Oil and Dictators

Will the collapse of oil prices benefit or erode petrodictators in the Middle East, Eurasia, Africa, and Latin America?

At first glance, the answer would seem obvious. Venezuela, Nigeria, and Iran need crude prices as high as $110 per barrel to fund their states in their present condition. Russia, half of whose government budget depends on black gold, is not far behind. Saudi Arabia, which did much to reverse the “Arab Spring”, announced in recent years new oil-funded projects costing about $500 billion and aimed at pre-empting adversaries who could use the discontent with the regime in Riyadh to agitate the mind of the masses.

But things are more complicated than they seem.

In Russia, where Vladimir Putin enjoys a favorable rating of 80 percent, the popular imagination associates the new Cold War between Moscow and the United States with the current crisis. (The severity of the crisis is apparent in two statistics: the ruble has lost 50 percent of its value in 2014, and GDP is expected to decline 4 percent to 5 percent in 2015.) The government propaganda machine is already busy selling the idea (through “independent” sources) that the energy giant Rosneft, one of the most indebted companies in the world, might have trouble meeting payments of more than $7 billion this month because Western sanctions are preventing it from getting access to foreign capital markets. Putin has given his friend Igor Sechin, the head of Rosneft and a symbol of mercantilist cronyism, a helping hand through the central bank and various private banks under his influence, and he hopes to reinforce the defensive psychology of a society that is deeply distrustful of the West.

In Venezuela, some believe that the coincidence of the sanctions recently adopted by the US Congress against the “Chavista” hierarchy and the collapse of oil prices will give Nicolás Maduro, who has been his own vociferous self in recent mass rallies, the opportunity to do what Fidel Castro did when he announced the “special period” in Cuba following the collapse of the USSR: appeal to his people for a Numantian-like resistance against superior forces.

In Saudi Arabia, whose government has accumulated $750 billion in reserves and is confident it can weather the fall in oil prices for quite a while, the blessing could come in a different shape. If oil remains below the break-even price of many companies engaged in the shale boom in North Dakota, Texas, and elsewhere, mass bankruptcies could cascade through the U.S. energy sector, reducing the main medium-term threat to Riyadh in terms of international competition and a prolonged downward pressure on prices through increased production.

What about Iran? The fall in prices should hurt Teheran. But there are two mitigating factors. One is the fact that the government, or at least part of it, embodies a moderate faction within the Shiite regime that is seeking a gradual rapprochement with the West and is involved in a subtle struggle with the hardline mullahs and their allies. The second one is just as important: It appears that the country has found ways to circumvent international sanctions by selling more oil than was thought, achieving on volume what it could never achieve on prices in this environment—a perception of improvement as compared to the situation prevalent a year ago, when sanctions really squeezed.

I am by no means trying to convince anyone that falling oil prices are good for authoritarian regimes that feed on crude. By and large, a traumatic reduction in their major—and sometimes their only—source of revenue cannot be a good thing medium term. But it is a mistake to believe that economic crises automatically topple or cause irreparable damage to dictatorships and that the negative political effect is immediate.

Often the short-term consequences are the opposite of what one would expect medium term. A surprising causal chain of effects can steer things in a disappointing direction and breathe some life into these types of regimes.