As Putin Starts Fourth Term, Higher Oil Prices Give Him Some Security

Thomas Grove

The Wall Street Journal

Biography
@tggrove
thomas.grove@wsj.com

May 7, 2018 10:18 a.m. ET

MOSCOW—Russian President Vladimir Putin began his fourth term on Monday with an unexpected weapon in his arsenal against Western sanctions: higher oil prices.

The price of oil is the highest it has been since 2014, pouring much-needed money into government coffers and giving Mr. Putin extra room to maneuver amid growing tensions with the West and protests at home.

Mr. Putin’s foreign policy has put Russia on a confrontation course with the West over conflicts in Syria and Ukraine and allegations that Moscow meddled with the 2016 U.S. presidential election. But Mr. Putin believes Russia is for now over the worst effects of U.S. and EU sanctions and that higher oil prices will help buffer against any future penalties, analysts said.

“He thinks that the Russian economy has stabilized and sees Russia now in a long-term battle of wills with the West,” said Timothy Ash, senior strategist at BlueBay Asset Management in London. “Higher oil prices will help him play for more time against the West.”

Russia has spent much of its foreign currency reserves since 2014, when the price of oil tumbled some 40% and Washington slapped the first round of sanctions on Russia. At the time, the money was used to support the ruble and keep military spending at an all-time post-Soviet high. But higher oil revenues could boost them again as a rainy-day fund to counter the effects of any new sanctions, Mr. Ash said.

Despite scattered protests, the Russian leader is still broadly popular after two decades in power and has taken credit for pulling his country out of recession in part thanks to the recovering oil price.

In a sign of his confidence, Mr. Putin strode into the gilded Kremlin Palace hall, taking the oath of office in an inauguration ceremony closely followed by state TV and watched in person by thousands of people. He presided over a military march in the Kremlin courtyard following the ceremony.

Speaking after the swearing-in, Mr. Putin said he would guarantee Russia’s security while boosting living standards with breakthroughs in technology, education and medical services.

“We must keep pace with global changes, create our own agenda for development, so that no obstacles and circumstances interfere as we and only we determine our own future,” he said to the audience of ministers, public figures and the country’s political elite.

Despite the higher prices, the country is unlikely ever to compete on an economic footing with Washington or Brussels. Mr. Putin has failed to deliver on a long-promised effort to diversify the economy, instead bolstered the importance of the oil and raising output during his tenure to 11 million barrels a day from less than 7 million barrels a day.

The heyday of $100 a barrel oil, allowed him to use the country’s energy bounty to rebuild the military against what he sees as Western threats. Since Mr. Putin announced Russia’s military modernization in late 2010, Russia has spent some 23 trillion rubles, or some $37 billion according to the current exchange rate.

Rising oil prices could help Mr. Putin shore up support among Russians who, after seeing a decade of military expenditures at as much as 5% of gross domestic product, want to see greater social spending. Protests against the start of Mr. Putin’s fourth presidential term saw police detain as many as 1,000 people across the country over the weekend.

Analysts, however, remained doubtful that domestic dissent, which has not yet threatened his high popularity, would force an increase in social spending. For now, Mr. Putin sees public spending as secondary to the funding of military modernization and projects to boost the prestige of Russia abroad.

“We could see some headline measures on social spending, but that’s about it,” said Neil Shearing, chief emerging-markets economist at Capital Economics, a London-based research firm.

Mr. Shearing said higher oil has already had some benefits. The last round of U.S. sanctions which were aimed at Russian businessmen, in particular Russian tycoon Oleg Deripaska and his aluminum producer Rusal, could have sparked more selling of the Russian ruble had it not been for higher oil prices, he said.

Higher oil prices have been brought about—in part—because of an unusual Saudi-Russia energy alliance in effect since late 2016. Russia, the world’s biggest oil producer, has cut about 300,000 barrels, or nearly 3%, of its daily production, along with Saudi Arabia and the rest of OPEC.

The production cuts have helped draw down global supplies to more traditional levels and raised oil prices above $70 a barrel. Strong oil demand globally and a host of geopolitical tensions in the Middle East have contributed to rising prices.

Following Mr. Putin’s inauguration ceremony, Energy Minister Alexander Novak underscored Russia’s dedication to the agreement with OPEC on Monday, saying Russia planned to abide by the deal again this month.

“We’re adhering to it, we’re set to it,” he said. “It’s 100% our aim.”

—Michael Amon in Dubai contributed to this article.

Write to Thomas Grove at thomas.grove@wsj.com

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