Economists are likely to spend months puzzling over why the effect of low oil prices has proved slow to emerge in the consumption statistics. But, ultimately, emerge they will, as they have every time such a large fall has occurred. The more important question is one for political scientists: Which governments will collapse this year, and with what consequences?
It is no coincidence that the last emerging-markets crisis, in 1997-1998, was also associated with a dramatic fall in oil prices. In that case, the two biggest victims were a dictator in Indonesia and a fragile democrat in Russia. In May 1998, nine months after the beginning of East Asia’s financial crisis, Indonesian President Suharto resigned after 31 years in office. A few months later, Russia defaulted on its sovereign debt as its currency collapsed. On December 31, 1999, President Boris Yeltsin resigned, leaving the country in the hands of his recently appointed prime minister, Vladimir Putin.
In attempting to predict which governments might face a similar fate this time, the basic criteria – in addition to the oil slump’s financial impact – are resilience and flexibility. Does a regime have the financial reserves with which to cushion the shock and buy time to adjust? Does a country have a robust banking system? Can its political system contain growing popular frustration or channel it through existing institutions? Oil-dependent regimes that fail to meet these criteria are in trouble.
This analytical framework yields surprising insights. As much as pundits like to predict the collapse of the Saudi Arabian monarchy, they are likely to be disappointed once again. The country is the world’s lowest-cost oil producer; and, though its political rigidity is beyond question, it is showing economic flexibility by cutting its budget and introducing wide-ranging reforms.
Russia, however, for all its bluster, may prove less fortunate. Its political robustness is not matched by financial and economic resilience. Putin will try to mask the pain, but at some point it is likely to become debilitating.
The potential victims are many, with worrying implications for geopolitical stability worldwide. Venezuela has been in financial crisis since long before the oil crunch, and Nigeria is looking a lot like Russia in 1998 – a fragile democracy facing a currency crisis.
As to who might become the next Suharto in the coming months, my best guess is one or more of the Central Asian oil autocrats in Azerbaijan, Kazakhstan, and Turkmenistan. In any case, this year promises to be interesting – and harrowing, if you happen to be a dictator clinging to power in an oil-exporting country.
This article is published in collaboration with Project Syndicate.
