As Medvedev Meets Obama, Oil Trouble Grows in Russia

Russian President Dmitry Medvedev visited with President Obama at the Nuclear Security Summit in Seoul, South Korea. The discussion was about arms. It probably should have included talks about oil as well. The U.S. needs crude prices to fall from their current levels to prevent the recession that $4 gasoline might bring. The Russian’s need very high crude prices to finance the government. The two needs are at significant odds, and they have much more near-term effect that a reduction in nuclear arms.

According to S&P:

Fiscal expansion, not least significant countercyclical spending during the recent crisis, has led to a significant increase in expenditures relative to GDP. As a result, despite record revenues from oil in 2011, we estimate the general government surplus at merely 0.8% of GDP. To balance the budget in 2012, the government will require an average oil price of $120 per barrel. However, spending pressures will likely fuel the need for rising revenues. This makes Russia’s public finances vulnerable to a decline in the oil price.

A drop in oil prices may cause S&P to downgrade Russia.

The Russian government already has its share of problems, both politically and economically. Gross domestic product grew by 3.9% in January. That is impressive by the standards of most nations other than the large ones in the developing world — India, China and Brazil. But the 2011 rate was 4.3%. An ongoing slowdown in Europe’s economy will put further pressure in Russia’s growth. So could a sharp deceleration in the growth of the Chinese economy.

Russia’s need for high oil prices runs counter to America’s interest. The same is true for the European Union, which remains a large net importer of oil, as does Japan. The oil price problem has become even more acute as trouble with Iran has driven crude prices higher. And the problem with Iran has been relentless. Tension over sanctions means it will not be resolved soon.

It is an oversimplification to say that high oil prices will cause a recession in the U.S. and low oil prices will cause one in Russia — but not much of one. It is rare that the economies of two huge nations are so much at odds with one another. But in the case of Russia and the U.S., the divergence of economic interests is tremendous.

Douglas A. McIntyre