The End of Rivalry?

The economic crisis could cause our adversaries to tone down their rhetoric and leave us alone—for now.

On November 19, 2008, The Nixon Center hosted a panel discussion entitled "The Economic Crisis and America's Rivals," to investigate the effects of the financial crisis and responses to its fallout in several of the world's key economic regions-China, Russia and the Arab Gulf. Moderator Paul Saunders, Executive Director of The Nixon Center and Director of its U.S.-Russian Relations Program, provided analysis on the situation in Moscow. He was joined by colleagues Drew Thompson, Director of China Studies and Starr Senior Fellow, and Geoffrey Kemp, Director of Regional Strategic Programs.

Having based much of its new economy on the U.S. model, the collapse of the American financial sector has forced China to approach its markets and industries with a critical eye. The main question, as Drew Thompson argued, surrounds the issue of Beijing's dependency on exports, mainly to the United States. Declining U.S. consumption and a low level of confidence in the current economic climate have had a detrimental effect on China's light industrial and manufacturing sectors. While the global decline in the price of commodities and energy would seem to benefit the Chinese economy, the drastic fall of oil prices is a reflection of the global drop in demand that has caused the downturn in China's export economy.

Despite these problems, Thompson did not predict doom for the Chinese economy. The fragmentation and lack of centralized structure in the Chinese economic system isolates individual sectors from the economy as a whole and will thus prevent the trickle-down effect seen in America and other Western nations. However, the large number of layoffs in the wake of decreasing Chinese exports will create a disproportionately high population of unemployed workers in specific regions of the country with the potential to cause significant unrest. While possibilities of problems exist on a social level, China's relations with the United States remain on relatively solid terms.

The outlook for the Russian economy, however, is bleaker. Moscow's leaders have sought to downplay the vulnerability of the Russian economic system to the global financial crisis, calling their economy "an island of stability" and overstating Russia's insulation and economic diversification from oil. Only recently has the Kremlin begun to concede that Russia is falling into a pervasive economic crisis. In highlighting future budgetary issues facing the Kremlin, Paul Saunders pointed to the disparity of the current price of oil (between fifty-five and sixty dollars a barrel) to the Russian government's projection of ninety-five dollars a barrel, the number it used as its benchmark in setting the national budget for 2009.

Saunders argued that one reason for Moscow's reluctance to openly acknowledge the poor state of the Russian economy is fear of losing political legitimacy, gained by pulling the nation out from the economic despair of the 1990's. The financial recovery of the last decade and increase in the value of the ruble-as a result of heavy government spending to back the currency-have been the hallmarks of the new era of Russian government. Another economic disaster and subsequent devaluation of the ruble on the heels of government claims that the Russian economy was insulated from the global financial crisis would have an enormously detrimental effect on the legitimacy of the current leadership.

This fear of losing a major source behind its political legitimacy may force the Kremlin to look for other means to shore up its support, such as foreign policy. The economic crisis will force a reordering of priorities within the Russian establishment and temper the prospects of those who seek to increase Russia's international influence. On the other hand, Moscow may seek to pursue an aggressive foreign policy as its economic base declines by demonstrating its resolve to confront the United States on a number of key issues. The question is whether such attempts by Russia to flex its political muscles would reflect substantial changes in policymaking, or just outsized rhetoric.

The economic boom that has benefited the Arab Gulf in recent years as a result of rising oil prices has given way to a freeze on economic expansion projects. Countries better positioned to weather the storm are Kuwait, Qatar and the emirate of Abu Dhabi, whose large energy revenues and small populations provide a cushion for loss. Kemp identified the weak countries as Saudi Arabia, Oman, Bahrain and the emirate of Dubai-Saudi Arabia must support a large population, Oman and Bahrain have little energy resources, and Dubai has exhausted its energy resources.

Kemp's depiction of a number of these Gulf Cooperation Council (GCC) states as "weak" is relative when compared to the economic situation of their Persian Gulf neighbor Iran. The Iranian government itself has stated that oil below ninety a barrel spells trouble for the already strained Iranian economy-and the average price of oil for 2008 is dangerously close to the tipping point. The current financial crisis has exacerbated the problem by limiting the prospects for investment from Asia's emerging economies and constricting the amount of money Iran can invest in its own energy sector.

There has been growing criticism within Iran of President Mahmoud Ahmadinejad's continued economic mismanagement, which will greatly impact Iran's largely energy-subsidized underclass. In view of the upcoming presidential election in Iran, Kemp claimed that we are likely to see less aggressive rhetoric from Tehran in the near future. Tempered Iranian anti-Americanism, as Kemp pointed out, is unlikely to affect the nuclear situation, unless the new U.S. administration dramatically changes our Iran policy.