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Petrostate Problems
The Paradox of Russian Sanctions Relief

Transatlantic solidarity on sanctions against Russia is on rocky ground these days. President Trump has made no secret that sanctions could be up for negotiation, his pick for Secretary of State led a company that professionally lobbied against them, and a growing chorus of voices in Europe–including French presidential candidate Francois Fillon—are calling for sanctions to be scrapped.

Nonetheless, President Putin made no effort to discuss sanctions during his first phone call with Trump, and back in Russia, Prime Minister Medvedev has been dampening expectations that they will be lifted any time soon. Why is Russia not rushing to push for sanctions relief? Bloomberg has an idea:

The ruble will “likely to be the main beneficiary” if the U.S. eases off pressure from sanctions, and may appreciate to 55-57 versus the dollar, according to Bank of America Corp. That’s near the level that Industry Minister Denis Manturov said earlier this month could pose a risk to the competitiveness of Russian producers on external markets. […]

“A further strengthening of the ruble will run into increasing resistance from exporters and the government,” said Sergey Narkevich, an analyst at Moscow-based Promsvyazbank PJSC.

In other words, lifting sanctions in the current climate would strengthen the ruble, but at the cost of making Russian exports uncompetitive. And a strong ruble could also contradict a developing government strategy, as reported by The Moscow Times, to fill budget gaps by devaluing the ruble:

Russia’s Finance Ministry has proposed devaluing the ruble by 10 percent, according to media reports.

A weaker ruble could help the struggling Russian economy to reduce its budget deficits while the price of oil remains low. […]

By devaluing the currency now, the Ministry of Finance hopes that the ruble can stay better in line with oil prices and bounce back to its current rate of 60 rubles to the U.S. dollar by the time that oil prices have hit that level of between $75 and $80, which would give the treasury a surplus budget worth 2 percent of GDP and 2.3 trillion rubles for the country’s reserves.

In the short term, then, a hasty lifting of sanctions could endanger both Russian exporters and the government’s best-laid budget plans. This does not mean that Putin will not push to have sanctions lifted, but he may put the issue on the back burner for the time being, until a more auspicious climate arises and oil prices are on the rise.

Unfortunately for Putin, the very development that has helped keep oil prices stubbornly low—the U.S shale boom unleashed during President Obama’s tenure—is likely to intensify under President Trump. Already, surging shale production is frustrating petrostates’ concerted efforts to quickly raise oil prices, and supply disruptions from the United States could continue to be a thorn in Putin’s side even after prices creep up and sanctions are lifted. For all these reasons, then, Trump’s election may not bring the sudden and unambiguous windfall for Russia that so many assume.

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  • Disappeared4x

    It WAS a very slow news day yesterday, or, maybe Russia hacked the USDA inventory database, or a lot more Americans are drowning their anxiety in bacon: “…A report from the United States Department of Agriculture said the supply of frozen pork belly, from which bacon is cut, is at its lowest level since Dec. 1957, according to the Ohio Pork Council. The total pork inventory dropped 41 million pounds last month alone.

    The Jan. 24 USDA report said the frozen pork belly stock was down 4 percent from Nov. 2016 and 67 percent from the same time in 2015.

    The record high was set in 1988 when there were more then 113 million pounds of pork belly in cold storage. This month, though, the
    record low was set at less than 18 million pounds….”

    http://www.wral.com/bacon-supply-safe-despite-plummeting-pork-reserves/16491597/

    At the same time, the NYT is on top of exposing Fake News “Now It’s Getting Serious: 2017 Could See a Bacon Shortage.”

  • Kevin

    I think this borders on the absurd. If it desires, the Russian govt would have little trouble inflating away any currency appreciation.

    There may be insiders who benefit from the sanctions (either economically or from political gains due to a siege mentality), but there’s little doubt the overall real wealth of Russia would rise without them.

    • Kev

      Yes, Russian economy would go from 1,5% GDP growth projected for 2018 to, maybe, 2%. Not that big of a deal.

  • Dhako

    You still are not able to “read” the Russians, Geo-strategically, do you? In other words, their “reticence” has nothing to do with prize of oil and what have you. But it’s larger than that. And by that I mean the election of Mr Trump as the US’s president is a golden opportunity for Russia. And in fact, no time in its long and tortuous history, did Russia have had such a unalloyed feat of luck, in the form of having its “asset” (or more properly, its “political stooge”) as the Chief-Executive-Officer of the USA. And that good fortune will require a careful handing of this asset, in the sense of not willy-nilly using it for secondary issue, such as the idea of lifting the sanction. And that is particularly so; when in fact, a higher priority of getting US to dismantle the NATO alliance (by spirit if not in deeds) could be at hand, if they play their assets with sublime touch at best. Or at worse, getting the US to accept the creation of “Sphere of Influence” could be much closer than any time.

