Russia Is Contemplating the Wrong Oil Hedge
Instead of looking to financial derivatives, the country should invest in a greener future.
President Vladimir Putin has asked officials to dust off the idea of a hedging program to protect revenues in the event of an oil crash. Rock-bottom crude prices make insurance look appealing, but a host of practical reasons means it is unlikely to get off the ground. Moscow would instead be wise to invest in a different kind of hedge: preparing its fossil-fuel industry and wider $1.7 trillion economy for a greener future.
Oil hedges — usually put options or contracts that allow oil to be sold at a predetermined future price, thus “hedging” against price falls — are tempting for producers. They are also uncommon, because of the hefty cost and the associated risk of expensive insurance going to waste: Just ask airlines. A rare exception is Mexico, whose so-called Hacienda hedge is Wall Street's biggest oil trade. From 2001 to 2017, the country paid $11.7 billion in fees, but made $14.1 billion in gains. Why shouldn’t Russia follow Mexico’s example?