3 countries to worry about in an era of cheap oil
Brian Borzykowski, Forbes March 13, 2016
The decline in oil prices has hurt the U.S. energy sector but has yet to take a toll on the overall economy… Other nations aren't so lucky.
This article first appeared on ZurichVoice on Forbes.com.
The decline in oil prices has hurt the U.S. energy sector but has yet to take a toll on the overall economy. American consumers are benefiting from lower gas prices, and the economy is still growing. Other nations aren't so lucky. Falling oil prices—West Texas Intermediate Crude is down 72 percent over the last two years—have sent many energy exporting countries into a tailspin, with some emerging market nations among the worst hit.
For global companies, falling oil prices have dramatically increased the risk for nationalization, societal unrest and higher taxes in some key markets. According to Jim Thomas, global head of credit and political risk at Zurich Insurance, investors should be particularly concerned about the impact of falling oil prices on Russia, Venezuela and Saudi Arabia.
Here's a look at the political and economic situations in each country.
Russia: Putin's popularity will have stabilizing effect
Russia, the world's largest country by land mass, is heavily dependent on oil. According to Trading Economics, Russia is the top oil-producing country on the planet, with the energy industry accounting for about 25 percent of its GDP. In September, the Moscow Times reported that oil and gas companies generated 98 percent of all profits reported by large Russian firms in 2014.
With such a reliance on energy, Russia's economy has been dealt a major blow from falling oil prices. Every time the price of oil drops by $1, the country loses $2 billion a day in revenue, Thomas indicated based on Zurich’s credit research team findings. That may not seem like a huge amount, but because most oil and gas operations are state-owned enterprises, the decline impacts the country more than it would in other places. The state benefits greatly from oil and gas exports given its large involvement in the sector, Thomas said.
The country is also dealing with heavy economic sanctions, which alone would hurt its economy. Many Russian companies can't secure financing, and interest rates have jumped as high as 17 percent. “This is all having a massive economic impact on an already fragile economy," said Thomas.
The primary concern about the Russian economy is that foreign investors will exit. If that happens, the government could limit the amount of money that corporations are allowed to transfer into other currencies. It could also nationalize other industries to make up for declining energy revenues. "We could see a return to resource nationalism," said Thomas. "The Russian government could look to obtain a larger share of existing contracts."
One major worry is how a depressed economy will affect the Russian people. Russia's unemployment rate has climbed from about 4.8 percent in August 2014 to 5.8 percent in December 2015. If it becomes harder to buy goods, if inflation soars and if even more jobs are lost, we might see an increase in anti-government protests, Thomas said. However, given President Vladimir Putin's popularity, civil unrest seems unlikely in the near term, he added.
Venezuela: Is civil unrest on the horizon?
The situation in Venezuela is potentially more critical, with the economy possibly on the brink of total collapse due to its over-dependence on oil, political pundits and financial experts say. “Just when you think it has gotten as bad as it can get, it continues to get worse," Thomas said.
Similar to Russia, oil accounts for about 25 percent of Venezuela's GDP, while oil revenues make up 95 percent of export earnings, according to the Organization of the Petroleum Exporting Countries. However, Venezuela's economy is even less diversified than Russia's, and the country lacks a strong leader.
If the economy worsens, the government could try to stabilize it by making it more difficult to take money out of the country. It may also nationalize more businesses, a potential concern to the many U.S. and European corporations operating there, Thomas said.
The real worry, though, is civil unrest. President Nicolas Maduro doesn't have the public support that his predecessor, Hugo Chavez, enjoyed. He lacks popularity at a time when he needs it most, Thomas said.
What's more, the International Monetary Fund has said that consumer inflation in the country will rise by an astounding 720 percent in 2016, up from 275 percent last year.
“It's incredibly dire there and while the military has stayed on the sidelines, it's not unthinkable that they could insert themselves into the political process after not doing so for quite some time," Thomas said.
Saudi Arabia: Oil crisis poses less of a threat
Saudi Arabia is often associated with oil and for good reason: Energy exports account for about 80 percent of its revenues according to Zurich’s credit research team, Thomas said
Even this leading OPEC nation is not immune to falling prices, however. Rating agency S&P projected the country would have a budget deficit of 16 percent of GDP in 2015, a big change from the 13 percent budget surplus it averaged between 2003 and 2013. "This budget deficit is really astounding," Thomas said.
A reduction in revenues could affect the country's many social programs used to “foster stability," possibly leading to unrest, Thomas said. Right now the country's unemployment rate has remained steady at around 5.7 percent over the last few years, but that could change if the economy continues to struggle.
It doesn't help that the country is also going through political transition. For years, several brothers ruled the Saudi kingdom, but now numerous cousins are competing for power, said Thomas. The country is also butting heads with Iran in the region.
While it's unlikely the Saudi economy will collapse, any strain on its people could have an impact on global policy because the country is such an important player in the Middle East. “It goes well beyond the Saudi economy," Thomas said. “It impacts U.S. and European foreign policy, too."
Assessing the risks
Companies that want to expand into these countries and other areas hard-hit by falling oil prices, such as Angola and Kazakhstan, need to be aware of these issues. Businesses must understand the pressure points, consider and assess potential risks, and prepare for worst-case scenarios. It's also important to build relationships with the local community, which can help a business navigate any murky waters if need be. “Go into it with eyes wide open," Thomas said.