Russian President Vladimir Putin with Salman bin Abdul Aziz during an official visit to Saudi Arabia (attribution: kremlin.ru / CC BY 4.0)
Eurasian geopolitics are in uncharted waters. This combined continental land mass is peppered with petrostates, particularly in the Middle East and in the former Soviet Union, who have historically relied heavily on energy exports for economic stability. But conflicts in Syria and Yemen, coupled with struggling Middle Eastern and Post-Soviet economies thanks to $30 oil prices, is threatening this stability. The active involvement of several of these petrostates, like Russia and Saudi Arabia, within these conflicts makes the situation all the more dire. The relevant question for the big men from Moscow to Riyadh in 2016 is: can their countries survive in a world of such low oil prices?
Let’s begin this tour in Moscow. Russia has taken major economic and geopolitical risks in the last two years. They have boded extremely well for Vladimir Putin’s approval ratings, but not for the Russian economy. Putin himself acknowledged that Russia was having a down year, but has said repeatedly that a rebound will happen soon. Most of Russia’s economic woes are directly related to oil prices, since almost all of the Putin-era growth has been predicated on energy exports. Consequently, these market shocks hit much harder than usual for Putin’s economic performance. The BBC reported that the Russian economy loses about $2 billion for every lost dollar in energy prices. That sum alone is peanuts for a G-8 economy, but considering that at this time last year oil was around $45 a barrel in a single-industry economy, the recent price drop is significant.
To weather this low-price storm Russia needs economic diversification. Under the Medvedev regime, Russia took steps to divorce its economic performance from oil markets, but was not successful. Russia’s ability to project its power may be under threat with its largest revenue source drying up.
A year of low energy profits has not caused President Putin to calm his bellicose rhetoric towards Ukraine and the west. It may be too optimistic to expect the energy market to calm Russia’s bellicose demeanor, but with sustained pressure on their economy and spending over time, it will become increasingly difficult for Russia to maintain its status quo. With oil prices diving ever downward, we can already see Russia’s pain laid bare; as of late January, the ruble hit its lowest rate against the dollar in its history.
Much of the future speculation of oil prices is predicated on the re-entry of Iran into the market as US sanctions on the country were lifted on January 16th. Iran, much like its belligerent regional cousins, has vast energy reserves, and is looking to greatly profit from its status as a newfound energy alternative for the rest of the world. In 2015, the World Bank modeled Iran’s re-entry to the energy market, predicting it could cause oil prices to drop by as much as $15 a barrel. Considering this prediction was made with oil at $50 a barrel, it is difficult to accept this premise today. That said, Iranian product is only going to further saturate an already over-supplied market and drive the prices even lower. The prospects for Tehran, however, are still high despite even lower prices, considering they will contribute to an already exacerbated world supply. This does not bode well for established oil producers, but it is likely this will also cause analysts to re-adjust their predictions for Iranian energy profit in 2016 downwards. To hopefully lessen the economic load, Russia itself is attempting to buy into the Iranian energy game by investing in the necessary infrastructure upgrades as they begin to export once again.
The other loser in this newfound world of absurdly cheap energy (and perhaps the biggest loser of all) is Saudi Arabia. Much like Russia, and perhaps more so, Saudi Arabia’s ability to deliver services to its population, engage in proxy wars, or grow their economy is almost entirely predicated on the profitability of oil.
Both Russia and Saudi Arabia have amassed impressive currency reserves for rainy days in the energy market. It is from these sources, much more than oil prices, that they can project their power and influence. Therefore the two countries’ responses to low prices seem to be to find other ways to collect more foreign currency, namely by selling off stakes in their state energy companies: Russia’s Rosneft, and Saudi’s Aramco. These moves gamble on the notion that foreign investors would like to cheaply buy into the eventual profits of each company when the market rebounds. Analysts will have to watch these moves closely to see if the gambling pays off for Moscow and Riyadh.
The winners in a world of $30 oil are undoubtedly the import-dependent non-petrostates throughout Eurasia. Looking at the geopolitics during periods of low oil prices, we can see which countries’ economies lack dynamism. Typically these states couple a single-sector economy with ideology-driven political systems and a stunning lack of democracy. This dynamic can especially be seen with the three states of the South Caucasus (Armenia, Azerbaijan, Georgia), a region which is primed to profit from an economically unhindered Iran. If they play the market correctly, these small states will not only survive low oil prices, but also have the potential to thrive.
Things will rebound, but not immediately
To answer the titular question of this article is difficult, especially since the largest losers have cushioned the shocks against their economies. It is therefore a foregone conclusion that their administrations will survive this downturn. Furthermore, we cannot expect oil to stay this cheap forever. Granted, prices have dropped far lower and stayed down longer than expected. The world is oversupplied and running out of space to put reserves while simultaneously developed economies are transitioning to a larger share of decarbonized and renewable energy each year. With this considered, we cannot expect the inevitable rebound to return us to a world of $100 barrels and with Middle Eastern and Post-Soviet powers running absurdly high profits anytime soon, if ever again.
The true winners of the ongoing price war in oil will be the petrostates that use their still-robust reserves of cash to diversify their economies and attract innovation. Looking at the investment climates can give us small hints about who might come out on top in this regard. Russia is awash in preferential treatment for its Putin-friendly oligarchy, and despite having the strong protections and capital necessary to diversify, it does not seem to be moving in that direction. Petrostates’ men in power can expect a rebound. But more importantly, these powerhouses must prepare themselves for a short time at oil prices that could go as low as $10. Their political survival might not be in question, but the power and influence of petrostates in the near future is certainly in the middle of a transition.