U.S. sanc­tions on Iran are driv­ing up oil prices around the globe—and help­ing Vladimir Putin

Newsweek - - News - BY OWEN MATTHEWS @owen­matth

How Rus­sia Ben­e­fits From New U.S. Sanc­tions on Iran

when pres­i­dent don­ald Trump de­clared in May that he was with­draw­ing from the Iran nu­clear deal, he vowed to reim­pose some of “the strong­est sanc­tions that we’ve ever put on a coun­try.” Among the big­gest tar­gets: Iran’s boom­ing oil fields, an eco­nomic en­gine that fu­els Europe and Asia with 4 mil­lion bar­rels of crude a day. But as Tehran and other world lead­ers re­coiled, one coun­try cel­e­brated: Rus­sia.

The rea­son? Sup­ply and de­mand. The new sanc­tions will likely re­move a mil­lion bar­rels of Ira­nian oil a day from world mar­kets once the re­stric­tions fully kick in this fall, and few are in a bet­ter po­si­tion to reap the ben­e­fits of the re­sult­ing price surge than the Krem­lin. Rus­sia is the world’s big­gest en­ergy ex­porter, but for the past four years, sag­ging oil prices have se­verely hurt the coun­try’s econ­omy, lead­ing to bud­get deficits and aus­ter­ity plans. Trump’s ac­tions could re­verse that.

“We have to thank Don­ald Trump for giv­ing us an un­ex­pected present,” says Mos­cow-based oil an­a­lyst Alexey Gavrilov. “Iran’s loss… will be Rus­sia’s gain.”

For Rus­sian Pres­i­dent Vladimir Putin, the oil rally rep­re­sents a new po­lit­i­cal life­line. In March, as he took his fourth oath of of­fice in the gilded St. Ge­orge Hall of the Grand Krem­lin Palace, he promised the as­sem­bled po­lit­i­cal elite that Rus­sians would “cre­ate our own agenda for devel­op­ment so that no ob­sta­cles and cir­cum­stances interfere as we and only we de­ter­mine our own fu­ture.” But be­hind the scenes, Putin was rapidly burn­ing through the coun­try’s $125 bil­lion re­serve fund to cope with a pun­ish­ing eco­nomic storm. Since the U.S. first im­posed sanc­tions on Rus­sia in 2014 for an­nex­ing Crimea and spon­sor­ing sep­a­ratist rebels in Ukraine, the ru­ble has lost nearly half of its value, in­fla­tion has hit dou­ble dig­its, and many Rus­sian busi­ness moguls have been cut off from in­ter­na­tional fi­nanc­ing. Fall­ing in­ter­na­tional oil prices—crash­ing from more than $110 a bar­rel to just $30 be­tween March and June 2014—con­trib­uted to a fis­cal crunch; oil and nat­u­ral gas make up about 50 per­cent of Rus­sia’s ex­ports. To off­set those losses and main­tain mil­i­tary and so­cial spend­ing, Putin tapped the re­serves the Krem­lin had set aside dur­ing boom times.

But by Jan­uary, Rus­sia’s Fi­nance Min­istry an­nounced that the cup­board was bare: The Re­serve Fund, down to just $17 bil­lion, was be­ing closed down. The Krem­lin even drew up plans for an un­pop­u­lar over­haul of the pen­sion sys­tem that would raise the re­tire­ment age from 55 for women and 60 for men to 65 for every­one.

The dire cir­cum­stances were a stark re­minder that the price of oil re­mains the sin­gle big­gest fac­tor in Putin’s abil­ity to run Rus­sia as he wishes and throw his weight around on the world stage. Now, as the price of oil surges—as of May 23, crude topped $80 a bar­rel, a three-and-a-half-year high—ex­perts pre­dict an em­bold­ened Krem­lin with lit­tle in­cen­tive to dial back its in­ter­na­tional in­ter­ven­tions in Ukraine and Syria. Over the past four years, de­spite fall­ing rev­enues, Putin boosted spend­ing on arms to a whop­ping 5 per­cent of Rus­sia’s gross do­mes­tic prod­uct. (NATO, by con­trast, re­quires mem­bers to spend 2 per­cent, and most spend much less.)

