Vladimir Putin is like the conductor of a symphony. All instruments of the state have their eyes on him. They play when he directs them to do so, and perform the music (the message) he directs them to perform.
The various “notes” that have been sounded from the finance ministry this month reflect the emphasis- the particular sound- Putin wants communicated to the world regarding how the country is being impacted by, and plans to deal with, lower for longer oil prices.
Russia may reevaluate the $50/bbl oil price assumption factored into its 2016 budget if the global oil market doesn’t change before the end of the first quarter of next year, its finance minister was reported as saying Wednesday.
Earlier this month, Russia announced its 2016 budget, which forecasts a deficit of 3% of GDP, based on an assumed oil price of $50/bbl. Russia’s Deputy Finance Minister Maxim Oreshkin said at the time, “In our estimates, one should hardly expect any serious growth of the oil price above $50…we see a range from $40 to $60 somewhere for the next 7 years. And these are the prices we should base our macroeconomic policy on,” he said.
Russia’s Deputy Finance Minister Maxim Oreshkin
Then, on December 17, Vladimir Putin said that the $50/bbl price assumption factored into the country’s 2016 budget was too optimistic and that the government may need to cut the federal budget. “We had calculated next year’s budget based on $50 per barrel. This is a very optimistic valuation today. Now it’s already $38. That’s why we will have to correct something there.”
On Wednesday, Russia’s finance ministry said that it would reevaluate its $50/bbl price assumption at the end of 1Q16 “if the situation doesn’t change.” Oreshkin’s boss, Russia’s Finance Minister Anton Siluanov, said in an interview cited by Bloomberg, “We should be ready for any oil price developments – our estimates for next year are for about $40 a barrel for budget calculations,” Bloomberg quoted him as saying on state television Rossiya 24.
Oreshkin’s boss, Finance Minister Anton Siluanov
Russia has reiterated that it is able to withstand lower for longer oil prices. Oreshkin earlier this month that the Russian economy has adapted to $45/bbl oil and can withstand much lower crude prices.
In saying this, he was directly warning Saudi Arabia (and ergo, OPEC) that Russia can withstand depressed oil prices for a long time, due the floating rouble that protects the country’s budget. Conversely, Saudi Arabia is trapped by a fixed exchange peg, forcing it to dip into its foreign reserves to cover a budget deficit currently running at 20% of GDP. These words were deliberately chosen to convey this message to Saudi: “We’ll be just fine, we’re going to produce more, and your economy will hurt more than ours.”
As we noted in a previous post, in Vladimir Putin’s Russia, no government official speaks “accidentally.” Wednesday’s more cautionary comments by Putin’s Finance Minister (Siluanov) temper those of the deputy finance minister (Oreshkin) earlier this month. Siluanov’s words also echo those of his boss, Putin, from December 17. It would be interesting to know whether Oreshkin’s wrists were slapped for “going too far”, or whether the permutations of this fiscal discussion are a manifestation of Putin’s keen political sense.
Oreshkin and Siluanov’s boss, Vladimir Putin
It is still an open question whether Russia really can withstand the very low oil prices for years. Currently, the economy is in recession, real incomes have dropped by 9%, and output has fallen by 4% over the last year.
There is the possibility that Oreshkin’s “we’ll be fine” comments were more about a trumpeted show of strength than a concrete appraisal of the country’s economic health (think Baroque), and that Siluanov’s comments reflect a more realistic assessment of Russia’s predicament going into 2016 (think Classical). Either way, Vladimir Putin is the conductor of Russia’s “oil price symphony.”