From the Los Angeles Times

Nations with vast oil wealth gaining clout

Some autocratic governments are challenging U.S. policies and silencing domestic dissent. But their increased spending raises the risk of inflation, which could erode popular support.

By Megan K. Stack and Borzou Daragahi
Los Angeles Times Staff Writers

July 17, 2008

MOSCOW — The boom in world oil prices is bolstering autocratic governments in a handful of petroleum-rich countries, emboldening them to challenge U.S. objectives and weakening their own democratic movements.

The cost of a barrel of oil has climbed dizzyingly, from $80 in September to more than $147, before settling Wednesday at $134.60. Some analysts expect it to continue rising to $200. The effects are visible across the globe:

Iraq's warring factions are scrapping for a share of the massive oil wealth. The Sudanese government has more money to spend on military equipment and the campaign against rebels in Darfur. Saudi Arabia has grown more distant from its allies in Washington.

But some of the most obvious effects are in countries whose leaders are most hostile to the United States: Venezuela's populist President Hugo Chavez, Iran's stringent Islamic rulers and Russia's growing autocracy.

The governments of these three countries, among the top eight in proven reserves, are demanding a greater role in world affairs while spending on domestic social programs, raising salaries and building infrastructure -- measures that help blunt concerns over a slide into greater authoritarianism.

"You have no control from society or opposition or the state or anybody," said Grigory Yavlinsky, a Russian economist and leader of the opposition Yabloko party. "So it's easy to use this money to support your popularity."

But vast oil wealth comes with risks. All three countries are struggling with inflation, which might slowly erode popular support.

In Russia, public spending doubled from 2004 to 2007. Oil and gas revenues are expected to surpass $178 billion in 2008, nearly $33 billion more than originally projected. The International Monetary Fund, wary of inflation, has warned Russia against rampant spending.

Inflation in Iran has aggravated a devaluation of the currency.

Political changes wrought by the oil windfall also may backfire. Venezuela's output is declining in part because skilled engineers and foreign companies are fleeing. Analysts say sanctions, brain drain and dearth of foreign investment have badly hurt Iran's potential output because of a lack of modern techniques.

For now, however, all three are riding high on oil revenue.

"This is perhaps the largest shift of wealth and resources in the history of the world economy," said Andrei Illarionov, who was an economic advisor to former Russian President Vladimir Putin and is now a senior fellow at the Cato Institute. "This money happens to be a kind of windfall profit for these countries, compensating for failures in other areas."

A nine-year run of growing oil revenue has restored Russia to a strength it hasn't experienced since the Soviet heyday. No longer a broken country fumbling for footing, Russia is now a major player on the world stage.

Ten years ago, Russia was swamped with debt. Today, it sits on the world's third-largest monetary reserves, topped only by China and Japan.

The government has unveiled popular initiatives to boost pensions and improve benefits for veterans. New President Dmitry Medvedev promised to focus on socioeconomic woes that beset ordinary Russians.

Meanwhile, Moscow has become increasingly aggressive toward Western-leaning former Soviet states, imposing a blockade on Georgia and engaging in a dispute with Ukraine over the pricing of natural gas.

Putin has sparred with the United States over NATO expansion; U.S. plans to install missile defense radar and rockets in Poland and the Czech Republic; and recognition of Kosovo's independence.

Russia has also boosted ties with Iran, building a nuclear power plant in the city of Bushehr and providing nuclear fuel -- even as Iran's nuclear program has emerged as a source of acrimony with the West.

Medvedev recently charged that incompetence and arrogance by Washington and U.S. businesses have provoked a global economic crisis.

"It was the disconnect between the formal role played by the United States of America in the world economic system and its actual capabilities that was one of the main reasons for the current crisis," Medvedev told political and business leaders at the St. Petersburg International Economic Forum.

"Russia today is a global player," Medvedev said. "We must recognize its responsibility for shaping the destiny of the world."

