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| Indonesian army personnel during a search and rescue operation for missing AirAsia flight QZ8501 over the Java Sea on Dec. 29.
In the past year, Southeast Asia’s aviation industry has suffered an unprecedented number of tragedies. Although the odds of any person boarding a flight dying in a plane crash are about 1 in 11 million, three planes — two based in Malaysia, the third an Indonesian affiliate of a Malaysia-based group — have apparently gone down, with no survivors. The latest, AirAsia Flight QZ8501, had been traveling from Surabaya, Indonesia, to Singapore when it vanished over the Java Sea.
To some extent, the three Malaysian air disasters are just brutal bad luck. Still, they point to several disturbing trends that raise the question of whether flying in peninsular Southeast Asia is completely safe. The air market in the region has embraced low-cost carriers, leading to a proliferation of flights throughout Southeast Asia, stretching air traffic controllers, and possibly allowing some airlines to expand too rapidly. Indonesian carriers, air traffic controllers, and Indonesian airspace in general have become notorious for weak safety regulations. AirAsia has responded to this crisis much more rapidly than state carrier Malaysian Airline(MAS:MK) did after the disappearance of Flight MH370 last March, but the opaque, authoritarian politics of Malaysia—which are common in Southeast Asia—will likely make the search and rescue operation, and any inquiry into why the flight crashed, more difficult than necessary.
AirAsia, modeled on carriers such as Ryanair (RYAAY:US) and Southwest Airlines, was the first low-cost airline to prosper in Southeast Asia, which had been dominated by state carriers until open-skies deals broke the market open in the past decade. AirAsia allowed the growing middle classes in Asia to use air travel for pleasure and business for the first time. The no-frills airline charged for food, bags of any significant size, choosing a specific seat, and many other services, but it also gained a reputation for solid customer service. In the wake of Flight QZ8501’s disappearance, AirAsia has continued to show its responsiveness. Through its website and emergency call centers, the airline has been providing families with up-to-the-minute and seemingly accurate information about the plane and the nascent search effort, a sharp contrast from Malaysia Airlines, which told families of passengers on MH370 virtually nothing for days after the plane vanished.
AirAsia has expanded rapidly in Indonesia, the most populous nation in Southeast Asia and an archipelago where cheap air travel is incredibly attractive to middle classes. Indonesia-based low-cost carrier Lion Air, meanwhile, placed a massive order in 2013 for 234 new Airbus planes and followed that up with an order last month for 40 more planes. Other low-cost carriers such as Citilink, Tigerair, Valuair, and many others have also built up their route networks across the archipelago.
But while air traffic has grown in the region, and while AirAsia had a mostly solid safety record, the increase in low-cost flights may have resulted in planes being operated by men and women with less experience than in the past. Southeast Asian airspace still has the same mountains, chaotic weather, and tough approach paths as it always did. The pilot on the AirAsia flight had about 6,000 hours of flight experience on the Airbus plane he was flying, but it is unclear whether he had experience flying at 34,000 feet or higher, where he was trying to take the plane to avoid bad weather. The higher the plane rises, the more difficult it can be to navigate tricky conditions such as thin air and ice crystals. Some low-cost carriers seem particularly strapped trying to find quality staff and allegedly push their pilots and crew to work too many hours in order to run so many flights. Indonesian carrier Lion Air has had at least three of its pilots arrested for crystal methamphetamine use since 2011; crystal meth is a stimulant that can be used to stay awake and alert.
This increase in flights seems to have particularly taxed air traffic controllers, pilots, and mechanics operating in Indonesia. The country has become infamous for poor management of planes in the air and coming in for landings, and for lax enforcement of airlines’ need to maintain planes. Pay for air traffic controllers, mechanics, and regulators of the aviation industry remains low by regional standards, and graft is endemic at all levels of regulatory agencies in Indonesia; the country ranks among the most corrupt in East Asia in Transparency International’s annual Corruption Perceptions Index. Yet the increase in flights into and through the country has required more air traffic controllers, mechanics, and pilots, whether Indonesia is capable of providing trained people to fill these jobs.
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Euphoria, by definition, is short-lived. In the days after Russia’s annexation of Crimea in February, Russian President Vladimir Putin could be forgiven for thinking he’d secured himself a resounding victory: He’d outmaneuvered the liberal West, which was more interested in avoiding conflict than confronting aggression, and aroused the historical yearning of his subjects, still angry and resentful about the makeup of the post-Cold War settlement. His approval numbers soared to 88 percent.
