Russia’s Oil Conundrum

Revenue from oil exports may be flowing into Russia, but Moscow can’t decide how to spend the money.


Global oil prices jumped sharply after drone attacks on two Saudi oil facilities last weekend. The two facilities produce about 5.7 million barrels per day – nearly half of Saudi Arabia’s daily production. With that volume temporarily out of commission, global oil prices rose by between 12 percent and 15 percent. That should be good news for Russia: Its economy depends on the oil and gas sector, with sector-related activities accounting for roughly half of the federal budget. And indeed, share prices for Russian oil companies as well as the price of Urals crude, which is based on the price of Brent crude, increased, meaning oil sales will be infusing the national budget with cash.

Fluctuations in the Price of Oil and the Ruble

(click to enlarge)

But the Russian state seems incapable of taking advantage of such a windfall, thanks in part to deep structural problems in the economy. Even when oil prices are lower, the government is unable to decide how to invest the money, leaving the Russian budget swollen with untapped funds. Between January and August 2019, the country had a budget surplus of 2.56 trillion rubles ($39.8 billion), equivalent to 3.7 percent of gross domestic product. The recent increase in oil prices could further bloat both the surplus and Russia’s National Wealth Fund. The government is required to put into the NWF profits from oil if the price per barrel of Urals oil exceeds $41.60. Once the NWF’s liquidity equals 7 percent of GDP, the government can start investing the money. With higher oil prices, the NWF could exceed the 7 percent threshold earlier than expected. And while spending the excess funds is not required by law, it’s in Russia’s interest to invest the funds in things like government programs and infrastructure since the economy has been sluggish and there’s been growing public unrest.

And yet the structural problems – including lack of domestic demand, poverty, rising inflation and a poor investment climate – are preventing the state from reaching a consensus on how the money should be spent. Investing in the national economy, namely through national projects, has drawbacks. For one thing, using the NWF can affect inflation in the medium term. This would place the Russian population’s real income, which has been declining for six years, under pressure once again. (In the first half of 2019, the real disposable cash income of Russians decreased by 1.3 percent.) Against the backdrop of falling incomes, consumer demand is stagnant and, accordingly, not a viable source of economic growth. The government would therefore be risking growing dissatisfaction among its constituents over worsening living standards and its failure to follow through on promises to achieve economic growth rates above the global average.

Changing Real Incomes in Russia(click to enlarge)


Short-term public investment in the economy doesn’t seem to be a viable option, either. It won’t generate the kind of national projects needed, since these require private investment too, and investors aren’t particularly eager to fund such projects. Neither will investing the additional funds abroad be helpful in stabilizing the Russian economy. Particularly with the fall in President Vladimir Putin’s approval ratings, the government won’t dare to pursue such avenues.

In any case, spending this money would only put more pressure on the budget and increase oil dependence. And using additional funds from the NWF, even with stable or rising oil prices, will make the ruble ever more vulnerable to oil price fluctuations. At present, the NWF investment rule somewhat reduces the ruble’s vulnerability to changes in oil prices; if oil prices jump by 10 percent, the ruble changes by only 1 percent. (In the latest round of oil price increases, the ruble did react, but its fluctuation was, in the end, rather insignificant.)

Moreover, even as Russian oil companies benefit from rising prices, there’s little they can do to change their positions in the world market. Russian oil exports are still limited by an OPEC+ agreement on production cuts, which stipulates that Russia reduce its oil production by 228,000 bpd, down to its October 2018 level of 11.4 million bpd. In addition, its natural gas exports are governed by long-term contracts that can’t be changed quickly.

Usually, high oil prices mean higher revenue for Russia, increasing the amount of money that could be used to improve the country’s economic well-being. But the Russian state seems paralyzed when it comes to actually spending those funds. What’s more, spending revenue from oil sales can undo any attempts to reduce the Russian economy’s dependence on the oil and gas sector. Structural economic problems are becoming ever clearer – and even a sharp rise in oil prices is not enough to kickstart the Russian economy.

Ekaterina Zolotova
Ekaterina Zolotova is an analyst for Geopolitical Futures. Prior to Geopolitical Futures, Ms. Zolotova participated in several research projects devoted to problems and prospects of Russia’s integration into the world economy. Ms. Zolotova has a specialist degree in international economic relations from Plekhanov Russian University of Economics. In addition, Ms. Zolotova studied international trade and international integration processes. Her thesis was on features of economic development of Venezuela. She speaks native Russian and is fluent in English.