Coronavirus, falling oil hit Putin hopes for economic revival

TRACKING_____Russian President Vladimir Putin insists the economy can weather the coronavirus storm and low oil prices but the two-pronged crisis is a huge challenge to his promises to reduce poverty and boost growth.

Since 2016, Russia had cooperated closely with the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, to curb oil production and support prices.

But this month, Saudi Arabia launched an all-out price war after OPEC and Moscow failed to clinch a deal to reduce output as the coronavirus pandemic put the energy markets into free-fall.

Putin has said the Russian economy will emerge stronger from the crisis, and officials say the country has accumulated enough reserves to withstand low oil prices, pointing to a $150 billion sovereign wealth fund.

The collapse of Moscow’s deal with Saudi Arabia was seen as a major victory for Igor Sechin, the powerful head of state oil company Rosneft and one of Putin’s closest allies, who has long argued the agreement was hurting Russia’s interests and boosting US shale companies.

But observers say he might have overplayed his hand and the economic situation appears to have got much worse than expected.

– ‘Nightmare’ –
This week oil registered its steepest fall in twenty years, leading the ruble to plummet to its lowest since early 2016.

Leonid Fedun, vice president at Lukoil, Russia’s second-largest oil producer, said Thursday that even those oil companies that wanted Russia to walk away from the deal with Saudi Arabia “could not have imagined even in a nightmare” oil at $25.

Lukoil has announced cost reduction measures of $1.5 billion, reducing investment in new projects in particular.

Finance Minister Anton Siluanov warned this week the budget, which is based on an oil price of $42 a barrel, would be in deficit this year, after having been in surplus in 2018 and 2019 thanks to austerity measures.

Governments and central banks around the world have been slashing interest rates in an effort to limit the damage but the Bank of Russia on Friday left its key interest rate unchanged at six percent, aiming to keep inflation in check.

Central Bank governor Elvira Nabiullina said new measures announced by the bank the same day were “aimed at maintaining financial stability and supporting citizens and businesses.”

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Some experts such as Sofya Donets, chief economist at Renaissance Capital, say Russia is positioned to weather the current shocks better than some other countries.

“With all checks and balances in place, we do not expect Russia’s credit quality to deteriorate,” she said.

Years of Western sanctions and international isolation have made Russia less sensitive to global crises, observers say.

Moody’s said that Russian banks would be less vulnerable to oil shocks than during the 2014-2015 crisis thanks to “tighter regulations” and less “dollarisation”.

But it is everyday Russians that will find themselves worse off, with the president’s promises of an improvement in living standards likely to evaporate.

Putin had promised to halve poverty and see growth greater than that of the world economy — about 3.0 percent in 2019 — by the end of his fourth term in 2024.

– ‘Turning point’ –
Putin has earmarked 25.7 trillion rubles ($325 billion) for investment in virtually all sectors including education, roads and health from now until 2024.

To cope with the crisis, the government plans to unlock 300 billion rubles to buttress the economy.

But disappointing growth in 2019 of 1.3 percent followed by the new crises will scupper hopes of doing better in 2020, with potentially serious implications for Putin’s government and himself.

Frustration over the economy and a decline in real incomes over the past few years was one reason Russians became disenchanted with the government of Putin’s ally Dmitry Medvedev, who he sacked in January.

“Obviously Russia has a lot stronger macro position now than it did in 1998, but $18 oil in August 1998 sent the currency crashing 70 percent, next came default, and then it took nearly two years to recover to pre-crisis levels,” said Louise Dickson, an analyst at Rystad Energy.

Igor Nikolayev, director of the FBK Grant Thornton Institute of Strategic Analysis, said that the poorest people are likely to suffer the most because consumer prices will rise.

Nikolayev predicted the decline in living standards will be worse than during the 2008-2009 crisis, adding that a new Great Depression may be looming.

Nikolayev warned that the entire Russian economy would have to reinvent itself and resolve the problem of its dependence on raw materials.

“It is a double whammy for Russia — the coronavirus and oil prices,” he told AFP.

“The barrel at 60-70 dollars will not return. The coronavirus will be a turning point in history.”