Now, half a year later, euphoria has been replaced by panic. In the span of 48 hours, the ruble shed more than 10 percent of its value to the dollar, tallying a loss of 50 percent this year—making it the world’s worst-performing currency. A surprise and desperate rate hike by the country’s central bank, which brought the main interest rate to 17 percent, only accelerated the crash. The Russian economy is projected to contract by 5 percent in 2015 if oil prices stay at their current low level. Putin’s gamble was that he could withstand the economic costs of his foreign policy adventurism, outlast the easily distracted West, and do just enough to placate the international markets. That’s a gamble he’s lost.
In political terms, Russia’s financial meltdown has left Putin a shadow of his former swaggering self. Not long ago, a joke was circulating around Moscow about how the ruble, a barrel of oil, and Putin would all be just over 60 if they were to meet next year; as it happened, the riddle came true even earlier, when a 62-year-old Putin watched as oil slid to $62 a barrel and the ruble was trading at well above 65 to the dollar. Whether Putin survives the crisis depends in part on how ruthless he’s prepared to be to enforce loyalty among his inner circle and to snuff out signs of public dissent wherever it may appear. (A safe guess: very.) At the same time, there’s a chance that the threats to the political structure of his rule will force him to modify or even abandon the policies that got him here.
Why has this contest proved far more costly than Putin ever imagined? He’s gotten unlucky with the global price of oil. During the past four months, the price for a barrel of Brent crude has dropped 40 percent, from $115 to $65. The most paranoid advisers in the Kremlin see a sinister anti-Russian conspiracy, led by the U.S. and Saudi Arabia, meant to starve the Russian treasury and push the country toward collapse. (They say this is exactly the sort of external plot that led to the Soviet Union’s demise.) The truth, most likely, is that Saudi Arabia and other Persian Gulf states want to preserve market share even at low prices as a way of pushing shale producers out of business.
Even a 17 percent hike in the main interest rate by the central bank couldn’t reverse the ruble’s collapse
A fluctuation in oil prices alone shouldn’t be cataclysmic for Russia; after all, it built up more than $400 billion in currency reserves over the past 15 years for exactly this reason. It managed to weather the fall in oil prices during the global economic crisis of 2008-09, in part by relying on its large pile of cash. What’s different this time, however, are sanctions. Several months after the U.S. and the European Union imposed sanctions against individuals, companies, and certain economic sectors, in particular banks and the oil industry, the measures have had a much larger effect than policymakers envisioned.
International capital markets have all but shut down to Russian companies—a serious problem, considering the $700 billion in external debt they hold. Because of sanctions and the retreat of lenders, companies can’t extend or refinance existing debts by borrowing. As debts come due, companies are paying them off, putting further downward pressure on the ruble as borrowers sell rubles to get dollars to cover the debts. Similarly, much of Russia’s projected $125 billion of capital flight this year is money flowing out to repay those loans coming due.
The combination of falling oil prices and a depreciating ruble puts a drag on state finances at a time when budget revenues are already under threat. The Kremlin will let some companies default on their debts, but surely not all; this will cost the state a big chunk of those billions in reserves. And playing favorites is no way to run a sensible monetary policy: The most dramatic run on the ruble came on Dec. 15 afterRosneft (ROSN:RU), the state oil company headed by longtime Putin adviser and confidant Igor Sechin, appeared to have borrowed 625 billion rubles ($9.2 billion) from the state and to have sold that cash as bonds to cover Rosneft’s own sizable debts. The move damaged the central bank’s reputation for independence; in crises, reputations often matter more than fundamentals. Sechin denied the company’s bond sale spurred the ruble’s collapse.
Putin is also deriving some political benefits from the sanctions, at least in the short term. As foreign lenders retreat, Russian companies are left with only the state to cover their debts. They then become more—and not less—beholden to Putin and prone to do whatever is necessary to prove their loyalty. After all, who else is going to give them the cash they need to survive? And as the ruble loses value, companies that earn rubles (banks, retailers, midsize businesses) will suffer, while those companies that earn dollars (energy producers and other natural resource extractors) will see their positions strengthen. Those that survive in this new environment will be the large, often state-run companies that sell Russia’s oil, gas, and metals abroad; private entrepreneurs will be weakened as an economic class and thus as a political voice.
The sharp devaluation of the ruble provides both dangers and benefits for Putin. As the currency falls, inflation is expected to reach 9 percent this year and will probably rise above 10 percent next year. Euroset, a retailer of mobile phones and other electronics, says prices at its stores may soon increase 30 percent to 50 percent.
Such a turn of events threatens the unwritten pact that defined the first decade of Putin’s rule, in which Russians traded political freedoms for unprecedented consumer opportunity. Unlike during the last cataclysmic default in 1998, when incomes were small and few had reached the trappings of middle-class comforts, Putin will have a much harder time persuading Russians to accept material deprivation. Too many have enjoyed a decade of shopping and travel.
