On December 4th, President Putin made a speech to the Russian Parliament, in which Bloomberg quoted him as declaring that Crimea has “invaluable civilizational and even sacred meaning for Russia, like the Temple Mount in Jerusalem for the followers of Islam and Judaism...And this is how we will always consider it.”
Reading between the lines, one might interpret this an the opening gambit in a proposed deal. If Crimea is sacred, then is Russian-occupied eastern Ukraine also sacred? Well, maybe not. Indeed, one might garner the impression that Putin might be willing to trade occupied Ukraine for Crimea. If that's the case, it's a deal worth making.
At present, Russia is being slowly strangled by sanctions and low oil prices. The ruble has plummeted in value, inflation is surging, and western products are increasingly scarce on Russian shelves. If the situation is not resolved, then Putin could lose his job, or in the better case, find his and Russia's prospects unappealingly dreary. He has an incentive to negotiate.
But so does the West. As the graph below shows, countries with exposure to Russia--for example, Germany, Finland, Austria and Hungary--have seen deteriorating macro fundamentals since the beginning of the Ukraine crisis. To put a number to it, the crisis appears to be knocking about 1 percentage point of GDP off the growth rates of the exposed countries, and indeed, has been threatening to send Germany back into recession. Resolving the Ukrainian crisis would help northern European growth rates, a policy priority there at present. Putin is not the only one with a reason to negotiate.
Annualized Real GDP Growth, Quarter on Previous Quarter, Select Euro Country Groups
Source: Eurostats, OECD
There is a window for a deal now, but it might not last. Oil prices are stunningly low and are expected to remain depressed for some time. But they might not. As I have stated earlier, I believe that a large volume of conventional production is at risk around the globe which will start rolling off in late Q1 2015, setting up the prospect of a price rally by next summer. If prices return to levels more typical of the last few years, the West's negotiating power will weaken and Putin's will strengthen. Europe's economies will once again be facing high oil prices and slower growth; and Putin's treasury will be re-filled. Thus, the time to do a deal is now.
Not alone do I hold this sentiment in the oil business. Oil field services giant Halliburton virtually leapt on industry No. 3 player Baker Hughes within just a month of the fall in oil prices. This week, reports are surfacing that Shell is contemplating the acquisition of BP (which will in fact be consummated, in my opinion). Why this rush to acquire in the industry? Fundamentals are part of it, but underneath it all, the oil majors and service companies do not believe current oil prices are sustainable. And they may not be sustainable for even longer than a few months. Therefore, companies like Shell and Halliburton want to seize the opportunity to make timely acquisitions while valuations are depressed. They a rushing to action because the opportunity might not last.
This same logic holds for negotiations with Russia. The time to make a deal is while Putin has a weak hand. For the next four or five months, this is a virtual certainty. After that, the climate could change.
Putin needs a deal. He wants to be remembered as Putin the Great, not Vlad the Destroyer. To achieve his vision, he must regain his standing with the West. To me, his speech signals that he will do a deal, and if that interpretation is correct, then the time to act is now.