Putin Faces Election Challenge As Fuel Subsidies Backfire

Subsidizing fuel is creating a budgetary crisis in Russia amid its ongoing war in Ukraine and soaring inflation, with the state budget now expected to take a multi-billion-dollar hit, according to Reuters calculations. 

In September, Moscow moved to slash by 50% a subsidy for oil refiners, which Reuters calculates will have to be offset by some $4.3 billion in subsidies to other industries, plus a one-off tax that equates to over $3.7 billion. 

When Russia moved to cut its damper subsidy for refiners just over a month ago, the knock-off effect was increased exports leading to diesel and gasoline shortages, which, in turn, led to soaring domestic wholesale prices. 

Now, the agriculture industry is in desperate need of subsidies to make up for the soaring fuel costs. Responding to this initial chaos in September, Moscow banned significant volumes of fuel exports and attempted to walk it back by reimplementing the subsidy to begin instead on October 1. In terms of the tax break Moscow was hoping to get from this September move, which would have amounted to some $3.7 billion in Mineral Extraction Tax income for the budget, because it is not coming into effect until the beginning of the New Year, leaving this year's budget out that amount, according to Reuters. It is a dire time for Russian President Vladimir Putin, who is under immense pressure ahead of elections that are less than a year-and-a-half away, amid a costly, never ending war in Ukraine. Putin cannot afford soaring inflation at this time. Last week, the Russian central bank was forced to hike interest rates by 200 basis points to 15% in order to prop up the rouble and fight inflation, which is now on track to surpass 7% this year. 

In November 2018, Russian President Vladimir Putin saw his approval ratings drop to a low not seen in six years, mainly due to higher prices at the pump, which saw a 7% increase since May. The government's response was to have oil companies and independent fuel refiners hold wholesale prices at June 2018 levels until the end of the year. Russia then agreed to allow fuel prices to increase in line-but only in line with inflation.

By Charles Kennedy for Oilprice.com

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