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This video was brought to you by
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Brilliant. For the past couple of years,
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the Russian economy has looked
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frustratingly invincible to Western
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policy makers. While inflation has
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ticked up higher than the Russian
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central bank would like, it's not been
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unmanageable. And that's in part a
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consequence of the fact that the Russian
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economy has actually been growing at an
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annual rate of about 4% for the past
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couple of years, according to official
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data. However, in recent weeks, it looks
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like the Russian economy has suddenly
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ground to a halt. Russia's official
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growth rate fell to 1.4% 4% in the first
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quarter of this year, down from 5.4% a
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year ago. And highfrequency estimates
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suggest that Russia is now in a
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recession. So, in this video, we're
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going to take a look at why Russia's
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economy has finally stalled and what's
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going to happen next.
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Who's the best politician right now?
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Here our thoughts and argue with us on
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our podcast, The World Leader
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Leaderboard. Find it on the TLDDR
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podcast YouTube channel or in your
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favorite podcast app. So, let's start
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with a quick recap. As we've detailed in
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previous videos, the Russian economy has
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so far outperformed expectations. When
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the West first imposed unprecedented
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sanctions on Russia after the full-scale
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invasion of Ukraine, there was a
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widespread consensus that the economic
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dislocation plus the collapse of the
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ruble would bring the Russian economy to
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its knees. However, that's not quite
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what's happened. While there was some
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turmoil and the ruble did fall, both the
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ruble and the wider Russian economy
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quickly recovered. In fact, the ruble
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recovered from a low of $130 for the
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dollar in March of 2022 to about 60 to
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the dollar later that year, stronger
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than it was prior to the invasion of
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Ukraine. And while the Russian economy
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did suffer a slight recession in 2022,
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contracting by 1.2%, it promptly
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returned to growth, growing by 4.1% in
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2023 and 4.3% in 2024. This actually
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made Russia one of the best performing
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large economies in the world over this
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time period with growth rates more than
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double that of most European economies.
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So how did this happen? Well, some of it
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was a consequence of savvy monetary
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policy which mitigated the immediate
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impact of sanctions. Russia's central
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bank immediately hiked its benchmark
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interest rate from 9.5% to 20%. making
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it more attractive to hold rubles and
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help the Kremlin enforce stringent
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capital controls to stop money from
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fleeing Russia, including limiting the
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number of rubles on official exchanges,
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banning foreign investors from selling
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their Russian investments, and requiring
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exporters to convert 80% of their
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foreign exchange reserves into rubles.
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This prevented a bankrun style crisis,
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kept inflation down to manageable
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levels, and bolstered consumer and
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business confidence. However, all of
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this was mostly driven by a steep
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increase in government spending, which
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was in turn funded by oil and gas
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revenues. Now, even though sanctions did
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force Russia to sell its oil and gas at
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a discount, prices were high enough in
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2023 and 2024 for the Kremlin to still
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turn a tidy profit. And this allowed
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Russia to increase its military spending
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to about 8% of GDP, accounting for
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nearly a third of the federal budget. At
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the same time, there's good evidence to
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suggest that the Kremlin was forcing
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banks to lend money to businesses
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involved in the war effort at favorable
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rates, further stimulating the economy.
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This government-ledd stimulus was the
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main driver behind Russia's recent
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economic growth and the reason that this
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recent spurt of growth has mostly been
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driven by the manufacturing and
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construction sectors, which are the most
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directly involved in the war effort.
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However, all of a sudden, it looks like
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the Russian economy is finally stalling.
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We first got a good hint of this last
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month when Goldman Sachs's highfrequency
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index of the Russian economy, which
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basically uses a whole load of
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constantly updating data to produce a
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real-time estimate of Russia's economic
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performance and which has broadly
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tracked Rostat's official GDP numbers,
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went negative for the first time since
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the invasion, suggesting that Russia has
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suddenly slipped into recession. While
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the most recent batch of official data,
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which was published over the weekend,
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wasn't quite as pessimistic, Rosa
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nonetheless admitted that according to
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provisional estimates, the Russian
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economy grew by just 1.4% yearonear in
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the first quarter of 2025, down from
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3.3% in the previous quarter and below
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analyst estimates of
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1.8%. So, what's actually going on here?
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Why has the Russian economy slowed down
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so dramatically? Well, as we see it,
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there are three obvious reasons. The
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first is that the state-led
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reorientation of the Russian economy
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onto a war footing has essentially
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finished. Over the past couple of years,
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the Russian state has been plowing money
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into the economy, building factories to
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build weapons and employing people to
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work in those factories. However, 3
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years into the war and this transition
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is basically complete. The factories
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have been built, military spending can't
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increase much more, and there aren't
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that many more young men left to employ.
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This means that this government-ledd
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stimulus has essentially flatlined and
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is no longer driving GDP growth. The
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second reason is monetary policy. This
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increase in spending has meant more
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demand for goods and more money in
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circulation, which has in turn pushed up
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prices and caused inflation. This also
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created demand for workers in sectors
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like construction and manufacturing. A
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labor pool that was already being
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squeezed by conscription, which has
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meant a tight labor market and some
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pretty steep wage increases, pushing the
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Russian economy into a mild wage price
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spiral. To combat both this wage price
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spiral and the more general increase in
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inflation, which is now running at above
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10% yearonear, the Russian central bank
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has hiked its benchmark interest rate
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back up to a 20-year high of 21%. And it
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looks like this is finally taking its
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toll on growth. And the third reason is
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that this is just a trend you often see
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in high inflation economies. When
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inflation goes up, consumers expect it
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to stay high for some time and they go
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on a spending spree because it makes
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more sense to spend your money now
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before inflation eats away at its real
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value. Think about it. If inflation in
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the UK, for instance, were at 10% and
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stayed there, you'd want to spend your
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cash now, because in a year's time,
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you'd be able to buy 10% less stuff.
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This obviously leads to a short-term
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consumption-led boom. But things quickly
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slow down once households exhaust their
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savings. We saw something similar happen
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in Turkey not too long ago when
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persistent inflation caused Turkish
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households to essentially just spend all
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of their lera as fast as possible,
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creating a short-term but unsustainable
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boom in consumption. Now, it's important
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not to overstate this. The Russian
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economy is nowhere near collapse, and
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the Kremlin isn't going to run out of
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money to feed its war machine anytime
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soon. Nonetheless, it's at least true to
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say that this will give Putin a bit more
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of an incentive to take peace
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negotiations seriously, especially
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because Trump clearly wants an excuse to
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normalize economic relations with
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Russia. And all of this could suddenly
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become a much more pressing and urgent
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problem if oil prices don't recover,
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which seems pretty likely given both the
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prospect of a new Iran deal and the fact
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that Saudi Arabia look intent on pumping
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more oil for the foreseeable future. If
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