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 ($6obn) on infrastructure and social spending as part of sweeping changes that could allow him to remain in power.
The national wealth fund, squirreled 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.