Nouriel Roubini's Global EconoMonitor

Roubini Bremmer FP Interview: $200 Oil and the Moscow-Beijing Alliance

From FP:

An exclusive conversation with Nouriel Roubini and Ian Bremmer on the toll of war with Iran — and why China and Russia just don’t care anymore what the United States thinks of them.

It’s a mixed bag these days. Europe appears to have arrested its fall into the abyss and the U.S. economy is finally looking up. But with a looming consensus that war with Iran is in the offing and Putin’s recent return to power in Russia, geopolitical chaos lurks around the corner. Foreign Policy once again turned to Nouriel Roubini — who’s always good for a little doom and gloom — and Ian Bremmer to make sense of the ticking time bombs. And they didn’t hold back.

When asked about the consequences of war in Iran, Roubini sees prolonged high oil prices “$170, $180, $200 a barrel” and warned of the knock-on consequences: “the last three major global recessions … were all caused by a geopolitical shock in the Middle East that led to spike in oil prices.” But Bremmer’s not buying all the war hype: “the Obama administration does not want to engage in military strikes against Iran — and they sure as hell are going to resist it, no matter what — before the elections.”

When it comes to metaphors, the pair of prognosticators didn’t disappoint: Roubini still sees a dark outcome in Europe — “a slow-motion train wreck” — while Bremmer sees the Chinese economy as a “very, very fast car” hurtling down a highway … “the problem is that there’s a bend in the road coming up and there’s no steering.”

But the real surprise comes at the end of the conversation, where Roubini and Bremmer both worry about instability in Moscow and Beijing bringing the two nations together — but it might be less a case of keeping your friends close than keeping your enemies closer.

Foreign Policy: February’s job numbers are out, the third straight month of 200,000-plus gains, but unemployment stays steady. Are we seeing the green sprouts of an economic recovery here?

Nouriel Roubini: My feeling is that the economic data are mixed. Certainly creating 200,000 jobs per month as opposed to only 100,000 is a positive signal. But while the data for the last 2 to 3 months were consistently surprising on the upside, some recent data suggests an element of caution. For example, real consumption spending has been flat for three months in a row. Durable goods orders — a proxy for capital spending by the corporate sector — are sharply down in January after the tax advantages expired at the end of last year. Construction spending is still down. Home prices are still falling. Today, the number on the trade balance in January came in worse than expected. So if you look at the macro supply data it looks better. But the demand data, whether it’s consumption or residential or net exports, suggests there’s still softness.

My view of it is still that economic growth is going to be soft, anemic, and below-trend. I think the tail risk of an outright recession conditional on external shock, like eurozone turmoil or oil or China is a small risk right now compared to six months ago. But I think the data is not consistent with the views that we are going to start growing at 3 percent plus in the next 12 months.

Growth for this year is going to be maybe 2 percent. And by next year, what’s going to happen is that — regardless of whether Obama is reelected or a Republican (say, Romney) there will be, first of all, a meaningful fiscal drag, because mandated spending cuts start to be triggered if they refuse to do the draconian spending cuts on defence or discretionary funds. All the tax cuts — dividends, capital gains, estate, income taxes — expire and not all of them are going to be fully renewed. The payroll tax cut is also supposed to be one year, now it’s two years, but we cannot have it forever. And discretionary transfer payments are going to be reduced and government spending is on the way down. So you have a fiscal drag. Disposable income growth has been boosted for the last year and a half … so some of the growth of last year and this year has been stolen from the future. And because of the fiscal drag and the effect of that on household disposable income, I see further economic softness even next year.

Ian Bremmer: From my perspective — not to disagree with anything Nouriel was saying — but we are, broadly speaking, in 2012, we’ve entered the post 9/11 era. We’re not going after Bin Laden or al Qaeda. We’re out of Iraq, we’re getting out of Afghanistan, and we’re entering the post-crisis period.

Really, since 2008, if it’s not been one thing, it’s been something else. We no longer believe that there’s meaningful likelihood that a shock is going to send the world back into recession. That’s in part true because of the strengthening of American numbers. Nouriel’s right, these are not exciting growth numbers — this isn’t the robust bounce-back that we think is going to power a global economy with the kind of figures you saw before the crisis, but it’s a very different environment from the last four years. That’s very important in terms of getting consumer confidence back, but it’s also very important in terms of the orientation of CEOs to start spending some of the major cash that they’ve left off the table. I think the answer that they’ll start doing it — and not just in the United States. I don’t want to say they’re getting ebullient, but they’re less fearful about medium and long-term trajectory.

