As we scan the proverbial geopolitical horizon, there are two countries that stand out as high-risk targets for significant social unrest in the coming months. Not surprisingly, both are oil producers terrified at the sight of Brent crude falling below $50 per barrel on Monday.
In Venezuela, a Glimpse of Popular Discontent
The first is Venezuela, where even the most optimistic of government-manufactured statistics should give observers a feeling of deep foreboding. Venezuela burns through its oil reserves at a dizzying rate of roughly $1 billion per month. Not only that, but the country is actually down to about $16.9 billion in total reserves, with only a fraction of that amount — estimated at less than $1 billion — held in liquid reserves. Given the country's heavy dependence on oil revenue, it hardly takes an expert statistician to see that Venezuela is in an untenable financial situation. The lack of foreign exchange to finance imports has led to severe food shortages. And the Dec. 6 legislative election only complicates matters, as an already hamstrung government is going to be all the more resistant to imposing structural economic reforms that are as unpopular among voters as they are necessary to the country's financial viability.
Exacerbating Venezuela's economic difficulties is widespread corruption. Government-affiliated mafias with powerful military links rely on Venezuela's overvalued exchange rates and capital controls to profit from arbitrage. So far, Venezuelan President Nicolas Maduro has shown neither the inclination nor the ability to crack down on these corrosive elements. Nor is Maduro willing to take the politically precarious step of cutting fuel subsidies in the lead-up to an election where his party is already at risk of losing significant support.
If the government's precarious situation has a silver lining — or at least a muted gray one — it is that a still-fragmented opposition is not yet willing to organize mass protests ahead of elections, since it is loath to risk its congressional seats by giving the government an excuse to impose a state of emergency.
That said, the threat of spontaneous unrest is still very much alive. We got a glimpse of popular discontent on July 31, when hundreds of people in San Felix, Bolivar state, angered by high food prices, shortages and a recent fivefold increase in local bus fares, started looting supermarkets. One of the rioters was killed in the melee.
The San Felix example is bound to be emulated more and more frequently in the Venezuelan hinterland. The government will no doubt prioritize population centers such as Caracas when supplying basic goods, leaving less fortunate states such as Bolivar and Tachira to face much more severe shortages and a higher risk of social unrest. We can expect the Venezuelan government to rely largely on the National Guard and the national police to put down such riots, followed by less disciplined colectivos should the situation warrant reinforcements. The national policy and interior ministry fall under Gen. Gustavo Gonzalez Lopez, an ally of powerful regime figure and National Assembly President Diosdado Cabello. And should economic difficulties breed divisions within the government, a weaker government will be even less able to cleanly and effectively contain widespread social unrest.
Trouble on the Horizon for Russia
The second country on our radar is Russia. The Russian economy has slipped into its second recession in six years, leaving the Kremlin with no choice but to slash the budget by 10 percent (save for defense). Tensions with the West have led direct foreign investment to drop by 50 percent over the past year, while capital flight from Russia is set to follow a similar course as last year, when the country was sapped of $151 billion. Hundreds of Russian banks across the country are in danger of collapsing. Of the country's 83 regional governments, 63 are estimated to be nearing bankruptcy or defaulting on their debts. In addition, hundreds of towns throughout Russia, where populations are specifically trained for one industry, now face industrial collapse and bankruptcy. And with their now unemployed residents unable to move anywhere else, economic downturn is planting the seeds for social unrest.
But Russia can be unpredictable when it comes to expressions of social discontent. Despite the seemingly dire circumstances, Russia has yet to witness mass protests over economic conditions. Indeed, Russian President Vladimir Putin's approval rating is still hanging in the high 80s. According to a recent Levada poll, roughly half the Russian population approves of the Kremlin's decision to prioritize defense spending over the country's economic development.
But even if the situation looks relatively calm now, the Kremlin knows the real threat to social stability in Russia will start in the heavily indebted regions, where the country could see a re-enactment of the 1998 protests. The federal government simply does not have the financial tools to bail out all of the country's 83 regions. Instead, the government is focusing on preventing protests before they even start and giving security forces the tools needed to crack down if demonstrations do erupt. Over the past month, the Russian Duma passed a series of laws to expand regional governments' ability to monitor for protests and to expand police powers, including more extensive rights to use weapons against civilians.
Regional security forces have been cracking down on opposition leaders and organizations leading into September's regional and municipal elections. Opposition leaders in some cities have already been detained in recent weeks, though local elections are still more than a month away. The Kremlin also moved up next year's legislative and regional elections from December to September in hopes that a date change could undermine opposition efforts to organize protests close to summer holidays. Moscow might also want to get the election over with earlier if it believes the economy will only worsen toward the end of the year.
Unless Venezuela and Russia get an economic lifeline from a willing sponsor or the price of oil significantly rebounds, both Caracas and Moscow are likely heading toward a very rough period of unrest and subsequent crackdowns in the months ahead. We will have our eyes peeled and our ears to the ground for the early warning signs.