Page 55 - bne_Magazine_July_2018

bne July 2018
Opinion 55
added to crude, would not only be willing to participate in some action that will bring the oil price lower, but actually push for it. After all, every additional $1 per barrel over a full year is worth approximately $2.5bn for the country and with the bulk of that going into the federal budget via taxes.
But there are very good reasons why the Kremlin was unhappy with oil looking set to breach the $80 per barrel level and is relatively more relaxed in the low to mid $70s range;
• Two oil-based slumps are enough. In 2008-09, Russia was shocked when the price of oil fell from almost $140 per barrel to $40 and pulled the economy into recession. GDP contracted by 7.8% in 2009. But that slump, although nasty, was short-lived and a rapid oil price recovery helped the economy return to 4.5% growth in 2010. In mid-2014 the oil price again fell and although the imposition of sanctions from August that year added some strains, the recession of 2015-16 was mostly due to the oil price slide. The govern- ment was able to ride that slump by blaming economic war- fare waged by western nations. A third oil induced recession may be harder to explain, or forgiven, by a less tolerant public. The view in the Kremlin appears to be “let’s not test it” by risking another price again spike to $100.
• Oil had stopped driving growth. Another reason for not wanting to see oil higher is because it had stopped working as an effective driver of economic growth from late 2012. In 2013, GDP grew by 1.3% or one-third of two years ear- lier and despite the fact that the price of crude traded near $110 per barrel all year. That was the year when the gov- ernment was forced to accept that the oil driven boom had become exhausted and the economy needs to move in a different direction, a fact acknowledged by President Putin in his Federal Assembly Address in December that year.
• Budget rule is working. The reason why Russia is much better placed to live with a more modest oil price than
is the case with all of the OPEC nations is because it was forced to make policy adjustments as a result of sanctions. The Finance Ministry could not comfortably borrow on international markets and the banks were also effectively locked out. It meant that there was no choice but to main- tain tight spending discipline and to let the ruble devalue and free-float. The legacy of that period is that the budget assumes $42 oil, and a modest deficit, for this year the aim is for a balanced budget with $44 oil through to 2021. All oil taxes above this price are diverted to financial reserves, which have grown by over $80bn since January last year.
• Russia does not need the money as much as it used to. The budget needed $115 per barrel to balance in 2013. This year it will balance at $54 per barrel, assuming the current ruble-dollar exchange rate. At $75 per barrel the budget will run a surplus of $30bn. Of course, a higher price would generate a larger surplus but, now that financial sta- bility has been achieved, there are greater priorities.
• Higher oil revenue creates internal instability. It used
be said that if you asked a liberal reformer what Russia most needed to change the economy the answer would be “ten years of low oil”. Whatever the merits of that state- ment, the fact is that higher oil wealth does reduce the momentum for change and causes division amongst the elites between those who want to spend on elaborate state projects and others calling for restraint. Much easier to keep the peace with an oil price high enough to maintain comfort but not so high as to create spending demands.
• Higher oil boosts alternatives. One of Moscow’s main points is that a high oil price leads to bigger budgets for the devel- opment of competing energy sources and especially in the transport sector, which is the biggest consumer of oil each day. As far as Russia is concerned $100+ oil only hastens the day when Ford or Toyota or another mass producer starts to roll out vehicles requiring much less oil to run.
Finally, the new-found relationship with the Saudi leader-
ship is very important for the Kremlin. Although Moscow
was becoming less comfortable with oil approaching $80 per barrel, there was never any prospect of it walking away from the current deal or not wanting to replace it with a new deal. Maintaining a close relationship with OPEC, with Saudi Arabia in particular, is a key geopolitical priority for the Kremlin. It represents the ideal combination of good business and very good politics. Whether that is a new set of production targets from January 2019 or a staged increase in the current quo-
tas, or some other agreed intervention mechanism, the main point is that Moscow will continue to work with Saudi to try and extend the age of oil, and with less volatility for as long as possible, and to protect respective market shares from the resurgent Americans.
bne has a full roster of columnists and opinion-makers, among them:
Mark Galeotti Liam Halligan Suna Erdem
Chris Weafer David Cecire Ben Aris
You can find all bne’s comment at
www.intellinews.com/opinion
www.bne.eu