And it’s clearly true in Europe as well, where just six months ago, you had folks saying “oh my god, even if I don’t know how to assess it, there’s a possibility that the euro’s just going to fall apart.” They’re not worried about that now. From that perspective, we’re in a much better macro environment than we have been.

FP: Ian, how much of this has been because Europe did actually get its political act together, that it came through with the requisite bailouts for Greece, and stemmed the immediate, pressing concern of a massive default?

IB: I think it’s about three things. First, it’s about the U.S. numbers being higher that what any of the broad consensus views were six or 12 months ago. Some of that is real. People underestimated how bad the recession was going to be in the United States. They also underestimated how much resiliency the U.S. economy would develop in 2012. Second, you have Europe, which is a very big piece of that, and it’s not just about putting together a couple meaningful bailout programs for the Greeks. It’s also about sticking with austerity, with vastly improved governance in Spain, Portugal, and Italy — especially Italy, where the new leadership of Mario Monti and the ability to get the broad political spectrum actually together on budget and competitiveness in a country that does actually manufacture things and has a long-term trajectory in a way that Greece does not. I think that’s very meaningful, as is the structural movement toward eventual fiscal compact.

But I think the third point, which is a meaningful one, is that in that last six months, we haven’t had another Fukushima — we haven’t had North Korea blow up; we haven’t had a war with Iran. There are a lot things making headlines, especially in the Middle East, but frankly, from a geopolitical period, the last few months of American recovery have not been accompanied by any real, horrifying external shocks. And we should recognize that, because in this geopolitical environment, we can’t count on that.

NR: I agree that some of the tail risk of an outside default or eurozone exit by Greece is lower. But the periphery’s recession is not going to improve and markets eventually are going to start to worry again. Unemployment is rising, the recession is deepening, the election in France could be disruptive, a referendum in Ireland, elections in Greece — there are lots of elements potentially spooking the markets and widening spreads again. I think that the risk of a southern collapse of the eurozone is lower, but it’s still a slow-motion train wreck.

FP: Let’s talk about spooking the market a bit, then. The one that everyone is concerned about — and that’s obviously being priced into the oil market already — is the concern over an Israeli attack on Iran. How imminent do you think that is?

NR: I’m not the geopolitical expert and I will let Ian and others figure out the probability of an attack on Iran this year before the U.S. election or after the election — or of an Israeli attack alone. Whether it’s 20 percent, or 30 or 50 — I think that view will change over time. But it’s likely that the second quarter of 2012 is going to be the period when final round of giving a chance to diplomacy is going to be attempted. If that fails, maybe at that point both the U.S. and Israel are going to say, “Unless you back down, we may eventually attack you.” So you have to time how much these things are going to affect markets.

But even without an attack outright, there’s a war of words between the U.S., Israel, and Iran, and this war of words has been escalating. There is also a covert war, because Israel and the U.S. allegedly have been killing some of the scientists, engaging in sabotage through cyberwarfare, and now Iran is reacting. They’ve tried to kill a bunch of Israeli diplomats around the world and, if sanctions become more binding, they could start making noises about other threats. Brent [Crude] that used to be $90 per barrel is already in the $120-125 range. But if that war of words and covert war escalates, there’s a possibility that — even short of a military confrontation — oil prices could become high enough that it becomes material for the economy.

I would not underestimate the effect of gasoline today, in a number of U.S. states, being already at $4.00 a gallon — and it could be so in many other states. Psychologically, once you’re above the $4 mark, it has an impact on consumer confidence. And in the summer, prices tend to go up another 20 or 30 cents. The higher those oil prices are, the higher the chance that has a negative effect on consumer confidence, on disposable income, and on the economy. And it’s not just in the U.S. — the price of oil is very high in Europe and in many other parts of the world. So I would let other people assess the risk of a conflict, but confidently I see oil prices from here going higher, rather than lower. The one thing I worry about more than the eurozone is oil.

FP: Ian, what’s the calculus for Obama regarding high oil prices and another war in the Middle East?

