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Given russias conventional weakness an increased risk

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Unformatted text preview: commitment on military spending, could be felt for years to come, giving price swings in oil a bigger role than ever on the Russian economy. Taxes on oil and natural gas sales provide half of Russia’s government revenue. Each increase in the Russian budget equivalent to 1 percent of the gross domestic product requires a rise in the price of oil of about $10 a barrel on global markets — which is how Citigroup arrived at the $150-a-barrel figure for meeting the new obligations Mr. Putin has taken on. Analysts worry that, even if the government can fulfill its promises, too little will remain for a sovereign wealth fund that is intended as a shock absorber for the Russian economy and th e ruble exchange rate during an oil price slump. Russia needed to use that buffer as recently as 2008, during the financial crisis. “The concern is simple,” Kingsmill Bond, the chief strategist at Citigroup in Russia, said in a telephone interview. “If the oil price that Russia requires to balance its budget is higher, the systemic risks that the market faces are also higher.” The bank estimated that Mr. Putin’s promises of higher wages and pensions, not counting the military outlays, add up to additional spending equal to 1.5 percent of Russia’s gross domestic product. That comes on top of an earlier pledge to spend an additional 3 percent of gross domestic product a year re -arming the military. In all, the new commitments would add up to about $98 billion a year, Citigroup estimates. The spillover from the Arab Spring and the specter of an Israeli attack on Iran’s nuclear development plants are propping up oil prices now. But over the long term, economic stagnation in Europe could help bring them down. Even before the election, Russia’s government spending was up, helping reinforce Mr. Putin’s message that he was the best candidate to deliver prosperity and stability. In January, the Russian military ministry, for example, doubled salaries in the nation’s million-person army. It was ostensibly a long-planned move. But coming just two months before the presidential vote, the political message was clear. Also smoothing the path for Mr. Putin’s victory was a national cap on utility rates that helped keep inflati on at the lowest level in Russia’s post-Soviet history for January and February, at a 3.7 percent annual pace. “Putin made large spending commitments,” the Fitch rating agency said in a statement released the day after the election. “The current high price of oil cushions Russia’s public finances,” Fitch said. “But in the absence of fiscal tightening that significantly cuts the non-oil and gas fiscal deficit, a severe and sustained drop in the oil price would have a damaging impact on the Russian economy and public finances and would likely lead to a downgrade” of the nation’s credit rating. As Mr. Putin’s spending promises started to be introduced in January, Fitch altered Russia’s outlook to stable, from positive. 18 | P a g e Russian Oil DA BDL Answers to: No Threshold [____] [____] Prices are high now —only...
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This document was uploaded on 02/06/2014.

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