Falling oil prices threaten to derail Putin’s spending promises
Russian president Vladimir Putin’s spending promises are under threat from falling oil prices that could hurt the savings the Kremlin is tapping to rekindle growth.
The coronavirus outbreak last week pushed Brent crude, the international oil benchmark, down 10 per cent to a year-low of close to $50 a barrel.
The fall puts prices near Russia’s break-even price of $42 a barrel, threatening to undermine the policy that has helped Moscow run a budget surplus and save $125bn in excess oil and gas revenue in a national wealth fund since 2017.
Facing a fall in living standards that pushed his approval ratings to record lows, Mr Putin pledged in January to spend Rbs4tn ($60bn) on infrastructure and social spending as part of sweeping changes that could allow him to remain in power.
The national wealth fund, squirrelled away during years of austerity, is key to those plans. Officials want to tap Rbs1tn from the fund to help pay for Mr Putin’s spending drive. The fund also plans to spend Rbs2.55tn on buying the central bank’s controlling share in Sberbank, Russia’s largest lender; most of the proceeds will be used to finance the increase in spending.
Sinking oil prices could derail those plans by cutting inflows into the fund and weakening the rouble, hampering Russia’s ability to purchase foreign currency to build further reserves. The rouble traded at 67 to the dollar on Friday, its lowest rate since September last year, as falling commodity prices prompted investors to sell their holdings.
“If the [oil] price stays above or in line with the . . . [Russian central bank’s] baseline of $55 a barrel this year, and then $50 a barrel in 2021-22, this financing operation for Putin’s political [special operation] will stay on the rails,” said Christopher Granville, managing director at TS Lombard. “If oil were to dip towards $40, the adverse impact would be reinforced by a nasty pincer movement from the rouble exchange rate.”
On Sunday, Mr Putin told economic officials and the heads of Russia’s main oil producers that “the current level of oil prices is acceptable for the Russian budget and our economy”, according to a transcript of the meeting released by the Kremlin.
“Our accumulated reserves, including the national wealth fund, are sufficient to ensure the situation remains stable and that all budgetary and social obligations are fulfilled even if the situation in the global economy worsens,” the president said.
Russia could finance its budgetary obligations for four years even with oil at $30 a barrel, Anton Siluanov, Russia’s finance minister, also said on Friday.
Russia’s finance ministry told the FT it would continue to use surplus oil and gas revenues for foreign currency purchases as long as oil prices remained above the $42 cut-off price. If prices were to fall lower, Russia would sell foreign reserves in proportion to the scale of the dip.
This policy is intended to prevent a repeat of the crisis during the last big slump in oil prices in 2014, after which the rouble’s value against the dollar halved and the central bank switched to a free float.
The central bank told the FT it “had sufficient instruments to prevent threats to financial stability” if market reaction to the coronavirus worsened, but it has not signalled it would intervene to strengthen the rouble.
“The rouble acts as a safety net because it is allowed to weaken with the oil price. But if the situation worsens then Putin will have to choose between priorities,” said Chris Weafer, a partner at Macro Advisory.
Although “people are very frustrated after six years of real income decline”, Mr Weafer said, “we also know that Putin is opposed to any action which will cut into the country’s financial reserves or at least reduce them to an uncomfortable level”. He added: “He is personally opposed to increasing national debt and prefers to have a comfortable financial reserve.”
Boosted by a weaker rouble rate that increases their domestic earnings from exported crude, Russian oil producers have compensated for past crises by pumping more oil. But that might not be an option this time: Moscow has yet to signal how it will respond to a call from Saudi Arabia to sign up to a significant collective production cut of an additional 1m barrels a day.
“All the companies are performing stress tests for a lower price,” said Anna Butko, oil analyst at Aton. “While the low prices are negative both for companies and for the budget, at this stage it is too early to say about a hard hit on both given that the country’s budget is based on low oil prices.”
The $40bn Sberbank sale could help compensate for the fall in oil prices and buoy the rouble. That is because the proceeds, in foreign currency, would be channelled from the finance ministry to the central bank allowing it to reduce its foreign currency purchases by the same amount, said Sofya Donets, chief economist at Renaissance Capital.
Most of the proceeds will be returned to the budget, which is governed more loosely than the national wealth fund — enabling the Kremlin to tap it for Mr Putin’s spending plans.
The Sberbank sale proceeds “are meant to be spread out over three to six years, which means [Russia] could spend as much as $5bn-$15bn less a year on foreign currency”, Ms Donets said.
The finance ministry said it would keep its Rbs1tn spending process so long as the national wealth fund remained above 7 per cent of gross domestic product. Though sustained oil prices at $50 per barrel or below could threaten that pledge, the steps Russia has taken to insulate itself from external shocks through the budget rule and move to a free float give it strong protection, said Natalia Orlova, chief economist at Alfa-Bank.