Galloping inflation, exploding key rates, economic partners hesitant in the face of American sanctions, XXL spending on Defense… The Russian economy has faced a certain number of challenges since the first day of its war in Ukraine. Despite everything, Moscow has shown a resilience that has surprised many observers. As recently as last October, the International Monetary Fund (IMF) forecast gross domestic product (GDP) growth of 3.6%.
Energy, Russian backbone
Russia owes this solidity to its fossil fuels, the central and (almost) unshakeable pillar of its economy. Despite the sanctions imposed since December 2022 on Russian oil, capped at $60 per barrel, petroroubles continue to flow into Russia, the fruit of increased exports to China and India, and oil tankers from the “black fleet” of Moscow, which ply the oceans illegally, the holds filled with oil at 80 dollars a barrel. According to the Center for Energy and Clean Air Research, revenues from crude oil transported by sea ($222 million per day) increased in October by 10% from the previous month, after a decline over a few month. The volume of exports increased by 6%.
Russia's Economy Ministry has raised its forecast for 2024 oil and gas export sales, key sources of budget revenues, by $17.4 billion from the previous estimate , to reach $239.7 billion, thanks to a more favorable price outlook, according to a document seen by Reuters.
But Russian spending is increasing – the country announced at the end of September a 30% increase, or nearly $13.7 trillion, in its defense budget – on the back of slowed economic growth. In its October estimates, the IMF highlighted “an environment that is becoming more and more complicated” for the country, and growth which should be limited to 1.3% in 2025.
A “maxi” oil group
To maximize fossil revenues, the highest Russian state circles, nomenclature modern times, would plan to bring together the large fossil resource companies under the tricolor banner. According to information from the Wall Street Journal, Energy Minister Sergei Tsivilev, a close relative of President Vladimir Putin appointed to this post in May, proposed a scenario that would allow the state to have greater control over the Russian energy production. State giant Rosneft would absorb state producer Gazprom Neft — a subsidiary of natural gas exporter Gazprom — and independent group Lukoil, according to sources familiar with the matter. All three companies are currently under US sanctions.
A restructuring in the kingdom of titans, which would see the birth of the second largest oil producer in the world, after Saudi Aramco, the Saudi jewel. The key: close ministerial supervision of large groups – traditionally led by powerful allies of Putin, such as the CEO of Rosneft, Igor Sechine, and that of Gazprom, Alexei Miller – and an elimination of competition which drives higher prices for customers like India and China.
Another benefit of this merger plan is access to the trading arm and global market entries of Lukoil, based in the United Arab Emirates, and one of the main transporters of Russian oil since the invasion of Ukraine. Lukoil has reserves in the Middle East, Africa, America and Russia
A unique company, target of the West
Asked by the Wall Street Journal, a Lukoil spokesperson said, however, that neither the company nor its shareholders were in merger negotiations. “with anyone because it would not be in the best interest of the company.” The blind spots of the project are indeed numerous: “A merger of this magnitude always carries the risk of temporarily reducing productivity, … potentially negating any theoretical short-term benefits”wrote analysts at FINAM, a Russian broker cited by Markets Insider.
They also point out that separate Russian companies and chains of separate trading companies make it easier for Moscow to circumvent sanctions. A single society would quickly become a target for the West to shoot down. What does the master of the Kremlin say about it? For the moment, nothing concise. Vladimir Putin has not yet given the green light to Sergei Tsivilev's project, but the idea is gaining ground.
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