Sunday, December 28, 2014

Falling prices put the squeeze on Cuba, Russia

Falling prices put the squeeze on Cuba, Russia
12/27/2014 2:00 PM 12/27/2014 7:00 PM

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

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.

Source: Falling prices put the squeeze on Cuba, Russia | The Miami
Herald -

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