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Commodity Bust To Bring Down Russia?

Walter Russell Mead, Via Meadia

There’s a must-read today from energy visionary Daniel Yergin in the Wall Street Journal. He analyzes the implications of the end of the commodity “supercycle”—the rising commodity prices, caused by surging demand in places like China, that have brought rapid GDP growth to several key players in the global economy. Some history:

The supercycle began a decade ago, in the middle of 2003. China had already reported two decades of 10% annual economic growth. In 2000, its growth began to speed up, fueled by a tilt toward heavy industry. The rapid pace of industrialization and urbanization led to accelerating demand for copper, iron ore and other commodities. China’s economy grew almost two and a half times from 2003-12. Hence it’s gargantuan appetite for commodities to fuel its industrial machine and support the shift of 20 million people a year from the countryside to cities.

The world’s commodity-supply system, accustomed to excess capacity and weaker demand for its products, was not ready. Something had to give, and that something was price. Commodity prices took off at a breathtaking pace. There was a stumble at the beginning of the recession in late 2008. Then, as Beijing’s massive stimulus kicked in, China’s economy roared back and so did the hunger for commodities. Copper prices reached their peak in 2011—six times higher than in 2003. China was consuming about 40% of the world’s copper, up from less than 20% in 2003.

As Yergin notes, this locomotive is running out of steam. China’s outsized appetite for raw materials seems to have been sated, with its leaders indicating that growth may be more moderate and powered by domestic consumption in the coming years. We’ve already noted that this slowdown is being felt in places like Australia and Brazil. Yergin wisely adds Putin’s Russia to the list of countries that will be feeling the pinch in the coming years.

Putin has been dancing on a knife’s edge in foreign policy. His deft bluffing and exploitation of President Obama’s errors have enabled him to position himself as an important player in the Middle East, and therefore in world politics as well. But Russia’s future is delicately balanced, at best, and its fortunes are intimately tied to the commodities markets.

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