Fighting to Survive Budget Contraction, Kremlin Tries to Fix Oil Prices

Publication: Eurasia Daily Monitor Volume: 13 Issue: 43


On March 1, President Vladimir Putin gathered the CEOs of Russia’s oil majors in the Kremlin to discuss a possible freeze of crude production to boost oil prices. Oil is Russia’s main export commodity and the main source of state revenue. Putin commended the “healthy state of the oil industry”—in 2015, Russia increased oil production by 1.4 percent to some 10.9 million barrels a day, pumping oil approximately on par with Saudi Arabia. Almost half of Russia’s produced oil is exported, with exports increasing in 2015 by some 9 percent. But the price of Russia’s “Urals” standard export crude has fallen “almost three times,” and this is a disaster that must be somehow mitigated. Energy Minister Alexander Novak has been talking to members of the Organization of the Petroleum Exporting Countries (OPEC), promoting an oil production freeze to boost prices. Putin gathered Russia’s domestic oil producers to obtain assurances that they would be ready to “freeze” oil production through 2016, at the level from January, to balance demand with output and possibly spark an oil price rally (, March 1).

During the 2000s, oil prices were growing and Putin’s then–finance minister, Alexei Kudrin, built a tax system that collected most of the windfall revenue from Russia’s oil majors into state coffers. Special “rainy day” sovereign funds were created to balance the budget if the oil price slumped. As a result, the fall in the price of Urals crude from well over $100 per barrel to under $30 (the average price throughout January 2016) affected the balance sheets of Russia’s oil companies less than the federal state budget. According to the Ministry of Finance, to keep the federal budget deficit in 2016 at 3–4 percent of GDP, the price of Urals export oil must be $40 per barrel or more. If the price continues to hover around $30 during 2016, the budgetary deficit may reach 5–6 percent of GDP and the sovereign reserve funds will be entirely spent. Moscow will be forced to severely cut budgetary expenditures, which will be extremely painful, and also massively borrow—something that may not be easy to do. Indeed, international money markets are mostly out of reach for Russia due to Western sanctions over the annexation of Crimea and the war in eastern Ukraine, while the internal money market is shallow. Too much credit scooped up by the state to cover the deficit will leave too little for anyone else, further depressing domestic investment and consumer confidence, causing more GDP contraction (, February 19).

Minister Novak told journalists, “nations exporting some 73 percent of world oil have agreed with Russia to freeze oil production”; and though Iran is expanding oil production and export to make up for losses during the years it was under sanctions because of its nuclear program, Tehran “still is sympathetic to the oil freeze idea.” Novak hopes non-OPEC exporters will join the oil production freeze: “the oil market glut will fade away and oil prices [will] rally to around $50 per barrel,” he predicted. The Kremlin is dreaming of a long-awaited oil rally, and an oil production freeze does not seem like too steep a price to pay to achieve it, but not all in Russia are happy. A number of oil companies—Gazprom Neft, LUKOIL and Bashneft—have invested into additional production; new projects are ready to come on line, and these firms reputedly oppose a production cut or a freeze in an attempt to raise prices. According to an unnamed LUKOIL representative: “We are a privately owned company and are not ready to lose our share of the market by decreasing production. If Russia exports less, other nations will step in and we will lose money. Who will check whether any agreement is indeed being honored?” A Gazprom Neft representative noted: “We are not seeking government aid—let them just leave us alone and not interfere” (, February 29).

After the meeting in the Kremlin, Novak announced: “All oil companies have agreed to freeze oil production at the level of January 11, 2016.” It is unclear whether the announced freeze means that all Russian companies are actually freezing production, or if some will decrease, while others increase their drilling activities, with the overall output more or less unchanged. In any event, the announced freeze may help Novak to press other OPEC and non-OPEC exporters to jointly try to work the market into an oil price rally. In return, Russian oil majors asked Putin not to impose additional taxes. Last December, Russian oil companies were ordered to pay out some additional $3 billion in taxes to help ease the budget deficit, and more such taxes may come (Kommersant, March 2).

The Kremlin is struggling to unite oil producers to fix prices internationally, but the problems on the home front have not been resolved. Rosneft—Russia’s biggest state-controlled oil company, put together through Kremlin-induced confiscations and hostile takeovers of private assets and controlled by Putin’s close associate Igor Sechin (55)—has been recently decreasing production as its old oilfields lose capacity. With Rosneft losing its market share, Sechin has reportedly demanded that other Russian oil companies also cut their output—purportedly, for Russia to provide an example for other oil producers. Sechin apparently also demanded the state tightly regulate oil exports—Russian oil companies are to be awarded export quotas in proportion to their overall production. Other oil majors reportedly rejected Sechin’s demands (, March 3).

A meeting of major oil exporters—Saudi Arabia, Qatar, Venezuela, Nigeria, Iran and Russia—is reportedly planned for March 20, in St. Petersburg, to discuss the oil production freeze and possibly sign some binding agreement. Several major producers—Iraq, Norway, Mexico, Kuwait and the United States—have not been invited to St. Petersburg (, March 3). Putin’s petro-state is in serious trouble and desperate to try to push oil prices up. Of course, it is not clear if an agreement can actually be reached in St. Petersburg and, if it is, whether it will be honored by all the participants. Nor is it apparent whether a fraction of the world’s largest oil-producing countries can successfully dissolve the world oil glut and swing the market. But evidently, Moscow has decided to try. Even if the St. Petersburg meeting results in only more talk rather than an effective cartel agreement to fix oil prices, the Kremlin is clearly hoping that talk alone could possibly edge up oil prices.