Vladimir Putin faces an unpalatable choice: steel himself for social trouble or strangle the source of Russia’s wealth
If you think the Panama Papers were bad for David Cameron, then turn your eyes to Moscow. The UK prime minister wasn’t proud to admit he had money parked in a tax haven – a fact revealed when 11.5 million files leaked from a Panamanian law firm last month. But allegations that a close friend of Vladimir Putin used offshore structures to smuggle $2 billion out of Russia, you would think, are a little more serious.
Or are they? In less time than it takes to book a flight to the Cayman Islands, the Russian president dismissed the papers as yet another US plot to destabilise the Kremlin. The money, he says, was mostly used by his associate to import musical instruments. Whether his alibi stacks up won’t affect him much anyway: the papers got zero mention on the country’s airwaves and few of its citizens are aware of them.
At home, Vladimir Putin has bigger things to worry about. The country he leads is broke: the Kremlin, which was already budgeting a 3 percent fiscal deficit for 2016 when oil was at $50 a barrel, has since seen prices dip further (they currently hover around $44). Oil prices brought in half of the state’s revenues in 2014, a share that fell to 28.6 percent in March.
The cash crunch has forced the government to take action. In January, it cut planned state expenditure for the year by a sizeable 10 percent. It is also planning to sell stake in some of its most valuable companies, including oil group Rosneft, diamond miner Alrosa and lender VTB.
But it recently became clear that this wouldn’t be enough to cut the losses. So last month Vladimir Putin did something more drastic: he ordered state-owned businesses to pay at least 50 percent of their 2015 earnings in dividends, a move expected to bring in an extra 100 billion roubles to the government (about $1.5 billion).
The raid on state corporations will not be without consequences. In a recent note, rating agency Fitch warned that the policy would put particular pressure on Rushydro and Gazprom, two of the state’s most profitable jewels. The former currently pays out 25 percent of its earnings in dividends, so the hike won’t be benign. On its part, Gazprom’s recommended minimum dividend is already equivalent to 50 percent of earnings – based on Russian accounting standards. But that’s much below what Gazprom would disburse under international rules, and the government has indicated that companies should pay whichever figure is higher.
Gazprom has been lobbying the government hard to obtain a waiver since the announcement, a sign of how seriously it takes the threat. It’s not the only one: the board of Rosneft has recommended paying out no more than 35 percent of its net profit in dividends.
Fitch says the government’s policy, while pushing leverage up at energy companies, shouldn’t lead to downgrades in 2016. But the agency warns that leaving dividend distribution at the same level next year could put Gazprom and Rushydro’s ratings under pressure in 2017 and 2018.
More important than ratings, however, is what companies will do to avoid a downgrade: cut capital expenditure projects. Oil and gas businesses rely on new discoveries to keep their business running; they need to make sure pipelines are maintained to minimise leaks. Power groups also need to invest in dams, plants, poles and wires to make sure they’ll continue to make money in the long term. Forcing companies to freeze investments now puts their future profitability in danger.
Vladimir Putin has a tough choice to make. Amid Russia’s longest recession in 20 years, he can’t afford to further cut welfare spending without risking social upheaval. That makes going after big business more tempting. But energy companies are the golden goose of Russia’s economy – by squeezing them hard today, it’s the country’s future wealth that Putin is putting in danger.
Perhaps the Russian president has already made his biggest mistake. Everything would be so much simpler, no doubt, if he and his friends hadn’t left all of Russia’s eggs in the oil and gas basket.