An axis in need of oiling

Plunging oil price is not helping Chavez, we are so happy!!!

"As Mr Chávez scales back spending he will have to choose between losing influence abroad or losing popularity at home. Already he has quietly cancelled a promise to build an oil refinery in Nicaragua"

vdebate reporter.

The anti-West
An axis in need of oiling
Oct 23rd 2008

From The Economist print edition
Russia, Iran and Venezuela have been making common cause. A plunging oil price may stay their hand, but the West should still watch out

Illustration by Claudio Munoz
IT WAS one of George Bush’s catchier turns of phrase—the “axis of evil” consisting of North Korea, Iran and Iraq. How evil, or even menacing, they really were is debatable. And it was not much of an axis: Iran and Iraq hated each other. North Korea exported nuclear know-how, but probably no more than other countries such as Pakistan, a supposed American ally.
Of late another trio, bound together by dislike for America, and confidence based on surging energy revenues, has appeared: an “axis of diesel”, as some have named it, comprising Russia, Iran and Venezuela. At least before the present financial crisis, the trio had been hobnobbing happily. Russia has sold billions of dollars’ worth of arms to Venezuela and blocked Western attempts to slap tougher sanctions on Iran. The Kremlin is also selling air-defence systems to the Iranians.
Yet in this case, too, the idea of an “axis” is exaggerated. Each of the trio has different aims. Venezuela wants to create an anti-American block in Latin America. Russia likes the idea of challenging the United States in its backyard: a suitable response to what it sees as American meddling in Russia’s own neighbourhood, where its president, Dmitry Medvedev, claims “privileged interests”. But Russia’s backing for Venezuela is constrained by its ties to other countries in the region, such as Brazil.
Similarly, Russia likes to play the “Iran card”, signalling to Mr Bush that he may have to give ground in, say, Georgia if he wants help in the Middle East. But as far as any outsider can say, the Kremlin does not want Iran to have a bomb.
So the common interests of the three countries are mostly tactical, not strategic. The same applies to China, which is a co-founder, along with Russia, of the Shanghai Co-operation Organisation, a loose security club. Having snubbed Russia over Georgia, China’s top priority is not gloating or spoiling, but salvaging the world economy, including that of America, which is a crucial outlet for its goods.
The “diesel” trio did gloat at first over the West’s meltdown. But they overlooked one of its effects: a plunge in oil prices, and hence their own revenues. This unwelcome news is likely to sharpen distinctions between them. Fyodor Lukyanov, a Russian foreign-policy pundit, says his country will have to prioritise. “Trying to achieve everything won’t fly any more.” The focus, he thinks, will be more on nearby countries and less on Latin America, not least because Venezuela will have less cash to buy Russian weaponry.
Indeed, the end of the oil boom may spell doom for that country’s populist leader, Hugo Chávez. Oil has been his political oxygen. When he took office in 1998 the price was $11 a barrel. It peaked in July at $147. Since then it has halved. Oil accounts for 90% of exports and more than half of government revenues. At home it has paid for what he calls “21st century socialism”: chiefly a torrent of central government spending, up from 22% of GDP in 2001 to 32% now. Mr Chávez also spends freely from the off-budget National Development Fund (Fonden), while Petróleos de Venezuela (PDVSA), the state oil company, has been required to divert part of its investment budget to social spending.
Oil has also financed an anti-American alliance. More than a dozen countries in Central America and the Caribbean receive a total of some 300,000 barrels per day (b/d) of Venezuelan oil on easy terms (of which 93,000 b/d go to Cuba). Venezuela has spent heavily to support Bolivia’s Evo Morales, Nicaragua’s Daniel Ortega and the opposition FMLN in El Salvador.
The price of cold turkey
For each $10 drop in the oil price, the government gets $5 billion (1.4% of GDP) less in revenue, according to LatinSource, a consultancy. Mr Chávez said this month that an oil price no lower than $80 was “sufficient”. But the economy is already deteriorating. Oil-dependency has risen; nationalisation, bullying and meddling have deterred private investment; a fixed and overvalued exchange rate has stoked imports. In 2006 growth was 10.3% and inflation 17%; the latest growth figure is a 7.1%; inflation is 36%. Foreign debt is up from $30 billion to $44 billion. The cost of credit has risen. Opaque statistics make it hard to gauge Mr Chávez’s room for manoeuvre. Fonden may contain some $15 billion; central bank reserves are about $27 billion. But the underlying trend is clear.
