I just listened to episode 288 of Common Sense with Dan Carlin, “Re-heating the Cold War”, from February 20. He was talking about Russia’s potential strategy of having local Russian separatists act as “ambiguous” proxies for them. This is a strategy that NATO would have a lot of trouble dealing with militarily, and he believed that the West’s treatment of Russia as an inconsequential country was ignorant and dangerous. While listening to the episode, I wondered what had happened to that.

The answer: the price of oil had already dropped 50% since mid-2014, causing (along with sanctions) Russia’s GDP to fall  by almost 11% in 2014. It wasn’t clear then that the price would stay low, but now it’s down to under $35 a barrel, a 65% drop from where it had been in 2014. Oil exports account for 17% of Russia’s GDP but far more of the government’s revenue. In 2013, oil accounted for almost 70% of Russia’s exports. As a result, the Ruble has fallen in near lock-step with oil prices, causing inflation in Russia to jump from a little over 6% at the beginning of 2014 to around 16% despite their contracting GDP. To make matters worse, Russia’s recent falling out with Turkey has resulted in the cancellation of their only plausible alternative route by which to deliver gas to western Europe.

So did the US just get lucky? I doubt it, unless you call ISIS “luck.”

Some mistake ISIS and Saudi Arabia as “birds of a feather” because they are Wahhabis. When it comes to the Saudi people and the younger princes, this is not that far from the truth. However, for the ruling old guard al-Sauds, the perception of ISIS as “better Wahhabis” by many Saudis presents an existential threat. Defeating ISIS is by far the House of Saud’s top priority. In comparison, getting a lower price per barrel for their oil is irrelevant, especially because pumping at full capacity maximizes the revenues they can spend on keeping their subjects happy and bolstering their military. At the same time, a lower oil price hurts their traditional competitors, Iran, and it makes the US happy by hurting Russia and Venezuela. In fact, many credit lower oil prices for the thawing of US relations with Cuba, since Venezuela’s ability to subsidize Cuba has been drastically reduced.

My guess is that the US has told the House of Saud that it would gladly take care of their mutual enemy ISIS provided the Saudis kept the oil flowing. I suspect they’ve made similar assurances to Turkey in exchange for scuttling the Turkish Stream pipeline project, which was already on the rocks before their recent downing of a bomber let each side blame the other for cancelling it. This leaves Russia with little choice but to make nice with Ukraine and the EU if it wants any chance of selling more gas to western Europe.

Sure, lower oil prices hurt US energy companies. But despite now being the largest oil producer in the world, the US is still a net importer of oil, and cheap oil prices have contributed to the US’s economic recovery. Were oil still near $100/barrel, there’s no chance the Fed would have finally decided to end their 7 year zero interest rate policy yesterday. And the most vulnerable energy companies are smaller highly-leveraged fracking companies. But guess what? The government has been guaranteeing their loans since 2013.

This “oil for bombs” strategy is the US’s response to Russia’s “they’re just ethnic Russians who want their independence” strategy. And it’s clearly working. Putin seems to have forgotten that the USA is an economic empire far more than it is a military one. The USSR didn’t collapse because the US out-gunned them; they fell because the US out-produced and out-spent them. And while the US may not be a bastion of freedom, its system still beats Russia’s cronyism hands down.

Sure, it could all just be a lucky set of coincidences. I’m not sure how much it matters whether it is or not. I feel bad for Russians, though. They bet on the wrong horse with Putin, and Putin made a huge mistake when he decided to put all of Russia’s eggs into the energy basket instead of using Russia’s massive talent base and diversifying more into high tech. Instead, I meet countless smart, well-educated former Yandex employees working at Facebook and Google. Russia still has the chance to switch gears, but it will be starting in a much worse place because of Putin than it otherwise would have.