Putin Pussy Riot Problem is Nothing Compared to Volatile Oil Prices

Last week Russian President Vladimir Putin was in London to take in one of his favorite events, judo, at the London Olympics. But the cheerful visit to the Games masked some serious problems for Putin at home; no, I'm not referring here to the on-going trial of the band Pussy Riot, but rather to some hard times for Russia's oil and gas industry.

Crude oil and natural gas have been the two pillars that have supported the Era of Putin. Under Putin, Russia edged out Saudi Arabia to become the world's largest oil producer (though the Saudis still export more crude) and until recently Russia was also the world's top producer of natural gas. Oil and gas revenues have buoyed the Russian economy – as gas and oil prices rose, so did the Russian economy, helping to drag the country out of the chaotic days of the twin economic collapses that followed the end of the Soviet Union, transforming cities like Moscow and St. Petersburg into modern metropolises and allowing Putin to win over the Russian population through massive domestic spending programs. Oil and gas revenues accounted for half of the Russian government's revenues in 2011.

But the future is not bright for Russia's domestic oil and gas industry. Many of Russia's existing oil and gas fields are considered “mature”, meaning that their production levels are falling. Investment in new oil and gas fields has been slow, and these new fields are located in increasingly harsh and remote locales: northern Siberia, Sakhalin Island in the Far East, and the Arctic Ocean; dramatically adding to their production and transportation costs. The Russian government, meanwhile, has become so dependent on oil revenues that they need to sell their benchmark Urals crude oil blend at $117 per barrel just to balance the national budget. As of August 8 though, the Brent futures contract (the benchmark crude oil price for Europe) was selling at only $112.19.

Putin's counter to the declining production problem is to allow Russia's state-run oil firm Rosneft to enter into a partnership with ExxonMobil, letting ExxonMobil bring their fracking technology to Russia to try to wring more oil out of the massive, but very mature, Bazhenov field in Western Siberia. But to entice ExxonMobil into the deal, the Russian government will have to severely cut oil production taxes, which means less money flowing into government coffers.

Russia's natural gas picture isn't much better. Last decade, the near monopoly Russia held on gas pipelines heading into Europe gave them not only a rich source of income but also a method of exerting great political influence over the European Union (embargoing gas supplies in the middle of winter can be a very effective bargaining tactic). But global natural gas supplies have been rapidly increasing: from new finds across Africa, to projects in the Persian Gulf, to the abundance of gas from hydrofracking in the U.S. The push today is for Liquefied Natural Gas (LNG) export terminals to load that gas onto ships and allowing it to be sent around the globe – a fact that will undercut Russia's European gas position. At the same time, large scale Russian gas projects, like their Sakhalin Island fields have run into numerous problems.

Put it all together and it spells trouble for Putin. Less oil and gas revenue means less money for the Russian government, which means less money to spend on the Russian public. Much of Putin's support from the Russian public is due to the economic stability and rise in standard of living the average Russian has seen during his 12 years in charge. While recent protests show that many in Russia's urban elite have turned against Putinism, Russia's working class remains behind him.

But this can change if the economy were to falter due to declining oil/gas revenues; many Russians still remember and fear the economic chaos of the 1990s. As writer Dmitry Travin notes, in the mid-90s the public turned against then-President Boris Yeltsin due to economic conditions. Yeltsin's presidency was saved by the support of the elites; a group Putin already seems to have lost. Should oil and gas revenues fail to live up to what are incredibly optimistic projections in Russia, Putin could rather quickly find himself without any political support.