By Paul Brandus at MarketWatch
Three huge, vastly important countries on the world stage are in deep economic and political trouble—far worse than we may realize. I’m talking about Russia, China and Saudi Arabia. Think America has problems? They pale in comparison to what Moscow, Beijing and Riyadh face, and our next president may have quite a bit of geopolitical leverage.
China, Russia and the Saudis share some very nasty characteristics. They are secretive, autocratic, brutally repressive police states that ruthlessly crush free speech and political dissent. I’ll start with China. For reasons mentioned in my July column, things have gotten worse in China. Its economy is slumping, crushing the global commodity trade, and sending financial markets into a freefall.
In a raucous, open economy like America’s, ideas, labor and capital move quickly to where they can add the most value; China is proving to be nowhere near as nimble. Promised reforms have sputtered under the weight of corruption and communist bureaucracy. President Xi Jinping’s answer thus far has been to increase repression and intimidate forces that could help move the People’s Republic away from heavy-handed and tone deaf central planning. China’s days of easy growth are over; ten million people enter the labor force every year, and there’s nowhere for them to go. Like Russian President Vladimir Putin, Xi has found it easier to distract his people by stirring up trouble abroad rather than fixing problems at home.
As for broiling Saudi Arabia and frigid Russia, what do they have in common? Oil, of course. The economies of both—the world’s #2 and #3 oil producers—are buckling under the strains of crude’s stunning collapse. Liked a caged animal backed into a corner, both are desperate—and lashing out in dangerous ways.
Unlike the #1 oil producer—the United States—Russia and Saudi Arabia lack diversified economies, dangerously tying their economic, and ultimately political stability to crude. Let’s start with Russia. Last summer, Vladimir Putin’s own central bank predicted that Russia’s economy would collapse 6% if oil fell to $40 a barrel. Price today? $34 (Brent). Too bad for Putin that oil and gas accounts for half of the Kremlin’s budget, and two-thirds of its export revenue. Let’s be honest: other than oil and gas, the world’s biggest country, spanning eleven time zones, has little, save vodka and weaponry, to offer the world.
How badly does Russia need oil revenue? An estimated 67 to 70% of GDP depends on it, calculates Andrey Movchan, director of the Carnegie Moscow Center. Without this critical revenue, Moscow can’t pay for imports, which explains its dwindling foreign reserves and galloping inflation.
Guess who’s paying the price for this economic pain? Largely hidden from prying eyes, Russia is beginning to implode from within. Paula J. Dobriansky and David B. Rivkin Jr., senior officials under the last three Republican presidents, note the following in the Washington Post:
“There is widespread labor unrest in cities where private-sector workers have not been paid for months at a time. There also have been months of strikes by long-distance truckers protesting extortionist road fees and corruption. Even fire and rescue first responders employed by the federal Ministry of Emergency Situations have not been paid in months. That emergency personnel in such major cities (and places where revolutions have started in Russia’s past) as St. Petersburg and Moscow, with responsibilities for handling public protests, have gone without pay underscores the precariousness of Russia’s finances and the risks it is forced to incur.”
Even in a police state, the citizenry can erupt. In 1962, the Red Army mowed down scores, including children, during a labor strike. Does anyone doubt that Putin, the former KGB officer who called the collapse of the Soviet Union one of the great geopolitical catastrophes of the 20th century—a man who now praises Stalin—would do whatever he felt necessary to cling to power?
The Soviet Union went quietly in 1991; Vladimir Putin will not.
Last, but not least, Saudi Arabia. Ever wonder why the Arab Spring—which toppled governments in no less than four countries and sparked often violent rebellion in a dozen oithers—barely touched the Royal Kingdom? Because for years, the Saudi government has used oil revenue to pay off its citizens. And I mean pay off. Here are the goodies that oil bucks currently provide:
• Free health care
• Free schooling
• No income tax
• Public pensions (90% of Saudis work for the government)
• Subsidized water/electricity
This wasn’t a problem when oil prices were high, but now the party’s over. CIA analysts say petroleum accounts for 80% of the Saudi government’s budget, 45% of GDP, and 90% of export earnings. So when oil falls below $29 as it did on Monday, you don’t have to be a math whiz to understand that the big squeeze is on. The government this month jacked up the price of gasoline 50% (it’s still absurdly low), and there’s talk of phasing out other freebies that simply can’t be covered with crude this low. With Saudi Arabia’s population at maximum combustible age—nearly half its 27 million citizens are age 24 or younger—this is a potential powder keg.
All three countries have tried to distract their citizens by acting tough abroad: Russia in Ukraine and Syria, China with its expansion and saber-rattling in the South China Sea, and the Saudis with their proxy war with Iran. State-run media in all three fan the flames of nationalism, putting Putin, Xi and Saudi King Salman on a pedestal, while ignoring huge domestic problems. All three nations are increasingly wobbly. The cornered animal is a desperate animal—dangerous for them and, if we’re careful, opportunistic, for us.