From Russian recession and falling oil prices to emerging market reform and divided responses to Islamic State, five areas will define political risk in 2015.
One year ago today, the world mulled over the global ramifications of Turkish anti-government protests, Chinese escalation in the East China Sea, and the imminent US military withdrawal from the Middle East. With the global economy finally on the mend, the post-shutdown US government abstained from military engagement in Iraq and Syria, instead seeking reconciliation through diplomacy with Russia and nuclear negotiations with Iran.
A year later, however, the tables have turned. Russian aggression in Ukraine has exposed rifts in NATO alliances as Western sanctions bring the Russian economy to its knees. The US-led campaign against Islamic State has erased any memory of US military disengagement from the Middle East, dragging regional and global players into ongoing civil wars in Iraq and Syria. And yet, as global oil prices continue their fall, promises of reform in India, Mexico, and Indonesia beg investor confidence.
2015 will be defined by the past year’s surprises, though bright spots remain. Here’s what to expect in political risk over the coming year.
Falling oil prices expose a weakened OPEC
Oil prices are down over 40 percent since mid-2014 as weakened demand from Europe and China meets a glut of supply from Canadian and US crude production. The fracking boom in the United States, along with the development of Canada’s Alberta tar sands, has put extra pressure on OPEC members to cut oil production to help stabilize the market.
The Organization of Petroleum Exporting Countries’ biggest producer, Saudi Arabia, has refused to cut production in the hopes that lower prices will help Gulf states retain market share amid increased global competition. Lower prices could also put budgetary pressures on US energy firms, who rely on expensive shale technology for oil extraction.
True damage to US competitors, however, would require oil prices to fall as low as $50 a barrel for a sustained period of time. Not even the Saudis have the financial reserves to withstand such low prices in the medium term. And with the price of oil still at $60 a barrel, OPEC producers will have to find a new strategy to deal with competition from the US, Mexico, and Brazil.
Russia slides into recession
As Russia presses ahead with its annexation of Crimea and support of separatists in eastern Ukraine, low oil prices and Western sanctions have begun to take their toll on the Russian economy. Even if the severity of sanctions remains unchanged, Finance Minister Anton Siluanov indicated the Russian economy is not expected to grow faster than 1 percent in 2015.
Tumbling oil prices have put extra pressure on Russia’s government. Over two-thirds of Moscow’s state budgets come from taxes on Russian oil and gas firms. Weakened oil revenues have caused the ruble to fall 41 percent against the dollar over the past year, creating fear that the economy could fall into a recession in 2015. The World Bank sees a recession as likely, indicating it expects the Russian economy to shrink by .7 percent next year.
Fears over Russia’s economic vitality have caused mass capital outflow, totaling to some $85 billion in 2014. And with lucrative energy projects like the South Stream pipeline on hold, President Vladimir Putin will have to find ways to lessen his country’s exposure to turbulent oil markets. How Russia navigates between an economic freefall and a brewing war with Ukraine will certainly define its fortune in 2015.
US, Middle East states divided over response to IS
Despite a months-long military campaign aimed at slowing the advance of Islamic State (IS), militant fighters have tightened their grip over large swaths of territory in Iraq and Syria. The US-led campaign, which includes air and ground power from Turkey, Saudi Arabia, UAE, and Bahrain, hopes increased military force can keep IS from establishing new fronts in Egypt and Libya.
Although the US initially limited its campaign to airstrikes, direct engagement of US ground forces in Iraq is becoming more likely by the day. The US strategy has drawn criticism from allies in the region, such as Turkey, who have been reluctant to intervene militarily in Syria. Tensions between the US and Turkey increased when the US airdropped weapons to the Democratic Union Party in Iraq, considered by Turkey a “terrorist organization.”
These disagreements underscore the division between the US and its Middle East allies over how to respond to the threat posed by IS. Turkey, Jordan, and Egypt worry that military intervention will drag them into an increasingly sectarian civil war in Syria, while Saudi Arabia fears a faulty strategy will give rise and legitimacy to neighboring Iran.
The US, whose nuclear negotiations with Iran are likely to continue throughout 2015, is unlikely to find a strategy in Iraq and Syria that appeals to the varying interests of its allies.
NATO alliances are tested, threatening Eurozone recovery
The crisis in Ukraine has highlighted divisions within NATO, raising questions about the future of the transatlantic military relationship. Disagreement over financial sanctions against Russia has further complicated ties between Germany and the US, whose relations hit a new low last year following revelations of US government surveillance programs that targeted German Chancellor Angela Merkel.
European NATO members, many of which rely on Russia for the majority of their energy input, have much to lose in the face of a growing Ukrainian conflict and weakening Russian economy. NATO’s strength will rely heavily on German leadership, whose status as the diplomatic and economic backbone of the EU will help to stabilize a tepid European economic recovery.
Germany’s leadership in NATO and the EU will set the stage for both the Ukrainian conflict and the Eurozone recovery throughout 2015.
Promise of emerging market reform begs investor confidence
With the new year comes the promise of great reform in three key emerging markets: Indonesia, Mexico, and India.
In Indonesia, recently elected President Joko Widodo increased the price of fuel subsidies by roughly a third, which investors are taking as a sign of his government’s commitment to economic reform. Fuel subsidies have accounted for up to 25 percent of annual Indonesian government outlays since 2010. Widodo has also committed to resolving legal problems for investors, which would help to bring more foreign capital investment into the state.
Mexico unveiled the first phase of its historic opening of its oil sector to foreign investors in December 2014, allowing foreign companies to drill for oil for the first time since 1938. While this is good news for investors, drug cartels and security concerns have undermined confidence in the stability of a potential Mexican energy market. President Enrique Peña Nieto will have to make ensuring security for locals and foreign companies alike a main priority if he wants energy reforms to bear fruit.
The election of President Narendra Modi has encouraged renewed confidence in India’s economic future. Reforms on the table include a goods-and-services tax that would allow India to have a single internal market for the first time in its history, and new laws that would permit commercial mining in the state. Modi has made foreign investment a top priority, forging new economic partnerships with China and the United States. Should the recently elected President make good on his promises, 2015 in India looks bright.