The Russian budget gets half its revenue from energy sales in dollars but pays its obligations in rubles. Although many analysts talk of the budget becoming balanced when oil is higher than $100 a barrel, this misses the benefits to the country of the floating ruble, even when the currency’s value is declining sharply. In ruble terms, the Russian budget needs oil to trade at about 3,700 rubles a barrel. It’s now at 3,900 rubles a barrel—in other words, still a loss but much smaller than in dollar terms. This could provide a cushion for Putin if inflation rates weren’t so stubbornly high. The government has frozen salaries for state workers, which in effect means their real salaries are decreasing. Putin may soon see how much of the loyalty to his system was effectively bought and paid for, and therefore how fragile it is once the spigot begins to slow or is shut off.
As the ruble plummets, Putin has argued that its decline will help Russian producers by making imports less attractive. The problem is that the Russian economic model was ailing long before oil prices began to fall and the West enacted sanctions. By the end of 2011, there was little spare production capacity in the economy, meaning that profits from oil and gas sales could not be so easily funneled into making goods to meet growing rates of consumption. This puts Russia on possibly even more dangerous ground than in 1998: Then, a dramatic devaluation, in which the ruble fell from 6 to 26 to the dollar in a matter of months, was catastrophic, but it allowed for rapid production increases when oil prices rebounded in 1999. Spare production capacity from the Soviet era made for an easy and obvious stimulus to the economy—exactly what’s missing now.
Putin knows the greatest threat to his rule comes not from the street but from an elite-led soft coup
What Russia’s economic model needs most is new investment to boost production capacity—which, given the terrible business climate, is almost impossible to imagine. Putin seems to have only bad choices from here on out: allow the ruble to tank in an effort to prop up growth, or stabilize it at the expense of a broader turnaround. Even this may be too late. The market is “simply losing confidence in Russia,” says Alexander Kliment of Eurasia Group. “That’s not something that a rate hike or even an oil recovery can sustainably fix anymore.”
For now, he needs to use every arm of the state propaganda apparatus to convince the Russian people that the source of all this economic woe isn’t his own policy but the West’s nefarious intent. In a high-profile policy speech this month, Putin declared that even if the events of the past year in Ukraine had never happened, Western capitals “would have come up with some other excuse to try to contain Russia’s growing capabilities.” He compared Western leaders to Hitler, who “set out to destroy Russia and push us back beyond the Urals.”
In the end, Putin knows that the greatest threat to his rule comes not from the streets, but from within his own palace gates. An elite-led soft coup to replace him with a more palatable figurehead is more likely than opposition protests sweeping a grass-roots, anti-Kremlin leader to power. (Curiously, the onetime oil magnate and Putin adversary, Mikhail Khodorkovsky, has been positioning himself from his post-prison base in Switzerland as a kind of compromise, transitional figure.) Knowing these dangers, Putin’s instincts for paranoia and self-preservation are likely to kick into overdrive. Not surprisingly, in a time of increasing scarcity, his closest friends have managed to retain their access to the state’s largesse: Companies linked to Putin allies Arkady Rotenberg and Gennady Timchenko have received more in state contracts this year than last.
Putin often likes to harken back to Russia’s great capacity for enduring hardship and sacrifice, returning again and again to the heroic and ghastly human cost required for the Soviet Union’s victory in World War II. But these are different times, with different values and different tolerance for material suffering. According to Lev Gudkov of the Levada Center, just 6 percent of Russians surveyed said they were willing to see a decrease in their personal incomes because of Russia’s policy in Ukraine; 30 percent now say they support the use of Russian troops in Ukraine, as opposed to 74 percent in late spring.
The Kremlin may not care much about Western public opinion or the institutions of democracy, but it does care about popular legitimacy of a sort, and poll numbers like that—combined with the state’s financial resources under pressure—could temper Putin’s adventurism. He may already have sensed that he overstepped his abilities in Ukraine. Yet when Russia’s foreign minister recently spoke about the breakaway territories in eastern Ukraine remaining within Kiev’s rule, he also suggested that Russia might base part of its nuclear arsenal in annexed Crimea. In other words, Putin’s current economic difficulties are as likely to produce belligerence as compromise. In his 2000 autobiography, Putin wrote of chasing a rat in his childhood apartment in St. Petersburg. Once he had the rat in a corner, it turned on him. The animal, he wrote, “lashed around and threw itself at me.” It was a lasting lesson, he concluded, of what it means to be cornered.
