Moscow got itself into an oil price war with Saudi Arabia, a major gamble for Russia's economy

The value of the ruble plummeted along with the cost of oil, with the currency hitting its lowest level in more than four years Tuesday. That has stirred fears of a recession in Russia, whose economy was already wobbly from sanctions.

None of this is likely to pose any immediate political pitfalls for President Vladimir Putin. The country is in the middle of major overhaul of the constitution that - one way or another - is likely to keep Putin's grip on Russia after his term ends in four years.

Still, there is "high level of uncertainty in Russia," said Marcel Salikhov, director of economic research at the Institute for Energy and Finance, a Moscow-based think tank.

"The economic politics is changing," he said. "The [ruble exchange] rate is volatile and that's why we now have high inflation expectations."

The Organization of the Petroleum Exporting Countries had asked Russia - not a formal member of the cartel - to further cut oil production by around 500,000 barrels a day. The reduction sought to support prices and address a slumping demand caused by the coronavirus outbreak. 

The Kremlin refused, turned the global oil market on its head - and perhaps directly targeting the U.S. shale industry in the process.

The sudden collapse of Russia's OPEC cooperative agreement, called OPEC+, caused a one-day plunge of more than 30% in oil prices Monday as Russia and Saudi Arabia vowed to pump more to compete for market share. It was the biggest one-day decline since 1991. Oil prices moved higher Tuesday.

Why did Russia refuse?

Moscow's motivations appear to be tied to the burgeoning American shale industry, which hasn't been under any obligation to stem production but has been bolstered by OPEC+ propping up prices. 

Russia's state-owned oil producer Rosneft, headed by Igor Sechin, a close Putin ally, has been especially vocal in its opposition to OPEC+. 

"From the point of view of Russian interests, this deal [to cut production] is simply meaningless," Rosneft spokesman Mikhail Leontiev told Russian media, who suggested that any OPEC+ cut would "clear a place" for American shale oil.

"Our volumes are simply replaced by the volumes of our competitors," he said. "This is masochism."

Meanwhile, the Kremlin has denounced U.S. sanctions hampering the conclusion of the Nord Stream 2 pipeline, which would link Russia's gas to Germany and, more broadly, the rest of Europe. Washington has also sanctioned a subsidiary of Rosneft for its ties to Venezuelan President Nicolás Maduro. 

Treasury Secretary Steven Mnuchin met with Russian Ambassador Anatoly Antonov Monday, discussing "compliance with sanctions programs, Venezuelan economic conditions, and the potential for trade and investment," according to the Treasury Department's readout of the talks. 

"Secretary Mnuchin emphasized the importance of orderly energy markets," the statement said.

Mikhail Krutikhin, an energy analyst at the Moscow-based RusEnergy consulting firm, said he doesn't believe Russia's refusal to curb production was related to political revenge but rather the logistical difficulties.

"It's not Saudi Arabia," Krutikhin said. "The Saudis are very flexible in their oil production, but Russia is not."

How do lower oil prices hit Russia?

Rystad Energy, an industry consulting firm, said the effect of the OPEC+ collapse "surpassed even our expectations," dropping to $31 per barrel at the opening of Asian trading Tuesday. 

Monday was a public holiday in Russia, but Russia's energy minister, Alexander Novak, was called to an emergency government meeting.

Russia is reliant on energy exports. "The backbone of the Russian economy," Prime Minister Mikhail Mishustin Krutikhin said. But one safety net is the country's substantial hard currency reserves.

Russia's Finance Ministry said Monday that it could withstand oil prices of $25 to $30 a barrel for six to 10 years, covered by the country's National Welfare Fund, which it says stands at more than $150 billion.

But while Russia says it could survive years of low prices, it also would level a serious blow to the country's GDP, analysts said. 

That's why Novak hasn't ruled out the possibility of a new OPEC+ agreement in the summer. In late December, he stated his support for OPEC+, noting that it brought in more than $83 billion of additional revenue for Russia's federal budget.

"I don't think the ruble is going to recover," Krutikhin said. "It's not good for ordinary Russians who have to rely on imported goods. Russia is very much dependent on imports, and it's going to be a big blow for Russians."

In a surprise appearance at a parliament session Tuesday, Putin made reference to the slumping oil prices, expressing confidence that the "economy will strengthen, and leading manufacturing industries will grow stronger and more competitive."

Lev Gudkov, director of the Levada-Center, Russia's lone independent pollster, said Putin's popularity could take a hit as a result of the economic downturn - though probably not immediately.

"If the crisis continues for a long time, and its impact on the primitive Russian economy is more significant than it seems today, then in two years Putin's popularity will significantly decrease to a critical 25 to 35%," Gudkov said. "Mass illusions about his ability to maintain the status quo in the country will be eroded and noticeably weakened."