The Shifting Oil Power: The Rising Russia

A Journal of People report

The power of oil is shifting. This shift may impact global politics with implications on the life of peoples in countries.

A Bloomberg report – “Russia to Leapfrog Saudi in Wealth League as Oil Power Shifts” – on August 11, 2019 said:

“The shifting balance of power in the oil world is showing up in a new indicator: central bank reserves.

“For the first time in eight years, the Bank of Russia’s total stockpile of cash, gold and other securities is about to surpass Saudi Arabia’s, highlighting the Kremlin’s leverage in talks between major oil producers about how much to reduce production.”

The report said:

“While Saudi Arabia has been draining its reserves to cover social spending amid low oil prices, Russia has tightened its budget and is running a surplus amid fears of new sanctions. With Russia increasingly the deciding voice in discussions with the Organization of Petroleum Exporting Countries, the financial divergence is the latest sign of the changing fortunes between the big oil players.

“‘OPEC can no longer ignore Russia because of its importance as an oil exporter and its economy,’ said Elina Ribakova, deputy chief economist at the Institute of International Finance in Washington. ‘The Russians will continue doing just enough to engage with the Saudis on oil production.’”

The Bloomberg report added:

“The price of Brent crude has plunged more than 20% since April to around $57 a barrel, far below levels most OPEC nations, including Saudi Arabia, need to cover government spending. The group and its partners pledged in December to reduce daily output, but it’s unclear whether Russia, the biggest non-OPEC partner will be willing to cut further. President Vladimir Putin has indicated he’s satisfied with prices near current levels.”

On reserves, the report said:

“Russia’s reserves have swelled 45% in the past four years to total $518 billion in June. Saudi Arabia’s are following the opposite trajectory, with reserves falling to $527 billion by June, as the Kingdom spends money stockpiled when oil prices were much higher.

“The divergence means Russia is about to leapfrog Saudi Arabia into fourth place in the world for reserve size. Saudi Arabia’s stockpile is likely to keep falling as the trade war weighs on global growth and oil prices.

“Russia, which now bases its budget on oil at around $40 a barrel, about half the level for Saudi Arabia, will likely be able to keep adding to its rainy day fund. A recent batch of sanctions from the U.S. that block non-ruble debt issuance gives Russia even more reason to hoard cash, although pressure is also rising from government to spur economic growth by increasing spending.

“‘Putin is determined to minimize refinancing risk for Russia so has supported responsible fiscal policy,’ said Charles Robertson, global chief economist at Renaissance Capital in London. ‘The Saudis by contrast went from a budget deficit to a budget surplus. Now they’re happy to run down those savings during the bad times.’”

Richard Heinberg writes in the “Foreword” of Matthieu Auzanneau writes in Oil Power and War, A Dark History:

“It is impossible to understand the political and economic history of the past 150 years without taking account of a central character of the drama – oil, the magical wealth-generating substance, a product of ancient sunlight and tens of millions of years of slow geological process, whose tragic fate is to be dug up and combusted once and for all, leaving renewed poverty in its wake.”

And Matthieu Auzanneau writes:

“Build on the might bestowed by oil and dollars, US ‘dominance’ is neither invincible nor unchallenged. The struggle for hegemony could easily unsettle the phusical foundation of today’s economic order.”

Lee Lane, visiting fellow at the Hudson Institute, writes:

“The economic base of U.S. world power has been in steep decline. A country’s global power is always relative to that of others, and World Bank figures show that between 2000 and 2014, China’s share of the world’s total gross domestic product (GDP) nearly quadrupled; Russia’s share tripled; India’s share almost doubled, while the U.S. share decreased by 28 percent. America is still the world’s single most powerful state, but global leadership requires both hard and soft power — and the wealth on which power is largely based. If America’s current relative economic decline continues, its ability to influence the world will also continue to fall.” (“Oil and World Power,” The New Atlantis, Number 47, Fall 2015)

“A recent International Monetary Fund working paper estimates that although the long-term impact of this increase in oil and gas production on the nation’s and the world’s GDP is ‘nontrivial, it is likely to be modest’ — between 1 and 1.5 percent increase in U.S. real GDP and less than a quarter percent globally. The authors noted that their findings for the U.S. economy were similar to those of the U.S. Congressional Budget Office, which has estimated that real GDP “will be about two-thirds of one percent higher in 2020 and about 1 percent higher in 2040 than it would have been without the development of shale resources.” (ibid)

“Nor will low prices end Russian dominance of Ukraine. Still less will they balance China’s rising power in the western Pacific.” (ibid.)

