By Anton Evstratov
The sudden oil crisis resulting from the confrontation between Russia and OPEC can affect not only oil exporting countries, but also other states associated with them and become fatal for the entire world economy.
The March 6 talks between Russia and OPEC to reduce oil production resulted in retaliatory actions by Saudi Arabia and its OPEC allies, who opened oil cranes and instantly brought down world oil prices by a third. Already on March 9, during the opening bidding, it turned out that the decrease in the price of Brent crude oil was 30%, and this was not the limit. The price of a barrel of oil tends to a critical level of $ 30, bringing down after itself the exchange rates of the countries somehow connected with this article of export.
Already on March 1, they gave 75 rubles for 1 dollar, and 86 rubles for 1 euro, which is the lowest figure for the Russian currency over the past four years. Russia almost immediately began to lose significant financial resources – the shares of the largest companies in the country fell by 12-15%, VTB and Sberbank lost at least 13-15% of their profits, and the consumer sector – 28%.
However, one must understand that the radical actions of Saudi Arabia and the intransigence of Russia are tactical realities. Strategically, oil prices have been doomed for quite some time. The coronavirus epidemic in China, and then in other countries of Asia, Europe and America (and later Africa) paralyzed a significant part of the transport of passengers and goods, which reduced the need for these countries in fuel.
Oil has become de facto cheaper. The decline in oil prices gradually led to a decrease in prices for other goods, as a result of which a global economic crisis developed. The currencies that have now fallen were held artificially, and in fact, they were no longer worth the price they were given for them.
Moreover, the crisis situation of recent days has obvious continuity since the financial crisis of 2008, taking shape in a special “crisis era”.
It should be noted that the ruble is not the only currency whose rate has fallen, or will still fall. Many world currencies “sag”, with the exception of the dollar and, possibly, the euro. However, for the American economy this situation may not be ideal or even desirable – in the conditions of the depreciation of most national currencies, American exports are called into question – there may simply be nothing to pay for it.
Here it is necessary to dwell on the reasons that prompted Russia to enter into such a difficult confrontation, and it is easy to agree to the breakdown of the transaction with OPEC that has been in force since 2016. First, OPEC now controls less than 50% of the world’s oil exports, and Moscow seems to be capable of a conflict with an organization that has pretty much weakened over the past 30 years.
Secondly, the Russian Federation could not afford to reduce oil production quotas at the request of OPEC because a general decrease in the amount of oil of the organization and its partner would create a vacuum that would immediately fill American oil, making Washington, increasing production, an even more powerful exporter of “black gold” “. In the context of a geopolitical confrontation with the United States, Russia seeks in every possible way to prevent such a scenario.
According to experts’ forecasts, reduced oil prices will remain at least until the second half of 2020, after which the situation will begin to change. Russia and Saudi Arabia will literally be forced to agree. Moscow undoubtedly suffers from lower oil prices, but if oil prices are kept at a level not lower than $ 30 per barrel, its stabilization fund will last for at least 2-3 years. An important factor here is that the share of oil in Russia’s GDP is 15%. For Saudi Arabia, the critical mark is $ 45 per barrel, and the “airbag” of the kingdom from petrodollars is rapidly melting. Riyadh can put pressure on its competitor – but only for a short time.
However, the consequences of the “oil war” are already being felt by other countries. Thus, the fall in oil prices has already raised concerns in almost all states of the Middle East. If we talk about oil exporters – the United Arab Emirates, Bahrain, Qatar and others, then there is already a World Bank forecast regarding the decline in their income this year.
An important factor in the upcoming recession is the coronavirus epidemic, which is an increasingly significant factor in the Middle East.
It is noteworthy that oil exporters will suffer from lower prices for “black gold”, both directly – simply receiving less money for the same amount of raw materials, and indirectly – due to a reduction in foreign investment, remittances and grants from consumers.
In this regard, it is not surprising that the countries of the Middle East that are members of OPEC are trying to find opportunities to prevent a further drop in oil prices. In particular, this was precisely what the Iraqi oil minister, Tamir Gadhban, said in his last statement, reporting on negotiations with his OPEC colleagues.