A devaluation risks setting off a downward spiral of inflation and rising poverty. As Mr Chávez scales back spending he will have to choose between losing influence abroad or losing popularity at home. Already he has quietly cancelled a promise to build an oil refinery in Nicaragua.
On the face of things, Russia looks better placed than its two friends to resist shocks; before the turmoil, it had built up the world’s third-biggest stash of currency, at more than $500 billion. However, the Kremlin has been spending heavily to prop up the rouble, bail out banks and plug holes in its budget. Apart from falling oil prices, a big cloud on the Russian horizon is falling oil output, a trend that looks hard to reverse without massive investment—and there are many other things Russia has pledged to invest in, from an expanding military to its own creaky infrastructure.
Compared with Mr Putin, Mr Chávez is less involved in the global financial markets and even more prone to blame everything on an American-driven fiasco. “There’s a spectre going round the developed world that was of its own making,” he said this month. “Like Frankenstein [sic]…it went around the world and then went back to his maker.” The first test of whom Venezuelans blame will come in local and state elections on November 23rd.
Thanks to sanctions, Iran is the axis member least exposed to the world economy. But the oil price fall will hit it hard. Some 80% of Iran’s government revenues come from energy. A drop in income is unlikely to make Iran slow down its nuclear programme, or end support for Israel’s armed foes. The nuclear efforts date back 20 years, predating the oil-price rise. But a sagging oil price will hurt the domestic economy and compound the woes of President Mahmoud Ahmadinejad.
Unlike Russia, which had prepared for a rainy day, Mr Ahmadinejad has been investing Iran’s oil money in a different future: his own. Energy subsidies alone are about 12% of Iran’s GDP; and energy revenues prop up the government budget. Inflation is at least 30%, up from an official 20% in February. The former central bank chief, sacked for resisting populist spending policies, has accused Mr Ahmadinejad of “looting” the bank’s assets. Merchants recently went on strike in several cities, including Tehran, over higher sales taxes.
Even before the oil price fell, some senior Iranians had criticised Mr Ahmadinejad for stoking confrontation with the West and making it easier for the United Nations to impose sanctions. Yet a falling oil price puts more pressure on Iran’s economy at a stroke than have several years of international sanctions.
The main aim of the “diesel” countries will now be to try to prop up falling prices. Iran and Venezuela, both members of the Organisation of the Petroleum Exporting Countries (OPEC), have called for it to cut output. Iran’s energy minister insisted defiantly this week that “the era of cheap oil is finished.” The cartel’s members are sufficiently worried about the falling price to have brought forward their next meeting by three weeks, to October 24th.
But Saudi Arabia, OPEC’s biggest producer, which would be responsible for the biggest share of any reduction in output, has not yet endorsed the idea of a cut and will not want to do all the cutting itself. It can withstand lower prices better than most, since it can balance its budget at an oil price of just $49 a barrel, according to the IMF. Iran and Venezuela, by contrast, need about $95 to make ends meet, according to Deutsche Bank.
Those fiscal straits will make Iran and Venezuela reluctant to forgo revenue by making cuts of their own, setting the stage for a row over quotas with Saudi Arabia. Yet the Saudis will not be unhappy to see Iran, a regional rival, squirm. What is more, says Leo Drollas of the Centre for Global Energy Studies, a consultancy, they are unlikely to agree to big cuts for fear of further blighting the world economy. There is also the question of whether the cartel will stick to whatever agreement it reaches. In the past, cash-strapped members have frequently cheated.
In sum, Iran, Russia and Venezuela are all likely to be left short of cash—and facing a diminution in their international clout. “Never confuse brilliance with a bull market,” goes a Wall Street saying. The leaders of the oily trio may have thought high oil prices were an adequate substitute for good governance. In many quarters, the difference is now painfully clear.