Russia’s economic reform remains elusive as oil stays weak

Mikhail Klimentyev | Kremlin | Sputnik | Reuters

Russian President Vladimir Putin attends a live nationwide broadcasted call-in in Moscow, Russia, June 15, 2017.

Two of the world’s biggest oil producing countries are coping with the slide in crude in sharply divergent ways.

Stubbornly cheap oil prices — which this week probed their lowest levels since August despite OPEC’s best intentions — have created a new world order for crude production powerhouses like Russia and Saudi Arabia.

Although the latter is pursuing a bold reform agenda, punctuated this week by a dramatic leadership shake-up, the former copes by flexing its geopolitical muscles in a way that successfully diverts from economic worries at home.

A Pew Research poll published this week revealed a few cracks in President Vladimir Putin’s Teflon on domestic issues. Although Putin retains overwhelming majority support, his ratings on energy policy and the economy have fallen by double digits over the last two years, Pew found.

With oil still firmly hunkered under $50 per barrel, “Saudi Arabia was in a better position going into this downturn in oil prices,” Win Thin, global head of emerging market currency strategy with Brown Brothers Harriman, told CNBC recently.

“Despite promises to diversify for years (if not decades), the country remains highly dependent on oil and natural gas exports. These still account for two-thirds of total exports,” Thin added.

Pew’s data were the latest reminder that Russia’s economy, while recovering from a deep recession amplified by international sanctions, remains sluggish at best. It grew by a marginal 0.5 percent in the first quarter — even as Russia flexed it geopolitical muscles in Syria and partnered with OPEC to curtail oil’s steep slide, to little discernible effect.

Just last week, Putin told a question and answer session that Russia’s economic was over. Despite international sanctions that walloped the economy last year, Russia “has moved to a period of growth,” Putin insisted.

However, economists note Russia’s susceptibility to swings in global crude prices loom large over its economy. In May, a World Bank report said Russia’s “growth projections remain sensitive to oil prices” and reform remains elusive.

“Despite policy efforts to reduce sensitivity, oil price volatility [will] still affect consumer and producer sentiments,” the bank said. “We expect a slightly higher response of the economy to the upper oil price variation due to improved investor sentiments.”

Diversification isn’t easy