    Moreover, the minute the French elect their “Russian-tilting” politician by the name of Fillon, the whole of the EU’s sanction is over. And since, the EU is far more important to Russia as destination of its oil than the US, then that means, that the European’s market and the access to it is more important to Putin than the ability to use the American’s banks, which are forbidden to him now under the current sanction regime.

    Furthermore, to Russian’s strategical theoreticians (back in Moscow) the idea of “concert of Europe” (or more precisely the idea of Congress of Vienna) is more important to them than any financial transaction of the kind the sanction relieve will bring forth to them. In other words, just like after the end of the Napoleonic war, which was when the the victorious powers of Europe (or the “Status-quo” powers of Europe of that time) did get together to decide the shape of the international state-system for the remainder of the bulk of the 19th century, it seems, that, Mr Putin, is looking for another go of “Congress of Vienna” kind of Geo-political carve-out of the world, in which an agreed system of “Sphere of influence” will be established among the the current great powers, such as US, China, Russia, India, EU, Brazil.

    This system then will either be “codified”, openly, where each sphere of influence begins and where it will end, will be shown in details on the map. Or failing that, it will be a “gentleman agreement” of the kind that was reached at Yalta between Roosevelt, Churchill, and Stalin, which divided the continental Europe down the middle. Hence, this is the “prize” Mr Putin is after. And it’s the reason he was so brazen to interfere with the US’s presidential election just so that he will “assist” his “political assets” in ascending to the highest office in the land in the US.

    Of course, the US’s political establishment (particularly the Republicans) will be aghast with the sight of seeing their president cutting up the world into a discrete “sphere of influence” at the behest of some one like Putin. But, to Putin, this is the last Chance, his nation will have to strategically impact the world before the “preordained decline” of Russia, even as a mid-ranking state, gets to underway. In other words, the Russians remember very well how UK lost its chance to “lock-in” a favorable strategical position for herself once the World War Two (WWII) was over, and the UK’s strategists could see how the British Empire was going to come unstuck in short order, as well as how UK by all intent and purposes was financially bankrupt (or at least dependent on the generosity of Uncle Sam).

    Hence, from the Russian’s point of view, they think that instead of UK given up the “political ghost” of being a great power, and therefore relying on their “cousins” in the form of the US to ensure that they will carry on where UK was retiring from being a great power, the UK should have insisted on a “sphere of influence” at Yalta, in which UK can then “locked-in” its preeminence of that sphere with the view of “milking” it to sustain the UK’s pretensions of being a great power. This (or a similar action) is what Mr Putin and his “advisers” believe that Russia must do now, just to “foreclosed” the strategical rapid decline of Russia in a world that will be economically dominated by US, China, EU, and India.

    Consequently, the sheer “gamble-taking” on the part of Mr Putin to engineer a political outcome in Washington, which in turn could be conducive to that strategical outcome. Hence, since that is his “final objective” then he will take care to ensure nothing as much as oil and sanctions get in the way of achieving that objective. Which means, he will put any other issues on the back-burner, and proceed to cultivate the ground for an eventual meeting between Russia and US (or more precisely between Mr Putin and his stooge in the White-house, namely Mr Trump). And that talk will begin some time this year (and I believe it will be in Reykjavik in Iceland).

    Of course, the US is not a monolithic power, in the sense that Putin’s Russia is. But in Putin’s calculation, he seems to have reasoned that he can “purchase” the US’s establishment goodwill in the form of helping to resolve the Syrian crisis and defeat the ISIS as well as well as helping the Trump’s administration to “rein-in” the Iranian recent waywardness of firing missiles (which is contrary with the Deal they have signed with the world powers). And once those “good deeds” is registered with the US’s establishment opinion (and foreign policy elites) then the crucial talks in which the “strategical gifts” from Mr Trump in the form of him “accepting” the desirability of the “sphere of influence” will begin.

    And hopefully (at least in the calculation of Mr Putin) those talks will end when the two leaders “cook” a deal behind close doors and then call for an international summit to discuss the current instability in the international state system. This is what Putin is gunning for. So don’t lose the “wood” of Russian’s strategical priority of getting an “sphere of influence” in the world with acceptance of Mr Trump, for the trees” of secondary issues such as the idea of lifting the sanction and how much the value the Russian’s oil could be value in that eventuality in the market.

    • Kev

      You are selling Russia short. Even if Putin and Trump don’t agree on Yalta 2.0 Ukraine’s per capita GDP is 20% of Russia’s level and the people’s republics are not going anywhere. Russia is in a good position to dominate Ukraine economically, militarily, strategically for decades to come.

  • Andrew Allison

    Surely you meant FORMER French presidential candidate Fillon.

  • Kev

    According to the latest figures from the Russian statistics service, GDP declined by 0,2% in 2016. The economy returned to growth in the final quarter. Futhermore the decline for 2015 was revised to 2,5%

    The bottomline is that Russian economy has succesfully overcome western sanctions, hence the Kremlin feels no pressure to have them removed immediately.

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