Vladimir Putin’s New Best Friends: Nervous Oil Traders
Policy + Politics

Vladimir Putin’s New Best Friends: Nervous Oil Traders

The news last week that warplanes from Saudi Arabia, the United Arab Emirates and Egypt all participated in attacks on Houthi rebels in Yemen was greeted with universal expressions of concern and calls for peace. 

There is at least one global leader who could be privately grateful for at least one side effect of the new fighting: Russian President Vladimir Putin. 

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This is not because Putin wants to see increased death and destruction in the Middle East. In a Kremlin readout of a phone conversation between Putin and Israeli Prime Minister Benjamin Netanyahu on Friday, according to the government-controlled Sputnik news service, Putin “emphasized the importance of joint efforts from the international community in order to reach a peaceful and long-term settlement of the situation in the country." 

However, the more tense the situation becomes in the Gulf states, the more nervous oil markets get. And with the Russian economy headed into recession, nervous oil traders could be Putin’s best friend. 

The global oil market has cratered, and the price for crude plunged from nearly $100 a barrel last year to below $50, touching a low of $45.19 earlier this month. But last week, as fighting intensified in Yemen, and the U.S. joined the Iraqi assault on Tikrit, prices began creeping up again. 

The concern is that spreading instability in the Middle East could begin to constrict supply, which would drive prices up. The world is currently awash in cheap oil. The U.S. fracking boom has brought new sources of crude online, and an economic slowdown in China and Southeast Asia has contributed to a decline in demand. But the Middle East remains the world’s dominant exporter, and expanded conflict there would have immediate ripple effects across the global market. 

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That would be particularly helpful to the Russian economy, which is largely dependent on oil exports for most of its revenue. Russia emerged from the economic stagnation of Communist rule at a time when demand for oil was increasing around the globe, and prices were rising. With its vast natural resources, expanding its oil extraction capabilities was an obvious choice for Moscow and for the newly minted oligarchs who took control of many former state-owned companies after Soviet-era restrictions on the ownership of capital were lifted. 

Russia was largely successful, as firms like Rosneft and Gazprom grew in to industrial giants. Yet Russia failed to diversify its economy during the years when oil profits were juicing it and taxes were filling the Kremlin’s coffers with a steady stream of revenue. That’s why, when oil prices crashed, Russia was hit hard and fast. Putin himself admitted as much during his annual year-end press conference in December. He noted that too much of Russia’s development has been tightly focused on oil and gas.

“We need to make use of the current situation to create additional conditions for developing production and economic diversification,” he said. “I hope that the current state of affairs will make this possible.”  

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Some in the Russian government are showing signs of increasing optimism. According to Bloomberg, the Russian Economic Ministry recently proposed that the country’s budget numbers be recalculated on the assumption that oil will rise to $60 per barrel in the next year. Putin’s advisors reportedly dismissed the suggestion as overly optimistic, and said that they would stick to their original estimates of $50-to-$55 a barrel. 

Considering that about half of the Russian government’s tax revenue comes from the oil industry, every time the price of a barrel of oil inches up, it does very good things for the Kremlin’s bottom line. 

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