Vladimir Putin is the proverbial dog in the manger, if the manger was the Russian president’s alleged $1.4 billion palace on the Black Sea. Higher oil prices make it easier for him to support the 20 million Russians below the poverty line, and those dissatisfied with lower incomes. The risk is he instead prioritises self-imposed fiscal constraints.
Thousands have flooded Russian streets in recent weeks to protest the jailing of opposition politician Alexei Navalny, who recently published a film about the palace, which the Kremlin denies Putin owns. The pockets of discontent go beyond Navalny’s sentence. Real incomes fell 3.5 per cent last year and the proportion of people below the poverty line is rising.
Falling living standards
Putin’s not deaf to these concerns: he made the 20 million poorest Russians a focus in a speech in December. He’s also expected to make some small concessions for struggling citizens. Russia’s fiscal straitjacket appears to offer little room for extravagance. Last year, the budget deficit was 3.8 per cent of GDP, exceeding the target primary deficit of 0.5 per cent. With most Covid-19 restrictions lifted the Kremlin wants to cut the budget 3 per cent in real terms this year.
Yet this austerity sits oddly alongside cheerier data. Around a quarter of last year’s four trillion rouble ($54 billion) budget deficit wasn’t actually spent and was carried into this year. Secondly, even during a painful 2020, Russia added to its rainy-day pot, the National Wealth Fund, where oil revenue above a cut-off price accumulate, increasing its liquid assets by $20 billion.
Rising oil prices
In 2021, that cut-off price is $43 per barrel. Roughly half of total government revenue of around $260 billion is from oil and gas. Revenue above the cut-off price is saved rather than spent. Therefore, increasing the cut-off price by $1 with an oil price of $49 a barrel, expected by BCS analysts, implies more than $3 billion in extra spending. Electing not to bolster the NWF is far from fiscally irresponsible, given its liquid portion has already surpassed a target of seven per cent of GDP.
There’s still the problem of how to distribute support effectively. Yet if the average oil price is above $43, the headroom will persist. Ahead of September’s parliamentary elections, that can help keep Russians whose gripes are economic rather than political on side.