Putin reaps Opec+ political gains as economic boost wanes

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Vladimir Putin, Russia’s president, applauds during a plenary session on day two of the Eastern Economic Forum in Vladivostok, Russia on Thursday. Russia’s pact with Opec has significantly enhanced Putin’s presence on the world stage, but as his geopolitical clout keeps growing the economic benefits for his country have lost some potency.

Russia’s pact with Opec has significantly enhanced President Vladimir Putin’s presence on the world stage, but as his geopolitical clout keeps growing the economic benefits for his country have lost some potency.What began in 2016 as a temporary measure to boost oil prices has become an alliance meant to last for “eternity.” For a third year, Russian companies are curbing output and scaling back investment in new projects. Yet concerns about how this is starting to weigh on the nation’s growth are overshadowed by the benefits to their president’s international profile.After years of Saudi Arabia calling the shots within the Organization of Petroleum Exporting Countries, Putin has quickly stolen the limelight. At the Group of 20 meeting in June, he demonstrated his new power over the global oil market by announcing an extension of production cuts himself, essentially making the group’s mid-year talks in Vienna redundant.


As Russia’s alliance with Opec has developed, the president’s comments on the oil market have become “deeper, much better researched and more influential,” said Ildar Davletshin, an analyst at Wood & Co. To be sure, the price gains that resulted from the so-called Opec+ deal have benefited Russia. Putin and his Energy Minister Alexander Novak have also managed their co-operation with the group astutely, bearing a smaller share of the cuts than Saudi Arabia despite having higher production, and timing the curbs in such a way that Russia’s average annual output has continued its decade-long ascent uninterrupted. Before the first Opec+ deal in late 2016, then again ahead of the second round of curbs agreed on in December, Russia hiked oil output to post-Soviet records, setting a generous baseline for its cuts. In both cases, the country was given several months to reduce production in line with its quota, and frequently left it drift above that level, according to data compiled by Bloomberg.


The initial Opec+ deal reached in late 2016 ended a slump in Brent crude prices, which fell as low as $28 per barrel at the start of the year. By mid-2018, extensions of the deal helped push the prices up to $80 a barrel, earning Twitter rebukes from US President Donald Trump but helping Russia’s government run the widest budget surplus in a decade. “Back then it made economic sense for Opec and Russia to agree on production targets, now not so much,” said Goldman Sachs Group Inc economist Clemens Grafe. “Having these extended periods of caps on production do not make much sense, this just gives producers who are not bound by the agreement time to increase their market share.” The price effects of the more recent deals were more modest, with crude falling back to $60 on concerns of slowing demand growth due to the US-China trade war. While that limits the benefit of Russia’s co-operation with Opec, it’s likely that crude would be even lower if producers were to end their agreement and open the taps.
The latest cuts, which run until the end of the first quarter next year, take as much as half a percentage point off Russia’s annual growth, which is a significant impact given that the economy expanded 2% on average in the past two years, said Grafe.


Throughout the Opec+ agreement, the benefits of higher oil prices to the wider economy has been minimal since the Finance Ministry is stashing away all additional revenue into a wealth fund, Grafe said. Russia imposed a budget rule in 2017 saying all energy revenues coming from an oil price above $40 should be saved, boosting the fund to $123bn from about $70bn in late 2016. Russia’s oil companies curbed spending on new projects and overall investment in the economy will expand 2% in 2019, half the pace of last year, according to the official state forecast. Still, many of those companies are generating enough cash to pay out handsome dividends, offering higher total returns to shareholders than most of their international peers, according to data compiled by Bloomberg. Russia’s largest oil producer Rosneft PJSC said the nation may lose out to US shale producers if the deal is extended, while Finance Minister Anton Siluanov called for considering all economic consequences of the new agreement.But the president’s agreement in June to keep Russia’s oil production flat for another nine months met no resistance.

Sources and photo-credits: Bloomberg, Gulf Times