IB: Well first of all, if you look at the assessments, whether it’s on Intrade or anywhere else, people at this point believe that Obama is going to get reelected, and that’s with understanding about oil, about gas, about Iran. I’m not saying that these guys are massively sophisticated, but the markets speak in a holistic way about this. I certainly agree that the risk for Europe has gone down radically, in terms of its ability to cause real problems for Obama before November. The risk of Iran and oil has gone up; it has not replaced it, but it has gone up. It is not as big a problem as Europe was in my view. But it is a big problem.

FP: Really? It’s something that Americans did not seem to care about at all.

IB: The White House was very concerned about Europe blowing up. But I think oil absolutely is more politically relevant; it’s something the Republicans can actually get their teeth into.

Let’s look at what’s actually likely to happen with Iran going forward. The first broad point going forward is that, in the same way that you should not trust eurozone coverage coming out of London because of the overwhelmingly negative bias, the same thing is true with coverage of Iran in the United States — you only get one side of the picture. Overwhelmingly, it is going to be the Israeli side, and it tend to overegg the likelihood that catastrophe is imminent. “We can’t live with an Iranian bomb,” they say even though we live with one in Pakistan and North Korea, so at some point or another we’re heading for blows.

I don’t’ care what percentage you want to put on it, and I do geopolitics here, right? My point is: If you read the press, it seems to indicate that it is inevitable that there will be blows between the U.S. and Iran. That is clearly not true.

It is true that in the second quarter, we will see an effort to ramp up sanctions that have been already been put in place but need to be implemented, and a real effort at negotiations. But you’ve also seen recent successful parliamentary elections in Iran that were not preceeded by demonstrations. We’ve seen [Ayatollah] Khamenei come out and say almost unprecedentedly positive things about the Obama administration and the United States. So clearly, they’re going to give a few months of negotiations a chance — and that means that right now, in the short term, the geopolitics of Iran is being hyped more than it should be.

Over the longer term, the Obama administration does not want to engage in military strikes against Iran — and they sure as hell are going to resist it, no matter what — before the elections. The Israelis don’t want to engage in strikes either. There was a recent poll in Haaretz that came out just yesterday: 58 percent of Israelis oppose unilateral strikes against Iran. Netanyahu has to deal with that, however popular he is. And remember: Netanyahu hasn’t made a decision that he is going to attack. What Netanyahu understands is that the best thing for him to do is pretend that he’s going to attack. Then, at the very least, he has to be talked down from the ledge by the Americans and he’s in a better position to demand concessions if he doesn’t attack — because it’s such a horrible thing for Israel and so on.

I think that the danger is that you do see an escalatory tit-for-tat that can eventually bring the U.S. into play, that puts a higher geopolitical premium on oil, and brings about a higher likelihood of military conflict. But I actually think the likelihood of the Israelis unilaterally going into Iran and blowing up their nuclear program — which is a broad, long, dangerous campaign — that’s relatively unlikely, and it’s quite unlikely before U.S. elections.

FP: Nouriel, what’s the worst-case economic scenario if Israel does attack Iran?

NR: The worse-case scenario is a protracted conflict. If there’s an effect on the supply of oil and gas from the Gulf, and production and exports from Iran go for a while to zero, oil could go to $170,$180, $200 a barrel.

Then, the question is how long it remains there. Of course, there are now discussions in Washington on how to respond. The amount of oil in the Strategic Petroleum Reserve is finite, but if you’re not going to use it in this situation, when else are you going to use it?

The reality is that if you think about the last three major global recessions, there were all caused by a geopolitical shock in the Middle East that led to spike in oil prices. The Yom Kippur War in 1973 led to the global recession from 1974 to 1979; the Iranian revolution in 1979 led to spike in oil prices and the 1980-1982 recession; and even in 1990, the Iraqi invasion of Kuwait brought a temporary spike in oil prices that led, among other factors, to a U.S. and global recession.

So if the conflict is severe and protracted and the increase in oil prices in significant, I would say we’re talking about not just a U.S. recession but a global recession. And this time around, we’re also coming out of a global financial crisis where now we have a huge amount of private and public debt in many advanced economies, like we did not have in 1973 or 1979 or 1990. So the global economy could not take a kind of protracted oil shock coming at a time where there’s already a painful process of deleveraging, with fragility in the balance sheets of governments and the private sector as well.

FP: Ian, you just got back from China, still buying Iranian oil and has been intransigent in the Security Council (along with Russia) on condemning the crackdown in Syria. And now, as the country seems to be prepping for the ascension of Xi Jinping to head of state, it lowers its GDP growth outlook to around 7.5 percent. Is this more of a political or an economic hedge?

