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Energy Still Turns the Wheels of Geopolitics

 

The world is about to discover that the substantial and totally unexpected drop in the price of crude oil may be as disruptive as the shock of oil price hikes in 1974.

Recent news out of Russia, Venezuela and Cuba illustrate how the consequences are beginning to become apparent.

 

In Venezuela, the economy was in shambles when oil was at $120 per barrel; with prices now sliding below $60 per barrel, the government known for its rampant corruption and woeful management is spinning out of control. Yet, President Nicolás Maduro has repeatedly claimed that the dire situation is caused by an international conspiracy and has reacted by ramping up the attacks on his critics (like me) and the repression of opposition politicians.

 

Venezuela’s economic collapse was an important factor in the historic change in U.S.-Cuba relations announced by President Obama and Raúl Castro on Dec. 17. Cuba’s bankrupt economy was kept afloat largely thanks to Venezuela’s massive oil subsidies since Hugo Chávez came to power in 1998. Recently, however, it became obvious that betting Cuba’s economy on Venezuela’s lifeline was too risky. Venezuela’s chaotic economy and politics increased the odds that the arrangements of the past 15 years will be harder to maintain. This surely made Cuba’s leaders more inclined to accept a thawing with the U.S. likely to spur trade and investment to the island. Thus, in very indirect but powerful ways, low oil has also been a factor in disrupting what had been a stagnant and ineffectual policy in place for over half a century.

 

In Russia on Monday equities in the Moscow stock market were down 11 percent, and the ruble plunged 13 percent, which meant that a quarter of the dollar value of all Russian-listed companies was wiped out in one day. The central bank reacted by raising interest rates from 10.5 percent to 17 percent. This painful move was still not enough to contain the swift and massive drop in reserves and a quickly devaluing currency driven by the huge decline in oil revenues, (75 percent of total exports and 50 percent of public budget revenues) massive capital flight and economic sanctions. The fear, of course, is that a belligerent Vladimir Putin will stir troubles abroad to distract from the dire situation at home.