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Falling oil prices shake economies of Iraq, Russia

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Alexander Zemlianichenko/AP

(Read caption) People walk past a sign advertising currency exchange rates in Moscow on Friday. The ruble hit another record low against the dollar even after Russia's Central Bank sought to ease the selling pressure on the currency by raising interest rates again.

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The plunging price of crude oil on international markets has been hailed by consumer analysts who say Americans who are spending less on gasoline and other petroleum products have more to devote to Christmas shopping.

And if the burgeoning US energy sector is groaning that falling oil prices are a disincentive to invest in new infrastructure, the US economy as a whole stands to benefit from a consumer-based stimulus.

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But around the world the dramatically lower prices are having an adverse affect on the economies of oil producing countries from Russia to Iraq, with some analysts saying even that the decline in the purchasing power of the ruble and living standards in Russia could pose a political peril for President Vladimir Putin.

On Friday, the global decline seemed destined to continue, with the price of Brent crude oil falling to its lowest price since July 2009 and the International Energy Agency, which coordinates the energy policies of industrialized countries, predicting that the demand for oil would grow at a slower rate in 2015 than anticipated. The IEA also said increased production from non-OPEC countries would aggravate the oil glut, Reuters news agency reported.

In the Middle East, the falling oil prices and the cost of fighting the Islamic State have created a cash crisis in Iraq that could affect its ability to make its last war reparations payment of $4.6 billion to Kuwait, Reuters quoted Iraqi Finance Minister Hoshivar Zebari as saying.

Since Iraq was first allowed to resume oil sales nearly two decades ago it has paid funds into a United Nations body overseeing compensation for looting and damage inflicted during Saddam Hussein’s seven-month occupation of Kuwait.

More than a million claimants have been paid and nearly all the $52.4 billion reparations bill has been met through Iraq's annual allocation of 5 percent of crude oil exports to the UN Compensation Commission (UNCC).

But with its economy now set to shrink for the first time since the 2003 U.S.-led invasion toppled Saddam and ended more than a decade of sanctions, Iraq can ill afford to divert a large chunk of the 2015 budget to make that last payment due next year.

"We have been really committed to paying this on time up until now," Zebari said in a telephone interview conducted on Thursday. "We are in discussions with the Kuwaitis, trying to defer the payment for two years or at least a year, to allow some space... to present a realistic budget."

One country where the impact of falling oil prices is being felt especially strongly is Russia, an energy producing giant whose economy has been stung by Western sanctions over Mr. Putin’s policies in Ukraine. On Friday, Reuters reported, currency traders said the central bank was intervening to prop up the value of the ruble, down more than 40 percent since the beginning of the year, after an earlier hike in interest rates had failed to halt its decline.

In an article on Putin’s latest state of the nation address, in which he accused the West of taking advantage of the Ukraine crisis to further its primary campaign of weakening Russia, The Economist said Russians “are tiring of news about Western aggression” and that “what most Russians really need is news about the unfolding economic crisis.” Putin’s current popularity, The Economist said, could change faster than many expect.

The continuing fall in the rouble, eroding living standards and a sharp rise in food prices are worrying people far more than the fate of separatists in Ukraine. Now that sanctions are starting to bite, enthusiasm for war and isolation is diminishing fast. “Cognitive consonance between propaganda and people’s self-feel does not withstand external shocks,” says Mikhail Dmitriev, head of New Economic Growth, a think-tank.

Over the past nine months opinion polls find that support for the presence of Russian troops in Ukraine have fallen from 74% to 23%. Many who dismissed Western sanctions as irrelevant now fret over Russia’s isolation. “The sanctions are working,” says Lev Gudkov, head of the Levada Centre, an independent pollster. The consumers who have emerged in Russia’s big cities in the past decade are “not prepared to tighten their belts,” he adds. This does not mean that such people are prepared to sacrifice their consumption for civic freedoms, either.

Despite growing anxiety about living standards, Mr Putin’s popularity rating remains at record levels. Yet, as the street protests in 2011 showed, this could change quickly. Polls show that the overall view of the state as corrupt and uninterested in the people remains as strong as ever. Mr Putin is aware of the dangers. To sustain his position, he needs the West to start lifting sanctions so as to induce more economic growth in Russia, but he also has to keep up the appearance of an enemy both within and outside. To achieve this Mr Putin might yet surrender the east of Ukraine while keeping Crimea.