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Central Asia’s Cheap Oil Double Whammy

Mar 04 , 2015

The prolonged slump in oil prices is causing plenty of wailing and gnashing of teeth from Oran to Ottawa. But for countries in the Caucasus and Central Asia, the oil swoon has been coupled with Russia’s economic implosion to create a particularly ugly economic outlook. That raises concerns about the region’s stability — even as it opens the door for a bigger role there for China.

The 50 percent drop in crude prices since last summer alone would be enough to spell pain for countries such as Kazakhstan and Azerbaijan that rely heavily on fossil fuel exports for government revenues. Kazakhstan last week trimmed its budget — which had been based on oil at $80 a barrel — while Azerbaijan may have to revise downward similarly rosy spending plans later this summer. Azerbaijan already had to dip into its oil fund for the first time since it was created 15 years ago. Kazakhstan’s sovereign wealth fund is looking to borrow fresh money due to the oil collapse.

But unlike other oil producers that are forced to tighten their belts, countries in Central Asia are suffering an extra dollop of pain: the knock on effects of Russia’s own economic woes. The collapse of the ruble and the Russian economic contraction — brought about by both cheap oil and Western sanctions — is hammering trade between Moscow and many countries in Central Asia. That, in turn, has forced countries across the region to devalue their own currencies, which makes imports more expensive, fuels inflation, and weakens the banking sector.

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