OPEC has raised its forecast for Russia’s oil and gas condensate output in 2017 by 10,000 barrels to 11.12mn barrels a day, the oil producers' organisation said in a report in September.
That still makes Russia the biggest producer of oil in the world and production is running at close to record highs, despite a deal to limit production cut with OPEC last year and extended for nine months this May.
Russia has met the production cut target agreed with OPEC in May and produced 300,000 fewer barrels of oil than in October, just after the agreement was signed, according to Energy Minister Alexander Novak, reports TASS.
OPEC states agreed to reduce their oil production by 1.2mn barrels daily to 32.5mn barrels in November 2016. Russia joined the agreement in December with a promise to cut output by 300,000 barrels daily compared with the October 2016 level. The agreement was concluded for January–June and was prolonged for nine more months in May without changing the terms of the deal.
The major oil producers are hoping to cut production to keep prices around $50, which is a big boon to the Russian budget. This year the budget plan is for a 2.1% federal budget deficit, which the government should be able to finance entirely from domestic borrowing slated at RUB1.2 trillion for each of the next few years.
The average price of oil for August was $49.94, but Brent was trading at above $50 consistently in the first week of September. The Russian economy functions at around $50 oil and can finance the resulting federal budget deficit out of purely domestic borrowing. However, it does not function at prices for oil at about $40 and would need to borrow internationally to finance the deficit in that case.
The key indicator is the non-oil budget deficit (the deficit Russia would have if all its oil magically disappeared and was subtracted from the national accounts). In the boom years Russian ran a non-oil deficit of around 4% of GDP — in other words oil revenues were subsidising the budget – but in the crisis of 2008 this blew out to -13% of GDP. More recently the non-oil deficit has decreased, but was still at -8.4% at the end of May. The share of oil in budget revenues has also decreased, from over 50% to around 25%-30% in the better months of this year.
In 2016 the Ministry of Finance had a very tough year, as it was missing some RUB2 trillion ($34bn) of revenues to cover the budget deficit. In the end the state rushed through a “privatisation” of a 19.5% stake in state-owned oil major Rosneft that turned out to be more of a loan. A 14% stake in Rosneft was just sold to the Chinese energy company China Energy Company (CEFC) to unwind that debt deal last week.
The Russian government is now playing a delicate balancing game between the amount of oil it pumps – and it wants to sell as much as possible so that it can make up what it lost in price with gains in volume – and cutting production to hold up prices.
Analysts have a rule of thumb that each $10/bbl increase in the oil price from the planned level boosts budget revenues by RUB1.2 trillion, while respective appreciation of the ruble reduces revenues by RUB0.5 trillion. Assuming a Brent price forecast of $54/bbl in 2017, the government should earn an additional RUB1 trillion this year, which still leaves it short but by a manageable level that can be financed by the RUB1.1 trillion of domestic bonds the Ministry of Finance plans to issue this year and for the next two years as well. A $3bn international Eurobond issued in June helps, but is not a material amount of money for the budget.
Russia’s public finances remain tight, but they are better than they were. The break even price of oil for the budget has been reduced from circa $115 per barrel in the boom years to circa $70 now, and this is still falling slowly. However, Russia’s economy has gone from running a triple surplus – federal budget, current account, and trade – to deficits in two of these; the federal budget has been in deficit since 2014 and the current account went into a deficit (of only $300mn) in the second quarter of this year.
In the meantime various factors have helped ease the pressure a bit more. A record harvest in 2016 of 119mn tonnes of grain made Russia the world’s biggest exporter of grain again, earning some $15bn of export revenue in the process. This year Russia is on course for an equally good harvest; the official forecast was recently increased to 110mn tonnes, and could break the all-time Soviet-era grain production record of 130mn tonnes, according to some observers earning an even more useful sum for the budget in the process.
OPEC also raised its forecast for global oil demand in 2017 by 280,000 barrels to 96.77mn barrels a day. In 2016, global demand for oil amounted to around 95.35mn barrels a day, according to OPEC.
OPEC states decreased oil production by 79,000 barrels a day in August compared with July and by 1.225mn barrels compared with October 2016 to 32.755mn barrels a day, thus fulfilling the oil production cut agreement by 97%, the report said. The organisation also revised down its July oil production data by 35,000 barrels to 32.834mn barrels a day.