China’s economy has continued to slow. The last update from China’s official statistics agency reported 6.9 percent growth in the third quarter of 2015. I suspect, although can’t prove, that the real growth rate is substantially less than what Beijing claims. And to the extent that the growth was real, it was likely not very profitable. China has many competitors who sell the same products at a lower price. Because of this slowing growth, the amount of industrial commodities China could buy, from iron ore to oil, declined. As always, there was a failure of the markets to grasp that the Chinese economy was not going to return to the old normal, but that a new normal had been in place for several years and, therefore, the price of these commodities was irrationally high. The inability of markets to see what was obvious was critical over the past two years or so. But this is a normal feature of financial markets, which have a great deal of trouble identifying discontinuities. It is the true irrationality of markets, but a dangerous one to try to exploit. The market’s ability to delude itself collectively for extended periods of time is part of one of the fundamental realities of geopolitics: the interaction between economics, politics, and war, which is the place we all live our lives. And certainly where Eurasia is now.
The illusion of China, which I once called the China Bubble, burst in 2014. I should emphasize that this was not the result of China’s economic shift. That had been going on for years. Rather, 2014 was when the markets realized that China’s downturn was now a permanent feature of the international system. Interestingly, the positive effects of lower oil prices on consumers were not trivial, but not nearly as significant as they would have been 30 years ago. Efficiencies and alternatives had decreased the importance of oil to consumers. But they did not decrease oil’s importance to producers. And, as important as the economic consequences of declining profits for mineral producers (it’s important to go beyond oil) have been, their political consequences have been critical.
Last week, the son of the Saudi king said that Saudi Arabia was interested in selling part of the state-owned oil firm Saudi Aramco. The only reason to put this on the table is that the Saudis need money badly. The potential political consequences of the sale of Aramco are enormous. For decades before the 1970s, European and American interests had owned most of the region’s oil. This had been a sore point in the region; however, the Saudis and others changed this dynamic following the 1973 oil embargo. Nevertheless, the hostility toward the West in the Arab world has increased and, more importantly, the two groups are fighting a war in the region. For the Saudis, at any moment… but particularly at this moment, to raise the possibility of selling part of Saudi Arabia’s oil resources (however small the amount) back to Western interests, represents the deep crisis that falling oil prices have created.
A similar problem exists for Russia. The Russians fumbled the Ukrainian crisis. They went from having a light but real control of all of Ukraine, to seeing the country governed by a pro-Western government, while Russia clings to Crimea and a small strip of support in the east. They were in the middle of confronting the West on this issue when the oil crisis hit. Oil revenues were a major component of Russia’s national budget and the driver of the economy. Their dramatic contraction led to a significant financial and economic crisis for which the Russians have no solution. There are many reasons for why they became more assertive in their foreign policy, but maintaining domestic confidence in the government is the key. The decline of oil prices and its impact on the economy will remind most Russians of the events prior to the fall of the Soviet Union. By appearing to be a major player in Syria (Russia actually has deployed relatively few aircraft and fewer t roops), the government has maintained its popularity in spite of the emerging hardships.
The point here is that not only is Eurasia as a whole in crisis, but the crises in individual countries and regions are increasingly interacting. The Middle East crisis is interacting with Russia. It is also interacting with Europe, both in terms of the refugee crisis and European deployments in the Middle East. The refugee crisis—where an extra million people on a continent of about 700 million people is hardly overwhelming—has revealed deep fault lines within Europe over the question of borders. Borders are the single central issue of the European Union, and it was thought to have been settled. In addition, Europe’s ongoing inability to solve its economic malaise—and I don’t expect a solution for a long time—has intensified China’s problems. Europe was China’s largest customer. Also, the crisis in Ukraine has focused Poland and Romania on the perceived threat from the east, much to the indifference of the rest of Europe, but drawing in the United States as the guarantor of the eastern frontiers. And as mentioned, our forecasting model at Geopolitical Futures points to serious instability in Central Asia as a result of Russian, Chinese, and Middle Eastern problems.
Trade is another potential source of disruption brought on by interdependence. Exports constitute about 23 percent of China’s GDP. They make up almost 50 percent of Germany’s GDP and 30 percent of Russia’s. In Saudi Arabia, it’s 52 percent. However, in Japan it’s 16 percent. And, in the United States, exports are only 13.5 percent of GDP and only about 8 percent is attributed to countries outside of NAFTA. When we look at the export levels, we are measuring a nation’s vulnerability to the international system. I would draw the boundary of excessive dependence on exports at about 20 percent of GDP. It is important to add that I evaluate the consequences of dependence, not so much in economic terms, but in their impact on social and political stability. High exporters are not necessarily unstable, but their risk is higher.
Based on this, and looking only at a handful of major powers, we can see one—though not all—of the drivers of the crisis in Eurasia. We can also see why Japan, as economically hard-pressed as it may be, has not destabilized. In looking at the American numbers, and at the geography of its exports, it is also evident why the United States, which may have triggered 2008, has generally not suffered much of the social chaos. It is least exposed to what happens in Eurasia because it depends least on those markets. There are other reasons, of course, but it is important to bear these export numbers in mind.
George Soros said this week that we are heading for a crisis similar to 2008. I disagree with him to this extent. First, the 2008 crisis never ended. It just merged with political, social, and military processes and became part of them. Second, the economic crisis, while there may be one, is trivial compared to the conflicts within Europe and along the European-Russian borders. It is trivial compared to the chaos in the Middle East and the economic dysfunction in China. Ultimately, the 2008 crisis never ended. Indeed, it defines the new Eurasia, a place where most human beings live, where stability is increasingly hard to find.-
George Friedman is editor of Mauldin Economics' This Week In Geopolitics.-