News on gold and dollar in August 2019 said:

Russia is set to replace Saudi Arabia as the fourth biggest holder of foreign currency reserves, precious metals, and other securities.

Russia is following the policy of ridding its economy of dollar-denominated assets due to U.S. sanctions. In last April, the Russian Central Bank started to drastically reduce its holdings in dollar-denominated assets in response to sanctions pressure from the U.S.

Russia also actively invested in gold to further lessen dependence on the U.S. dollar. This led to Russia becoming the top buyer of the precious metal in 2018. The country continued with the same course in 2019, securing the position as the world’s top gold buyer in the first quarter of 2019.

According to data by the Central Bank of Russia, the country’s international reserves amounted to around $518 billion as of August 1.

The figure has been growing significantly for the past four years and is projected by Fitch Ratings to keep rising to $537 billion by the end of 2019, and $591 billion by 2021.

According to Bloomberg’s estimations Saudi Arabia has around $527 billion at its disposal. The top three countries with the largest foreign exchange reserves are China, Japan, and Switzerland.

The price of gold itself rallied last month, breaking through a record $1,400 per-ounce mark for the first time since 2013. Among the factors behind this were expectations of lower interest rates, and political uncertainty due to a recent escalation in the US-China trade war, according to a World Gold Council (WGC) report.

Both gold and foreign currency reserves are managed in Russia by the central bank and include foreign currency kept in accounts with foreign banks, securities nominated in these currencies, as well as monetary or physical gold. The central bank buys foreign currency for reserves in the open market from exporters. Previously, gold reserves were used to influence the ruble exchange rate through foreign exchange interventions, but in 2014 the central bank decided to abandon this practice.

Top of Form

Russia will continue to boost its foreign exchange and gold reserves, adding more than $70 billion to its coffers in two years, Fitch Ratings predicted as it raised the country’s credit rating to the highest level since 2014.

While Russia’s international reserves are measured in terms of U.S. dollars, they are actually highly-liquid foreign assets, comprising stocks of monetary gold, foreign currencies and Special Drawing Right (SDR) assets, which are at the disposal of the Central Bank and the government.

The Central Bank of Russia has reportedly increased holdings of Chinese yuan and lowered the share of US dollars in its reserves over recent months.

In March, the Central Bank of Russia added nearly 18.7 tons of gold to the county’s vast stockpile of the precious metal. The step reportedly brought Russia’s estimated gold holdings to more than 2,170 tons (69,700,000 ounces), which accounts for nearly 18 percent of the country’s total foreign exchange reserves.

The international rating agency said that Moscow will be able to cope with new U.S. restrictions against its financial sector.

While Washington’s restrictions could weigh on Russia’s external financing flexibility, investment and growth prospects, the “heightened” sanctions risk has not stopped Fitch from upgrading Russia’s rating to ‘BBB’ with a stable outlook from ‘BBB- .’

“Russia has entrenched a credible and consistent policy framework that will deliver improved macroeconomic stability, reduce the impact of oil price volatility on the economy, and support increased resilience to external shocks,” Fitch Ratings analysts said in a statement made in early-August.

“Increased exchange rate flexibility and compliance with the fiscal rule support the economy’s capacity to absorb real, financial and geopolitical shocks, and limit the impact of oil price volatility on the economy,” Fitch said.

Russia’s debt is rated at investment grade by all three big international rating agencies. In February, U.S.-based Moody’s upgraded Russia’s rating to investment grade (to Baa3 from Ba1) with a stable outlook.

S&P Global Ratings upgraded Russia from junk level last year and has recently said the new U.S. sanctions targeting sovereign debt will have no immediate impact on the nation’s investment grade credit rating.

Gold rush

Official global gold reserves continued to grow at a rapid pace this year, with demand for the precious metal reaching 1,123 tons in the second quarter of 2019.

A report released by World Gold Council (WGC) in the last part of July 2019 showed that central banks purchased a record $15.7 billion (374 tons) of gold in the first six months of the year. That was the largest acquisition of gold recorded by WGC in its 19-year quarterly data releases.

The record gold-buying was led by Russia, China and Poland, the report said, as many countries seek to diversify reserves away from the US dollar.

Gold demand increased to more than 2,181 tons in the first half of 2019, a rise of eight percent on the same period last year.

The price of gold rallied in June, breaking through $1,400 per-ounce for the first time since 2013. Among the factors driving the rally were expectations of lower interest rates, and political uncertainty, with a further boost coming from strong central bank buying, the WGC said.

The WGC expects looser monetary policy and geopolitical uncertainty to continue pushing central banks to build gold reserves in the second half of the year, while consumer demand “may be a bit soft, as people adapt to the higher price level.”

 

 

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