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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