Oil price crisis may call Kremlin’s spending boost plans into question

Russian President Vladimir Putin’s spending promises are under threat, as falling oil prices can hurt the savings the Kremlin is tapping to rekindle growth, considers The Financial Times. In January, Putin pledged to spend 4 trillion rubles ($60 billion) on infrastructure and social spending to improve living standards and push his approval ratings. Part of this money is supposed to be taken from the $125-billion National Wealth Fund accumulated since 2017. Besides, the fund plans to spend 2,55 trillion rubles on buying the Central Bank’s controlling share in Sberbank with the intention to use most of the proceeds to finance the increase in spending.

However, international Brent oil benchmark lost 10% last week due to the coronavirus epidemic. Thus, oil prices are getting closer to Russia’s break-even price of $42 per barrel threatening to undermine the policy that has helped Moscow run a budget surplus. The situation is also weakening the ruble, which hinders Russia’s ability to purchase foreign currency to build further reserves. Nonetheless, the president considers the current level of oil prices “acceptable for the Russian budget and our economy”, according to the transcript of his recent meeting with economic officials and heads of Russia’s main oil producers.

Russia’s Minister of Finance Anton Siluanov said on Friday that Russia could finance its budgetary obligations for four years even with oil at $30 a barrel. According to the ministry, Russia will continue to use surplus oil and gas revenues for foreign currency purchases as long as oil prices remain above $42 per barrel. If prices fall lower, foreign reserves will be used to compensate for the dip and thus prevent a repeat of the 2014 crisis. The Central Bank told the Financial Times it “had sufficient instruments to prevent threats to financial stability”, although it has not signalled it would intervene to strengthen the ruble in case of a deeper market reaction to the coronavirus.

“The ruble 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,” commented Chris Weafer, a partner at Macro Advisory. He added that “Putin was opposed to any action which would cut into the country’s financial reserves or at least reduce them to an uncomfortable level”.

The Ministry of Finance pledged to spend from the National Wealth Fund as long as it remained above 7% of GDP. Sustained oil prices at $50 per barrel or below may threaten that pledge, but according to Alfa Bank’s Chief Economist Natalia Orlova, 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.