The Decline of the Petro-Czar

What a difference a half a year makes. Last summer, when oil prices hit an all-time high of $147 a barrel, so did the hubris of the petro-czars. Vladimir Putin sent Russian tanks rolling into Georgia, laying bare his ambition to restore Russian dominion over the lands of the old Soviet empire. In Iran, President Mahmoud Ahmadinejad was busy bashing the dollar, which he had declared "worthless," and transferring Iran's reserve wealth into euros. Meanwhile, Venezuelan President Hugo Chávez was in Russia meeting with Putin to negotiate arms deals.

The rise of these leaders was the dark side of an otherwise golden era of growth in the global economy. A prospering world was thirsty for oil, and had little choice but to buy heavily from them. Not now. With the world economy collapsing in recession, and falling demand driving the price of oil down to $37 per barrel, the trio of Putin, Chávez and Ahmadinejad are losing their strength. The empires that they built on oil are proving rickety, vulnerable to inflation and joblessness, and now mounting political unrest is jeopardizing their personal power. "High oil prices and oil wealth reshaped geopolitics in recent years," says energy expert Daniel Yergin. "Now we're seeing the reversal of all that."

The decline of the petro-czars is an unexpected bright spot in a grim global recession. Barack Obama has invited America's enemies to talk, and Putin, Chávez and Ahmadinejad are responding with surprising alacrity, in no small measure because the price of oil no longer supports their geopolitical ambitions. Suddenly, these bold challengers of U.S. "imperialism" want to sit down and have a nice chat with the new administration. Chávez, who frequently referred to George W. Bush as "the Devil," has said that he is willing to talk "on equal and respectful terms" with Obama. Last week, on the 30th anniversary of the Iranian revolution, Ahmadinejad declared his nation "ready for talks." Although Putin is still rattling regional sabers, his aides are starting to make friendly noises: "Relations between Russia and NATO," said Foreign Minister Sergey Lavrov, "should get back on track."

It's been widely noted that Obama comes to power facing an extraordinary array of foreign challenges, from Sudan to North Korea, but what distinguished the petro-czars was the scale and aggression of their ambitions. Putin hoped to create a gas cartel to rival OPEC, and continues to battle the U.S. for political influence and control of gas pipelines across Eastern Europe and Central Asia. Chávez had aspired to finish building the Latin empire that his hero Simon Bolívar once dreamed of, including a regional bank controlled by Chávez himself. Ahmadinejad wanted to restore Iran as a regional powerhouse, backed by nuclear weapons, in a Middle East without Israel. It would be very hard to name three leaders whose declining fortunes better serve U.S. interests.

The decline is dizzying. The petrostates are getting slammed harder than most by the global credit crunch. All three had built their popularity on programs of oil-fueled welfare spending, food and energy subsidies, and other favors to the public. Initial 2009 budgets built around all that spending assumed oil would stay between $86 and $100 a barrel. The result is that falling prices threaten not only the economy, but also the political legitimacy of these regimes.

The impetus to keep spending is driving up deficits and fueling inflation, now in the high double digits, despite falling growth. Morgan Stanley predicts Russia will contract by 3.5 percent this year, and that the Venezuelan economy will contract 1 percent (comparable figures for Iran are not yet available). As foreigners flee Russia faster than from any other emerging market, its stock market has fallen further than any other in the world, down 75 percent since last summer. No wonder Putin, whose men turned a blind eye to Russian partners' expelling executives from big Western oil companies like BP as recently as last May, is now sending welcome signals to foreign investors.

The collapse was far from inevitable. The petro-czars set themselves up to fail, by neglecting to invest enough either in improving their oilfields or developing export-income sources other than oil. Other oil states like Saudi Arabia and the Gulf nations are still comfortably flush, according to Washington-based PFC Energy. Meanwhile, Iran and Venezuela are drawing down their savings just to keep their government budgets running. Russia has spent nearly a third of its $650 billion in foreign assets defending the ruble over the past couple of months. PFC estimates that by year's end, Venezuela will have run through 38 percent of the foreign assets it had at the end of 2008, and Iran will have spent some 25 percent. In short: under the current economic conditions, these petro-nations simply can't stay afloat much longer.

Rising unemployment and deteriorating finances are leading to a political backlash. In Iran, factories are closing en masse, and popular former president and reformer Mohammad Khatami is back to challenge Ahmadinejad in national elections in June. In Venezuela, antigovernment protests are intensifying ahead of this week's referendum, which would allow the president to run for re-election indefinitely. In Russia, numerous street protests have broken out over tax hikes and unpaid wages in the steel and manufacturing industries. In response, the Kremlin has passed a raft of nasty new laws. One makes participating in "mass disorders" a "crime against the state." Plans to fire 280,000 Army officers have been shelved, and the Interior Ministry has set up three "special-purpose centers" in major cities, packed with surveillance equipment designed to combat street unrest.