Henry Kirby -
Recent estimates of break-even oil prices have painted a worrying picture for Russia’s fiscal future following a sharp decline in spot prices. Oil prices have lost 20% of their value this year and threaten to bring Russia's economy to its knees. Or do they?
While Russia's new three-year budget breaks even with oil prices of $100, how does this stack up against other petrol producers around the world? According to Deutsche Bank's figures, all but three of the countries included in its estimates can expect to record a budget deficit for 2014, with their break-even prices sitting far higher than last week’s two-year low of $84 a barrel.
But with a break-even price of $100.10, Russia will have to gamble on the further decline of the ruble against the dollar to ease the burden of the fall in spot price. The ruble has already fallen by some 20% since January.
The budget estimates for oil prices are denominated in dollars, but the revenue it receives from oil taxes are paid into the budget. That means if oil prices fall, so long as the ruble/dollar exchange rate also falls, the budget receives more rubles and as budget spending is set in nominal rubles unadjusted for changes in the exchange rate, the devaluing ruble can compensate for the falling price of oil - at least as far as running a federal budget deficit is concerned.
A longer-term prognosis predicts that Russia runs a deficit of 2.5% if oil prices remain around the $80 mark and the ruble value stays in line with current trends, forcing the Ministry of Finance to dip into its foreign exchange reserves.
Yet Russian reserves are the equivalent of some 25% of GDP and so the state has plenty of wiggle room compared most other major oil producers. With reserves amounting to only 1.4% of GDP and a break-even price of $162 – nearly double current prices – Venezuela, for example, is in a lot more trouble than Russia.
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