While Valenzuela is facing social unrest as there is a wide spread shortage in cash, Nigeria stands on the brink of bankruptcy and faces insurgency. Russia already plunged into Recession and its currency, the Ruble, went into free-fall to hit a new all-time low. And, Saudi Arabia is burning its Foreign Reserves and has to borrow billions.
The ones, who cannot cope with the new dynamics of the oil market and sharp reductions in oil revenues, are more likely to face political upheavals as the four ways of coping with this sharp reductions in oil revenues are already exhausted, which are the following:
- Foreign Reserves;
- More Borrowing;
- Cutting State Spending; and
- Cutting the Private Sector Spending.
The International Monetary Fund (IMF) is also saying that the biggest oil producer, Saudi Arabia, is heading towards a 20% budget deficit of its GDP. However, Saudi Arabia has a tremendous foreign reserves and massive debt capability in which it allows them to borrow both internally and externally. Moreover, Saudi Arabia has the capacity to cut spending on big projects, which might slow down the growth of the Saudi economy. In the same time, it is not going to cost them hugely when it comes to the local society. In short, the Saudi government should be careful in cutting its Public Expenditure where it won’t impact their population.
On the other hand, Saudi Arabia is fighting very expensive wars in both Yemen and Syria. It is worth noting that Saudi Arabia has a very young population in which if the Saudi government decides to cut too much, they might face more unrest on the home front. Nevertheless, Saudi Arabia is a low-cost oil producer, unlike Russia, where it can maintain and increase its market share.
Likewise, almost 60% of Russia’s revenue depend on Oil & Gas and 70% of its exports are Oil & Gas. In addition, the Ruble decreased in a disorderly fashion in which Russia is facing an economic trouble which can be considered dangerous. Furthermore, Russia doesn’t only have problems at home but also is going into foreign adventures in Ukraine and else where. This pressures Russia to squeeze greatly on its local economy as it is plunged into recession and burning foreign reserves as well as decreasing the value of its currency. The situation is incredibly worrying as the West might intensify sanctions.
The social contract of getting a high/good/fair living standard while not getting so much freedom is falling apart and breaking down as these commodity producing states don’t have the money to keep its people sweet or at least minimize the pressure on this social contract. The best historic case is Iraq, after becoming bankrupt becasue of its war with Iran, Iraq was tempted to go into a foreign adventure in Kuwait without calculating the risk of its action. Forced to leave Kuwait and living under 13 years of sanctions, Iraq lost its 2003 war in less than 40 days and its society is already heading to partition its country as such a social contract only works in good times where the state is making good revenues and disbursing it to its citizens. However, when the revenues get hit, the social contract is under enormous pressure and is eroding in front of our eyes, especially in the case of Valenzuela. The best two ways out for such countries are:
- Squeezing the government spending on major ways; and
- Squeezing the private sector not only by reducing subsides but also letting the exchange rates devalue their currencies very strongly.
These oil-producing autocracies have to get used to low oil prices and plan ahead on this assumption or fact.