Ac­cord­ing to Ti­mothy Ash, a se­nior strate­gist at London-based

“We have to thank Don­ald Trump for giv­ing us an un­ex­pected present.”

Blue­bay As­set Man­age­ment, Putin sees Rus­sia in a “long-term bat­tle of wills” with the U.S. and Europe. “Higher oil prices will help him play for more time against the West.”

U.S. poli­cies, an­a­lysts say, are set­ting the stage for a sus­tained rally. News of the reim­posed Iran sanc­tions sent ten­sions soar­ing in the Mid­dle East, a re­gion that holds 47 per­cent of the world’s oil re­serves. In South Amer­ica, Venezuela, an­other key oil pro­ducer, is also reel­ing. In late May, Wash­ing­ton an­nounced re­stric­tions on Venezuela’s oil com­pa­nies in response to a widely con­demned pres­i­den­tial elec­tion, with tighter sanc­tions likely to fol­low. That will take even more crude off in­ter­na­tional mar­kets.

Mean­while, Opec—that of­ten dys­func­tional car­tel—has been co­or­di­nat­ing ef­forts for the past two years to cut sup­ply by 3 per­cent in or­der to steadily nudge prices up­ward. And since a 2016 deal bro­kered by Saudi Ara­bia, Rus­sia has been on board with OPEC’S sup­ply squeeze too, re­duc­ing pro­duc­tion by 300,000 bar­rels a day. Pa­trick Pouyanné, CEO of French oil gi­ant To­tal, pre­dicts a re­turn to $100 a bar­rel oil within months. “We are in a new world,” Pouyanné told oil busi­ness lead­ers in late May. “A world where geopol­i­tics are dom­i­nat­ing the mar­ket again.”

For Rus­sia, soar­ing oil mar­kets are not with­out risk. The coun­try is de­pen­dent on crude, but higher prices sud­denly spark in­vest­ments in more ef­fi­cient and cheaper elec­tric en­gines and bat­ter­ies. More­over, they give a boost to the Rus­sian oil in­dus­try’s big­gest strate­gic neme­sis: U.S. shale gas pro­duc­tion. An oil price “in the $50 to $55 range… suits Rus­sia’s best in­ter­ests,” says Chris Weafer of the London-based con­sul­tancy Macro Ad­vi­sory. In other words, high enough to bal­ance the Krem­lin’s bud­get but not so high that it jeop­ar­dizes the long-term fu­ture of oil by juic­ing al­ter­na­tive sources and tech­nolo­gies.

In­deed, fear of an­other run­away, shale-fu­el­ing boom-and-bust cy­cle is why Rus­sia, para­dox­i­cally, op­posed Trump’s plans to scrap the Iran nu­clear deal. For­eign Min­is­ter Sergey Lavrov ac­cused Wash­ing­ton of “tram­pling in­ter­na­tional law” in back­ing out of the deal. An­other rea­son: A slew of Rus­sian in­vest­ments in Iran’s oil in­dus­try—in­clud­ing ma­jor­ity stakes in projects across Iran’s un­tapped nat­u­ral gas fields and the plan­ning of pipeline cor­ri­dors from Iran to Syria and on­ward to Europe—could be com­pro­mised.

But with oil at $80 a bar­rel, the im­me­di­ate fu­ture looks bright: Rus­sia will earn some $10 bil­lion more per month than it needs to bal­ance the fed­eral bud­get. Gold­man Sachs has forecast eco­nomic growth of 3.3 per­cent for 2018, out­strip­ping both the Eu­ro­pean Union and the U.S. And in­fla­tion has dropped to just 2 per­cent in this year’s first quar­ter, de­spite new rounds of U.S. sanc­tions in­tended to pun­ish the Krem­lin for med­dling in Amer­ica’s last pres­i­den­tial elec­tion.

Putin says spa­sibo.

OILED UP Left, Rus­sia’s No­vokuiby­shevsk reɿn­ery plant. Be­low: The price of oil re­mains the bi­j­jest fac­tor in Putin’s abil­ity to run Rus­sia as he wishes.

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