Oil-Dependent Russia Seeks to Protect Economy From Energy Transition

Source: By Georgi Kantchev, Wall Street Journal • Posted: Monday, October 4, 2021

Putin orders review of threshold for tapping sovereign fund after finance ministry says lower oil demand could hurt Russia’s budget

President Vladimir Putin ordered Russia’s government to look into raising the threshold for tapping into the $190 billion National Wealth Fund. Photo: Kremlin Pool/Zuma Press

MOSCOW—Russia is looking to limit spending from its sovereign-wealth fund as the global transition away from fossil fuels threatens the backbone of its economy.

President Vladimir Putin has ordered the government to look into raising the threshold for tapping into the $190 billion National Wealth Fund, which holds part of the country’s oil-and-gas proceeds. Currently, authorities are able to invest money from the fund once the liquid part of its assets reaches 7% of gross domestic product. Mr. Putin now wants to raise that level to 10% of GDP, a move that would effectively curtail spending from the fund.

Mr. Putin’s order comes after the country’s finance ministry said global efforts to reduce emissions and transition away from fossil fuels could hit Russia’s budget from the early 2030s. Oil-and-gas sales contribute as much as one-fifth of the nation’s GDP, while fuel and energy products make up the majority of Russia’s exports.

“Since the international financial economic environment of Russia is very, very unpredictable and fraught with crisis risks, the role of the [fund], of course, is very big and difficult to overestimate,” Kremlin spokesman Dmitry Peskov told reporters Friday.

Limiting spending from the fund could affect Mr. Putin’s plans to overhaul the nation’s creaking infrastructure and boost economic growth. Earlier this year, the government said it could invest as much as 400 billion rubles, equivalent to $5.5 billion, a year from the National Wealth Fund into infrastructure and development projects.

On Thursday, the finance ministry recommended a more cautious approach to spending the fund’s money after conducting stress tests on its budget outlook.

“The stress test results reflect that, if the most ambitious scenarios for reducing emissions are implemented, the issue of the sustainability of the federal budget can arise as early as the beginning of the 2030s,” the ministry said. “In light of this, investing additional income accumulated in the period of relatively high prices must be especially careful.”

The ministry expects a downtrend in the oil market in the medium to long term, saying that international oil prices could drop to $35 a barrel in 2030 and to $25 a barrel by 2050 as demand falls around the world. On Friday, Brent crude, the international benchmark, was trading at $78.74 a barrel.

“The ministry of finance is worried about the potential drop in oil demand and prices,” said Dmitry Dolgin, Moscow-based economist at ING Bank. “This calls for higher quality of state savings going forward.”

Climate change and its impacts on the Russian economy have risen to the top of the agenda of the Russian government in recent years as scientists say that temperatures in the country are rising at higher rates than the global average and massive forest fires devastate parts of the nation.

This summer, Mr. Putin ordered authorities to develop a plan to cut carbon emissions to below European Union levels by midcentury. The EU aims to reach net-zero emissions by 2050.

Russian companies are also making a green push as they seek to fend off new regulations and respond to growing pressure from investors.

Write to Georgi Kantchev at georgi.kantchev@wsj.com