Pushing Back on Putin: Gaining Leverage with Cheaper Oil and Gas

Read the full memo here.

Executive Summary and Introduction

For three years, Russian President Vladimir Putin has seemed immune to the dual stresses of increasingly tighter economic sanctions and stubbornly low oil prices. He has maintained covert pincers on Ukraine sovereignty, captured a diplomatic and military foothold in Syria, and attacked the democratic systems of the U.S. and Europe. In the wake of Putin’s March 18 election to another six-year term, extending his rule through at least 2024, oil offers him the opportunity for even bolder action to come.

Oil, always a tool of bare-knuckled Russian statecraft, has risen substantially in price. From lows between $20 and $40 per barrel in 2015 and 2016, crude oil prices rose above $70 per barrel in January of this year and again in late March. This was the result of surging demand, a historic alliance between Russia and OPEC that tightened supply, a dearth of new investment,2 and a more bullish market psychology.

Chastened by the price crash, Russia says it has predicated future state budgets on $40 per barrel of oil, much lower than today’s levels. This fiscal conservatism, combined with the partial price recovery, has given Putin greater latitude for his asymmetrical warfare strategy that has most challenged the West.

In 2017, Russia managed less than percent GDP growth after two years of economic contraction. The squeeze was felt top to bottom: real disposable income fell by 1.3 percent the first 10 months of the year – making it likely that 2017 will mark the fourth consecutive annual decline – and, officially at least, Putin cut Russia’s military budget in 2017 and again in 2018 after record spending the prior two years. But billions of dollars in new oil revenue would provide the opportunity to turn that around and provide an even broader budget for Russia’s ongoing hybrid warfare against the West.

Many analysts forecast a further price surge in coming years, too, taking oil back to $80 per barrel and beyond; some predict prices exceeding $100 per barrel in the early 2020s. Natural gas – just behind oil exports in terms of the contribution to state income – has also seen a rise in prices. In January, liquefied natural gas (LNG) prices in Asia rose to a three-year high, and the previous month they were at a four-year high in the UK.

The U.S. is in a position to anticipate and respond to this new source of Russian spending, and the consequent fresh challenges that it would pose to U.S. geostrategic interests. It should be a national security priority to contain the rise in global oil and natural gas prices as a financial restraint on Putin’s capacity to engage in foreign adventurism. The tools at the United States’ disposal are its massive energy resources: its reserves of shale oil and gas as well as its energy technology industry.

Read the full memo here.

Pasi Eronen is a Russia project researcher at the Foundation for Defense of Democracies (FDD), where Boris Zilberman is deputy director of congressional relations and a Russia analyst. Follow Boris on Twitter @rolltidebmz. 

Follow the Foundation for Defense of Democracies on Twitter @FDD and its Center on Sanctions and Illicit Finance @FDD_CSIF. FDD is a Washington-based, nonpartisan research institute focusing on national security and foreign policy.