s death had already been abandoned apparently for fear of causing a breach with Moscow. In a letter explaining her decision to block the inquiry the coroner had recommended in its place, May cited concerns over the potential impact on “international relations.” Last summer, however, May revealed a change of heart. Her announcement of a public inquiry came less than a week after the shooting down of Malaysia Airlines Flight MH17 over eastern Ukraine, an act Ukraine (and much of the rest of the world) attributed to pro-Russian separatists. Russia accused Ukraine. Whitehall sources told the BBC that the timing of the May’s announcement was “a coincidence.” That may be true, but Britain has substantially toughened its stance toward Russia since then, as have other Western countries including the U.S. where on Monday an alleged Russian spy was arrested in New York.

Litvinenko’s strange tale speaks to a world in which the public handshakes between country leaders count for little. In 1998 he broke ranks with his then employer, Russia’s spy service the FSB, alleging a state-sanctioned plot to assassinate the Kremlin-insider-turned-critic Boris Berezovsky (whose eventual death, last March, raised questions, attracting an open verdict). Litvinenko sought asylum in the U.K. in 2000 and forged close links with Berezovsky and other figures unpopular with the Kremlin, including the investigative journalist, Anna Politkovskaya, slain just weeks before Litvinenko. But he also retained friendships with some of his former colleagues and during a meeting at a London hotel with two such men, Andrei Lugovoi and Dmitry Kovtun, allegedly drank tea spiked with polonium-210. Britain’s Crown Prosecution Service named the pair as suspects in the killing, respectively in 2007 and 2012. Both men deny involvement and Russia has continued to refuse their extradition.

The polonium apparently left traces that enabled the Metropolitan Police to trace its progress around London. On the first morning of the public inquiry, Robin Tam QC, counsel to the inquiry, revealed that there may have been an earlier attempt to poison Litvinenko in October 2006 that failed. The inquiry will seek to reveal many other hitherto invisible trails and connections but key parts of the evidence will also be heard in secret. Britain may be more willing to risk Kremlin anger than it used to be, but details of Litvinenko’s later work as an informant to the British foreign intelligence service MI6 will not be publicly aired, and other matters deemed diplomatically sensitive will also be considered in private.

Despite these strictures, Litvinenko’s widow Marina, who campaigned for the inquiry, told broadcaster Sky News that she hopes the process will lead to the truth. The inquiry will weigh alternative theories: might Litvinenko have died at the hand of agencies other than the Russian state, such as organized criminals, Chechen separatists, Berezovsky’s associates, the British secret services or even by his own hand? Ben Emmerson, the counsel representing Marina Litvinenko, gave an opening speech to the inquiry forcefully rejecting these scenarios. “The startling truth, which is going to be revealed in public by the evidence in this inquiry,” he said, “is that a significant part of Russian organized crime is organized directly from the offices of the Kremlin. Vladimir Putin’s Russia is a mafia state.” Marina Litvinenko told Sky News a key part of the truth is already clear: “I know my husband was killed, I saw how it happened. It was a torture. He died a long 23 days in front of me, in front of his son, in front of his friends.”

TIME Ukraine

Moscow and NATO Trade Barbs as Fighting Intensifies in Ukraine

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Azif Alikberov recovers in a hospital after being wounded as fighting erupted in Mariupol, Ukraine on Jan. 26, 2014. Oleksandr Stashevskiy —AFP/Getty Images

Putin continues to blame a "NATO foreign legion" for the war in Ukraine, while the alliance says Russia is responsible for the resumed fighting

Clashes continued to escalate in Ukraine’s war-torn Donbas region Monday after a weekend of fierce fighting and shelling in the country’s southeast rendered a five-month-old peace accord all but dead.

On Monday, pro-Russian insurgents encircled a government garrison in the town of Debaltseve that lies along a main road and rail route between two vital rebel strongholds in Donetsk and Luhansk, according to Reuters.

The Ukrainian government has declared the imposition of emergency rule in the embattled Donetsk and Luhansk regions and placed the entire country on “full readiness,” according to President Petro Poroshenko’s office.

Moscow continued to saddle Poroshenko’s office with responsibility for the conflict this week, and chided his administration for refusing to engineer a political settlement with Kremlin-aligned forces that have effectively seceded from the state.

On Monday, Russian President Vladimir Putin accused Kiev of relying on a “foreign legion” to wage war against separatist militias.

“Essentially, this is not an army but is a foreign legion, in this particular case, a NATO foreign legion, which is not pursuing Ukraine’s national interests of course,” Putin told students at St. Petersburg’s Mining University.

NATO Secretary General Jens Stoltenberg later dismissed Putin’s accusation as “nonsense” following an emergency meeting with the alliance’s ambassadors and Ukrainian diplomats in Brussels — the first such session in six months.

At a brief press conference following the meeting, Stoltenberg lambasted the Kremlin for allegedly providing insurgent forces in southeast Ukraine with advanced heavy artillery, tanks, armored vehicles and manpower in recent weeks.

