Putin's Lifelong Rule Stalled by Low Oil Prices... Double Crisis of COVID-19 and Fiscal Deterioration

Economic Downturn and Approval Rating Decline, Constitutional Referendum Postponed Indefinitely
Global Oil Producers Including Russia and Middle East Forecast Negative Growth Due to Plummeting Oil Prices

[Image source=Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] The plan of Russian President Vladimir Putin (photo) to achieve lifelong rule through constitutional amendment is gradually slipping away. Following the postponement of the constitutional referendum due to the impact of the novel coronavirus infection (COVID-19), concerns are growing that the economy will contract due to the sharp drop in international oil prices, leading to a decline in President Putin's approval ratings. He is facing a double blow of a pandemic and economic deterioration.

According to foreign media including the Associated Press (AP), Russia ultimately failed to hold the constitutional referendum scheduled for the 22nd (local time). This constitutional referendum attracted attention because it included a clause that would remove the limit on the number of presidential terms. Under the current constitution, the presidency is limited to three terms, meaning President Putin cannot run in the 2024 presidential election. He planned to use this amendment as a stepping stone for lifelong rule.

Russian authorities explained that the election was impossible due to COVID-19. However, contrary to this explanation, the interpretation that the biggest factor was the decline in President Putin's approval ratings due to economic deterioration is gaining more credibility. The Washington Post (WP) reported that President Putin's approval rating was 69% in February but fell to 63% last month. Kremlin spokesman Dmitry Peskov rebutted in an interview with CNBC on the same day, saying, "President Putin is not afraid of the drop in approval ratings and is prioritizing economic recovery above all."

The economic deterioration in Russia is largely due to the low oil price shock. This is because Russia's fiscal dependence on oil exports is high. According to the U.S. business magazine Forbes, oil and natural gas exports account for 30% of Russia's gross domestic product (GDP). Forty-three percent of government revenue comes from this sector. The Russian government had previously prepared a sovereign wealth fund worth $170 billion to prepare for the low oil price shock and was confident that if Brent crude oil prices stayed at $25, fiscal stability would be maintained for a long period. However, Brent crude oil prices fell more sharply than expected, dropping below $20 to $19.33 the day before.

The Russian government estimates that a $5 drop in Brent crude oil prices causes about a $40 billion fiscal deficit. There are pessimistic forecasts that if the current situation continues, half of the sovereign wealth fund prepared could be used up this year. Spokesman Peskov also stated, "COVID-19 is causing an enormous economic crisis not only for President Putin and Russia but for all countries, and it is an unprecedented challenge."

Concerns about an economic crisis due to low oil prices are spreading not only in Russia but also to all oil-producing countries. The International Monetary Fund (IMF) has downgraded Russia's growth rate this year to -5.5%, followed by major oil-producing countries such as Saudi Arabia at -2.3% and the United Arab Emirates (UAE) at -3.5%.

According to Bloomberg News, Saudi Arabia needs international oil prices to remain at $76 to balance its budget, but it already experienced a fiscal deficit of about 23% of GDP last year when oil prices fell to around $40. The deficit is expected to widen this year. Saudi Arabia plans to reduce national spending by about 5% and raise the government debt limit from 30% to 50% of GDP. There are concerns that most government construction projects promoted by Crown Prince Mohammed bin Salman will be delayed or halted. Saudi Arabia previously announced the issuance of $7 billion in government bonds to increase fiscal revenue, while Qatar and the UAE issued $10 billion and $7 billion in government bonds, respectively.

Other Middle Eastern countries, where government capital procurement is even more difficult, are expected to face worsening situations. The Iraqi government stated that due to fiscal deterioration, it would be difficult to pay more than half of public sector workers' salaries, and Algeria's foreign exchange reserves are expected to plummet from $96 billion in 2017 to $11 billion next year.

This content was produced with the assistance of AI translation services.