The swift drop in the price of oil is realigning global economic power — and might help President Obama achieve some of his foreign policy goals.
The precipitous fall in oil prices, which is hammering countries heavily dependent upon oil exports, could prod Russia into abiding by a ceasefire in Ukraine, make Iran more pliable in talks over its nuclear program, undercut Venezuela’s influence in the Caribbean, and weaken the finances of the Islamic State.
At the same time, however, other parts of Obama’s foreign policy agenda could become more difficult, including efforts to open up Mexico’s oil industry to foreign companies, promote oil-fueled development in poor nations in Africa, and reduce global fossil fuel use to limit climate change. Brazil, already grappling with a corruption scandal linked to its state-owned oil company, is now uncertain about long-anticipated revenues from ultra-deepwater oil prospects.
Russia, which has been fueling fighting on Ukraine’s eastern front, suddenly finds itself fighting a rear guard action on its own economy. And, as one Russia expert put it, President Putin, instead of reveling in neo-imperial triumphalism over annexing Crimea, is being forced to convince Russians of the need to hunker down in a tough economic period.
The Russian central bank’s stunning hike in interest rates Monday night to 17 percent is designed to stabilize the value of the currency by making it attractive to leave money in Russia’s banks. The size of the increase reflects the difficulty facing the central bank: Half the dollars earned from oil exports has dried up while a record level of private sector capital flight has drained roughly $75 billion out of the country.
All the economic cures for Russia are painful. High interest rates could slow the ruble’s decline, but deepen the country’s economic downturn. The falling ruble is helping to keep the Russian budget in balance, but also fuels rapidly rising inflation.
The drop in oil revenue is far outstripping the impact of sanctions imposed by Western nations upset about Russian support for separatists in eastern Ukraine and Russia’s annexation of Crimea.
“This certainly provides great serendipitous leverage on Iran and on Russia by undermining their government revenue streams and limiting their ability to have both guns and butter,” said David Goldwyn, a consultant to energy companies and former special envoy for international energy affairs at the State Department. “The Russian devaluation is really going to hamstring [Russian President] Putin’s ability to spread wealth to his cronies and meet public needs.”
But some analysts worry that the Obama administration hasn’t considered all the consequences.
“The ruble is in real trouble, the Russian economy is in real trouble,” said Bruce Jones, deputy director of the foreign policy program at the Brookings Institution. But, he adds, “do we understand what happens if we really break the back of the Russian economy? I’m not sure we’ve thought that through.”
The Obama administration and its European allies had planned to gradually ratchet up sanctions if Putin did not act to ease tensions in Ukraine. That way sanctions could be gradually lifted if Russia took needed steps.
“We had a theory that a modulated impact could secure better behavior. Now we’re pushing past that to a more severe response — and not by design,” Jones said.
Russia still has financial resources. It has more than $400 billion in foreign exchange reserves, prudently squirreled away when oil prices were high. But that money could disappear quickly; the government has already spent tens of billions of dollars trying to prop up the currency — money that has disappeared into the pockets of international currency traders.
Moreover, Russia’s leaders are keenly aware of the danger posed by plunging oil prices. Four short years of low oil prices in the late 1980s helped weaken the Soviet Union in its final days, and a couple of years of very low prices led to a financial and currency crisis in Russia, including a debt default, in 1998. The next year, Putin came to power pledging national renewal.
Iran, where oil accounts for as much as 75 percent of fiscal revenues, the government would need an oil price of $127 a barrel to balance its books, according to Jadwa Investments. Now, Iran more than ever needs a deal with international powers on its nuclear program that would end sanctions limiting its oil sales.
“Some people may not like to see the sanctions lifted. Their numbers are few, and they want to muddy the water,” Iran’s President Hassan Rouhani in told a gathering of officials at a Central Bank seminar in Tehran, according to Reuters.
Earlier in the month, he also submitted a new budget, slashing projected oil price from $100 to $72 a barrel. That’s already out of date. On Tuesday, the price of the international benchmark Brent grade of crude oil slipped below $60 a barrel.
“The play with Iran has always been to apply economic pressure and then offer relief,” said Michael Levi, an energy expert at the Council on Foreign Relations. “So more economic pressure puts the U.S. in a stronger position.”
Venezuela, where oil accounts for about half of government revenues, is scrambling to raise money. According to Jadwa Investments, Venezuela has enough foreign exchange reserves to cover only 4 months of imports. Long a patron of poor Caribbean nations — and supplier of oil to them — Venezuela is raising money by selling off the island nations’ debt at 50 to 60 percent discounts to Wall Street investment banks such as Goldman Sachs, according to Goldwyn.
Until recently, Venezuela has extended loans to the region’s governments for 3 percent a year over 20 years, enticing the governments to buy expensive Venezuelan diesel fuel at a 20 percent discount. The strategy got the Caribbean hooked on Venezuelan oil. Now that the financing scheme is falling apart, the region’s governments are desperate for alternatives.
Goldwyn says that for about $2 billion the United States could retrofit power plants in the area to make some more efficient or simply replace others with abundant solar and wind power. And it would box out the influence of Venezuela’s populist, anti-American leaders.
Falling oil prices also threaten the much-needed dribble of money that the Islamic State was earning from smuggling oil over the border with Turkey
But the oil price collapse has also hurt some governments the United States wants to protect, such as Nigeria, a supplier of light, high quality oil to the United States. In addition, Nigeria has been battling Boko Haram, a ruthless group of self-styled Islamists.
Nigeria gets 70 percent of its government revenues from oil taxes and royalties, and when the country set a benchmark price for planning purposes, it chose what seemed to be a conservative number: $78 a barrel. Then oil prices started sinking and it trimmed its forecast to $65 a barrel, higher than current levels.
“The oil price of course has made it tougher for us. But when you have a commodity important in the economy you’re always on edge,” Ngozi Okonjo-Iweala, Nigeria’s economics minister, said in an interview last week.
As it was, the $65 a barrel baseline required the government to increase the 5 percent value added tax and close tax loopholes. Only a quarter of the country’s small and medium sized businesses are registered, and the rest don’t pay taxes. “We have a very large informal sector,” Okonjo-Iweala said.
“When you have oil prices dropping, it means we have to take the requisite measures to manage in an orderly fashion,” Okonjo-Iweala said. “What we don’t want is disorderly. We tried to put in measures that would be tough.”
Correction: An earlier version of this post misspelled the name of Ngozi Okonjo-Iweala, Nigeria’s economics minister.