Russia to adjust budget amid warnings of 'middling risk' from low oil price

By bne IntelliNews November 26, 2014

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Russia is set to adjust the three-year federal budget to reflect oil prices of $80-90 per barrel, Russia's finance minister Anton Siluanov said on November 26.

“Our fiscal and economic plans need to be compiled based on fresh macroeconomic events, which likely won’t change soon. The new price for oil of $80-90 [per barrel] will most probably remain for the long term,” Siluanov told a session of the Federation Council on November 26, as quoted by newswires.

“If the current situation continues with the exchange rate and oil prices, we could lose around  RUB500bn ($10.7bn) in revenues," Siluanov added. Slowing economic growth would cost the budget the same amount again, he said.

Impact of $80 oil

Oil prices have fallen sharply in 2014, with Brent crude dropping from $115 per barrel in mid-June to close to $80 per barrel currently, and this is set to hit oil exporters through their budgets and through their trade balances, according to analysts.

Talks between OPEC members Saudi Arabia and Venezuela and non-OPEC Russia and Mexico in Vienna on November 25 failed to bring about a production cutting agreement that could support the price of oil.

Russia is hit by a double whammy of low oil prices and sanctions imposed by the West over aggression in Ukraine, cutting off Russia's financial sector from international capital markets.

But according to Fitch Ratings, Russia is not in the 'high risk' group of countries, should the price of oil continue at $80 in 2015. In a new report, Fitch argues that Russia - the world's largest crude oil producer - is in the same group with middling vulnerability to low oil prices as Saudia Arabia – the country with the largest reserves.

Fitch sees both Russia and Saudi Arabia running a fiscal deficit in 2015 because of the oil price drop, which will erode existing fiscal and external buffers, such as sovereign wealth funds, creating problems later. “For these sovereigns, ratings pressures could build in 2015 if prices do not recover,” writes Fitch.

The speed and extent to which this happens will depend on two factors: firstly the size of the existing financial buffers, international reserves and sovereign wealth funds - of which Saudi Arabia has the largest; secondly, the broader impact of cheap oil on the economy, whereby, Russia with a more diversified economy, is more protected, since import substitution through devaluation will soften the impact of low oil prices, according to Fitch. Policy responses will also play a crucial role, says the ratings agency.

The countries most at risk from low oil are those with high fiscal break-even prices – the price of oil they need to balance the budget – and which are already running deficits at high oil prices, such as Bahrain, Angola, Ecuador and Venezuela, Fitch argues, with Norway and Kuwait among the oil exporters at least risk, because of their large pro capita production.

Ratings risk

Another big five ratings agency, Standard and Poor's, panicked the market on October 30, as rumours spread they would downgrade Russia's sovereign status to junk. It never happened, as S&P is now saying it is unlikely to happen even were Russia to enter recession in 2015, although S&P are predicting growth.

Russia could cope with a recession induced by sanctions and low oil prices because of its low foreign debt and large fiscal reserves, S&P senior director for sovereign ratings, Christian Esters, told a conference in Moscow on November 25, according to newswires.

S&P in fact sees oil recovering to $90 per barrel in 2015, and that price predicts slight growth in Russia: 0.7% in 2015, rising to 1.4% in 2016. Inflation will fall to 6% in 2015, the analysts said.  

S&P's GDP forecast exceeds that of Russia's own central bank, which recently downgraded its growth forecast for 2015 from 1% to 0%. The World Bank and International Monetary Fund both forecast recession in 2015. S&P expects a technical recession only in the fourth quarter of 2014, with the economy contracting by 0.5% q/q in Q3.

Import substitution caused by ruble devaluation was supporting Russian growth, S&P said, and the effect would continue through next year, despite the ruble being expected to strengthen slightly against the dollar, after losing over 25% in 2014. Investment in large infrastructure projects such as Gazprom's giant Power of Siberia pipeline is also likely to be a growth driver, with the pipeline expected to add up to 0.5 percentage points to GDP growth.

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