Skip to footer

Oil prices keep falling. Why that's bad news for Russia.

Oil prices continue to plummet on steady supply and weak demand across the globe. With oil revenue accounting for around half of Russia's budget, the drop in oil prices is bad news for the Kremlin.

|
Rosneft press service/AP/File
The West Alfa drilling platform is seen anchored at the Cara Sea some 156 miles north of the Russian shore. The Russian economy is far too dependent on the global price of oil, a volatile benchmark largely out of the Kremlin’s control.

Falling oil prices are inflicting deeper economic pain on Russia’s economy, which is already reeling from EU and U.S. sanctions.

Russia is currently considering its budget for 2015-2017, and based on the numbers, the Kremlin is planning for leaner times. With oil revenue accounting for around half of the country’s budget, any dip in prices has a ripple effect.

And in recent years, Russia’s economy has become more dependent on oil to meet its budget commitments. Excluding oil revenue, Russia has run a budget deficit that hit 10.3 percent in 2013, the highest level in three years.

In other words, the government needs oil revenues to plug budget holes, and that need is growing. (Related: Will Ukraine Commit Economic Suicide?)

Russia occupies a strong economic position when oil prices are high, but for every $1 decline in the price per barrel of oil, Russia loses $2.1 billion in revenue on an annualized basis. Slumping oil prices in recent months could see revenues to the state decline by $30 to $40 billion.

The Russian economy may only expand 0.4 percent this year, and just 1 percent in 2015. But even that meager growth rate is not a certainty. Russia is increasingly facing the possibility of recession, according to a Bloomberg survey of economists.

Oil prices dipped to around $92 per barrel in early October. While that won’t plunge Russia into an immediate economic crisis, the government needs oil prices to stay around $105 in order to balance the budget. Thus, if oil prices don’t rebound soon, problems will only grow worse for the Kremlin.

The upcoming budget plans for the possibility of persistent inflation, a weakening ruble, and the potential need for the state to dip into cash reserves in order to finance its budget. What is worse, even this negative outlook is based on highly optimistic assumptions – it assumes oil prices of around $100 per barrel.

 

“It is quite optimistic given where oil prices are at now and given how much the Russian budget depends on oil revenues,” Liza Ermolenko, an analyst at Capital Economics, told The Moscow Times. “For the next year, it's more likely that the oil prices will be lower than what they are penciling in.”

Running a deficit will be tricky because western sanctions have restricted access to financial markets. Major Russian companies targeted by the U.S. and Europe are unable to take out long-term loans. As a result, they are turning to the Russian state for funds. That has worked so far, but a Bloomberg report outlines an emerging fight within the Russian elite over a dwindling pile of money.

The mid-September arrest of Vladimir Evtushenkov, the head of oil company OAO Bashneft, was a sign that the situation is starting to deteriorate. He is the richest Russian arrested since Mikhail Khodorkovsky was thrown in jail in 2005 and whose oil company, Yukos, was taken over by the state. Evtushenkov, an ally of Prime Minister Dmitry Medvedev, is thought to have been arrested because of a growing rift in Russia’s elite that is at least partially due to the troubled economy. (Related: Europe Seeks To Undermine Russian Energy Influence)

“This is creating a dire financial situation, particularly for state companies friendly to Putin, which are now vying for shrinking state resources,” Yevgeny Yasin, a former Russian economy minister, told Bloomberg. Russian President Vladimir Putin and his allies are hunting for more assets as the economy worsens, according to the same article.

Oil prices could remain low for a while. Reuters reports that the Russian central bank is beginning to plan for a disaster scenario in which oil prices drop to $60 per barrel. Such a scenario would precipitate a dramatic weakening of the ruble, forcing the central bank into action.

But there is no easy way out. The Russian economy is far too dependent on the global price of oil, a volatile benchmark largely out of the Kremlin’s control.

By Nick Cunningham of Oilprice.com

More Top reads From Oilprice.com:

Source: http://oilprice.com/Energy/Oil-Prices/Low-Oil-Prices-Raise-The-Risk-Of-Recession-In-Russia.html

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.
editor@csmonitor.com
Subscribe
Mark Sappenfield
Editor

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

Subscribe to insightful journalism

QR Code to Oil prices keep falling. Why that's bad news for Russia.
Read this article in
https://www.csmonitor.com/Environment/Energy-Voices/2014/1008/Oil-prices-keep-falling.-Why-that-s-bad-news-for-Russia
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe