The recent outbreak of violence in Yemen may bring short-term gains for Russia’s oil producers, but over the long-term, will result in disincentives for Russia to modernize its economy.
Shiite rebels, known as Houthis, gather to protest against Saudi-led airstrikes in Sanaa, Yemen. Photo: AP
The Middle East has once again confirmed its reputation as a permanently smoldering hot spot. The flashpoint on this occasion is Yemen, where the latest offensive by Iranian-backed Shia militia resulted in their seizure of strategically important areas, forcing the legitimate president to flee. His appeal to Saudi Arabia did not go unanswered, and on Wednesday, March 26, a Saudi-led coalition of ten countries officially entered the Yemeni conflict, delivering a series of powerful airstrikes against militia positions.
As usual in such cases, analysts set about describing apocalyptic scenarios — up to and including all-out conflict between the two regional hegemonies of Shia Iran and Sunni Saudi Arabia. Overly sensitive investors immediately began preparing for the prospect of the Red Sea becoming closed to oil traffic. Given that more than half of the world’s reserves of black gold are concentrated in this region, the markets understandably shuddered.
But the recoil was somewhat unconvincing, and price positions were restored on the very next day of trading. It seems that investors either doubt an escalation of military activity or are confident that, given the relative abundance of oil, any temporary shortage can be easily made up for through unconventional reserves and a revitalization of the shale boom.
In any event, such sentiment stands in sharp contrast to Saudi Arabia’s recent pricing strategy, which aims to oust the unwanted North American shale upstarts from the oil market. Not to mention that regional turmoil is perhaps the last thing that Iran’s already ailing economy needs.
The proverbial drowning man clutches at straws, and so it was that despite the decidedly moderate reaction of the world’s oil markets, the Yemen-inspired one-day price surge produced an entirely disproportionate emotional response in Russia. Many Russian commentators seized upon the aggravation of the Middle East conflict with undisguised enthusiasm, as if to say the slump in oil prices would soon be reversed and all would be business as usual.
There and then, by coincidence or otherwise, it emerged that the Russian Ministry of Economic Development was ready to change its short-term outlook in favor of a much more optimistic assessment. Recalling that since the beginning of March the ruble had appreciated by nearly 10 percent, the government began talking about a decisive stabilization of the markets and a swift onset of investment renewal and economic growth as early as 2016.
However, the statistics for the first two months of this year do not encourage optimism: industrial production is stagnating and household incomes, retail trade, investment and transportation of goods are down. It would be strange to assert that prosperity built on the dramatic and unpredictable events in Yemen can be fundamentally sound.
After all, however you slice it, the key to the solution of Russia’s urgent economic problems does not lie in the sand thousands of miles from its borders, but within Russia itself. Regrettably, recent months have seen the government fail not only to take decisive steps to lead the country out of the crisis, but even to propose any steps that might be considered to be “decisive.”
By the weekend, however, news from Yemen had virtually disappeared from the headlines, dropping off the front pages of online newspapers. That certainly does not mean that this age-old conflict has been consigned to the “nothing new” category — at any moment it could ignite in such a way that no one will know what’s hit them.
However, the fact remains that the oil market is not the same as it was the 1960s and 70s. Today it is far more polycentric and adaptable to the vicissitudes of the Middle East, meaning that the more significant the initial price shock to the markets, the deeper and more painful the subsequent fall in price quotes dictated by factors both new and fundamental.
But even if the “Yemeni bonus” causes a tangible rise in oil prices and lasts for some time, it may be squandered away. Like the many hundreds of billions of petrodollars that Russia has received over the past decade, it will either burn up in the furnace of Russia's inefficient economic system, or be allocated to its beneficiaries and become part of the capital outflow from Russia.
At the same time, the authorities will be handed a long-awaited pretext to continue the favored strategy of doing nothing and new grounds to peddle the illusion that, on the whole, all is well and the crisis will soon resolve itself. Hence, the deteriorating situation in the Middle East should be seen as a net negative – not a net positive – for Russia’s long-term economic interests.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.