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Letter from Moscow: Putin triumphant, but facing choppy waters

The Russian strongman’s referendum delivered him the expected result. But there are troubles on the horizon

Russia’s late June constitutional referendum delivered a strong majority in support of reforms that could keep President Vladimir Putin in power until 2036. Almost 78pc of voters supported the measures, election officials say, while turnout was estimated at 65pc. This has given the Kremlin its desired mandate.

In a national address at the end of June, Putin urged voters to ensure Russia’s “stability, security and prosperity”. But amid the continuing economic fallout from the coronavirus pandemic, Russia, like many other countries, will struggle to deliver on such promises.

Economic turmoil

Large sectors of the Russian economy were closed during lockdown, with little government support available to shuttered businesses and hundreds of thousands of laid-off workers. Russia lacks anything close to the kind of welfare system that can cope with such high rates of unemployment. Its economy was stagnating even before the pandemic struck and is forecast by the government to shrink by almost double-digits in the second quarter.

Russia’s bedrock oil and gas industry has fared comparatively well thanks to its low costs. But even so, Russian producers have followed their international peers in booking first-quarter losses this year, largely on non-cash charges. Their core earnings have also collapsed, and the second quarter will be more brutal still.

The reality is that Russia faces serious questions about its future role in the global energy industry and the global economy

The Russian rouble plunged in value after the 2014 oil price crash, providing oil exporters with some relief. But the currency has been much more stable this time around, owing to central bank policy reform. This has helped prop up the overall economy but has left producers with no currency relief from low prices.

Producers in Russia, as in the rest of the world, have reined in spending this year by 15-20pc. But for the most part they have maintained their dividends. Lower upstream spending is mostly a consequence of the latest Opec+ deal, under which Russia committed to unprecedented cuts to oil supply.

The consensus is that Russian producers are abiding by their commitments, at least for the time being. But the same influential voices that urged the government to make its ill-fated decision to walk away from Opec+ talks in March—causing the market to collapse—might chime up again as prices rise.

Russian producers remain as wary as ever of higher-cost US shale drillers profiting from their sacrifice as the market recovers. Furthermore, the pro rata cuts that Moscow has imposed on its oil sector are, technically speaking, voluntary, and there is no system in place to penalise those that do not comply.

Production challenges

For as long as Opec+ restrictions apply—and backsliding by signatories such as Iraq and Kazakhstan will not help—Russia’s upstream activity will be muted. Even before the pandemic, the government forecast that national oil production would either remain flat or decline in the coming years. Russia’s new energy strategy, approved in April but drawn up last year, forecasts average liquids output of 11.15-11.25mn bl/d between 2020 and 2024, versus 11.25mn bl/d in 2019, before falling to 9.84-11.05mn bl/d between 2025 and 2035.

Prospects for gas are stronger. Production is forecast to rise from 790bn m³ last year to 795-820bn m³/yr by 2024 and 860-1,000 bn m³/yr by 2035, driven by new Arctic LNG supplies.

15-20pc – Cut in producer spending

Russian producers are increasingly turning to challenging projects in remote areas like the Arctic and Eastern Siberia to maintain production as fields in well-developed basins reach maturity and then start to become depleted. This drives up costs, and in current market conditions, some of the more ambitious ventures are simply unfeasible.

Russia has sought to create a more uniform tax environment to help spur investment and encourage efficiency. It has even been trialling a profit-based tax system, but this is likely to be scrubbed after it led to billions of dollars in lost budget receipts last year. Tax breaks and other types of support will likely continue to be secured case-by-case basis, by companies with the strongest political leverage.

On top of these challenges, the global outlook for oil and gas demand has never been more uncertain, due both to the pandemic and to increased calls to constrain fossil fuel use. For all Putin promises stability, security and prosperity, the reality is that Russia faces serious questions about its future role in the global energy industry and the global economy.

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