September 28, 2011

Putin's gamble: a bet on high oil prices

Steve Levine

Russian Prime Minister Vladimir Putin's decision to reclaim the Kremlin is a bet on high oil prices.

The weekend announcement has rattled markets a bit, Reuters reports -- the value of the ruble dropped after the current president, Dmitry Medvedev, fired Russia's rebellious finance minister, Alexei Kudrin, who is much respected abroad. Some of the angst is rooted in Russia's continued reliance on revenue from its 10 million barrels a day of oil production, and continued failure to diversify its economy.

Yet it is this very hydrocarbon foundation that Putin is banking on in a new period as president starting next May. Western financial analysts wring their hands that Russia needs at least $116-a-barrel oil to balance its budget, while the price of the Brent benchmark is just $105 at the moment and is forecast to drop over the next year or so. But, with his move, Putin aligns himself with the longer-term outlook of most oil-price forecasters, who foresee a major spike in prices starting in roughly 18 months or two years and running until the end of the decade. At that point -- 2020 or so -- many forecasters think oil prices will be so high that they will begin to trigger more or less a permanent destruction of much demand as consumers switch to alternatives.

By that time, Putin will be the end of a new 12-year run as president. His last, highly popular 8-year term as Russian president coincided with high world oil prices -- reaching a record high of $147 a barrel -- which he used to boost employment, to build up a war chest of financial savings, to elevate the buying power of ordinary citizens, and to lead a voluble, chin-out foreign policy.

In remarks in recent days, former Finance Minister Kudrin said that Russia already is having problems absorbing the income from oil prices, resulting in the flight of $31 billion in largely oil proceeds out of the country in the first half of the year, Bloomberg reports. But Putin could simply begin to resume socking away the largesse into a rainy-day fund, or a sovereign wealth fund

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