Venezuela, oil prices and political risk

Following the extraordinary people power uprising that toppled the government of Ukraine, and after weeks of protests in Caracas, Venezuela’s capital, many are asking, “will Venezuela be the next Ukraine”? There are asking the wrong question. The question is, will Venezuela be the next Iran? Resource prices and political risk have long been correlated. When resource prices go up, governments tend to seize the assets of natural resource investors, whether through expropriation or extreme levels of taxation. The oil price boom of the 2000’s was accompanied by seizures of foreign-owned oil investments in, for instance, Venezuela, Bolivia, Russia, and Kazakhstan. This was by no means a new pattern. In the 1970s, the same phenomenon occurred: oil prices skyrocketed following the Arab oil embargo. Within a few years, nearly every major Western-owned oil and gas (and mining) investment in the emerging world had been seized – expropriated or nationalised – by host governments. There is another lesson to learn from the 1970s resource-price surge. That is that eventually, resources prices will fall. And when they do, a new type of risk emerges. Regimes that have become dependent on oil revenues suddenly find they are desperately short of money. If these regimes have been relying on measures such as seizures of the assets of foreign investors to stay afloat, chances are their macroeconomic management is not very good. The result is that when oil prices fall, the hitherto fast-rising incomes in these countries tend to crash (bad economic policy is procyclical), just when the fast-rising flow of resources available to the government to pay off supporters comes to a sudden stop....

Ukraine is Europe’s struggle, and it is likely to win

There has been a great deal of commentary regarding alleged blunders that have led us to the current position in Ukraine (as I write this, the Ukrainian province of Crimea has voted to join Russia, and Russia has recognized Crimea’s independence, which could be a prelude to annexation). In reality, the only serious blunder was committed by the new, interim government of Ukraine immediately after taking power, when it declared that Russian would no longer be an official language of the country. This gave Putin to a pretext to act. Chalk it up to inexperience. The old hands at the table – Russia, the EU, and the US – have played their positions well. First Russia. Many say Putin is a reckless gambler; and indeed that is true. But he has had no choice but to gamble. Losing Ukraine so soon after asserting Russia’s position on the world stage via the Sochi Olympics was a humiliating blow. Invading Crimea while pretending the troops involved are not Russian and offering Crimea a referendum on secession are awkward ways to cover up a violation of international law. (Perhaps he will next offer Chechnya a referendum on secession from Russia? This is the kind of precedent Putin presumably would rather not have established.) That said, it appears that Putin may succeed in turning his humiliating loss in Ukraine into a partial victory, by gaining Crimea in some form, with little blood on Russian hands. Once the government of Yanukovych had fallen, that is probably the best outcome Putin could have hoped for. It is thus a bad hand played well, although Crimea...

Intervention in Ukraine reflects Russia’s weakness, not strength

Following Russia’s de facto ‘invasion’ of Crimea there has been a great deal of navel-gazing commentary regarding the “weakness” of the West. Some say the EU is impotent; others say the US lost Ukraine; others that the Obama administration is weak. These comments reflect an astonishing lack of even short-term memory. The most obvious point first: it is not the US or EU that has lost Ukraine, it is Russia. Until protesters toppled Ukraine’s government, the contest for Ukraine was in the main a soft-power contest. The EU offered Ukraine a trade agreement (a Deep and Comprehensive Free Trade Area, DCFTA, in the jargon); Russia offered a Customs Union as an alternative. (Admittedly, Russia’s approach was not 100% soft, as the Customs Union offer was coupled with threats of goods embargoes and energy price hikes.) Until recently, it appeared that Russia had won. The Customs Union was indeed an attractive package. Signing it would probably have been economically beneficial for Ukraine (although, over the long term, the EU deal would have been much better). Yet Ukrainian premier Yanukovych, after a good deal of wavering, announced that he would sign the Russian deal. Perhaps his oligarch backers (reportedly including men such as Rinat Akhmetov, Dmitry Firtash, and Andriy Klyuyev) feared the legal and governance reforms that would accompany the EU deal. Perhaps Russia’s economic threats and bailout offer were persuasive given Ukraine’s precarious economic position. That moment, in early 2014, when Yanukovych sided with Russia, was the high point of Putin’s success. But then Ukraine’s (relatively small) middle-class rose up in the “Euromaidan” people power protest movement that toppled the...