BACKGROUND: The impact of these two interactive crises have differentiated impacts upon CIS governments because energy producers may be less implicated in the Russian economy; while they suffer from falling energy prices, Russia’s travails have less effect upon them. Conversely importers and consumers of energy who will save billions due to falling prices may yet face serious challenges from the impact of Russia’s specific crisis.
It is already clear that energy producers will face serious pressure to suspend, stretch out, or even curtail existing or planned future energy projects because they cannot get capital for such large projects at current prices and the likelihood of sales that could justify huge capital investments is moot at best. Thus projects like Turkmenistan’s Galkymish, Azerbaijan’s Shah Deniz, and Kazakhstan’s Kashagan, will come under increasing pressure. This does not mean they will be terminated but clearly the risks of going forward have multiplied.
Similarly producers and exporters who depend on energy revenues for their state budgets to fund major welfare and infrastructure projects will now run the risk of budget deficits that must be made up since their collateral for borrowing has become much less attractive. There has already been talk in the Azerbaijani press of the necessity of raising taxes, never a popular policy, to meet budgetary obligations.
Similarly, other energy producers, facing budget deficits, diminished revenues, and substantial obligations that cannot be disregarded may be tempted to devalue their currencies and thus resort to inflationary policies. The devaluation option looks better given that the ruble’s devaluation by over two-thirds since October prices their goods out of the Russian market and even makes their own domestic products much more expensive. Last year, Kazakhstan launched a surprise devaluation and Turkmenistan recently followed suit. In the present context, this was entirely understandable since devaluation benefits the debtor who pays back in devaluated or deprecated currency. Nevertheless it is a bitter pill to swallow.
IMPLICATIONS: At least two other challenges immediately come to mind in assessing the impact of these interacting crises. Whether states are energy producers like Azerbaijan and Uzbekistan or consumers like Tajikistan, if they depend to any significant degree upon remittances from migrant workers in Russia they will face a set of interlinked problems due to these crises. The falling ruble and energy prices, and recessionary trends in the Russian economy, will substantially diminish the value of those remittances. To the extent that states like Tajikistan depend on that income, they must find alternatives to it or run the risk of serious socio-economic discontent. In addition, Russia’s recession means less construction and less demand for these workers, many of whom will have to return home to experience difficulty finding decent jobs. Since most Central Asians who are radicalized (and it is well known that young men are the most susceptible age cohort) are radicalized in Russia, if they return home and cannot find work they constitute an attractive recruiting target for ISIS, Al-Qaida, and other Islamist groups. All this obviously adds further to the risk calculus of governments across the region.
The second risk factor is that the Eurasian Economic and Customs Union, the centerpiece of Russia’s policy, is now very much compromised. Belarus and Kazakhstan are already importing European goods for resale to Russia in order to bypass the sanctions. This trade undercuts Russian producers, replaces Russian commercial links with Europe, and has generated considerable anger in Russia. But beyond this, the Economic and Customs Union now confronts the real possibility of competitive devaluation by members who have no choice but to follow beggar thy neighbor policies. As the ruble slides, the pressure grows on Kazakhstan and other members to resort to their own form of devaluation to ensure that their goods are competitive throughout the region, and in particular in the Customs Union members.
The weaker members like Armenia and (prospective) Kyrgyzstan will need even bigger bailouts to keep going and the entire idea of regional integration, even in the warped form proposed by Russia, will suffer devastating blows leading to economic and political frictions among members. And in such circumstances, given the unpredictability of Russian foreign and military policies and the temptations of popular nationalist policies, the risks may spill over into the military sphere. The Turkmen and Kazakh devolutions of 2014 already point to this process while Russia has had devaluation imposed on it. This trend could easily continue into the future.
Crises present both opportunity and danger. Rahm Emmanuel, as Chief of President Obama’s Staff, joked that a crisis is a terrible thing to waste. Therefore this crisis is comprised of both opportunity and dangers for regional states. It challenges them to improve their economic and political governance, to diversify their production and foreign trade, and to create much more auspicious conditions at home for foreign investment. As all of these states, although to varying degrees, have enormous room for improvement with regard to these policies, they can actually use the crisis to minimize hardship and improve their competitive position and economic vitality, for there is no sign that Russia is going to make the necessary reforms. If anything, examples like the bailout of Rosneft indicate a stubborn determination to keep ripping off the state for the benefit of the elite.
CONCLUSIONS: If governments draw the necessary lessons, they will emerge stronger and more independent, and perhaps more interested in and able to cooperate effectively with each other than has so far been the case. Certainly their dependence on foreign governments will decline and their political systems will become much stronger.
On the other hand, as has often been the case in the past, they could fail to grasp the opportunity and continue trying to maintain business as usual or become even more repressive and rapacious. That is a course for ultimate disaster for they risk falling afoul of the fast-moving currents of this crisis. Russia has already spent 24.4 percent of its reserves and will have to spend more to stave off disaster. And Putin has warned that the crisis could last until 2017.
Some governments, like those of Armenia, Tajikistan, and Kyrgyzstan, may not have two years to wait for a turnaround while refusing to put their house in order. These crises occur while Central Asian states are also very nervous about terrorist threats and their failure to reform might make them vulnerable not only to economic and political unrest but also to insurgent or terrorist violence. This last consideration obliges us to think about what we should do to help them get through these challenges, for the strengthening of Central Asian independence and economic –political governance is decidedly in our interest. For us too, this crisis presents an opportunity if not a challenge, and if we ignore the opportunity we may have to pay much more to put out the ensuing fire.
AUTHOR’S BIO: Stephen Blank is a Senior Fellow with the American Foreign Policy Council.
Image Attribution: FinMarket.ru