Russians have embraced this vision, and Putin and Medvedev enjoy strong popularity. But the country also suffers from rampant corruption and a focus on quick profits. Independent media have been squashed and dissent is being silenced. Beyond the new class of super-rich nourished by oil and gas prices, widespread poverty lingers.

And in the first four months of 2008, oil output decreased 1.5% compared with the same period in 2007. There are fears that rising costs and aging fields mean output could decrease this year for the first time in a decade.

Iran too has experienced an increase in clout and a weakening of democracy as the price of oil has risen. The Islamic Republic has been able to simultaneously expand its influence, bolster military capability and suppress dissent.

Since the 1979 Islamic Revolution, the price per barrel has played a critical role in determining the tone of relations between the U.S. and Iran, which is heavily dependent on energy exports to finance its gigantic public sector, its military and its foreign allies.

In the 1990s, with oil prices bottoming out and foreign debt piling up, Iran was forced to moderate its domestic and international policies to attract European investment and trade with Persian Gulf states.

With oil at an inflation-adjusted $24 a barrel and dropping, reformist Mohammad Khatami was elected president with a mandate to make Iran a more open country.

But by 2002, with oil at $27 and rising, analysts detected a drift toward greater authoritarianism, including a crackdown on the independent media and the arrests of dissidents and members of Khatami's entourage.

With oil at $55 a barrel, conservative President Mahmoud Ahmadinejad ascended to power in 2005. Record oil prices have enabled Ahmadinejad to offer low-interest loans or food coupons to government supporters, launch infrastructure projects and import large amounts of food to keep commodity prices low. Meanwhile, journalists, activists and bloggers are silenced by intimidation or jailing.

Tehran earned more from oil money in May 2008 than it did in all of 1998, the height of Khatami's power.

Iran's nuclear program has become one of the major foreign policy worries of the Bush administration and Israel, as well as a grave concern for Europe and the Arab world.

Iranian backing for militant groups in the Palestinian territories and Lebanon did not begin with the oil boom. But its strong role in Iraq, along with the rapid expansion of its uranium enrichment program over the last two years, did.

"You can't attribute that entirely to higher oil prices," said Paul Sampson, a London-based analyst for Energy Intelligence, a trade publisher covering the oil and gas industries. But "the fact is that the hard-liners have become more entrenched because they have this constant stream of oil revenue."

"As a general rule in Iran, the increase of oil price has disproportional relationship to democratization," said Said Laylaz, a Tehran economist. "The higher the price, the less democratic society. . . . The government has been emboldened to control everything."

High oil prices have also shielded Iran from the effects of sanctions over its nuclear program.

"If you took Iran's oil off the market, that would bring the international economy to its knees," Sampson said. "Iran knows that."

In Venezuela, the Central Bank reports that oil revenue for the first quarter of this year was $20 billion, up 60% from the first three months of last year.

Chavez has channeled much of the oil bonanza into programs for the poor. But observers worry that the windfall is encouraging his autocratic tendencies, and that Chavez is using the cash to finance an arms buildup and an anti-U.S. policy initiative.

Others predict that in a country where 70% of economic output is directly related to oil, his economic model will crash if and when prices fall.

Growth is evident everywhere in Venezuela, in shopping malls where consumers snap up clothing, whiskey and electronics, and on streets where traffic jams tell of a 47% increase in car sales last year.

For now, it matters little that production has sharply declined over the last five years because of the flight of home-grown professionals and the foreign firms with expertise in dealing with Venezuela's difficult-to-handle heavy oil.

But some say rising oil prices mask economic troubles to come.

Gustavo Garcia, an economist at a Caracas think tank and graduate school known by its initials, IESA, said growth such as Venezuela's that is based on high oil prices cannot be maintained indefinitely.

"In the medium term, when these prices return to normal levels, the economy will be subject to a traumatic adjustment," he said. "We are repeating cycles of past economic expansions that were based on oil booms that aren't sustainable."