BLBG:Putin Walks Oil-Price Tightrope in Return to Russia’s Presidency
Vladimir Putin returns to the pinnacle of Russian politics today still relying on oil prices to underpin his regime as he tries to stamp out domestic dissent and reassert his country’s influence abroad.
The Russian leader, who will be inaugurated for his third term as president, benefited from an almost fivefold jump in Urals crude during his first stint from 2000 to 2008. The surge swelled state coffers, allowing Russia to recover from its 1998 default and spend more on military, infrastructure and social programs. The main stock index soared more than 1,000 percent.
Putin inherits an economy with more difficult prospects, making it harder to soothe the domestic tension that brought tens of thousands onto the streets of Moscow yesterday in the latest protests. The European Union, Russia’s largest export market, is grappling with its worst economic crisis in decades just as the struggling world economy puts a cap on crude prices. That threatens his ambition of turning Russia into one of the world’s five largest economies by purchasing power by 2015.
“Putin’s ability to provide stability thanks to high oil prices is drained,” Yulia Bushueva, who helps oversee $500 million at Moscow-based Arbat Capital Management, said by phone. “For a long time the people were demanding an improved quality of life while not demanding political reform. The middle class has grown, and the protests have shown that the demand for political reforms and a fight against corruption has emerged.”
Depend on Oil
Putin will take the mantle of power from Dmitry Medvedev in an elaborate ceremony in the Kremlin, about a kilometer (0.6 mile) from where hundreds of protesters were detained by Moscow police yesterday.
He will march through the building’s ornate ballrooms to tsarist-era Andreyevsky Hall. There, Medvedev will give a short speech before handing over the presidential emblem, a gold chain with links in the shape of double-headed eagles and medallions featuring the Cross of St. George.
Putin will take the oath of office, followed by the national anthem and an artillery salute. Following the ceremony, Putin and his wife Lyudmila will go to the Kremlin’s Cathedral of the Annunciation to be blessed by Russian Orthodox Patriarch Kirill.
As his third term begins, Putin is trying to reassert Russia’s historical dominance over regional economies and compete with the U.S. for global influence. His ability to do so may nevertheless depend on him finding the cash to pay for programs including a 23 trillion-ruble ($782 billion) military upgrade.
Oil’s Weight
The oil and gas industry accounts for about 50 percent of Russia’s budget revenue and Deputy Economy Minister Andrei Klepach estimated last month that it contributed 4 percentage points to the average 7 percent growth over the past decade.
Given forecasts of stagnant oil production and “modest” increases in gas output and exports, the industry can now only provide 1.5 to 2 percentage points of growth, the ministry estimates. The budget deficit may narrow to 0.1 percent of GDP this year from an initially planned 1.5 percent shortfall, according to government budget revisions.
Putin’s advisers point to the historical precedent of government predictions being proven correct, while warning about the dangers of complacency.
“We’re losing time and eating away the future,” said Sergei Guriev, rector of the Moscow-based New Economic School and a government adviser. “The authorities have always answered that by saying: ‘Don’t try to frighten us. When we need it, oil prices always rise. And they will in the future.’ And so far, the authorities have been right.”
Crude Outlook
The oil boom after 2000 helped Putin transform the Russia he inherited when Boris Yeltsin resigned on Dec. 31, 1999, and assert his dominance over a political system driven by disputes among oligarchs who had little respect for the president.
The price has risen from $24 on the day Putin took charge to $117 when he left office, helping the country expand by an average 7.1 percent per year from 2000 to 2008 before the global financial crisis triggered a 7.8 percent contraction in 2009.
The Micex Index (VTBMICX), a ruble-denominated equities benchmark, surged 1,045 percent from 1999 through the end of Putin’s first two term. The Standard & Poor’s 500 Index fell 4.9 percent over the same period. Investors have become more skittish over the past year. The Micex has dropped 16 percent, compared with a 1.6 percent gain in the U.S. benchmark over the same period.
In response to the danger of stalling exports to Europe and to counter what Russia sees as the advance of U.S. and Chinese interests around its borders, Putin is looking to solidify the country’s clout in the former Soviet Union.
