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The world is awash in oil, and oil conspiracy theories. Falling oil is a grand, wicked game designed by Saudi Arabia to punish oil-export rivals Russia and Iran. Or it's a conspiracy concocted by the United States and Saudi Arabia together to break Russia. Or a conspiracy authored by Saudi Arabia alone to curtail expensive and expansive U.S. shale oil and Alberta oil sands output.

The credible conspiracy theory is that Economics 101 – supply and demand – is setting the price. There is too much of the former, thanks to shale oil and resurgent Libyan production, and too little of the latter, thanks to slowing economies, rising energy efficiency and the roll-back of oil subsidies in some countries. The equation is producing as many winners as losers, but it is the losers that we should be worried about, and they would be the oil exporters. Countries that are overly reliant on oil to fund their budgets – the one-product wonders – tend to get stressed out and embark on strange and disturbing adventures.

Which brings us to Russia, patriae non grata in the Western world, thanks to its love of Crimean real estate, eastern Ukraine and bits of the planet you never heard of, like Abkhazia, a de facto independent region of Georgia.

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Russia is the third biggest oil producer, just behind the United States (yes, the United States, thanks to its ocean of shale oil) and Saudi Arabia.

Russia is the second biggest oil exporter, after Saudi Arabia. It should come as no surprise then, that oil is Russia's life blood, its gift to energy-hungry importers like China and India and the main instrument of domestic stability; the higher the price, the greater the social spending, the more popular the Kremlin.When oil prices fall, Russia gets nervous, and with good reason. Oil and gas prices – state-controlled Gazprom is the world's biggest gas exporter and ties its contract prices to oil – can make or break the Russian economy. The Russian economic collapse of the 1990s was largely driven by sinking crude prices, which hit $11 (U.S.) a barrel in 1998. Russia duly defaulted that year, wiping out most of its banks and sending the ratio of national debt to gross domestic product to more than 80 per cent. To this day, more than a few Russian and former Soviet officials think the United States somehow pushed the price down to cripple Russia.

Russia was spared from outright destruction when prices reversed themselves and galloped to $147 before the 2008 financial crisis hit. The oil-revenue gusher pushed down Russia's debt to GDP to a mere 10 per cent (it's now 11 per cent, compared to about 90 per cent for the euro zone) and allowed president Vladimir Putin to embark on lavish spending sprees, like dropping $50-billion (U.S.) on the 2014 Sochi winter Olympics and $20-billion to renovate Vladivostock for the 2012 Asia-Pacific Economic Co-operation Forum.

Russia is vulnerable to big price swings because almost half of the Russian budget is financed by energy export revenues. It has been widely reported that the state draft 2015 budget assumes $100 oil (speaking in Milan last week, Mr. Putin said the budget is based on $96 oil, but it wasn't clear whether he was talking about the current year or the next year). Both figures are well above current world oil prices – about $86 – which are down more than 20 per cent since June and could go lower since Saudi Arabia shows no interest in curtailing production to support prices.

If this were a different time, Russia would not worry. Besides a low national debt, it has a built-in shock absorber in the form of a currency – the ruble – that can be, and is being, devalued (oil is priced in U.S. dollars). The country also has some $450-billion in reserves.

For Russia, the glitch is that oil prices are falling just as the United States and European sanctions, and the retaliatory sanctions imposed by Russia, are making life difficult for Russian businesses and consumers. Russian companies are having trouble financing themselves. The ban on Western technology exports has already killed off a joint venture between France's Total and Russia's Lukoil to explore for shale oil in western Siberia. In an ominous move, state-controlled oil giant Rosneft, hurt by the low oil price and the sanctions, this month asked for about $50-billion in assistance from Russia's National Wealth Fund. Novatek, a private natural gas company, did the same.

Inflation is running high as the ruble tumbles and Mr. Putin launches a "buy Russian" campaign. Forcing businesses and consumers to buy often more expensive and less efficient local products – import substitution – is typically unproductive.

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It comes as no surprise that forecasts for Russian growth in 2015 are being scaled back to about 1 per cent, compared to 4-per-cent-a-year between 2010 and 2012, and a recession is not out of the question. To cope with the stress of an underfunded budget, Russia may have to follow the dismal euro zone model – cut spending, raise taxes or both. This is called austerity and we all saw how popular that was in Europe. Austerity translates into lower living standards, which won't win the Kremlin leaders any popularity contests.

The question is whether Mr. Putin will concoct a diversionary conspiracy theory of his own to deflect attention away from his ailing economy and any austerity measures. The Ukraine crisis actually raised his popularity among Russians. Another chilling geopolitical move should not be ruled out if oil keeps falling.

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