IB: 62 percent of China’s GDP is now state-owned enterprises. That number has actually gone up from what it was before. China’s consumption is going up, but it’s not going up as fast as state investment is. The World Bank report that came out at the end of February was an excellent report: it was comprehensive, it showed exactly what the Chinese need to do. And the Chinese government also cosponsored it, that’s great. But there’s nothing new there. They need to fundamentally rebalance, they need transparency in their economy, they need to move away from labor-intensive state investment, and they need to move away from state-owned enterprises that are inefficient. I do not see any political will to do that on the part of the senior leadership in China, and I don’t see that changing with Xi Jinping and his colleagues following their ascension to power later on this year. And I think that’s the real problem.

Nouriel and I wrote this piece in the Wall Street Journal a few months ago where we came to the conclusion that, long-term, the biggest can being kicked down the road is China. I feel more strongly about that having just come back from there. Look, China’s a very, very fast car; it’s got a very big engine and it’s been going down a very long, straight highway for a few years now. The problem is that there’s a bend in the road coming up and there’s no steering on this Chinese car, and I don’t think we’re going to see any. That should really concern us.

Also, the U.S.-China relationship continues to deteriorate. I mean, you’re right, they vetoed the Syrian Security Council resolution — they did not abstain, they vetoed. And they did it a week before Xi Jinping came to the United States. They do not care.

The U.S. is not the demographic. They’re not trying to impress us. They’re not trying to offend us unnecessarily — but they don’t really care what we have to say. You’ve seen that in the recent Senate legislation as well, which is really trying to push the Chinese on currency. The Chinese response was absolute indifference.

But they’ve got massive internal challenges that they are not addressing in a structural systemic way — and that in the long-term will bite them in the ass and creates vastly more volatility around economic and political trajectories.

FP: Is there a downside volatility to China not being a responsible power, if they continue to refuse to step up to the table and act as an emerging superpower?

IB: Hillary Clinton made it very clear, you don’t criticize your banker. Their ability to do what they want from a human rights perspective — despite the fact that their record is vastly worse than that of any developed country — is not one that we’re going to particularly ding them for. But there are other issues that will come up.

Clinton recently gave a speech where she said that America welcomes China’s peaceful rise, if they act responsibly. Well, assuming that they don’t act responsibility — and there’s no one in the administration right now that thinks that they do (and that also includes a prospective Romney administration) — then what do you do? Then the American pivot to Asia becomes a hedge, and then American strategy in Asia starts looking to the Chinese a lot more like containment. So, in other words, your relationship between the two largest economies in the world deteriorates dramatically, and that has enormous implications in terms of volatility of the global economic environment. This is by far the biggest medium-term risk out there. It’s not the Middle East, it’s not Europe, it’s this — because these are the world’s two largest economies.

FP: Nouriel, speaking of ascensions to power, what do you think about Vladimir Putin’s election? Do you see any willingness in him to reform the Russian economy or is he just sort of coasting along on high oil prices? And how long is that leash?

NR:  Russia used to grow at 8 percent a year between 1998 and 2008. Then the global financial crisis happened and there was a contraction, but since then their economic record has been between 3.5 to 4 percent — even with oil prices going from $30 a barrel in 2009 to well above $100 now. And the problem with Russia is that unless you do structural reforms by reducing the role of the government in the economy and state-owned enterprises, and developing the private sector more — unless you do a variety of market-oriented structural reforms — the potential growth rate of Russia may not be much higher than 4 percent. And in an economy where there’s a huge amount of rent extraction occurring because of an excessive reliance on oil, energy, and raw material, and as long as those prices are high, the incentive to do reforms is going to be limited. Yes, now there’s a movement especially in Moscow and in the middle classes that is resisting him. But Putin won. We’ll see how much that is a reflection of the majority vote as opposed to ballot rigging. He may be slightly weakened compared to what he was a year ago, and he might be nudging a little more to the center and offering slightly more reforms than he would have otherwise done, but in my view reforms in Russia are going to occur at a mediocre, suboptimal pace relative to what’s desirable. They’ll be cosmetic rather than radical.

FP: Ian, was the “reset” a failure?

