Op-Ed

Falling prices put the squeeze on Cuba, Russia

TNS
TNS KRT

Is there any connection between the two almost simultaneous blockbuster news events of the month? The announcement that the United States and Cuba have decided to work toward normalizing relations came just hours after we learned of a 1 a.m. emergency meeting in Moscow, where the Russian central bank took drastic measures to stop the spiraling of the Russian currency, seeking to prevent an economic tsunami from slamming against Vladimir Putin’s Russia.

The two events occurred thousands of miles apart, but it is no coincidence that they came at this moment. They are only the beginning; the first of a giant wave of geopolitical change powered by the collapse in global oil prices breaking ashore.

The massive changes unleashed by the lower prices, hundreds of billions of dollars not reaching the coffers that expected them, not fueling the policies they were supposed to fund, will be the driving force for events on the international stage in 2015.

In many cases, lower oil prices will not be the obvious motivators behind the actions of global players. They will play their role quietly, prompting political leaders to dust off other explanations for their actions, worrying underneath about a tectonic shift in global money flows.

Tiny Cuba, a country with practically no oil, is being buffeted by the petroleum price tempest. The regime in Havana relies on the generosity of oil-rich Venezuela for its survival. Since the days of Hugo Chávez, Venezuela has given Cuba, its ideological ally, almost all the oil it needs to function in exchange for medical, military, intelligence and other services.

The Cubans know how much worse it could get. The “special period” of bone-deep austerity after the fall of the Soviet Union left still-tender scars. The Castros know they could not survive another special period. Now they hope Washington will become their savior.

In Russia, Putin’s rule will be put to the test. The Russian president has governed during a time of prosperity, with Russian oil and gas exports fueling a surge in living standards and his own reckless adventurism. He dressed his actions in the armor of paranoid nationalism to protect himself from criticism at home and sanctions from abroad. Low oil prices, combined with international sanctions, will make it impossible to prevent a sharp slide in living conditions and, therefore, Putin’s personal standing. The risk for the rest of us is that he will engage in more adventurism to stoke patriotic fervor.

Low oil prices are already wreaking havoc in Venezuela, the world’s worst managed economy. Disaster was already preordained when the country’s vast oil exports fetched high prices. With prices at about half what they were just a few months ago, Venezuela is looking into the abyss. Already Venezuela’s regional influence is on the decline.

The smart oil producers are not surprised by fluctuations and have kept massive cash reserves. Eventually, prices will rise again. The question is whether the reserves are large enough to withstand the drought in earnings.

Venezuela has essentially no reserves. Russia started with about $500 billion. (It blew $50 billion on the Sochi Olympics, in an ill-timed burst of hubris.) Moscow already spent almost $100 billion trying to stop the ruble’s collapse. It still has a hefty rainy-day fund, but nobody knows how long low prices will last.

Prices are dropping because the United States is producing more, and Saudi Arabia refuses to produce less. The Saudis, with more than $700 billion in reserves, want low prices to make U.S. fracking less profitable, and thus slow American oil production.

And Saudi Arabia doesn’t mind tightening the screws on its archrival, Iran.

Low prices will cut deeply in Iran. The question is how the new economics will affect Iranian behavior. Tehran has already endured sanctions, and its economy received a boost from eased sanctions during nuclear negotiations with the West. It just hiked military spending by more 33 percent, and the regime has reaffirmed its commitment to strong material backing for Syrian dictator Bashar al-Assad, as well as Hezbollah and Hamas. The nuclear program looms large.

The plummeting oil prices create an unprecedented opportunity for the United States. Not only is it a giant economic windfall, but it is a chance to utilize diplomatic skill at a moment of maximum leverage. The window of opportunity will close. Prices will rise again. Nobody knows when.

Until then, prepare for a 2015 in which oil prices, often invisibly, play a major role in practically every major global development.

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