And if the voices from countries loyal to Saudi Arabia, Riyadh, the de facto leader of OPEC, can not help but be guided, then the problems of Iran, which is also part of the organization, but which is the main regional opponent of the kingdom, are only at hand. It is worth recalling that the Islamic Republic is currently going through very difficult times – the consequences of US sanctions were superimposed on the most powerful epidemics of the coronavirus, and lowering oil prices will undoubtedly complicate the situation of Tehran.
This is unlikely to affect the stability of the Islamic regime of Iran, more than once verified by various shocks, but will seriously reduce Iran’s capabilities in foreign policy operations in the Middle East (in Syria, Lebanon, Iraq and Yemen), as well as its ability to arm and purchase the latest weapons.
The latter factor becomes relevant, given that the UN embargo on arms supplies to Iran imposed in 2015 will soon expire. The issue of extending restrictions will be discussed again in the Security Council, but Russia and China have already expressed their willingness to block any anti-Iranian resolution on this issue. Moreover, the Russian Federation and China are ready to supply their weapons to Iran. It is, first of all, about the Russian Su-35 and Su-30 SM aircraft, with which the Iranian military is going to update their pretty outdated fleet, as well as the T-90 tanks.
At present, the Iranian military industry, having analogues of these samples, is not able to create them massively. China, in turn, can provide Iran with its own air defense systems and also aircraft. However, coronavirus and lower oil prices seriously reduce Iran’s solvency, raising the question of updating its military-technical potential and, in fact, playing in favor of Saudi Arabia.
However, in connection with this, one can also suggest one more – a radical, but not entirely impossible scenario. Iran, mindful of the successful strike of Yemeni Hussites at the oil facilities of Saudi Arabia last fall, could contribute to such an action by its allies. If autumn success repeats and Saudi oil refining infrastructure collapses, oil prices are likely to rise again. At the same time, Iran, of course, is unlikely to do so, given the possible prospect of a response to such an action on the part of the United States. However, in a truly desperate situation, Tehran can go all-in.
However, the Middle Eastern states and Russia are not the only states that suffer from oil attack on Saudi Arabia. For example, Kazakhstan’s main oil exporter in Central Asia is also likely to experience significant problems. On the one hand, having 2% of the world’s oil reserves and not entering OPEC, Astana is not able to somehow change the current situation. On the other hand, oil revenues account for 40% of the state budget of Kazakhstan, and lower prices cannot but affect all spheres of its economy. In this context, the creation of the Anti-Crisis Headquarters is a logical and understandable step.
Most likely, a drop in oil prices, will increase the actual price of imported goods, and lead to inflation, which, in turn, will entail the depreciation of wages and social benefits. In order to prevent this from happening, the country simply needs to use reserves from the National Fund – all the more so since, most likely, such oil prices will not stand for a long time, and the consequences of inattention to the current situation are at risk of being extremely critical.
Alarming statements are already being heard, including by representatives of the authorities. For example, the Minister of Social Protection Birzhan Nurymbetov announced the refusal of the state to index salaries to budget employees. This obviously shows the consequences of the crisis for millions of citizens of Kazakhstan in the near future.
Obviously, a crisis that could not be avoided would hit countries that do not sell oil directly, but are economically connected with exporters. Kazakhstan also concerns this problem – after all, Russia, suffering from the crisis, is the most important trade partner of Kazakhstan, both bilaterally and within the framework of the EAEU, and its share in the foreign trade of the republic is within 20%. Thus, active trade and other economic interactions with Moscow (in particular, investments) become an additional negative factor for Astana.
If optimistic forecasts about the short-term nature of the crisis and the near-term correction of oil prices come true, exporters of this type of raw material, albeit not without loss, will be able to keep their economies from collapse. Most of these countries have stabilization funds that can last from several months to several years. It should be noted that if the crisis drags on, countries that do not export oil or that export it in small quantities, including the US world hegemonic, will also suffer from it. In this case, it is logical to expect the assistance of the latter in resolving the situation and collective efforts to combat the problem.
However, if the crisis nevertheless lasts a significant period of time – from six months / a year, the consequences for the global economy will become critical, and somewhere irreversible. This applies to Russia, the Middle East and Kazakhstan, which depend on oil exports and are unlikely to be able to replace it with anything else in the short and medium term.
(The views expressed in this article belong only to the author and do not necessarily reflect the views of World Geostrategic Insights)
Image Credit: Akos Stiller/Bloomberg