“We call on Russia to stop its support for the separatists immediately,” he told reporters.

Over the weekend, Human Rights Watch accused Russian-backed forces of launching a “salvo of unguided Grad rockets” that struck the government-held port of Mariupol and resulted in dozens of deaths. The organization described the assault as one of the most lethal attacks on civilians since the pro-Russian uprising first erupted in southeastern Ukraine last April.

The U.N. Office for the Coordination of Humanitarian Affairs claims that more than 5,000 people have been killed and at least 900,000 displaced since fighting first flared. An additional 600,000 people are believed to have fled the country.

TIME Justice Department

Sloppy Russian ‘Spymasters’ Burn a Deep Cover Operative in New York

Busted in the Bronx, he faces 20 years in prison.

Monday was a bad day for Evgeny “Zhenya” Buryakov, the alleged spy arrested in the Bronx for his role as a deep cover case officer in a Russian ring targeting female university students, business consultants and the operations of the bank at which Buryakov worked. But it was an even worse day for his alleged spymasters, two Russian officials operating under diplomatic immunity who come across as sloppy, bureaucratic buffoons in the Justice department complaint detailing the alleged conspiracy.

Buryakov nominally faces up to 20 years in prison on two charges of acting as a foreign agent. But practically speaking he will only have to cool his heels in a U.S. jail for a few weeks or months until officials in Moscow find a suitable American operative to arrest and trade for him. Thereafter, he’ll likely return to Moscow, and given what appears to be fairly entrepreneurial work as a deep cover agent in New York, he can probably expect to thrive in the public or private sector there.

His two bosses, on the other hand, broke basic tradecraft rules and exposed Buryakov’s work, as well as other intelligence efforts by the Russian espionage services, according to the complaint. Both have already left the U.S. for other assignments. And while the days of banishment to Siberia for failed spy-handlers are long gone, the two at least face a grim professional future of pushing paper in the bowels of the Russian Foreign Intelligence Service in Moscow.

Buryakov was a particularly valuable asset known as a “NOC,” operating under “non-official cover,” according to the complaint. A regular employee of a bank in New York, with no diplomatic immunity, he was able to gain valuable economic intelligence that a Russian government official—even one pretending to be a normal diplomat not a spy—wouldn’t have easy access to, according to the complaint. Placing and maintaining NOC’s is one of the more challenging aspects of running spies in a foreign country.

But Igor Sporyshev, a Russian Trade Representative in New York, and Victor Podobnyy, an attaché to the Russian United Nations mission, managed to expose Buryakov by calling him on an open phone line and by using his true name in a conversation in the New York offices of the Russian Foreign Intelligence Services (SVR) which were apparently being bugged by the FBI’s counterintelligence division.

Even before they outed their deep cover man, the two come across as buffoons in the complaint. In April 2013, the Justice department recounts, Podobnyy tells Sporyshev how disappointed he is at how boring the life a spy runner is, contrasting his life with a James Bond movie. Sporyshev responds that he always “thought that at least I would go abroad with a different passport,” according to the complaint.

The two men also discussed their attempts to recruit young women from a financial consulting firm and from a major university in New York, which a Justice Department official identifies as New York University. Sporyshev blusters that “in order to be close you either need to —k them or use other levers to influence them to execute my requests. So when you tell me about girls, in my experience, it’s very rare that something workable will come of it,” according to the complaint.

But it is in the exposure of the NOC Buryakov that Sporyshev and Podobnyy really shine. First, in May 2013, Sporyshev calls up Buryakov over a phone that was being monitored by the FBI and announces that he needs his help. Sporyshev says a Russian news organization acting on behest of the SVR wants to know what questions to ask a source about the New York Stock Exchange, the complaint claims. Sporyshev says he needs the questions in 15 minutes.

Twenty minutes later, according to the complaint, Buryakov calls back and tells Sporyshev the news organization should ask about how Exchange Traded Funds could be “mechanisms of use for destabilization of markets” (Buryakov has to correct Sporyshev who thinks he says “stabilization”). Buryakov also points Sporyshev towards the issue of automated trading robots, and says he could also ask about the interest of NYSE participants in products tied to the Russia.

Buryakov later shows himself to be entrepreneurial in his efforts. In November 2012 and March 2013, he attended conferences in a foreign country for the bank he worked for, and gathered intelligence about a potential airplane deal that could benefit Russia, the Justice department alleges. The deal was potentially a good one for Russia as it would bring jobs and technology, but unions in the company’s home country were resisting, the complaint says.

Buryakov drafted and submitted to Sporyshev and Pobodnyy a proposal recommending that the SVR’s “Active Measures Directorate” take steps “towards pressuring the unions and securing from the company a solution that is beneficial to us,” according a recording the FBI made of a conversation between the two spy-runners in the SVR offices in late May 2013.