Regional Alliance
He set out to build regional alliances, luring Kazakhstan and Belarus to join Russia in a customs union, which he says will be a catalyst for growth and may expand to include neighbors such as Ukraine.
The bloc, which plans further policy integration to become the Eurasian Union by 2015, is “the biggest geopolitical event in the post-Soviet area since the collapse of the Soviet Union,” Putin said in his final Cabinet meeting as prime minister on May 2.
With $523 billion in reserves, the world’s fourth largest, Russia has the opportunity to buy itself a bigger role in global affairs, according to Francesco Garzarelli, co-head of macro and markets research at Goldman Sachs Group (GS), who said the country is “probably punching below their weight.”
‘More Sophisticated’
“We all go to the Chinese when we think about who’s going to help out Europe,” he said. Russia could “think about being a bit more sophisticated or using capital in a geopolitical sense.”
The International Monetary Fund last month doubled the amount of cash pledged to defend against further threats from Europe’s debt crisis. Russia may decide later this year to commit more than the planned $10 billion, Finance Minister Anton Siluanov said.
Putin targets economic growth of at least 6 percent per year after gross domestic product rose 4.3 percent each in 2011 and 2010. Economists forecast Russia will grow 3.65 percent this year and 3.85 percent in 2013 before hitting 4 percent growth in 2014. That compares with economists’ median forecast of at least 8 percent growth in China for the next three years, according to two Bloomberg surveys.
Russia needs an average Urals crude price of $117 a barrel this year to balance the budget, Siluanov said in February. The price has averaged $117 so far this year, according to data compiled by Bloomberg.
‘Push Limits’
Credit Suisse (CSGN) last month raised its 2012 forecast for Brent, which the Urals blend tends to track, by 20 percent to $125 a barrel and said oil will “push limits” in 2013 and 2014.
With oil-related revenue being capped, Putin will have to sell state assets and overhaul pensions, said Bushueva at Arbat Capital. Russia will need to introduce “new faces” to the government and fight corruption to lure investment, she said.
Russia has delayed plans to sell stakes in state banks OAO Sberbank (SBER), VTB Group, as well as oil company OAO Rosneft and shipper OAO Sovcomflot. Putin has called the sales a priority in reducing the state’s role in the economy. A new asset-sale plan will be one of the government’s first tasks after the inauguration, First Deputy Prime Minister Igor Shuvalov told reporters last month.
‘Much More Difficult’
With the budget slipping into a deficit and the current- account balance likely to turn negative in 2014 or 2015, Putin will face “a much more difficult time in his third term,” said Ivan Tchakarov, chief economist for Russia at Renaissance Capital in Moscow.
“The economy remains his biggest challenge, despite all the things we saw happening on the political front over the last couple of months,” Tchakarov said.
The economic challenges threaten Putin’s ability to quell a surge in political dissent. Tens of thousands protested in Moscow yesterday to demand fair elections. More than 400 people were detained after at least 20 officers were injured in sporadic clashes, the state-run news website Vesti reported, citing police.
Tens of thousands of Russians poured out onto the streets of Moscow and St. Petersburg last year in the biggest challenge to authority in a more than a decade after international observers reported evidence of ballot-box stuffing in a Dec. 4 parliamentary vote. The ruling United Russia party then held on to a narrow majority of seats.
Trust in Putin
Fifty-three percent of Russians say they trust Putin, with another 24 percent saying they partially do, the Public Opinion Foundation, a Moscow-based pollster, said May 3. That was up 8 percentage points from December and 17 percentage points lower than in 2008. The poll of 3,000 people was conducted April 28-29 and didn’t give a margin of error.
While the number Russian billionaires in the Forbes list rose from eight in 2001 to 96 in 2012 and the poverty rate was halved, the oil price needed to balance the budget swelled tenfold. Perceptions of corruption in Russia are on par with Nigeria and Uganda, according to Transparency International.
“This is the beginning of a new phase for our country,” Putin told finance ministry officials April 17. “We see the looming challenges, we understand them and perfectly understand that we’ll have to solve the challenges of national development amid a fair amount of global economic and financial turbulence.”
To contact the reporters on this story: Scott Rose in Moscow at rrose10@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net
To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net
