Thursday

19th Jul 2018

Column / Crude World

Petropolitics 2.0

  • Putin: Fearful of unrest, some leaders are reading the writing on the wall (Photo: kremlin.ru)

Down to $36 from its peak of $115 a barrel in June 2014, the oil price decline has rattled petrostates around the world.

Russia, which already had a horrendous 2015, saw the rouble reach a record low against the dollar and may witness a budget deficit of 6 percent in 2016.

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Azerbaijan’s manat lost a third of its value in December last year and the country is currently in talks with the International Monetary Fund and World Bank about a possible $4 billion emergency loan. Kazakhstan’s tenge depreciated a whopping 100 percent against the dollar in January alone.

According to the International Energy Agency oil markets risk “drowning in oversupply.”

So, what does a prolonged period of low oil prices mean for petrodictatorships in Europe’s eastern neighbourhood, their domestic stability and that of the wider region? Cheap oil may be great at the pump, but be careful what you wish for.

Putin your (lack of) money where your mouth is

So far, Russia’s leadership is slow to wake up to the new economic reality. When the rouble collapsed, president Vladimir Putin plainly denied there’s a problem.

The rouble’s decline badly affects the purchasing power of average Russians. There is already a growing number of angry homeowners, who bought property on a mortgage denominated in dollars, who demand answers from the government. Since late last year, a group of truck drivers has also been protesting over the instalment of a new road tax system which they feel would badly erode their earnings.

The truckers are particularly incensed that the company awarded the contract to collect the fees is co-owned by the son of one of Putin’s cronies. The protest matters as it is a rare sign of strain on Putin’s working-class support base. Next to eroding people’s savings, low oil prices wreak havoc on Russia’s government finances. In response, the finance ministry has called for cuts of 10 percent.

These measures however are unlikely to suffice. Russia can rely on its financial reserves for a while, but at the current rate - and if oil prices do not recover - the rainy day fund will be depleted by the end of 2016.

A worrying development is that the dire state of Russia’s public finances risks upsetting the contract Putin has with Chechen strongman Ramzan Kadyrov. Kadyrov receives money from Moscow to keep Chechnya stable, and in return is allowed to run it as his personal fiefdom.

In recent weeks, Kadyrov has been issuing unusually vocal threats against the Russian opposition which many view as an attempt to demonstrate his loyalty to Putin, worried as he is that his money may run out.

In another possible sign of how the Kremlin fears the domestic situation may get out of hand, the government adopted a law in December last year allowing the FSB, the Russian intelligence service, to fire into crowds, including at women, children and the disabled, ostensibly to combat terrorism. However, I doubt you would give your security forces such a broad mandate unless you somehow fear your own people.

Flashpoint Central Asia

Regionally, Russia’s economic decline has caused a currency crash throughout Central Asia and prompted migrant remittances to dry up. For Tajikistan, Kyrgyzstan and Uzbekistan - the most remittance-dependent countries worldwide - this represents a serious economic shock. Worse, in time unemployed migrant workers will probably make their way back, only to arrive home where unemployment is already rife.

One does not need a PhD to see how unemployed young males are vulnerable to radicalisation and recruitment by jihadist organisations.

Fearful of unrest, some leaders are already reading the writing on the wall. This month Kazakhstan’s strongman Nursultan Nazarbayev dissolved the lower house of parliament and called snap elections in an attempt to cling to power amid rising discontent. There is no doubt who will win the elections, but Nazarbayev and his colleague from Uzbekistan, Islam Karimov, have a more pressing issue: their age.

Without an adequate successor, the combination of economic decline and growing unemployment may only need a catalyst, say a leader’s death, to spark social unrest.

Further south, in Azerbaijan, president Ilham Aliyev is forced to brace himself for the first period of economic decline under his leadership. Protests over rising prices and unemployment have already broken out in various regions.

So far unrest has remained local. But Aliyev is on high alert. If unable to turn things around, he could resort to another trusted tactic: stir up trouble abroad in a bid to rally people around the flag.

The break-away republic of Nagorno-Karabakh, subject of an unresolved dispute between Armenia and Azerbaijan, saw a flare-up in fighting in 2015. If the pressure on Aliyev mounts and protests become more frequent, one should not be surprised if he decides to up the ante.

Living with cheaper oil

The World Bank predicts that crude prices are to average $37 this year, and with Iran returning to global oil markets, oil prices are unlikely to bounce back soon. What is more, the advent of the American shale revolution has radically altered the fundamentals of the international market.

US shale producers, rather than Saudi Arabia, could become the world’s swing producers, narrowing the oil price bandwidth. Add a rise in renewable energy, and petro-dictatorships have little choice but to live with cheaper oil for longer. However, there are few signs that leaders are prepared to deal structurally with the factors that cause (economic) decline.

Europe and Nato countries, for their part, would be wise to invest more in strategic early warning capabilities. For if oil prices remain depressed for long enough, the eastern neighbourhood can quickly become an even more contentious place than it already is.

The new Crude World monthly column on Eurasian (energy) security and power politics in Europe’s eastern neighbourhood is written by Sijbren de Jong, a strategic analyst with The Hague Centre for Strategic Studies (HCSS), specialised in Eurasian (energy) security and the EU’s relations with Russia and the former Soviet Union

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