Having a deep cover operative who is capable of getting inside a potential trade deal and is clever enough to see how it might be positively influenced is, despite what movie watchers like Sporyshev and Pobodnyy might think, an unusually fortunate set of circumstances for a spy service. But the bureaucratic Pobodnyy hesitates, according to the complaint, because the action is taking place in the country Buryakov visited for the conference:

VP: It’s strange to offer a [Country-2] proposal from New York.

IS: Why?

VP: It’s considered bad taste. What the —k? Can’t [Country-2] sort this out?

Ultimately, Buryakov’s aggressiveness tripped him up. In the summer of 2014, the complaint alleges, Buryakov met a wealthy investor looking to develop casinos in Russia and willing to trade U.S. Treasury documents he’d obtained from a friend in exchange for help setting up a deal—a plot-line worthy of “American Hustle.” The investor was in fact an undercover FBI agent.

But if Buryakov was naïve, his handlers didn’t do much to protect him. Sporyshev said it sounded like “some sort of a set up. Trap of some sort.” But rather than warning Buryakov off, Sporyshev told him to go ahead and meet an associate of the “investor”: “You will look and decide for yourself.” Later in the summer, Buryakov allegedly received documents purporting to be from the U.S. Treasury regarding sanctions against Russia and passed them along to Sporyshev at a clandestine meeting.

Acting as a foreign agent without registering with the Justice department is a crime in the U.S., as is receiving coded documents and passing them along. And now Buryakov is under arrest.

TIME National Security

Feds Accuse Three of Being Russian Spies in New York City

The suspects allegedly discussed methods to recruit local New Yorkers by falsely promising rewards in exchange for private documents

Attorney General Eric Holder charged three Russian citizens with conducting economic espionage in New York City on Wednesday, according to a complaint that details secret meetings, coded dispatches and attempts to recruit local citizens into the spy ring.

The complaint alleges that three Russian operatives met on at least 48 occasions in clandestine locations in Manhattan and the Bronx from March 2012 to September 2014. The suspects allegedly discussed methods to recruit local New Yorkers by falsely promising rewards in exchange for private documents.

Evgeny Buryakov, 39, stands accused of gathering field intelligence on topics ranging from U.S. sanctions against Russia to developments in the alternative energy sector. He allegedly gathered the information while posing as a private employee of a Russian bank.

Igor Sporyshev, 40, a trade representative of the Russian Federation to the United Nations, is accused of relaying covert assignments from Moscow, while partnering with Victor Podobnyy, 27, a diplomatic attache, to analyze the “the fruits of Buryakov’s intelligence-gathering efforts,” according to a complaint filed by the Department of Justice.

Potential recruits included several employees of major companies and young women associated with a major university. “The attempt by foreign nations to illegally gather economic and other intelligence information in the United States through covert agents is a direct threat to the national security of the United States,” said Assistant Attorney General Carlin in a public statement.

An investigation was opened against the three suspects shortly after a 2010 bust of a 10-person Russian spy ring. Buryakov was arrested on Monday in New York, and was due to appear in federal court in Manhattan later the same day. Sporyshev and Podobnyy no longer reside in the United States and have not been arrested. Both were protected by diplomatic immunity while they held their diplomatic positions in the U.S.

TIME russia

Russia’s Credit Rating Downgraded to Junk Status

Vladimir Putin Attends National Forum The State and Civil Society
Russian President Vladimir Putin attends the National Forum "The State and Civil Society" on Jan. 15, 2015 in Moscow, Russia. Sasha Mordovets—Getty Images

Standard and Poor's dropped the country's rating to BB+ from BBB-

Standard & Poor’s rating agency on Monday downgraded Russia’s credit grade by one notch to junk status, citing a weakened economic outlook.

The agency dropped the rating to BB+ from BBB- as it sees the country’s financial buffers at risk amid a slide in the country’s currency and weakening revenue from oil exports.

“In our view, the Russian Federation’s monetary policy flexibility has weakened, as have its economic growth prospects,” it said.

Russia’s economy has been hit hard by the double impact of weaker prices for its energy exports as well as Western sanctions.

The Russian currency tumbled on the downgrade, dropping nearly 7 percent to 68.5 rubles to the dollar.

Standard & Poor’s said that Russia’s financial system is weakening, limiting room for maneuver for Russia’s Central Bank. It said the bank “faces increasingly difficult monetary policy decisions,” while also trying to preserve incentives for growth.

The Russian economy is expected to contract by 4 to 5 percent this year for the first time since President Vladimir Putin took the helm in 2000.

Capital outflows, which averaged $57 billion annually during 2009 to 2013, soared to $152 billion last year. “Stresses could mount for Russian corporations and banks that have foreign currency debt service requirements without a concomitant foreign currency revenue stream,” the rating agency said.

There was no immediate comment to the downgrade by the Russian government, which have sought to play down the anticipated move.

Prior to the announcement, Putin had a meeting with Cabinet members on anti-crisis measures. He said the government should focus on cutting spending, keeping inflation under control and making sure that the country doesn’t waste its hard currency reserves.

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