IB: Well, it’s over. Bush’s effort, post 9-11, was a bit of a reset as well. It failed. Who lost Russia? Clinton. That also failed. We’ve now gone through three complete cycles of up and down with Russia. Historically, a lot of the down has come from the United States. This time it’s come from Russia, because Putin is not somebody that the U.S. administration is going to work well with, and Putin himself is not well oriented towards the United States. In China, you see very incremental changes in foreign policy and disposition towards the rest of the world because it’s run by consensus. In Russia, it is not. Foreign policy is run by one person with very few checks and balances on his power.

And Putin’s under pressure domestically, which makes him even more unwilling to play nice with the Americans. Most of the people that he’s brought in around him are folks with a strong nationalist orientation. Everything that we see from Moscow suggests that the U.S.-Russia relationship will deteriorate pretty dramatically, and the real question there is: If U.S.-Russia relations deteriorate dramatically and U.S.-China relations deteriorate dramatically, and since Putin has had very nice things to say about China recently, are we going to see a real orientation of those two countries together?

There are a lot of challenges to doing that — demographic challenges, issues of anti-Chinese discrimination on the part of the Russians — but from an energy perspective, it’s very interesting. From an arms perspective, it’s very interesting and very problematic for the United States. I think that’s one thing we should watch carefully.

FP: Do you think there’s going to be heightened tensions, or does Russia not really matter all that much anymore?

IB: It doesn’t matter anywhere near China. I mean, if we had had this entire conversation and you didn’t bring up Russia once, I would have been okay with that. But it does matter — and more for the Europeans than it does for the United States. Nouriel and I both believe that Russia should not be a BRIC. The BRICS are the countries that are going to be dominant — but look at Russian GDP slowing down, major capital flight, a civil service that doesn’t run effectively, massive corruption, terrible demographics. We would kick Russia right out of the BRICs.

NR: On Russia, Ian, you’re right that Russia and China may get closer to each other, but I think the biggest strategic threat to Russia is China. You’ve got a land mass in Siberia that is as big as the United States, where there are barely 15 million people, and there are millions of Chinese now moving across the border of Mongolia — buying land, starting to produce. As you know, possession is nine-tenths the law. So strategically, at some point, Russia’s going to realize that the only one who can defend them from losing Siberia is the United States and Europe. So I don’t understand the logic of their views. They’ll be better off being friends with the U.S. and Europe than with China.

IB: I get your point. I think strategically, there’s a lot to be said for that, but China’s got a lot of money and needs energy. Russia’s got a lot of energy and Putin wants to show some quick wins. You see that Russia and China are both on the same side on Syria and Iran — and my guess is that Hu Jintao decided to go with the Security Council veto rather than the abstention only after Putin called him personally before that vote. And they’re both increasingly having problems with the United States for very different reasons: because of the Arab Spring, because of general views toward democracy, human rights, etc. From a purely realpolitik perspective, if there was nothing happening domestically within these countries — if we’re moving chess pieces on the board — I can see a lot of reasons why the Russians would want to go long-term with the United States. But I think there’s a lot more going on than that in Russia right now.

5 Responses to “Roubini Bremmer FP Interview: $200 Oil and the Moscow-Beijing Alliance”

princess1960April 4th, 2012 at 11:14 am

pr.Roubini is right i know hi is very knews actual situation in global crisis total..oli price allways go up AND will continue to go up ..and this i think doesn't have to do about politice but about relly situation of oil-gas in wordl is problem….we have to much growth population fast grow tech ..who needed just oil -gas maybe we have to find other resolution (is necessery) because we stop wars around us about oil….TOO i dont think Iran needed nuclear for economy help (i dont believe ) ..Iran (prokali) with the position political …I think the wordl is 2 paces..we finish cold war (i dont think)..but i see CH +RU+IR+VEN+others small countrys is one side another side is USA+JAP+SOME COUNTRYS EU and all this make the crisis economic in world more deeper ..AND i am not agree a situation in EU is better because the unemployment in all the EU IS 24%..this is really not grow but fix this situation I DON'T KNOW.. just one small excamble..''we have one old house and every day or every month we have to fix something but after again we have problem because is old''' RICONSTRUTION FROM BASE.. thank you your debat is intristing ..

JMeDieManMay 16th, 2012 at 10:23 pm

Nouriel, please do an impact study on what happens when the 35 million people in Tokyo are evacuated because of the Fukushima Reactor 4 SFP pool criticality. What will be the economic cost of the next thousand years of radioactive contamination?

I want to start stocking up in derivatives to get ready.